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Direct Digital Holdings(DRCT) - 2025 Q2 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the period ended June 30, 2025, show a significant decline in total assets and a worsening stockholders' deficit. The company reported a substantial decrease in revenue and an increased net loss compared to the prior year, primarily driven by a severe downturn in its sell-side advertising segment. Cash flow from operations remained negative, though improved from the prior year, with financing activities, particularly stock issuance, providing necessary liquidity. The notes highlight substantial doubt about the company's ability to continue as a going concern Condensed Consolidated Balance Sheets The balance sheet shows a decline in total assets and an increase in liabilities, leading to a worsened stockholders' deficit Condensed Consolidated Balance Sheets | Balance Sheet Items (in thousands) | June 30, 2025 (Unaudited) | December 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $6,727 | $8,535 | | Total Assets | $23,326 | $26,006 | | Total Current Liabilities | $13,675 | $13,350 | | Total Liabilities | $47,907 | $45,736 | | Total Stockholders' Deficit | ($24,581) | ($19,730) | - The company's financial position weakened, with total assets decreasing by 10.3% and total liabilities increasing by 4.7% from December 31, 2024, to June 30, 2025. This resulted in a 24.6% increase in the total stockholders' deficit9 Condensed Consolidated Statements of Operations The statements of operations reveal a significant revenue decline and an increased net loss, primarily from sell-side advertising Condensed Consolidated Statements of Operations | Income Statement (in thousands) | Q2 2025 | Q2 2024 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | $10,144 | $21,855 | -53.6% | | Sell-side advertising | $2,483 | $14,298 | -82.6% | | Buy-side advertising | $7,661 | $7,557 | +1.4% | | Gross Profit | $3,561 | $5,931 | -40.0% | | Loss from Operations | ($2,426) | ($2,065) | +17.5% | | Net Loss | ($4,196) | ($3,141) | +33.6% | | Net Loss per Share (Basic) | ($0.23) | ($0.16) | +43.8% | - For the six months ended June 30, 2025, total revenues plummeted by 58.5% to $18.3 million from $44.1 million in the prior-year period. The net loss for the six-month period widened to $10.1 million from $7.0 million11 Condensed Consolidated Statements of Cash Flows Cash flow from operations improved but remained negative, with financing activities providing necessary liquidity Condensed Consolidated Statements of Cash Flows | Cash Flows (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | ($5,398) | ($10,111) | | Net cash used in investing activities | ($38) | ($10) | | Net cash provided by financing activities | $5,584 | $6,074 | | Net increase (decrease) in cash | $148 | ($4,047) | - Cash used in operations for the first six months of 2025 improved to -$5.4 million from -$10.1 million in the prior year. Financing activities provided $5.6 million in cash, primarily from the issuance of $5.9 million in Class A Common Stock22 Notes to Condensed Consolidated Financial Statements Key notes highlight going concern doubts, customer concentration, ongoing litigation, and significant long-term debt - Going Concern: Management has identified conditions that raise substantial doubt about the Company's ability to continue as a going concern. These include a net loss of $10.1 million for the six months ended June 30, 2025, an accumulated deficit of $13.4 million, low cash reserves of $1.6 million, maturing debt, and non-compliance with Nasdaq's listing requirements6566 - Customer Concentration: For the three months ended June 30, 2025, two customers accounted for 31% of revenues. This is a significant reduction in concentration from the same period in 2024, where one sell-side customer accounted for 58% of revenues50 - Litigation: The company is involved in litigation, including a lawsuit it filed against the author of a defamatory article that caused a significant sell-side customer to temporarily pause its connection, disrupting business. The company is also defending against a putative class-action lawsuit alleging violations of federal securities laws121122 - Long-Term Debt: As of June 30, 2025, total long-term debt was $41.2 million. The company has received multiple amendments to its credit facilities to provide temporary relief from debt covenants and extend maturity dates, indicating ongoing liquidity challenges708788 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the severe 54% year-over-year revenue decline in Q2 2025 to a significant disruption in its sell-side business, caused by a defamatory blog post in May 2024 that led a key customer to temporarily halt activity. While buy-side revenue saw marginal growth, the collapse in sell-side revenue led to a wider net loss. The company is facing substantial liquidity challenges, evidenced by a 'going concern' warning, non-compliance with Nasdaq listing rules, and reliance on an Equity Reserve Facility for funding. Management has implemented cost-saving measures, including staff reductions, to mitigate the financial impact Results of Operations Operational results show a sharp revenue drop due to sell-side disruption, despite cost-saving measures - The primary cause for the 83% decrease in Q2 2025 sell-side advertising revenue was an unexpected business disruption from a defamatory blog post in May 2024, which caused partners and clients to pause activity. Sell-side volumes have not yet recovered to prior levels173 Results of Operations | Revenue and Gross Profit (in thousands) | Q2 2025 | Q2 2024 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | $10,144 | $21,855 | (54%) | | Sell-side advertising | $2,483 | $14,298 | (83%) | | Buy-side advertising | $7,661 | $7,557 | 1% | | Gross Profit | $3,561 | $5,931 | (40%) | - Operating expenses for Q2 2025 decreased by 25% to $6.0 million, primarily due to lower compensation costs resulting from a staff reduction effective July 1, 2024, and reduced professional fees183184185 Liquidity and Capital Resources Liquidity remains a major concern, with substantial doubt about going concern and reliance on equity financing - The company's ability to continue as a going concern is in substantial doubt due to significant net losses, low cash balance ($1.6 million), maturing debt, and Nasdaq delisting risk191 - To address liquidity concerns, the company is relying on cash from operations, its Equity Reserve Facility, and potential future financing. It has also implemented cost reductions and obtained temporary relief from debt covenants192 - During the first six months of 2025, the company sold 6,059,351 shares of Class A Common Stock for $4.6 million under its Equity Reserve Facility to fund operations143 Liquidity and Capital Resources | Key Liquidity Metrics (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,593 | $1,445 | | Working capital deficit | ($6,948) | ($4,815) | Recent Developments Recent developments include Nasdaq non-compliance notices for equity and bid price, with an extension granted - On October 18, 2024, the company was notified by Nasdaq of non-compliance with the minimum stockholders' equity requirement. Subsequently, on May 12, 2025, it received another notice for failing to meet the $1.00 minimum bid price requirement140141 - The company has been granted an extension until October 14, 2025, by a Nasdaq Hearings Panel to regain compliance with the stockholders' equity rule, subject to meeting certain interim conditions141 Quantitative and Qualitative Disclosures About Market Risk The company, as a "smaller reporting company," is not required to provide the information for this item - As a smaller reporting company, the registrant is exempt from providing quantitative and qualitative disclosures about market risk210 Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2025. This is due to a previously identified material weakness related to the technical evaluation of accounting matters. While remediation efforts are underway, including hiring additional personnel and engaging consultants, they were not fully effective by the end of the period - The CEO and CFO concluded that the Company's Disclosure Controls were not effective as of June 30, 2025211 - A material weakness in controls over the technical evaluation of accounting matters, previously identified as of December 31, 2023, and 2024, has not been fully remediated212215 - Remediation steps include engaging consultants and hiring additional qualified accounting personnel, but these controls have not been in place long enough to demonstrate operating effectiveness215 Part II. Other Information Legal Proceedings The company is actively involved in two significant legal matters. It has filed a lawsuit against the author of a defamatory article from May 2024 that negatively impacted its business. Concurrently, it is defending against a consolidated putative class-action lawsuit filed by stockholders alleging violations of federal securities laws - The company filed a lawsuit against the author of a defamatory article published on May 10, 2024, which caused a major sell-side customer to temporarily pause its connection219 - A putative class-action lawsuit was filed against the company and certain officers in May 2024, alleging violations of federal securities laws related to public disclosures. The company believes the claims lack merit and intends to defend itself vigorously220 Risk Factors The primary risk highlighted is the potential delisting of the company's Class A Common Stock from the Nasdaq Capital Market. The company is non-compliant with both the minimum stockholders' equity and minimum bid price requirements. Failure to regain compliance within the granted extension period could severely impact the stock's liquidity, the company's ability to raise capital, and investor confidence - A significant risk is the potential delisting from the Nasdaq Capital Market due to non-compliance with the minimum stockholders' equity requirement and the minimum bid price rule222223 - Delisting could adversely affect the ability to raise additional financing, negatively impact the value and liquidity of the stock, and result in a loss of institutional investor interest223 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities in the reporting period224 Other Information On August 5, 2025, the company entered into a Sixth Amendment to its Credit Agreement with East West Bank (EWB). This amendment extended the maturity date of the credit facility from July 31, 2025, to August 31, 2025, in exchange for a principal payment of $200,000 - The company amended its credit agreement with EWB on August 5, 2025, extending the maturity date to August 31, 2025230 - In connection with the maturity extension, the company agreed to make a principal payment of $200,000 by August 15, 2025230