What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-11-13 compared with 2024-10-15 · 158 added, 120 removed, 253 unchanged (52% of the section changed)

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• our failure to manage our growth effectively;

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• the difficulty in identifying and integrating any future acquisitions or strategic investments;

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In late September 2020, DDH LLC acquired Orange142, LLC (“Orange 142”) to further bolster its overall programmatic buy-side advertising platform and enhance its offerings across multiple industry verticals such as travel, education, healthcare, financial services, consumer products and other sectors, with particular emphasis on small- and mid-sized businesses transitioning into digital with growing digital media budgets.

The subsidiaries of Direct Digital Holdings, Inc.

are as follows:

Direct Digital Holdings, Inc.

owns 100% of the voting interest in Direct Digital Holdings, LLC.

As of September 30, 2024, DDH owns 25.9% of the economic interest in Direct Digital Holdings, LLC.

See further discussion of the Up-C structure in Note 6 of our condensed consolidated financial statements.

Direct Digital Holdings, LLC was formed on June

21, 2018 and acquired by DDH on February 15, 2022 in connection with the Organizational Transactions.

Direct Digital Holdings, LLC’s wholly-owned subsidiaries are as follows:

Subsidiary Current %

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Huddled Masses, LLC 100% Buy-side November 13, 2012 June 21, 2018

Direct Digital Holdings, LLC (1)

N/A June 21, 2018 February 15, 2022

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(1) DDH owns 100% of the voting interest in Direct Digital Holding, LLC.

As of March 31, 2024, DDH owns 25.3% of the economic interest in Direct Digital Holdings, LLC.

See further discussion of the Up-C structure in Note 6 of our condensed consolidated financial statements.

Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP™ (“Colossus SSP”).

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Nasdaq Rule Noncompliance.

On April 17, 2024, May 21, 2024 and August 21, 2024, we received notices from the Listing Qualifications Department of Nasdaq regarding the Company’s failure to timely file its Annual Report on Form 10-K for the year ended December 31, 2023, its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 and its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023, respectively, with the SEC.

The Company submitted a plan to Nasdaq to regain compliance with respect to the Delinquent Filings, and Nasdaq granted the Company an exception until October 14, 2024 to evidence compliance with the rule requiring filing of our periodic reports.

Neither the notices from Nasdaq nor the Company’s non-compliance with the rule has an immediate effect on the listing or trading of the Company’s securities on Nasdaq, which currently continues to trade on The Nasdaq Capital Market under the symbol “DRCT.” We have since filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 on October 15, 2024 and are filing this Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 on the date hereof, leaving only one Delinquent Report left to file.

The Company continues to work diligently to complete and file the remaining Delinquent Filing with the SEC and thereby regain compliance with the Rule as soon as practicable.

Restatement of 2023 Quarterly Financial Information.

On October 14, 2024, the Company's management and the audit committee of the Company’s Board of Directors determined that interim financial statements (collectively, the “Prior Period Financial Statements”) as of the periods ended March 31, 2023, June 30, 2023 and September 30, 2023, and for the three months ended March 31, 2023, the three and six months ended June 30, 2023 and the three and nine months ended September 30, 2023, could no longer be relied upon.

During the preparation of Company’s consolidated financial statements as of and for the year ended December 31, 2023, the Company identified prior-period accounting errors resulting from the incorrect (1) accounting for, and presentation of, noncontrolling interests ("NCI"), (2) recognition of an organizational transaction in connection with the Company’s initial public offering, (3) presentation of earnings per share considering the effect of certain features of the Company’s warrants and the impact of correcting the accounting for, and presentation of, NCI and (4) timing of the recording of the 2023 redemption of warrants.

As a result, on October 14, 2024, the Audit Committee, in consultation with management, determined that the Prior Period Financial Statements could no longer be relied upon and the Company included a restatement of the Prior Period Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2023 it filed on October 15, 2024.

On October 18, 2024, we received a deficiency letter (the “Letter”) from the Listing Qualifications Department of Nasdaq (the "Staff") notifying the Company that it was not in compliance with the minimum stockholders’ equity requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(b)(1).

Nasdaq Listing Rule 5550(b)(1) requires companies listed on Nasdaq to maintain stockholders’ equity of at least $2.5 million (the “Stockholders’ Equity Requirement”).

The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2024 reported a stockholders’ deficit of $8.77 million.

The Letter further noted that as of the letter date, the Company did not have a market value of listed securities of $35 million, or net income from continued operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years, which are the alternative quantitative standards to the Stockholders’ Equity Requirement for continued listing on Nasdaq.

In accordance with the Nasdaq Listing Rules, the Company was provided 45 calendar days, or until December 2, 2024, to submit a plan to regain compliance (the “Compliance Plan”).

If the Compliance Plan is acceptable to the Staff, the Staff may grant an extension of up to 180 calendar days from the date of the Letter.

If the Staff does not accept the Compliance Plan, the Staff will provide written notification to the Company that the Compliance Plan has been rejected.

At that time, the Company may appeal the Staff’s determination to a Nasdaq Hearings Panel.

The Company intends to submit a Compliance Plan on or before December 2, 2024.

Further, the Company intends to take all reasonable measures available to regain compliance under the Nasdaq Listing Rules and remain listed on Nasdaq, including by capital-raising activities such as through the Purchase Agreement, defined below, for the equity reserve facility described in Note 4 — Stockholders’ Deficit and Stock-Based Compensation.

However, there can be no assurance that Nasdaq will approve the Compliance Plan or that the Company will ultimately regain compliance with all applicable requirements for continued listing.

Neither the Letter nor the Company’s non-compliance have an immediate effect on the listing or trading of the Company’s Class A Common Stock.

Equity Reserve Facility.

On October 18, 2024, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with New Circle Principal Investments LLC, a Delaware limited liability company (“New Circle”), pursuant to which New Circle has committed to purchase, subject to certain limitations, up to $20 million (the “Total Commitment”) of the Company’s Class A common stock, par value $0.001 per share (the “Class A Common Stock”).

Under the applicable Nasdaq rules, the Company may not issue to New Circle under the Purchase Agreement more than 19.99% of the shares of all classes of the Company’s common stock outstanding immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”), unless (i) the Company obtains stockholder approval to issue shares of its Class A Common Stock in excess of the Exchange Cap in accordance with applicable Nasdaq rules, or (ii) the average purchase price per share paid by New Circle for all shares of the Company’s Class A Common Stock, if any, that the Company elects to sell to New Circle under the

Purchase Agreement equals or exceeds certain minimums permitted under the rules of the Nasdaq Stock Market.

The purchase price of the shares that may be sold to New Circle under the Purchase Agreement will be based on an agreed upon fixed discount to the market price of our Class A Common Stock as computed under the Purchase Agreement.

As consideration for New Circle’s irrevocable commitment to purchase shares of the Company’s Class A Common Stock upon the terms of and subject to satisfaction of the conditions set forth in the Purchase Agreement, the Company paid New Circle structuring and legal fees of less than $0.1 million.

In addition, the Company will pay a commitment fee of $150,000 to New Circle, which we may issue in the form of the Company’s Class A Common Stock (the “Commitment Fee”), the market value of which shall be determined based on the closing price of the Class A Common Stock on the date the Registration Statement is declared effective by the SEC;

provided, however, that the Company may, in its sole discretion, elect to pay any portion of the Commitment Fee in cash, so long as such amount is paid on or prior to the day of filing of the Registration Statement filed in order to register the Company’s Class A Common Stock sold under the Purchase Agreement.

The Purchase Agreement will automatically terminate on the earliest of (i) the 36-month anniversary of the Purchase Agreement, (ii) the date on which New Circle shall have made payment to the Company for Class A Common Stock equal to the Total Commitment or (iii) the date any statute, rule, regulation, executive order, decree, ruling or injunction that would prohibit any of the transactions contemplated by the Purchase Agreement goes into effect.

The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty, upon five trading days’ prior written notice to New Circle so long as (a) there are no outstanding purchase notices under which our Class A Common Stock have yet to be issued and (b) the Company has paid all amounts owed to New Circle pursuant to the Purchase Agreement.

Relationship with Sell-Side Customer.

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The Company cannot make any predictions about the final outcome of this litigation matter or the timing thereof.

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Buy-side Unification.

On October 31, 2024, the Company announced the unification of its buy-side businesses, Orange 142 and Huddled Masses.

The unification did not have a material impact on the Company's business operations nor on the Company's condensed consolidated financial statements.

Key Factors Affecting Our Performance

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Our customers (or buyers) include ad exchanges, DSPs, agencies and individual advertisers.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 141,000 advertisers per month in the three months ended March 31, 2024, a decrease of 8% over the 153,000 advertisers per month in the three months ended March 31, 2023.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 176,000 advertisers per month in the three months ended September 30, 2024, an increase of 71% over the 103,000 advertisers per month in the three months ended September 30, 2023.

As spending on programmatic advertising increasingly becomes a larger share of the overall ad spend, advertisers and agencies are seeking greater control of their digital advertising supply chains.

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We enter into master service agreements with our publishers which, among other terms, set a fixed rate for content to be sold on Colossus SSP.

Our strategy on the sell-side advertising business represents growth potential, and we believe we are well positioned to be able to bring underserved multicultural publishers into the advertising ecosystem, thereby increasing our value proposition across all customers, including large advertisers and agencies.

Our strategy on the sell-side advertising business represents growth

potential, and we believe we are well positioned to be able to bring underserved multicultural publishers into the advertising ecosystem, thereby increasing our value proposition across all customers, including large advertisers and agencies.

Monetizing ad impressions for publishers and buyers

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We focus on monetizing digital impressions by coordinating daily real-time auctions and bids.

The publisher makes its ad inventory available on Colossus SSP and invites advertisers to bid based on the user’s data received.

Each time the publisher’s web page loads, an ad request is sent to multiple ad exchanges and, in some cases, to the demand side platform directly from Colossus SSP.

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Growing access to valuable ad impressions

Our recent growth has been driven by a variety of factors including increased access to mobile web (display and video) and mobile app (display and video) impressions and desktop video impressions.

Historically, our growth has been driven by a variety of factors including increased access to mobile web (display and video) and mobile app (display and video) impressions and desktop video impressions.

Our performance is affected by our ability to maintain and grow our access to valuable ad impressions from current publishers as well as through new relationships with publishers.

For the three months ended March 31, 2024, we processed over 830.0 billion average monthly bid requests, up 107% from 2023.

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For the three months ended September 30, 2024, we processed over 513.3 billion average monthly bid requests, down 51% from 2023, reflecting the pause in service by one of our sell-side customers in May 2024 which has not yet returned to pre-pause levels.

Expanding and managing investments

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We are technology, DSP and media agnostic, and we believe our clients trust us to provide the best opportunity for success of their brands and businesses.

As a result, our clients have been loyal, with approximately 90% client retention amongst the clients that represent approximately 80% of our revenue during the three months ended March 31, 2024.

As a result, our clients have been loyal, with approximately 88% client retention amongst the clients that represent approximately 80% of our revenue during the nine months ended September 30, 2024.

In addition, we cultivate client relationships through our pipeline of managed and moderate serve clients that conduct campaigns through our platform.

The managed services delivery model allows us to combine our technology with a highly personalized offering to strategically design and manage advertising campaigns.

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Shift to Digital Advertising

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In the advertising industry, companies commonly experience seasonal fluctuations in revenue.

Historically, for our buy-side advertising segment, the second and third quarters of the year reflect our highest levels of advertising activity and the first quarter reflects the lowest level of such activity.

Historically, for our buy-side advertising segment, the second and third quarters of the year reflect our highest levels of advertising activity and

the first quarter reflects the lowest level of such activity.

We expect our buy-side revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.

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We pay suppliers for the cost of digital media, advertising inventory, data and any add-on services or features.

Our revenue recognition policies are discussed in more detail under “ —Critical Accounting Estimates and Related Policies .”

Our revenue recognition policies are discussed in more detail under “ —Critical Accounting Estimates and Related Policies ” set forth in our Annual Report on Form 10-K for the year ended December 31, 2023.

Cost of revenues

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Operating expenses consist of compensation expenses related to our executive, sales, finance and administrative personnel (including salaries, commissions, stock-based compensation, bonuses, benefits and taxes);

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administrative expenses (including rent expense, professional fees, independent contractor costs, selling and marketing fees, administrative and operating system subscription costs, insurance, amortization expense related to our intangible assets);

general and administrative expenses (including rent expense, professional fees, independent contractor costs, selling and marketing fees, administrative and operating system subscription costs, insurance, amortization expense related to our intangible assets);

and other expenses (including transactions that are unusual in nature or which are occurring infrequently).

Other expense, net

Other income (expense), net

Other income.

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In March 2023, we issued a notice of termination and recognized a loss on the write-off of the deferred financing fees.

Derecognition of tax receivable agreement liability.

The Company derecognized its tax receivable agreement liability in connection with the full valuation allowance recorded on the Company's deferred tax assets.

Results of Operations

Comparison of the Three Months Ended March 31, 2024 and 2023

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

The following tables set forth our condensed consolidated results of operations for the periods presented (in thousands).

The period-to-period comparison of results is not necessarily indicative of results for future periods.

Three Months Ended March 31, Change

2024 2023 Amount %

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2024 2023 Amount % 2024 2023 Amount %

Sell-side advertising $ 2,202 $ 51,622 $ (49,420) (96) % $ 33,001 $ 89,006 $ (56,005) (63) %

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Operating expenses 7,172 7,259 (87) (1) % 22,973 21,652 1,321 6 %

Loss from operations (2,807) (141) (2,665) *nm

Other expense, net (1,212) (1,267) 55 (4) %

Loss before income taxes (4,019) (1,408) (2,611) 185 %

Income tax benefit (200) (74) (126) 169 %

Net loss $ (3,819) $ (1,334) $ (2,485) 186 %

(Loss) income from operations (3,658) 4,494 (8,152) (181) % (8,529) 6,607 (15,136) (229) %

Other income (expense), net 3,887 (977) 4,864 (498) % 1,323 (3,229) 4,552 (141) %

Income (loss) before income taxes 229 3,517 (3,288) (93) % (7,206) 3,378 (10,584) (313) %

Income tax expense 6,606 166 6,440 3880 % 6,132 166 5,966 3594 %

Net (loss) income $ (6,377) $ 3,351 $ (9,728) (290) % $ (13,338) $ 3,212 $ (16,550) (515) %

Adjusted EBITDA (1)

$ (2,855) $ 5,371 $ (8,226) (153) % $ (5,858) $ 8,978 $ (14,836) (165) %

nm – not meaningful

_______________________________________________________

(1) For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net income see “ – Non-GAAP Financial Measures .”

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Our revenues of $22.3 million for the three months ended March 31, 2024 increased by $1.1 million, or 5%, from $21.2 million for the three months ended March 31, 2023.

Sell-side advertising revenue increased $2.7 million, or 20%, primarily due to a continued increase in impression inventory, as well as increased publisher engagement across both general market and underrepresented publisher communities.

The Company sold approximately 1.9 billion average monthly impressions over the three months ended March 31, 2024, an increase of 7% from the prior period.

For the three months ended March 31, 2024, the Company processed over 248 billion average monthly impressions through its sell-side advertising segment, an increase of 20% over the same period of 2023.

In addition, the Company’s sell-side advertising platforms processed over 830 billion average monthly bid requests and received approximately 13 billion average monthly bid responses in the first quarter of 2024, an increase of 107% over the same period in 2023.

Sell-side revenue per advertiser for the first quarter of 2024 increased 30% compared to the same period of 2023.

Buy-side revenue decreased $1.7 million, or 22%, over the three months ended March 31, 2023 due to a decrease in spending from our existing customer base, completion of certain one-time campaigns in 2023 as well as a shift in timing of spend among quarters.

Our revenues of $9.1 million for the three months ended September 30, 2024 decreased by $50.4 million, or 85%, from $59.5 million for the three months ended September 30, 2023.

Sell-side advertising revenue decreased $49.4 million, or 96%, primarily due to a decrease in impression inventory.

This decrease was primarily caused by one of the Company’s sell-side customers pausing its connection to the Company during the second quarter while it investigated allegations made against the Company in a defamatory article / blog post which the Company believes was part of a coordinated misinformation campaign.

This customer reconnected the Company on May 22, 2024 and sell-side volumes have resumed but not yet at the levels experienced prior to the pause in May 2024, which affected the entirety of the quarter ended September 30, 2024.

The Company sold approximately 0.2 billion average monthly impressions over the three months ended September 30, 2024, a decrease of 97% from the prior period.

Buy-side revenue decreased $1.0 million, or 12%, over the three months ended September 30, 2023 due to a $0.7 million decrease in spending from our existing customer base, a $0.7 million decrease from completion of certain one-time campaigns in 2023 partially offset by growth from existing and new customers.

Our revenues of $53.2 million for the nine months ended September 30, 2024 decreased by $62.9 million, or 54%, from $116.1 million for the nine months ended September 30, 2023.

Sell-side advertising revenue decreased $56.0 million, or 63%, primarily due to a decrease in impression inventory, resulting from the customer suspension that occurred during May 2024, which negatively affected revenue in the second and third quarters of 2024.

The Company sold approximately 1.4 billion average monthly impressions over the nine months ended September 30, 2024, a decrease of 64% from the prior period.

Buy-side revenue decreased $6.9 million, or 25%, over the nine months ended September 30, 2023 due to a $4.5

million decrease in spending from our existing customer base and a $3.6 million decrease from completion of certain one-time campaigns in 2023 partially offset by growth from existing and new customers.

Cost of revenues

Consistent with the overall increase in revenues, cost of revenues of $17.3 million for the three months ended March 31, 2024 increased by $2.5 million, or 17% from $14.8 million for the three months ended March 31, 2023.

Sell-side advertising cost of revenues increased $3.0 million, to $14.8 million, or 90% of revenue for the three months ended March 31, 2024, compared to $11.8 million, or 86% of revenue, for the same period in 2023.

The increase in costs was primarily due to the related increase in revenue, while the 4% increase as a percentage of revenue was due to a short-term increase in fixed costs of approximately $0.6 million related to an increase in server capacity to support the growth as well as the mix and concentration of publishers and the related costs.

Buy-side advertising cost of revenues decreased $0.5 million, to $2.5 million, or 43% of revenue for the three months ended March 31, 2024, compared to $2.9 million, or 40% of revenue, for the same period in 2023.

Gross profit was $5.0 million, or 22% of revenue, for the three months ended March 31, 2024, compared to $6.4 million, or 30% of revenue, for the same period in 2023, reflecting a decrease of $1.4 million or 22%.

The change in margin for the three months ended March 31, 2024 is attributable to the mix in revenue between our business segments as our sell-side segment has higher cost of revenues compared to our buy-side segment, as well as the additional fixed costs related to an increase in server capacity.

Sell-side advertising gross profit decreased $0.2 million for the three months ended March 31, 2024 as compared to the same period in 2023, primarily due the increase in temporary fixed costs related to our servers partially offset by the increase in revenues.

Sell-side advertising gross margin was 10% and 14% for the three months ended March 31, 2024 and 2023, respectively.

Sell-side gross margin in 2024 was negatively impacted by additional fixed costs of approximately $0.6 million incurred in the three months ended March 31, 2024, related to an increase in server capacity to support our growth.

Buy-side advertising gross profit decreased $1.2 million for the three months ended March 31, 2024, as compared to the same period in the prior year, primarily due to the decrease in revenue.

Buy-side advertising gross margin was 57% and 60% for the three months ended March 31, 2024 and 2023, respectively.

Buy-side gross margin in 2024 was negatively impacted by reduced leverage due to lower revenue associated with the same level of fixed costs, which the Company expects to recover with the shift of a portion of revenue to the second quarter of 2024.

Consistent with the overall decrease in revenues, cost of revenues of $5.6 million for the three months ended September 30, 2024 decreased by $42.2 million, or 88%, from $47.7 million for the three months ended September 30, 2023.

Sell-side advertising cost of revenues decreased $42.0 million, to $2.7 million, or 121% of revenue for the three months ended September 30, 2024, compared to $44.6 million, or 86% of revenue, for the same period in 2023.

The decrease in costs was primarily due to the related decrease in revenue, while the increase as a percentage of revenue was due to fixed costs remaining at a level consistent with the prior year.

Buy-side advertising cost of revenues decreased $0.2 million, to $2.9 million, or 42% of revenue for the three months ended September 30, 2024, compared to $3.1 million, or 40% of revenue, for the same period in 2023.

Consistent with the overall decrease in revenues, cost of revenues of $38.8 million for the nine months ended September 30, 2024 decreased by $49.1 million, or 56% from $87.8 million for the nine months ended September 30, 2023.

Sell-side advertising cost of revenues decreased $46.5 million, to $30.7 million, or 93% of revenue for the nine months ended September 30, 2024, compared to $77.2 million, or 87% of revenue, for the same period in 2023.

The decrease in costs was primarily due to the related decrease in revenue, while the 6% increase as a percentage of revenue was due to an increase in fixed costs of approximately $0.5 million related to an increase in server capacity and approximately $1.1 million related to new analytic and technology-related costs to support the growth as well as the mix and concentration of publishers and the related costs.

Buy-side advertising cost of revenues decreased $2.6 million, to $8.1 million, or 40% of revenue for the nine months ended September 30, 2024, compared to $10.7 million, or 39% of revenue, for the same period in 2023.

Gross profit was $3.5 million, or 39% of revenue, for the three months ended September 30, 2024, compared to $11.8 million, or 20% of revenue, for the same period in 2023, reflecting a decrease of $8.2 million, or 70%.

The change in margin for the three months ended September 30, 2024 is attributable to the mix in revenue between our business segments as our sell-side segment has higher cost of revenues compared to our buy-side segment, as well as the consistent level of fixed costs not covered by current period sell-side revenue.

Sell-side advertising gross profit decreased $7.5 million for the three months ended September 30, 2024 as compared to the same period in 2023, primarily due to a consistent level of fixed costs not covered by current period sell-side revenue.

Sell-side advertising gross margin was (21)% and 14% for the three months ended September 30, 2024 and 2023, respectively.

Buy-side advertising gross profit decreased $0.8 million for the three months ended September 30, 2024, as compared to the same period in the prior year, primarily due to the decrease in revenue.

Buy-side advertising gross margin was 58% and 60% for the three months ended September 30, 2024 and 2023, respectively.

Gross profit was $14.4 million, or 27% of revenue, for the nine months ended September 30, 2024, compared to $28.3 million, or 24% of revenue, for the same period in 2023, reflecting a decrease of $13.8 million or 49%.

The change in margin for the nine months ended September 30, 2024 is attributable to the mix in revenue between our business segments as our sell-side segment has higher cost of revenues compared to our buy-side segment, as well as the additional sell-side fixed costs related to an increase in server capacity and new analytic and technology-related costs.

Sell-side advertising gross profit decreased $9.5 million for the nine months ended September 30, 2024 as compared to the same period in 2023, primarily due to the increase in fixed costs of approximately $1.6 million related to our servers and analytic and technology-related costs and the decrease in revenues.

Sell-side advertising gross margin was 7% and 13% for the nine months ended September 30, 2024 and 2023, respectively.

Buy-side advertising gross profit decreased $4.3 million for the nine months ended September 30, 2024, as compared to the same period in the prior year, primarily due to the decrease in revenue.

Buy-side advertising gross margin was 60% and 61% for the nine months ended September 30, 2024 and 2023, respectively.

Operating expenses

The following table sets forth the components of operating expenses for the periods presented (in thousands):

Three Months Ended March 31, Change

2024 2023 Amount %

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2024 2023 Amount % 2024 2023 Amount %

Compensation, tax and benefits $ 3,526 $ 4,747 $ (1,221) (26) % $ 12,216 $ 12,934 $ (718) (6) %

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Compensation, taxes and benefits

Compensation, taxes and benefits of $4.5 million, increased by $0.9 million, or 24%, for the three months ended March 31, 2024 from $3.6 million for the same period in 2023.

The increase is due to headcount additions made throughout

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2023 primarily in our operations area to support our growth as well as in our shared services to support our public company infrastructure and increased stock compensation, partially offset by a decrease bonus expense.

Sequentially, compensation, taxes and benefits decreased by $0.3 million, or 6%, from $4.8 million for the three months ended December 31, 2023 primarily due to lower bonus accrual.

We expect to continue to invest in corporate infrastructure and incur additional expenses associated with our transition to and operation as a public company, including increased compensation associated with additional headcount to support our sales initiatives.

Compensation, taxes and benefits of $3.5 million, decreased by $1.2 million, or 26%, for the three months ended September 30, 2024 from $4.7 million for the same period in 2023.

The decrease is due primarily to a decrease in bonus and commissions expense related to the decrease in revenue.

Sequentially, compensation, taxes and benefits decreased by $0.6 million, or 15%, from $4.2 million for the three months ended June 30, 2024 primarily due to lower payroll costs resulting from headcount reductions made effective July 1, 2024.

Compensation, taxes and benefits of $12.2 million, decreased by $0.7 million, or 6%, for the nine months ended September 30, 2024 from $12.9 million for the same period in 2023.

The decrease is primarily due to a decrease in bonus and commission expense related to the decrease in revenue.

On July 1, 2024, we executed an internal reorganization plan that included a staff reduction, a pause on hiring and cost savings measures, which we anticipate will lower certain ongoing expenses, especially as the Company incurs additional one-time expenses to regain compliance with respect to delinquent SEC filings.

General and administrative expenses

General and administrative (“G&A”) expenses of $3.3 million for the three months ended March 31, 2024 increased from $2.9 million for the same period in 2023.

G&A expenses as a percentage of revenue was 15% and 14% for the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024, we incurred higher professional fees and software licenses.

Sequentially, G&A expenses decreased by $1.2 million, or 27%, from $4.5 million for the three months ended December 31, 2023 primarily due to lower professional fees, sales and marketing costs and travel expense.

General and administrative (“G&A”) expenses of $3.6 million for the three months ended September 30, 2024 increased from $2.5 million for the same period in 2023.

G&A expenses as a percentage of revenue was 40% and 4% for the three months ended September 30, 2024 and 2023, respectively.

During the three months ended September 30, 2024, we incurred $1.1 million in costs to regain compliance with respect to delinquent SEC filings as well as $0.3 million higher legal expenses compared to the prior year.

Sequentially, G&A expenses decreased by $0.2 million, or 5%, from $3.8 million for the three months ended June 30, 2024 primarily due to lower sales and marketing expenses, travel and franchise tax expense, partially offset by $0.9 million of higher compliance and legal costs.

General and administrative (“G&A”) expenses of $10.8 million for the nine months ended September 30, 2024 increased from $8.7 million for the same period in 2023.

G&A expenses as a percentage of revenue was 20% and 8% for the nine months ended September 30, 2024 and 2023, respectively.

During the nine months ended September 30, 2024, we incurred $1.3 million in costs to regain compliance with respect to delinquent SEC filings, $0.4 million higher legal expenses and $0.4 million higher franchise tax expense.

We expect to continue to invest in and incur additional expenses associated with our operation as a public company, including increased professional fees, investment in automation, and compliance costs associated with developing the requisite infrastructure required for internal controls.

Other expense, net

The following table sets forth the components of other expense, net for the periods presented (in thousands).

However, on July 1, 2024, we executed an internal reorganization plan that included a staff reduction, a pause on hiring and cost savings measures, which we anticipate will lower certain ongoing expenses, especially as the Company ceases incurring additional one-time expenses to regain compliance with respect to delinquent SEC filings, which have now all been filed.

Other income (expense), net

The following table sets forth the components of other income (expense), net for the periods presented (in thousands).

Three Months Ended

March 31, Change

2024 2023 Amount %

September 30, Change Nine Months Ended September 30, Change

2024 2023 Amount % 2024 2023 Amount %

Interest expense $ (1,413) $ (1,060) $ (353) 33 % $ (4,068) $ (3,104) $ (964) 31 %

Other income 99 83 16 19 % 190 175 15 9 %

Loss on early termination of line of credit — (300) 300 nm

Total other expense, net $ (1,212) $ (1,267) $ 55 (4) %

Loss on early termination of line of credit — — — nm — (300) 300 nm

Derecognition of tax receivable agreement liability 5,201 — 5,201 nm 5,201 — 5,201 nm

Total other income (expense), net $ 3,887 $ (977) $ 4,864 nm $ 1,323 $ (3,229) $ 4,552 nm

nm – not meaningful

Other expense, net for the three months ended March 31, 2024 primarily consists of $1.3 million of interest expense.

Other expense, net for the three months ended March 31, 2023 is primarily consists of $1.0 million of interest expense and $0.3 million related to the loss on early termination of the line of credit with Silicon Valley Bank.

Interest expense increased for the three months ended March 31, 2024 to $1.3 million, compared to $1.0 million for the three months ended March 31, 2023.

The increase in interest expense in the period is due to additional net borrowings of $10.2 million under the Company’s credit facilities, as well as higher interest rates.

Other income (expense), net primarily includes $5.2 million relating to the derecognition of tax receivable agreement liability in connection with the full valuation allowance recorded on the Company’s deferred tax assets during the three months ended September 30, 2024.

Other income (expense), net for the three months ended September 30, 2024 and 2023 also consists of $1.4 million and $1.1 million, respectively, of interest expense.

Interest expense increased by $0.4 million due to additional net borrowings of $12.7 million under the Company’s credit facilities, as well as higher interest rates.

Other income (expense), net for the nine months ended September 30, 2024 primarily includes $5.2 million relating to the derecognition of tax receivable agreement liability in connection with the full valuation allowance recorded on the Company’s deferred tax assets.

Other income (expense), net also consists of $4.1 million and $3.1 million, respectively, of interest expense.

Interest expense increased by $1.0 million due to additional net borrowings of $12.7 million under the Company’s credit facilities, as well as higher interest rates.

Lastly, other income (expense), net for the nine months ended September 30, 2023 also includes $0.3 million related to the loss on early termination of the line of credit with SVB.

Liquidity and Capital Resources

Going Concern

On May 10, 2024, the Company was the subject of a defamatory article / blog post which the Company believes was part of a coordinated misinformation campaign.

As discussed in Note 9, one of the Company’s sell-side customers paused its connection to the Company for a couple of weeks in May 2024, which reduced sell-side sales volumes.

As discussed in Note 9 to the condensed consolidated financial statements, on May 10, 2024, the Company was the subject of a defamatory article / blog post which the Company believes was part of a coordinated misinformation campaign.

In connection with this post, one of the Company’s sell-side customers paused its connection to the Company for a couple of weeks in May 2024, which reduced sell-side sales volumes.

As of the date of this report, sell-side volumes related to this customer have resumed but not yet at the levels experienced prior to the pause in May 2024 which has created significant disruption in the Company’s sell-side business.

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However, there can be no assurance that the Company will be able to achieve prior volume levels with its partners or on the timing of achieving such volume levels.

Additionally, the Company (1) incurred a net loss of $6.8 million in 2023 primarily related to payments made to a few publishers of $8.8 million associated with a disputed short payment from a customer and a net loss of $3.8 million in the three months ended March 31, 2024 consistent with seasonal historical trends for the Company, (2) reported an accumulated deficit of $3.3 million as of March 31, 2024 (3) reported cash and cash equivalents of $3.3 million as of March 31, 2024, (4) has borrowed $7.0 million and $9.7 million as of March 31, 2024 and the date of this report, respectively, under the Credit Agreement which matures in July 2025, (5) was notified on April 17, 2024 that the Company’s auditor had resigned and (6) was unable to timely file its 2023 annual report and quarterly reports for the first two quarters of 2024.

The delay in filing the Company’s annual and quarterly reports disrupted existing capital-raising efforts and created additional audit,

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legal and other expenses.

Additionally, the Company (1) incurred a net loss of $13.3 million for the nine months ended September 30, 2024 reflecting the impact of the sell-side disruption described above and a decrease in customer spend on the buy-side, (2) reported an accumulated deficit of $6.6 million as of September 30, 2024, (3) reported cash and cash equivalents of $4.1 million as of September 30, 2024, (4) has borrowed $9.7 million and $8.7 million, respectively, as of September 30, 2024 and the date of this report, under the Credit Agreement which matures in July 2025, (5) was notified on April 17, 2024 that the Company’s auditor had resigned, (6) was unable to timely file its 2023 annual report and quarterly reports for the first two quarters of 2024 and (7) was notified by Nasdaq on October 18, 2024 that it was not in compliance with Nasdaq's minimum stockholders' equity requirement.

The delay in filing the Company’s annual and quarterly reports disrupted existing capital-raising efforts and created additional audit, legal and other expenses.

These factors raise substantial doubt about the Company’s ability to continue as a going concern over the next twelve months.

The Company anticipates sources of liquidity to include cash on hand and cash flow from operations and has taken several actions to address liquidity concerns.

These actions include (1) a plan to reduce expenses through a staff reduction, a pause on hiring and cost savings measures that were executed on July 1, 2024, (2) working with lenders to provide temporary relief from debt covenants (see Note 3 – Long-Term Debt to the Company's unaudited financial statements) while rebuilding sell-side volumes, (3) raising capital through arrangements with various providers, and (4) regaining compliance with respect to delinquent SEC filings which will allow the Company to access the capital markets as well as other financing sources.

These actions include (1) a plan to reduce expenses through a staff reduction, a pause on hiring and cost savings measures that were executed on July 1, 2024, (2) working with lenders to provide temporary various relief from debt covenants (see Note 3 — Long-Term Debt in the condensed consolidated financial statements) while rebuilding sell-side volumes, (3) putting in place a program to raise capital through an equity reserve facility (see Note 4 - Stockholders' Deficit and Stock-Based Compensation in the condensed consolidated financial statements), (4) regaining compliance with respect to delinquent SEC filings on October 15, 2024 which will allow the Company to access the capital markets as well as other financing sources and (5) a plan to achieve compliance with

Nasdaq's minimum stockholders' equity requirement.

There can be no assurance that the Company’s actions will be successful or that additional financing will be available when needed or on acceptable terms.

Sources of Liquidity

The following table summarizes our cash and cash equivalents, working capital, and availability under our Credit Agreement (as defined below) on March 31, 2024 and December 31, 2023 (in thousands):

March 31, 2024 December 31, 2023

The following table summarizes our cash and cash equivalents, working capital, and availability under our Credit Agreement (as defined below) on September 30, 2024 and December 31, 2023 (in thousands):

September 30, 2024 December 31, 2023

Cash and cash equivalents $ 4,087 $ 5,116

Working capital (1)

$ (33,813) $ 3,280

Availability under Credit Agreement $ 300 $ 7,000

(1) Working capital as of September 30, 2024 includes all amounts owed to Lafayette Square, which is shown as current portion of long term debt until a waiver or amendment is finalized with Lafayette Square.

See Note 3 — Long-Term Debt in the notes to the condensed consolidated financial statements.

To fund our operations and service our debt thereafter and depending on our growth and results of operations, we may raise additional capital through the issuance of additional equity and/or debt, which could have the effect of diluting our stockholders.

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The terms and conditions of the various credit facilities we entered into are further described in Note 3 — Long-Term Debt in the notes to the condensed consolidated financial statements.

Equity Reserve Facility

The terms and conditions of the equity reserve facility we entered into with New Circle are further described in Note 4 — Stockholders’ Deficit and Stock-Based Compensation in the notes to the condensed consolidated financial statements.

Historical Cash Flows:

The following table sets forth our cash flows for the three months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended

The following table sets forth our cash flows for the nine months ended September 30, 2024 and 2023 (in thousands):

Nine Months Ended September 30,

Net cash (used in) provided by operating activities $ (7,095) $ 4,481

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Net (decrease) increase in cash and cash equivalents $ (1,029) $ 1,435

Our cash and cash equivalents at March 31, 2024 were held for working capital and general corporate purposes.

The decrease in cash and cash equivalents compared with March 31, 2023, primarily resulted from $5.7 million in cash flows used in operating activities partially offset by $3.9 million in cash flows provided by financing activities.

Our cash and cash equivalents at September 30, 2024 were held for working capital and general corporate purposes.

The decrease in cash and cash equivalents compared with September 30, 2023, primarily resulted from $7.1 million in cash flows used in operating activities partially offset by $6.1 million in cash flows provided by financing activities.

Operating Activities

For the Three Months Ended March 31, 2024 and 2023

For the Nine Months Ended September 30, 2024 and 2023

Cash provided by operating activities has typically been generated from net income and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable and accrued expenses, adjusted for certain non-cash and non-operating expense items such as depreciation, amortization, stock-based compensation and deferred income taxes.

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For the three months ended March 31, 2024, net cash flows used in operating activities were $5.7 million and consisted of net loss of $3.8 million, $1.1 million in adjustments for non-cash and non-operating items and $3.0 million of cash out flows from working capital.

Adjustments for non-cash and non-operating items mainly consisted of depreciation and amortization expense of $0.8 million and stock-based compensation expense of $0.5 million partially offset by $0.2 million of deferred tax benefit.

The $3.0 million decrease in cash resulting from changes in working capital primarily consisted of a $18.1 million decrease in accounts payable and a $0.7 million decrease in accrued expenses such as payroll and payroll related expenses partially offset by a $15.8 million decrease in accounts receivable.

The decrease in accounts payable and accounts receivable is mainly due to the seasonal nature of the sell-side segment of the business as well as a payment of $8.8 million to a few publishers associated with a charge recorded in 2023 related to a disputed short pay from a customer.

For the three months ended March 31, 2023, net cash flows provided by operating activities were $3.1 million and mainly consisted of net loss of $1.3 million, $1.0 million in adjustments for noncash and non-operating items and $3.4 million of cash inflows from working capital.

For the nine months ended September 30, 2024, net cash flows used in operating activities were $7.1 million and consisted of net loss of $13.3 million, offset by $4.1 million in adjustments for non-cash and non-operating items and

$2.1 million of cash inflows from working capital.

Adjustments for non-cash and non-operating items mainly consisted of depreciation and amortization expense of $2.3 million, stock-based compensation expense of $0.8 million and deferred tax expense of $6.1 million partially offset by $5.2 million of derecognition of tax receivable agreement liability in connection with the full valuation allowance recorded on the Company’s deferred tax assets.

The $2.1 million increase in cash resulting from changes in working capital primarily consisted of a $30.9 million decrease in accounts receivable, partially offset by a $27.5 million decrease in accounts payable and a $1.5 million decrease in accrued expenses such as payroll and payroll related expenses.

The decrease in accounts payable and accounts receivable is mainly due to the May 2024 temporary disconnection by a significant customer as a result of a customer investigating a defamatory article / blog post against the Company, as well as a payment of $8.8 million to a few publishers associated with a charge recorded in 2023 related to a disputed short pay from a customer.

For the nine months ended September 30, 2023, net cash flows provided by operating activities were $4.5 million and mainly consisted of net income of $3.2 million and $3.2 million in adjustments for noncash and non-operating items, partially offset by $2.0 million of cash outflows from working capital.

Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of $2.2 million, stock-based compensation expense of $0.5 million and loss on early termination of line of credit of $0.3 million.

The $3.4 million increase in cash resulting from changes in working capital consisted primarily of a $7.3 million decrease in accounts receivable and a $0.4 million increase in deferred revenues partially offset by a $3.9 million decrease in accounts payable.

The decrease in accounts receivable and accounts payable is mainly due to the seasonal nature of the sell-side segment of the business.

The $2.0 million decrease in cash resulting from changes in working capital consisted primarily of a $28.4 million increase in accounts receivable and a $0.8 million decrease in accrued liabilities, offset by a $27.3 million increase in accounts payable.

The increase in accounts receivable and accounts payable is mainly due to the seasonal nature of the sell-side segment of the business.

Investing Activities

For the Three Months Ended March 31, 2024 and 2023

For the Nine Months Ended September 30, 2024 and 2023

Our investing activities to date have consisted primarily of purchases of software, office furniture and leasehold improvements.

For the three months ended March 31, 2023, net cash flows used in investing activities of less than $0.1 million were primarily related to leasehold improvements and office furniture.

For the nine months ended September 30, 2024 and 2023, net cash flows used in investing activities of less than $0.1 million and $0.1 million, respectively, were primarily related to office furniture and leasehold improvements.

Financing Activities

For the Three Months Ended March 31, 2024 and 2023

For the three months ended March 31, 2024, net cash provided by financing activities was $3.9 million mainly resulting from $4.0 million of proceeds from line of credit and $0.2 million proceeds from warrants exercised partially offset by $0.4 million paid on term loan.

For the three months ended March 31, 2023, net cash used in financing activities was $0.4 million mainly resulting from $0.2 million paid on term loan and $0.2 million deferred financing costs.

For the Nine Months Ended September 30, 2024 and 2023

For the nine months ended September 30, 2024, net cash provided by financing activities was $6.1 million mainly resulting from $6.7 million of proceeds from line of credit and $0.2 million proceeds from warrants exercised partially offset by $0.6 million for payments on shares withheld for taxes and $0.4 million paid on term loan.

For the nine months ended September 30, 2023, net cash used in financing activities was $2.9 million mainly resulting from $2.0 million for distributions paid to LLC holders, $0.5 million paid on the term loan and $0.4 million for deferred financing costs.

Contractual Obligations and Future Cash Requirements

As of March 31, 2024, our principal contractual obligations expected to give rise to material cash requirements consist of the 2021 Credit Facility, the Credit Agreement and non-cancelable leases for our various facilities.

We anticipate that the future minimum payments related to our current indebtedness over the next five years will be $1.1 million in 2024, $8.5 million in 2025, $25.7 million in 2026, less than $0.1 million in 2027, less than $0.1 million in 2028, and $0.1 million thereafter, assuming we do not refinance our indebtedness, enter into a new revolving credit facility or make any further draws under the revolving facility.

As of September 30, 2024, our principal contractual obligations expected to give rise to material cash requirements consist of the 2021 Credit Facility, the Credit Agreement and non-cancelable leases for our various facilities.

After giving effect to the October 2024 amendments to the Company's debt facilities, we anticipate that the future minimum payments related to our current indebtedness over the next five years will be $1.0 million in 2024, $8.7 million in 2025, $28.2 million in 2026, less than $0.1 million in 2027, less than $0.1 million in 2028, and $0.1 million thereafter, assuming we do not refinance our indebtedness, enter into a new revolving credit facility or make any further draws under the revolving facility.

The leases will require minimum payments of $0.1 million in 2024, $0.3 million in 2025, $0.3 million in 2026, $0.3 million in 2027, $0.2 million in 2028, and $0.2 million thereafter.

As of March 31, 2024, we had cash and cash equivalents of $3.3 million.

Based on projections of revenue and operating results in the coming year, the available cash held by the Company and the amounts the Company may borrow under the Credit Agreement, the Company believes that it will have sufficient cash resources to finance its operations and service any maturing debt obligations for at least the next twelve months following the issuance of these financial statements.

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As of September 30, 2024, we had cash and cash equivalents of $4.1 million.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S.

generally accepted accounting principles (“GAAP”), including, in particular operating income, net cash provided by operating activities, and net income, we believe that earnings before interest, taxes, depreciation and amortization, as adjusted for loss on early termination of line of credit and stock-based compensation (“Adjusted EBITDA”), a non-GAAP measure, is useful in evaluating our operating performance.

generally accepted accounting principles (“GAAP”), including, in particular operating income, net cash provided by operating activities, and net income, we believe that earnings before interest, taxes, depreciation and amortization, as adjusted for loss on early termination of line of credit, derecognition of tax receivable agreement liability and stock-based compensation (“Adjusted EBITDA”), a non-GAAP measure, is useful in evaluating our operating performance.

The most directly comparable GAAP measure to Adjusted EBITDA is net income.

The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods presented (in thousands):

The following table presents a reconciliation of Adjusted EBITDA to net (loss) income for each of the periods presented (in thousands):

Three Months Ended

Net loss $ (3,819) $ (1,334)

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

Net (loss) income $ (6,377) $ 3,351 $ (13,338) $ 3,212

Add back (deduct):

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Loss on early termination of line of credit — — — 300

Income tax benefit (200) (74)

Income tax expense 6,606 166 6,132 166

Derecognition of tax receivable agreement liability (5,201) — (5,201) —

Adjusted EBITDA $ (2,855) $ 5,371 $ (5,858) $ 8,978

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We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:

• Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, provision for income taxes, stock-based compensation, revaluation of tax receivable agreement liability, and certain one-time items such as acquisition transaction costs, losses from early termination or redemption of credit agreements or preferred units and gains from settlements or loan forgiveness that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

• Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, provision for income taxes, stock-based compensation, derecognition of tax receivable agreement liability, and certain one-time items such as acquisition transaction costs, losses from early termination or redemption of credit agreements or preferred units and gains from settlements or loan forgiveness that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

• Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance;

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The Company bases its estimates on past experiences, market conditions, and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

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There have been no material changes to our critical accounting estimates and related policies as compared to the critical accounting estimates and related policies described in our "Management’s Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Annual Report on Form 10-K for the year ended December 31, 2023.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis