Direct Digital Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and par value amounts) March 31, 2025 December 31, 2024 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,789 $ 1,445 Accounts receivable, net of provision for credit losses of $ 978 4,391 4,973 Prepaid expenses and other current assets 701 2,117 Total current assets 6,881 8,535 Property, equipment and software, net 288 341 Goodwill 6,520 6,520 Intangible assets, net 9,242 9,730 Operating lease right-of-use assets 838 832 Other long-term assets 48 48 Total assets $ 23,817 $ 26,006 LIABILITIES AND STOCKHOLDERS’ DEFICIT CURRENT LIABILITIES Accounts payable $ 7,024 $ 7,657 Accrued liabilities 1,512 1,257 Liability related to tax receivable agreement, current portion 41 41 Current maturities of long-term debt 4,122 3,700 Deferred revenues 558 507 Operating lease liabilities, current portion 202 188 Income taxes payable 19 — Total current liabilities 13,478 13,350 Long-term debt, net of current portion, deferred financing cost and debt discount 32,878 31,603 Operating lease liabilities, net of current portion 776 783 Total liabilities 47,132 45,736 COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS’ DEFICIT Class A Common Stock, $ 0.001 par value per share, 160,000,000 shares authorized, 7,093,480 and 5,450,554 shares issued and outstanding, respectively 7 6 Class B Common Stock, $ 0.001 par value per share, 20,000,000 shares authorized, 10,798,000 and 10,868,000 shares issued and outstanding, respectively 11 11 Additional paid-in capital 3,776 3,769 Accumulated deficit ( 11,129 ) ( 8,774 ) Noncontrolling interest ( 15,980 ) ( 14,742 ) Total stockholders’ deficit ( 23,315 ) ( 19,730 ) Total liabilities and stockholders’ deficit $ 23,817 $ 26,006 See accompanying notes to the unaudited condensed consolidated financial statements. 3 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per-share data) Three Months Ended March 31, 2025 2024 Revenues Sell-side advertising $ 2,028 $ 16,500 Buy-side advertising 6,129 5,775 Total revenues 8,157 22,275 Cost of revenues Sell-side advertising 2,638 14,807 Buy-side advertising 3,126 2,470 Total cost of revenues 5,764 17,277 Gross profit 2,393 4,998 Operating expenses Compensation, taxes and benefits 3,664 4,524 General and administrative 2,653 3,281 Total operating expenses 6,317 7,805 Loss from operations ( 3,924 ) ( 2,807 ) Other income (expense) Other income 28 85 Expenses for Equity Reserve Facility ( 198 ) — Interest expense ( 1,846 ) ( 1,297 ) Total other expense, net ( 2,016 ) ( 1,212 ) Loss before income taxes ( 5,940 ) ( 4,019 ) Income tax benefit — ( 200 ) Net loss ( 5,940 ) ( 3,819 ) Net loss attributable to noncontrolling interest ( 3,585 ) ( 3,044 ) Net loss attributable to Direct Digital Holdings, Inc. $ ( 2,355 ) $ ( 775 ) Net loss per common share attributable to Direct Digital Holdings, Inc.: Basic $ ( 0.35 ) $ ( 0.22 ) Diluted $ ( 0.35 ) $ ( 0.22 ) Weighted-average number of shares of common stock outstanding: Basic 6,710 3,509 Diluted 6,710 3,509 See accompanying notes to the unaudited condensed consolidated financial statements. 4 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (Unaudited) (in thousands except share data) Three Months Ended March 31, 2025 Common Stock APIC Accumulated Deficit Noncontrolling Interest Stockholders’ Deficit Class A Class B Units Amount Units Amount Balance, December 31, 2024 5,450,554 $ 6 10,868,000 $ 11 $ 3,769 $ ( 8,774 ) $ ( 14,742 ) $ ( 19,730 ) Stock-based compensation — — — — 316 — — 316 Issuance related to vesting of restricted stock units, net of tax withholdings 33,575 — — — — — — — Issuance pursuant to the Equity Reserve Facility 1,539,351 1 — — 2,038 — — 2,039 Conversion of Class B to Class A Common Stock 70,000 — ( 70,000 ) — ( 95 ) — 95 — Net loss — — — — — ( 2,355 ) ( 3,585 ) ( 5,940 ) Noncontrolling interest rebalancing — — — — ( 2,252 ) — 2,252 — Balance, March 31, 2025 7,093,480 $ 7 10,798,000 $ 11 $ 3,776 $ ( 11,129 ) $ ( 15,980 ) $ ( 23,315 ) Three Months Ended March 31, 2024 Common Stock APIC Accumulated Deficit Noncontrolling Interest Stockholders’ Deficit Class A Class B Units Amount Units Amount Balance, December 31, 2023 3,478,776 $ 3 10,868,000 $ 11 $ 3,067 $ ( 2,538 ) $ ( 5,962 ) $ ( 5,419 ) Stock-based compensation — — — — 504 — — 504 Issuance related to vesting of restricted stock units, net of tax withholdings 88,386 1 — — ( 1 ) — — — Warrants exercised 39,101 — — — 215 — — 215 Stock options exercised 8,338 — — — 79 — — 79 Issuance of stock in lieu of cash bonus, net of tax withholdings 69,677 — — — 913 — — 913 Net loss — — — — — ( 775 ) ( 3,044 ) ( 3,819 ) Noncontrolling interest rebalancing — — — — ( 1,336 ) — 1,336 — Balance, March 31, 2024 3,684,278 $ 4 10,868,000 $ 11 $ 3,441 $ ( 3,313 ) $ ( 7,670 ) $ ( 7,527 ) See accompanying notes to the unaudited condensed consolidated financial statements. 5 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2025 2024 Cash Flows Used In Operating Activities: Net loss $ ( 5,940 ) $ ( 3,819 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred financing cost and debt discount 1,818 186 Amortization of intangible assets 488 488 Reduction in carrying amount of right-of-use assets 46 37 Depreciation and amortization of property, equipment and software 68 71 Stock-based compensation 316 504 Deferred income taxes — ( 200 ) Expenses for Equity Reserve Facility 198 — Provision for credit losses/bad debt expense — ( 11 ) Changes in operating assets and liabilities: Accounts receivable 582 15,783 Prepaid expenses and other assets 69 ( 89 ) Accounts payable ( 633 ) ( 18,062 ) Accrued liabilities and tax receivable agreement payable 254 ( 748 ) Income taxes payable 19 — Deferred revenues 51 176 Operating lease liability ( 44 ) ( 20 ) Net cash used in operating activities ( 2,708 ) ( 5,704 ) Cash Flows Used In Investing Activities: Cash paid for capitalized software and property and equipment ( 15 ) — Net cash used in investing activities ( 15 ) — Cash Flows Provided by Financing Activities: Payments on term loan — ( 372 ) Proceeds from line of credit — 4,000 Payment of expenses for Equity Reserve Facility ( 198 ) — Proceeds from issuance of Class A Common Stock 3,311 — Payment of deferred financing cost ( 46 ) — Proceeds from options exercised — 79 Proceeds from warrants exercised — 215 Net cash provided by financing activities 3,067 3,922 Net increase (decrease) in cash and cash equivalents 344 ( 1,782 ) Cash and cash equivalents, beginning of the period 1,445 5,116 Cash and cash equivalents, end of the period $ 1,789 $ 3,334 Supplemental Disclosure of Cash Flow Information: Cash paid for taxes $ 19 $ 28 Cash paid for interest $ 92 $ 1,078 Non-cash Financing Activities: Common stock issued for subscription receivable $ 90 $ — See accompanying notes to the unaudited condensed consolidated financial statements. 6 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 — Organization and Description of Business Direct Digital Holdings, Inc., incorporated as a Delaware corporation on August 23, 2021 and headquartered in Houston, Texas, together with its subsidiaries, is an end-to-end, full-service advertising and marketing platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to help brands, agencies and middle market businesses deliver successful marketing results that drive return on investment ("ROI") across both the sell- and buy-side of the digital advertising ecosystem. Direct Digital Holdings, Inc. is the holding company for Direct Digital Holdings, LLC (“DDH LLC”), the business formed by the Company's founders in 2018 through acquisitions of Colossus Media, LLC (“Colossus Media”) and Huddled Masses, LLC (“Huddled Masses ® ” or “Huddled Masses”). Colossus Media operates the Company’s proprietary sell-side programmatic platform ("SSP") operating under the trademarked banner of Colossus SSP TM (“Colossus SSP”). In September 2020, DDH LLC acquired Orange142, LLC (“Orange 142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals. In February 2022, Direct Digital Holdings, Inc. completed an initial public offering of its securities and, together with DDH LLC, effected a series of transactions (together, the “Organizational Transactions”) whereby Direct Digital Holdings, Inc. became the sole managing member of DDH LLC, the holder of 100 % of the voting interests of DDH LLC and the holder of 19.7 % of the economic interests of DDH LLC, commonly referred to as an “Up-C” structure. (See Note 6 — Related Party Transactions). In October 2024, the Company announced the unification of its buy-side businesses, Orange 142 and Huddled Masses. In these condensed consolidated financial statements, the “Company,” “Direct Digital,” “Direct Digital Holdings,” “DDH,” “we,” “us” and “our” refer to Direct Digital Holdings, Inc., and, unless otherwise stated, all of its subsidiaries, including DDH LLC and, unless otherwise stated, its subsidiaries. All of the subsidiaries are incorporated in the state of Delaware, except for DDH LLC, which was formed under the laws of the State of Texas. Direct Digital Holdings, Inc. owns 100 % of the voting interest in DDH LLC and as of March 31, 2025, it owns 39.6 % of the economic interest in DDH LLC. See further discussion of the Up-C structure in Note 6 — Related Party Transactions. DDH LLC was formed on June 21, 2018 and acquired by DDH on February 15, 2022 in connection with the Organizational Transactions. DDH LLC’s wholly-owned subsidiaries are as follows: Subsidiary Business Segment Date of Formation Date of Acquisition Colossus Media, LLC Sell-side September 8, 2017 June 21, 2018 Orange142, LLC Buy-side March 6, 2013 September 30, 2020 Huddled Masses, LLC Buy-side November 13, 2012 June 21, 2018 Our sell-side advertising business, operated through Colossus Media, provides advertisers of all sizes an advertising platform that automates the sale of ad inventory between advertisers and marketers. Our platform is intended to help brands, media holding companies, independent agencies or emerging businesses reach audiences, curated creators and publishers find the right brands for their readers, as well as drive advertising yields across all channels: web, mobile, and connected TV ("CTV"). Our platform offers advertising inventory and creator content that is intended to align with brands, media holding companies and mid-market agencies focusing on key growth audiences. Our buy-side advertising business, now operating as Orange 142, provides technology-enabled advertising solutions and consulting services to clients through multiple demand side platforms (“DSPs”), across multiple industry verticals such as travel and tourism, higher education, energy, 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. In the digital advertising space, buyers, particularly small and mid-sized businesses, can potentially achieve significantly higher ROI on their advertising spend compared to traditional media advertising by leveraging data-driven over-the-top/connected TV (“OTT/CTV”), video and display, in-app, native including programmatic, search, social, influencer marketing and audio advertisements that are delivered both at scale and on a highly targeted basis. Providing both the front-end, buy-side operations coupled with the Company’s proprietary sell-side operations is intended to enable the Company to curate the first through the last mile in the ad tech ecosystem execution process to drive higher results. 7 Table of Contents Note 2 — Basis of Presentation and Consolidation and Summary of Significant Accounting Policies Basis of presentation and consolidation The accompanying condensed unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Rule 8-03 of Regulation S-X. Accordingly, the condensed unaudited consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The condensed consolidated balance sheet as of December 31, 2024 included herein was derived from audited financial statements but does not include all disclosures required by GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying condensed unaudited consolidated financial statements contain all adjustments, consisting of items of a normal and recurring nature, necessary to present fairly the Company’s financial position as of March 31, 2025, the results of its operations for the three months ended March 31, 2025 and 2024, cash flows for the three months ended March 31, 2025 and 2024, and stockholders’ deficit for the three months ended March 31, 2025 and 2024. The results of operations for the three months ended March 31, 2025 are not necessarily indicative of the results to be expected for the full year. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, and related disclosures, as of the date of the financial statements, and the amounts of revenues and expenses reported during the period. Actual results could differ from estimates. The accompanying condensed unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the accompanying notes for the year ended December 31, 2024. The condensed consolidated financial statements include the accounts of Direct Digital Holdings, Inc. and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards otherwise applicable to public companies until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) it affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The adoption dates discussed below reflect this election. Revenue recognition The Company recognizes revenue using the following five steps: 1) identification of a contract with a customer; 2) identification of the performance obligation(s) in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligation(s) in the contract; and 5) recognition of revenue when, or as, the performance obligation(s) are satisfied. The Company’s revenues are derived primarily from two sources: sell-side advertising and buy-side advertising. Thus, the Company disaggregates the revenue earned into these two segments. For additional segment disclosures, refer to Note 7 — Segment Information. The Company maintains agreements with its customers in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically 30 to 90 days). For the sell-side advertising segment, the Company generates revenue by selling advertising inventory (digital ad units) that the Company purchases from publishers to advertisers through a process of monetizing ad impressions on the Company’s proprietary sell-side programmatic platform operating under the trademarked banner Colossus SSP. For the buy-side advertising segment, the Company generates revenue from customers that enter into agreements with the Company to provide managed advertising campaigns, which include digital marketing and media services to purchase digital advertising space, data and other add-on features. In connection with the Company’s analysis of principal-versus-agent considerations, the Company has evaluated the specified goods or services and considered whether the Company controls the goods or services before they are provided to the customer, including the three indicators of control. Based upon this analysis and the Company’s specific facts and circumstances, the Company concluded that it is a principal for the goods or services sold through both the Company’s sell-side advertising segment and buy-side advertising segment because the Company controls the specified good or service before it is transferred to the customer and the Company is the primary obligor in the agreement with customers. Therefore, 8 Table of Contents the Company reports revenue on a gross basis inclusive of all supplier costs and pays suppliers for the cost of digital media, advertising inventory, data and any add-on services or features. In the advertising industry, companies commonly experience seasonal fluctuations in revenue. For example, in our sell-side advertising segment, many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year in order to coincide with increased holiday purchasing while, in our buy-side 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. Sell-side advertising The Company partners with publishers to sell advertising inventory to the Company’s Colossus Media-curated clients and the open markets (collectively referred to as “buyers”) seeking to access the general market as well as unique multi-cultural audiences. The Company generates revenue from the delivery of targeted digital media solutions, enabling advertisers to connect intelligently with their audiences across online display, video, social and mobile mediums using its proprietary programmatic SSP. The Company refers to its publishers, app developers, and channel partners collectively as its "publishers." The Company’s platform allows the Company to sell, in real time, ad impressions from publishers to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats. The Company recognizes revenue at a point in time when an ad is delivered or displayed in response to a winning bid request from ad buyers. Buy-side advertising The Company purchases media based on the budget established by its customers with a focus on leveraging data services, customer branding, real-time market analysis and micro-location advertising. The Company offers its services on a fully managed basis, which is recognized over time using the output method when the performance obligation is fulfilled. An “impression” is delivered when an advertisement appears on pages viewed by users. The performance obligation is satisfied over time as the volume of impressions are delivered up to the contractual maximum. Many customers run several different campaigns throughout the year to capitalize on different seasons, special events and other happenings at their respective regions and localities. The Company provides digital advertising and media buying capabilities with a focus on generating measurable digital and financial life for its customers. Revenue arrangements are evidenced by a fully executed insertion order (“IO”) and/or a master service agreement (“MSA”) covering a combination of marketing tactics. Generally, IOs specify the number and type of advertising impressions to be delivered over a specified time at an agreed upon price and performance objectives for an ad campaign. Performance objectives are generally a measure of targeting, as defined by the parties in advance, such as number of ads displayed, consumer clicks on ads or consumer actions (which may include qualified leads, registrations, downloads, inquiries or purchases). These payment models are commonly referred to as CPM (cost per impression), CPC (cost per click) and CPA (cost per action). The majority of the Company’s contracts are flat-rate, fee-based contracts. Cash payments received prior to the Company’s delivery of its services are recorded to deferred revenue until the performance obligation is satisfied. The Company recorded deferred revenue (contract liabilities) to account for billings in excess of revenue recognized, primarily related to contractual minimums billed in advance and customer prepayment, of $ 0.6 million and $ 0.5 million as of March 31, 2025 and December 31, 2024, respectively. Revenue recognized during the three months ended March 31, 2025 and 2024 from amounts included within the deferred revenue balances at the beginning of each respective period amounted to $ 0.2 million and $ 0.4 million, respectively. Accounting Standards Codification ("ASC") 606 provides various optional practical expedients. The Company elected the use of the practical expedient relating to the disclosure of remaining performance obligations within a contract and will not disclose remaining performance obligations for contracts with an original expected duration of one year or less. Goodwill As of March 31, 2025 and December 31, 2024, goodwill was $ 6.5 million, including amounts related to acquisitions in 2018 and in 2020. Goodwill is attributable to entry into new markets not previously accessible and generation of future growth opportunities. The Company expects to deduct goodwill for tax purposes in future years. Goodwill is assessed for impairment at least annually (December 31) starting with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting 9 Table of Contents unit is less than its carrying value, then a quantitative goodwill impairment analysis is performed. Depending upon the results of the quantitative measurement, the recorded goodwill may be written down and an impairment expense is recorded in the condensed consolidated statements of operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit. Goodwill is reviewed annually and tested for impairment upon the occurrence of a triggering event. The carrying value of the Company's sell-side reporting unit was negative as of March 31, 2025. Goodwill of $ 1.2 million as of March 31, 2025 is allocated to the sell-side reporting unit, which is included in the sell-side reportable segment. The Company also performed a qualitative goodwill impairment assessment on the buy-side reporting unit. The Company determined that there was no impairment of goodwill during the three months ended March 31, 2025 and 2024. Intangible assets, net Intangible assets consist of customer relationships, trademarks and non-compete agreements. Intangible assets are recorded at fair value at the time of their acquisition and are stated within the condensed consolidated balance sheets net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives and recorded as amortization expense within general and administrative expenses in the condensed consolidated statements of operations. The Company’s intangible assets are being amortized over their estimated useful lives, using the straight-line method with non-compete agreements over 5 years and other intangibles over 10 years. Impairment of long-lived assets The Company evaluates the recoverability of long-lived assets, including property, equipment and software costs and intangible assets if facts or circumstances indicate that any of those assets might be impaired. ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows to determine if a write-down to fair value is necessary. No impairment loss was recognized during the three months ended March 31, 2025 and 2024. Stock-based compensation Stock-based compensation cost for options and restricted stock units (“RSU”) awarded to employees and directors is measured at the grant date based on the calculated fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). Contingently issued awards with a requisite service period that precedes the grant date are measured and recognized at the start of the requisite service period and remeasured each reporting period until the grant date. The Company estimates the fair value of RSUs based on the closing price of the Company’s common stock on the date of the grant. The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the fair value of the Company’s common stock, as well as assumptions regarding the expected common stock price volatility over the term of the stock options, the expected term of the stock options, risk-free interest rates and the expected dividend yield. The risk-free interest rate is derived using the U.S. Treasury yield curve in effect at date of grant. Other assumptions are based on historical experience and activity. The Company considers an estimated forfeiture rate for stock options based on historical experience and the anticipated forfeiture rates during the future contract life. Income taxes In February 2022, concurrent with the Organizational Transactions, the Company entered into a tax receivable agreement (“Tax Receivable Agreement” or “TRA”) with DDH LLC and Direct Digital Management, LLC (“DDM”). The TRA provides for certain income (loss) allocations between the Company and DDH LLC under the agreement. DDH LLC is a limited liability company, is treated as a partnership for federal income tax purposes and generally is not subject to any entity-level U.S. federal income tax and certain state and local income taxes. Any taxable income or loss generated by the Company is allocated to holders of LLC units (“LLC Units”) in accordance with the Second Amended and Restated Limited Liability Company Agreement (“LLC Agreement”), and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss under the LLC Agreement. Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), the Company expects to obtain an increase in its share of the tax basis in the net assets of DDH, LLC when LLC Units are redeemed or exchanged by the members of DDH, LLC. The Company made an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC interest occurred. During the three months ended March 31, 2025, members of DDM exchanged 70,000 shares of Class B Common Stock into shares of Class A Common Stock. No shares were exchanged or converted during the three months ended March 31, 2024. 10 Table of Contents Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Accounts receivable, net Accounts receivable primarily consists of billed amounts for products and services rendered to customers under normal trade terms. The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral. Accounts receivable are stated at net realizable value. The Company insures a significant portion of its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establishes provision for credit losses as deemed necessary for accounts not covered by this insurance. Management periodically reviews outstanding accounts receivable for reasonableness. If warranted, the Company processes a claim with the third-party insurance company to recover uncollected balances, rather than writing the balances off to bad debt expense. The guaranteed recovery for the claim is approximately 90 % of the original balance, and if the full amount is collected by the insurance company, the remaining 10 % is remitted to the Company. If the insurance company is unable to collect the full amount, the Company records the remaining 10 % to bad debt expense. The Company’s provision for credit losses reflects the current expected credit loss inherent in the accounts receivable considering the Company’s aging analysis, historical collection experience, customer creditworthiness, current and future economic conditions and market conditions. Accounts receivable balances are written off against the provision when the Company believes it is probable the receivable will not be recovered. For the three months ended March 31, 2025 and 2024, the Company's provision for credit losses net of recoveries, as reflected in the condensed consolidated statements of cash flows was $ 0 and less than $ 0.1 million, respectively. Concentrations of customers and suppliers There is an inherent concentration of credit risk associated with accounts receivable arising from revenue from major customers on both the sell-side and buy-side of the business. For the three months ended March 31, 2025, three customers (one sell-side and two buy-side) accounted for 39 % of revenues. For the three months ended March 31, 2024, one sell-side customer represented 68 % of revenues. As of March 31, 2025 two customers (one sell-side and one buy-side) accounted for 29 % of accounts receivable. As of December 31, 2024, three customers (two buy-side and one sell-side) accounted for 34 % of accounts receivable. As of March 31, 2025 and December 31, 2024, two vendors and one vendor each accounted for at least 10%, and collectively accounted for 26 % and 16 %, r espectively, of accounts payable. Accrued liabilities The components of accrued liabilities on the condensed consolidated balance sheet as of March 31, 2025 and December 31, 2024 are as follows (in thousands): March 31, 2025 December 31, 2024 Accrued compensation and benefits $ 373 $ 330 Accrued expenses 1,108 877 Accrued interest 31 50 Total accrued liabilities $ 1,512 $ 1,257 Cash and cash equivalents Cash and cash equivalents consist of funds deposited with financial institutions and highly liquid instruments with original maturities of three months or less. Such deposits may, at times, exceed federally insured limits. The risk of loss attributable to any uninsured balances is mitigated by depositing funds only in high credit quality financial institutions. The Company has not experienced any losses in such amounts and believes it is not exposed to any significant credit risk to cash. 11 Table of Contents Deferred offering, financing, discount and issuance costs The Company records certain legal, accounting and other third-party fees that are directly associated with a debt financing to deferred financing costs in the event that the Company completes the debt financing. Costs associated with debt offerings are amortized to interest expense using the straight-line method, which approximates the effective interest method, over the life of the debt. As of March 31, 2025 and December 31, 2024, $ 3.7 million and $ 4.2 million, respectively, of unamortized deferred financing costs are netted against debt in the condensed consolidated balance sheets. As of March 31, 2025 and December 31, 2024, less than $ 0.1 million and $ 0.1 million, respectively, of unamortized deferred financing costs are classified as prepaid expenses and other current assets in the condensed consolidated balance sheets. The Company records the differences between the face amount and the proceeds upon issuance of debt as a discount. As of March 31, 2025 and December 31, 2024, $ 0.5 million and $ 1.7 million, respectively, of unamortized debt discount related to the interest reserve added under the LS Amendment are netted against debt in the condensed consolidated balance sheets. Fees that are directly associated with an equity offering are recorded to additional paid-in capital in the event the Company completes an equity issuance. Fair value measurements The Company employs a hierarchy which prioritizes the inputs used to measure recurring fair value into three distinct categories based on the lowest level of input that is significant to the fair value measurement. The methodology for categorizing assets and liabilities that are measured at fair value pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest levels to unobservable inputs, summarized as follows: • Level 1 – Quoted prices in active markets for identical assets or liabilities. • Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities). • Level 3 – Significant unobservable inputs (including our own assumptions in determining fair value). We use the cost, income or market valuation approaches to estimate the fair value of our assets and liabilities when insufficient market-observable data is available to support our valuation assumptions. Fair value of financial instruments The Company considers the fair value of all financial instruments, including cash, accounts receivable and accounts payable to approximate their carrying values at year-end due to their short-term nature. The carrying value of the Company’s debt approximates fair value due to the market rates of interest. Net income (loss) per share Basi c net income (loss) per share excludes dilution and is determined by dividing net income (loss) by the w eighted average number of common shares outstanding including participating securities during the period. Diluted net income per share attributable to common stockholders reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock including stock options, restricted stock units and warrants using the treasury stock method. Recent accounting pronouncements Accounting pronouncements adopted In August 2023, the FASB issued ASU 2023-05, Business Combinations - Joint Ventures Formations, which requires that joint ventures, upon formation, apply a new basis of accounting by initially measuring assets and liabilities at fair value. The amendments in ASU 2023-05 are effective for joint ventures that are formed on or after January 1, 2025. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements. During the three months ended March 31, 2025, the Company entered into a joint venture, but no material activity has occurred to date. 12 Table of Contents Accounting pronouncements not yet adopted In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, a final standard on improvements to income tax disclosures. The standard requires disaggregated information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions and applies to all entities subject to income taxes. The new standard is effective for emerging growth companies for annual periods beginning after December 15, 2025. This accounting standard is effective in the first quarter of the Company's fiscal year ending December 31, 2026. The Company is currently evaluating the impact on the disclosures of the Company's condensed consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses, which requires a tabular disclosure of the amounts of specified natural expense categories included in each relevant expense caption. Additionally, ASU 2024-03 requires the disclosure of the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses. The new standard is effective for annual reporting periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact on the disclosures of the Company's condensed consolidated financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s condensed consolidated financial statements. Liquidity and capital resources Going Concern The Company evaluated whether relevant conditions or events, considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern. Substantial doubt exists when conditions and events, considered in the aggregate, indicate it is probable that a company will not be able to meet its obligations as they become due within one year after the issuance date of its financial statements. Management’s assessment is based on the relevant conditions that are known or reasonably knowable as of the date these condensed consolidated financial statements were issued or were available to be issued. As discussed in Note 9 — Commitments and Contingencies, 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. The Company is actively working with its partners to achieve prior volume levels. 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 $ 5.9 million for the three months ended March 31, 2025 including the impact of the sell-side disruption described above, (2) reported an accumulated deficit of $ 11.1 million as of March 31, 2025, (3) reported cash and cash equivalents of $ 1.8 million as of March 31, 2025, (4) has borrowed $ 3.7 million as of March 31, 2025 and the date of this report, under the Credit Agreement (as defined below) which matures in July 2025 and (5) was notified by Nasdaq on October 18, 2024 that it was not in compliance with Nasdaq's minimum stockholders' equity requirements and is currently subject to a delisting letter and a hearings and appeal process. 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, cash flow from operations and cash generated from its sales under the Company's Equity Reserve Facility with New Circle Principal Investments LLC 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 was executed on July 1, 2024 with continuing cost savings impacts through March 31, 2025, (2) working with lenders to provide temporary various relief from debt covenants via amendments on October 15, 2024 and December 27, 2024 (see Note 3 — Long-Term Debt) while rebuilding sell-side volumes, (3) putting in place a program to raise capital through an Equity Reserve Facility with stock sales continuing into 2025 (see Note 4 — Stockholders’ Deficit and Stock-Based Compensation ) , and (4) a plan to achieve compliance with Nasdaq's minimum stockholders' equity requirement by raising additional funds in a registered or private offering. 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. 13 Table of Contents The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern. Note 3 — Long-Term Debt At March 31, 2025 and December 31, 2024, long-term debt consisted of the following (in thousands): March 31, 2025 December 31, 2024 2021 Credit Facility (1) $ 37,362 $ 37,362 Credit Agreement 3,700 3,700 Economic Injury Disaster Loan 150 150 Total long-term debt 41,212 41,212 Less: deferred financing cost (1) ( 3,718 ) ( 4,238 ) Less: debt discount (2) ( 494 ) ( 1,671 ) Total long-term debt, net of deferred financing cost and debt discount 37,000 35,303 Less: current portion ( 4,122 ) ( 3,700 ) Total long-term debt, net of current portion, deferred financing cost and debt discount $ 32,878 $ 31,603 (1) As of March 31, 2025 and December 31, 2024, amount includes an exit fee of $ 3.0 million, which is non-interest bearing and due at maturity or prepayment. (2) As of March 31, 2025 and December 31, 2024, amount includes $ 0.5 million and $ 1.7 million, respectively, for the interest reserve, pursuant to the LS Amendment, as defined below, net of amounts amortized for interest. The components of interest expense and related fees for long-term debt is as follows (in thousands): Three Months Ended March 31, 2025 2024 Interest expense – 2021 Credit Facility (1) $ 1,131 $ 974 Interest expense – Credit Agreement 70 136 Interest expense – other 4 1 Amortization of deferred financing cost and debt discount 641 186 Total interest expense and amortization of deferred financing cost and debt discount $ 1,846 $ 1,297 (1) For the three months ended March 31, 2025, the interest expense related to the 2021 Credit Facility was applied against the interest reserve, as described below, and included in amortization of deferred financing cost and debt discount in the condensed consolidated statement of cash flows. Lafayette Square On December 3, 2021, the Company entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Services, LLC ("Lafayette Square") as administrative agent, and the various lenders thereto. The term loan under the 2021 Credit Facility initially provided for a term loan in the principal amount of up to $ 32.0 million, consisting of a $ 22.0 million closing date term loan (the "Term Loan") and an up to $ 10.0 million delayed draw term loan (the “Delayed Draw Loan”). The loans under the 2021 Credit Facility are calculated using Term Secured Overnight Financing Rate with a credit spread adjustment of 0.10 % per annum for interest periods of one month and 0.15 % per annum for interest periods of three months ("Term SOFR"). The loans under the 2021 Credit Facility bear interest at Term SOFR plus the applicable margin minus any applicable impact discount. Prior to entering into the Fifth Amendment as defined below, the applicable margin under the 2021 Credit Facility was based on the consolidated total net leverage ratio of the Company at a rate of 7.00 % per annum if the consolidated total net leverage ratio was less than or equal to 1.00 to 1.00 with gradual increases as the ratio increased up to 10.00 % per annum if the consolidated total net leverage ratio was 14 Table of Contents greater than 3.50 to 1.00. After giving effect to the Fifth Amendment, the applicable margin under the 2021 Credit Facility is based on the consolidated total leverage ratio of the Company at a rate of 7.00 % per annum if the consolidated total leverage ratio is less than or equal to 1.00 to 1.00 with gradual increases as the ratio increases up to 10.00 % per annum if the consolidated total leverage ratio is greater than 3.50 to 1.00. The maturity date of the 2021 Credit Facility is December 3, 2026. On July 28, 2022, the Company entered into the Second Amendment and Joinder to Term Loan and Security Agreement and received proceeds of $ 4.3 million borrowed under the Delayed Draw Loan to pay the balance owed on the common unit redemption as well as costs associated with the transaction. Subsequently, on October 3, 2023, the Company entered into the Fourth Amendment to the 2021 Credit Facility (the “Fourth Amendment”) and received proceeds of $ 3.6 million borrowed under the Delayed Draw Loan to make payments in connection with the consummation of the 2023 warrant tender offer and fees and expenses incurred as described in Note 4 — Stockholders’ Deficit and Stock-Based Compensation. In connection with the Fourth Amendment, the Company agreed it would not be permitted to request any additional funds under the Delayed Draw Loan, and Lafayette Square would not be obligated to fund any such requests. Quarterly installment payments on the Term Loan and the Delayed Draw Loan, due on the last day of each fiscal quarter, began March 31, 2022 with a final installment due December 3, 2026 for remaining balances outstanding under each loan. Each quarterly installment payment under the closing date term loan was $ 0.1 million from January 1, 2022 through December 31, 2023, and each quarterly installment payment thereafter until maturity is $ 0.3 million. Each quarterly installment payment under the Delayed Draw Loan was 0.625 % of the amount of the Delayed Draw Loan through December 31, 2023, and each quarterly installment payment thereafter until maturity is 1.25 % of the amount of the Delayed Draw Loan. The 2021 Credit Facility contains customary affirmative and negative covenants, including restrictions on the ability to incur indebtedness, create certain liens, make certain investments, make certain dividends and other types of distributions, and enter into or undertake certain mergers, consolidations, acquisitions and sales of certain assets and subsidiaries. Prior to entering into the Fifth Amendment (as defined below), the Company was required to maintain varying threshold levels by quarter for the net leverage ratio and the fixed charge coverage ratio. On October 15, 2024, with an effective date of June 30, 2024, the Company and Lafayette Square entered into the Fifth Amendment to the Term Loan and Security Agreement (the “Fifth Amendment”) which among other things, (1) deferred quarterly installment payments on the Term Loan and the Delayed Draw Loan for the periods from June 30, 2024 through December 31, 2025, (2) required that the Company pay a commitment fee of 50 basis points or an amount of $ 0.1 million to Lafayette Square, (3) allowed proceeds from future equity raises by the Company, if any, to cure potential financial covenant noncompliance, (4) provided for one-month and three-month interest periods and (5) replaced the financial covenants under the 2021 Credit Facility (effective as of June 30, 2024) with varying threshold levels by quarter for minimum trailing twelve months EBITDA, minimum liquidity, maximum consolidated total leverage ratio and minimum fixed charge coverage ratio. The Fifth Amendment was accounted for as a modification. In connection with the Fifth Amendment, fees paid to Lafayette Square totaling $ 0.1 million were capitalized and are being amortized to interest expense using the straight-line method, which approximates the effective interest method, over the life of the debt. On December 27, 2024, the Company and Lafayette Square entered into the Sixth Amendment and Waiver (the “LS Amendment”) to the 2021 Credit Facility. Under the terms of the LS Amendment, among other changes, Lafayette Square extended a term loan equal to $ 6.0 million (the “Sixth Amendment Term Loan”). Lafayette Square and the Company agreed to use (1) $ 4.0 million out of the Sixth Amendment Term Loan to prepay the revolving credit notes under the Credit Agreement as described below, and (2) $ 2.0 million to fund an interest reserve under the 2021 Credit Facility. The LS Amendment also (1) implemented a minimum unrestricted cash requirement of $ 750,000 at all times and removed the minimum consolidated EBITDA and minimum liquidity financial covenants, (2) requires Lafayette Square’s prior written consent for certain permitted dividends, including dividends to the Company’s shareholders and (3) waived certain existing events of default related to minimum EBITDA covenants. Additionally, the Company is required to provide to Lafayette Square a weekly cash flow forecast, prepared on a cumulative, weekly roll forward basis through a thirteen (13) week projection period. Lastly, a $ 3.0 million exit fee, which was fully earned upon execution of the LS Amendment and is payable directly to Lafayette Square at maturity or prepayment, was added to the term loan balance. The Company was in compliance with all the financial covenants under the 2021 Credit Facility, as amended, as of March 31, 2025. The LS Amendment was accounted for as a modification. In connection with the amendment, the $ 3.0 million exit fee was capitalized and is being amortized to interest expense using the straight-line method, which approximates the effective interest method, over the life of the debt, and fees paid to third parties totaling $ 0.1 million were expensed as incurred. At the Company's option, the Company may at any time prepay the outstanding principal balance of the 2021 Credit Facility in whole or in part, without fee, penalty or premium other than the $ 3.0 million exit fee due at maturity or 15 Table of Contents prepayment, as defined under the LS Amendment. The obligations under the 2021 Credit Facility are secured by senior, first-priority liens on all or substantially all assets of the Company. Additional deferred financing costs of less than $ 0.1 million and $ 0 were incurred during the three months ended March 31, 2025 and 2024, respectively. Unamortized deferred financing costs as of March 31, 2025 and December 31, 2024 were $ 3.7 million and $ 4.2 million , respectively. Unamortized debt discount related to the interest reserve added under the LS Amendment as of March 31, 2025 and December 31, 2024 was $ 0.5 million and $ 1.7 million, respectively. Accrued and unpaid interest was less than $ 0.1 million as of March 31, 2025 and December 31, 2024 . 2023 Revolving Line of Credit - East West Bank On July 7, 2023, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”), with East West Bank (“EWB”), as lender. The Credit Agreement provides for a revolving credit facility in the principal amount of up to $ 10.0 million, subject to a borrowing base determined based on eligible accounts, and an up to $ 5.0 million uncommitted incremental revolving facility. Loans under the Credit Agreement mature on July 7, 2025 (the “Maturity Date”), unless the Credit Agreement is otherwise terminated pursuant to the terms of the Credit Agreement. Borrowings under the Credit Agreement bear interest at a rate per annum equal to the one-month Term SOFR rate and as determined by EWB on the first day of the applicable interest period, plus 0.10 %, plus 3.00 % per annum (the “Loan Rate”); provided, that, in no event shall the Loan Rate be less than 0.50 % of the Loan Rate effective as of the date of the Credit Agreement nor more than the maximum rate of interest allowed under applicable law. Upon an event of default under the Credit Agreement, the outstanding principal amounts of any advances will accrue interest at a rate per annum equal to the Loan Rate plus five percent ( 5 %), but in no event in excess of the maximum rate of interest allowed under applicable law. At the Company’s option, the Company may at any time prepay the outstanding principal balance of the Credit Agreement in whole or in part, without fee, penalty or premium. All accrued but unpaid interest on outstanding advances under the Credit Agreement are payable in monthly installments on the last day of each monthly interest period until the Maturity Date when the then-outstanding principal balance of the advances and all accrued but unpaid interest thereon becomes due and payable. The obligations under the Credit Agreement are secured by all or substantially all of the borrowers’ assets. Prior to entering into the Third Amendment as defined below, the Company was required to maintain compliance at all times with financial covenants with varying threshold levels by quarter for fixed charge coverage ratio, total funded debt-to-EBITDA ratio and a liquidity covenant. Revolving Credit Availability was defined as an amount such that the ratio of the value of eligible accounts to the aggregate amount of all outstanding advances under the credit agreement at such time is not less than 2.0 to 1.0. Additionally, the amounts outstanding under the Credit Agreement exceeded the Company’s borrowing base as of June 30, 2024 by $ 0.5 million which was addressed in the Third Amendment, requiring a $ 1.0 million principal payment on the outstanding loans under the Credit Agreement as of the date of the Third Amendment. On October 15, 2024, with an effective date of June 30, 2024, the Company and EWB entered into the Third Amendment to the Credit Agreement (the “Third Amendment”) which, among other things, (1) provided that the Company make prepayments of the outstanding principal balance of the Credit Agreement of $ 1.0 million upon execution of the Third Amendment, $ 1.0 million on or before January 15, 2025 and $ 2.0 million on or before April 15, 2025, (2) required the Company to file a registration statement with the SEC to establish an equity line of credit offering on or before October 31, 2024 and to use commercially reasonable efforts to cause such registration statement to become effective, (3) required the net proceeds of a potential equity line of credit to be applied to the outstanding principal balance under the Credit Agreement in an amount that would cause the ratio of the value of eligible accounts to the aggregate amount of revolving credit advances to be not less than 1.00 to 1.00, (4) required the consent of EWB prior to the ability of the Company to make certain restricted payments, including cash dividends, (5) required the Company to make additional prepayments in the amount by which the outstanding loans under the Credit Agreement exceed the borrowing base between the calendar months ending November 30, 2024 and April 15, 2025 in an amount of $ 1.0 million, and (6) replaced the financial covenants under the Credit Agreement, effective as of June 30, 2024, with varying threshold levels by quarter for minimum trailing twelve months EBITDA, minimum liquid assets, maximum total funded debt to EBITDA leverage ratio, minimum fixed charge coverage ratio and revolving credit availability. The Third Amendment was accounted for as a modification. In connection with the Third Amendment, fees paid to third parties totaling less than $ 0.1 million were expensed as incurred. On December 27, 2024, the Company and EWB entered into the Waiver and Fourth Amendment (the “EWB Amendment”) to Credit Agreement. Under the terms of the EWB Amendment, among other things, (1) the Company made prepayments on the revolving credit notes under the Credit Agreement equal to $ 5.0 million, consisting of (a) $ 4.0 million 16 Table of Contents from the proceeds of the LS Amendment (as defined above) and (b) $ 1.0 million as the Company's out-of-pocket prepayment, (2) such prepayments were used to permanently reduce the commitment under the Credit Agreement to $ 5.0 million, (3) the financial covenants under the Credit Agreement were amended to implement a minimum unrestricted cash requirement of $ 750,000 at all times and to remove the minimum EBITDA covenant; and (4) EWB waived certain existing events of default related to the prior minimum EBITDA covenant. Additionally, the Company is required to provide to EWB a weekly cash flow forecast, prepared on a cumulative, weekly roll forward basis through a thirteen (13) week projection period. The Company was in compliance with all the financial covenants under the Credit Agreement, as amended, as of March 31, 2025. The EWB Amendment was accounted for as a modification. In connection with the EWB Amendment, fees paid to third parties totaling less than $ 0.1 million were expensed as incurred. The Credit Agreement contains customary representations and warranties and includes affirmative and negative covenants applicable to the borrowers and their respective subsidiaries. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental compliance, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. The Credit Agreement also includes customary events of default, including, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, defaults under any of the loan documents, certain cross-defaults to other indebtedness, certain bankruptcy and insolvency events, invalidity of guarantees or grant of security interest, certain ERISA-related transactions and events, certain orders of forfeiture, change of control, certain undischarged attachments, sequestrations, or similar proceedings, and certain undischarged or non-stayed judgments, in certain cases subject to certain thresholds and grace periods. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement of the Company or other borrowers. Additional deferred financing costs of less than $ 0.1 million and $ 0 were incurred during the three months ended March 31, 2025 and 2024, respectively. The collateral securing the obligations under the 2021 Credit Facility and the Credit Agreement is subject to intercreditor agreements between Lafayette Square and EWB. U.S. Small Business Administration Loans Economic Injury Disaster Loan In 2020, the Company applied and was approved for a loan pursuant to the Economic Injury Disaster Loan (“EIDL”), administered by the U.S. Small Business Administration (“SBA”). The Company received the loan proceeds of $ 0.2 million on June 15, 2020. The loan bears interest at a rate of 3.75 % and matures on June 15, 2050. Installment payments, including principal and interest, of less than $ 0.1 million began monthly on December 15, 2022. Each payment will first be applied to pay accrued interest, then the remaining balance will be used to reduce principal. The loan is secured by substantially all assets of DDH LLC. Overall As of March 31, 2025, future minimum payments related to long-term debt are as follows (in thousands): Remaining 2025 $ 3,700 2026 37,366 2027 3 2028 3 2029 4 Thereafter 136 Total 41,212 Less current portion ( 4,122 ) Less deferred financing cost ( 3,718 ) Less debt discount ( 494 ) Long-term debt, net of current portion, deferred financing cost and debt discount $ 32,878 17 Table of Contents Note 4 — Stockholders’ Deficit and Stock-Based Compensation Stockholders’ Equity – Initial Public Offering Following the completion of the Organizational Transactions, DDH LLC’s limited liability company agreement was amended and restated to, among other things, appoint the Company as the sole managing member of DDH LLC and effectuate a recapitalization of all outstanding preferred units and common units into (i) economic nonvoting units of DDH LLC held by the Company and, through their indirect ownership of DDM, the Company's Chairman and Chief Executive Officer and President, and (ii) noneconomic voting units of DDH LLC, 100 % of which are held by the Company. In March 2025, DDM tendered 70,000 of its limited liability company units to the Company in exchange for newly issued shares of Class A Common Stock of the Company on a one -for-one basis. In connection with these exchanges, an equivalent number of the holder’s shares of Class B Common Stock were cancelled. As of March 31, 2025, DDM held 10,798,000 shares of Class B Common Stock. The Company is authorized to issue 160,000,000 shares of Class A Common Stock, par value $ 0.001 per share, 20,000,000 shares of Class B Common Stock, par value $ 0.001 per share, and 10,000,000 shares of preferred stock, par value $ 0.001 per share. In connection with the Company’s initial public offering of units (“Units”), each consisting of (i) one share of its Class A Common Stock and (ii) one warrant entitling the holder to purchase one share of its Class A Common Stock at an exercise price of $ 5.50 per share, the Company issued to the underwriters of the offering a unit purchase option to purchase (i) an additional 140,000 Units at a per Unit exercise price of $ 6.60 , which was equal to 120 % of the public offering price per Unit sold in the initial public offering, and (ii) warrants to purchase 21,000 shares of Class A Common Stock at a per warrant exercise price of $ 0.012 , which was equal to 120 % of the public offering price per warrant sold in the offering. A group of underwriters exercised 70,000 Units and 10,500 warrants in November 2023. At March 31, 2025, 70,000 Units and 10,500 were outstanding. The warrants had a fair value of $ 0 that was calculated using the Black-Scholes option-pricing model and were equity classified. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 1.94 % based on the applicable U.S. Treasury bill rate, (2) expected life of 5 years, (3) expected volatility of approximately 66 % based on the trading history of similar companies, and (4) zero expected dividends. There were no warrants outstanding as of March 31, 2025 and December 31, 2024. 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 was not permitted to 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 obtained 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 elected to sell to New Circle under the Purchase Agreement equaled or exceeded 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 is based on an agreed upon fixed discount to the market price of our Class A Common Stock as computed under the Purchase Agreement. On December 27, 2024, the Company’s stockholders approved the issuance and sale of up to 8.5 million shares above the Exchange Cap to New Circle 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 issued 62,762 shares of the Company’s Class A Common Stock to New Circle. The Company sold 1,580,000 shares of the Company's Class A Common Stock for $ 3.0 million during the year ended December 31, 2024. During the three months ended March 31, 2025, the Company sold 1,539,351 shares of the Company's Class A Common Stock for $ 2.0 million. Subsequently and through the date of this report, the Company sold an additional 1,020,000 shares of the Company's Class A Common Stock for $ 0.5 million. During the three months ended March 31, 2025, the Company incurred incremental issuance costs, which were expensed in the condensed consolidated statements of operations, given the nature of the Equity Reserve Facility. The Purchase Agreement will automatically terminate on the earliest of (i) the 36-month anniversary of the 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 18 Table of Contents 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. The Company and New Circle may also agree to terminate the Purchase Agreement by mutual written consent. Noncontrolling Interest Direct Digital Holdings, Inc. is the sole managing member of DDH LLC, and consolidates the financial results of DDH LLC but does not own all the economic interests in DDH LLC. Therefore, Direct Digital Holdings, Inc. reports a noncontrolling interest ("NCI") based on the common units of DDH LLC held by DDM. While Direct Digital Holdings, Inc. retains its controlling interest in DDH LLC, changes in its ownership interest in DDH LLC are accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Units by DDM will result in a change in ownership and reduce or increase the amount recorded as noncontrolling interest and increase or decrease additional paid-in capital when DDH LLC has positive or negative net assets, respectively. Stock-Based Compensation Plans In connection with the initial public offering, the Company adopted the 2022 Omnibus Incentive Plan (“2022 Omnibus Plan”) to facilitate the grant of equity awards to the Company’s employees, consultants and non-employee directors. The Company’s board of directors reserved 3,500,000 shares of Class A Common Stock for issuance in equity awards under the 2022 Omnibus Plan. Information on activity for both the stock options and RSUs is detailed below. During the three months ended March 31, 2025 and 2024, the Company recognized $ 0.3 million and $ 0.5 million, respectively, of total stock-based compensation expense in the condensed consolidated statement of operations in compensation, tax and benefits. Stock Options Options to purchase shares of common stock vest annually on the grant date anniversary over a period of three years and expire 10 years following the date of grant. The following table summarizes the stock option activity under the 2022 Omnibus Plan during the three months ended March 31, 2025: Stock Options Shares Weighted Average Exercise Price Weighted Average Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2024 335,883 $ 2.49 7.78 $ — Granted 277,575 $ 1.38 9.82 $ — Exercised — $ — — $ — Forfeited and expired ( 2,834 ) $ 1.55 — $ — Outstanding at March 31, 2025 610,624 $ 1.99 8.56 $ — Vested and exercisable at March 31, 2025 212,102 $ 2.50 7.51 $ — As of March 31, 2025, unrecognized stock-based compensation of $ 0.4 million was related to 398,522 of unvested stock options which will be recognized on a straight-line basis over a weighted-average vesting period o f 0.73 y ears. 19 Table of Contents Restricted Stock Units RSUs generally vest annually on the grant date anniversary over a period of three years . A summary of RSU activity during the three months ended March 31, 2025 and related information is as follows: Restricted Stock Units Number of Shares Weighted Average Grant Date Fair Value per Share Unvested - December 31, 2024 258,744 $ 2.80 Granted 457,575 $ 1.31 Vested ( 45,780 ) $ 3.92 Forfeited ( 2,618 ) $ 1.48 Unvested- March 31, 2025 667,921 $ 1.71 The majority of vested RSUs were net share settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes. The total shares withheld were 13,978 and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. As of March 31, 2025, there was unrecognized stock-based compensation o f $ 0.8 million related to unvested RSUs which will be recognized on a straight-line basis over a weighted average period of 0.69 yea rs. Note 5 — Tax Receivable Agreement and Income Taxes Tax Receivable Agreement The Company's TRA with DDH LLC and DDM (together, the “TRA Holders”) provides for payment by the Company to the TRA Holders of 85 % of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that the Company actually realizes or is deemed to realize in certain circumstances. The Company retains the benefit of the remaining 15 % of these net cash savings. The TRA liability is calculated by determining the tax basis subject to the TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the resulting impact. The blended tax rate consists of the U.S. federal income tax rate and assumed combined state and local income tax rate driven by the apportionment factors applicable to each state. Any taxable income or loss generated by the Company will be allocated to TRA Holders in accordance with the LLC Agreement and the TRA, and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations will be made. Pursuant to the Company’s election under Section 754 of the Code in 2022, the Company expects to obtain an increase in its share of the tax basis in the net assets of DDH, LLC when LLC interests are redeemed or exchanged by the members of DDH, LLC. During the three months ended March 31, 2025, members of DDM exchanged 70,000 Class B shares into Class A shares. The Company has recorded a liability related to the tax receivable agreement of less than $0.1 million as of March 31, 2025 and December 31, 2024. The Company has recorded a deferred tax asset of $ 0 as of March 31, 2025 and December 31, 2024 which is net of a valuation allowance. Payments of $ 0 were made during the three months ended March 31, 2025 and 2024. The payments under the TRA will not be conditional on holder of rights under the TRA having a continued ownership interest in either DDH LLC or the Company. The Company may elect to defer payments due under the TRA if the Company does not have available cash to satisfy its payment obligations under the TRA. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date. The Company accounts for any amounts payable under the TRA in accordance with ASC Topic 450, Contingencies, and recognizes subsequent period changes to the measurement of the liability from the TRA in the condensed consolidated statement of operations as a component of income before taxes. For the three months ended March 31, 2025 and 2024, no amounts were recorded as income in other income (expense) for such change. The term of the TRA commenced upon completion of the initial public offering and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless the Company exercises its right to terminate the TRA. If the Company elects to terminate the TRA early (or it is terminated early due to changes in control), the obligations under the TRA would accelerate and the Company would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by the Company under the TRA. 20 Table of Contents Income Taxes Through the Organizational Transactions completed in February 2022, the Company formed an Up-C structure which allows DDM to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership for U.S. federal income tax purposes. Under the Up-C structure, the Company is subject to corporation income tax based on the ownership. The components of income tax expense are as follows (in thousands): Three Months Ended March 31, 2025 2024 Income tax benefit $ — $ ( 200 ) Effective income tax rate — % 5.0 % The effective tax rates were lower than the statutory tax rates for the three months ended March 31, 2024 primarily due to the Company’s partnership loss that is not subject to federal and state taxes. The effective tax rates were different from the statutory rates for the three months ended March 31, 2025 primarily due to the Company’s partnership loss that is not subject to federal and state taxes and recording a valuation allowance against deferred taxes. The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. In the normal course of business, the Company can be examined by various tax authorities, including the Internal Revenue Service in the United States. There are currently no federal or state audits in process. The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. Federal and various states returns for the years ended December 2023 and 2022 remain open as of March 31, 2025. The Company evaluates tax positions taken or expected to be taken in the course of preparing an entity’s tax returns to determine whether it is “more-likely-than-not” that each tax position will be sustained by the applicable tax authority. As of March 31, 2025 and December 31, 2024, the Company had no uncertain tax positions. Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions. Note 6 — Related Party Transactions Up-C Structure In February 2022, the Company completed an initial public offering of its securities, and through the Organizational Transactions, formed an Up-C structure, which is often used by partnerships and limited liability companies and allows DDM, a Delaware limited liability company indirectly owned by Mark Walker (“Walker”) and Keith Smith (“Smith”), to retain its equity ownership in DDH LLC and to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for U.S. federal income tax purposes. DDM holds economic nonvoting LLC Units in DDH LLC and holds noneconomic voting equity interests in the form of the Class B Common Stock in Direct Digital Holdings (See Note 4 — Stockholders’ Deficit and Stock-Based Compensation). One of the tax benefits to DDM associated with this structure is that future taxable income of DDH LLC that is allocated to DDM will be taxed on a pass-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, DDM may, from time to time, redeem or exchange its LLC Units for shares of the Company’s Class A Common Stock on a one -for-one basis. The Up-C structure also provides DDM with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. If the Company ever generates sufficient taxable income to utilize the tax benefits, DDH expects to benefit from the Up-C structure because, in general, the Company expects cash tax savings in amounts equal to 15 % of certain tax benefits arising from such redemptions or exchanges of DDM's LLC Units for Class A Common Stock or cash and certain other tax benefits covered by the TRA. The aggregate balance of tax receivable liabilities as of March 31, 2025 and December 31, 2024, is as follows (in thousands): March 31, 2025 December 31, 2024 Liability related to tax receivable agreement Short term $ 41 $ 41 Total liability related to tax receivable agreement $ 41 $ 41 21 Table of Contents Note 7 — Segment Information Revenue by business segment is as follows (in thousands): Three Months Ended March 31, 2025 2024 Sell-side advertising $ 2,028 $ 16,500 Buy-side advertising 6,129 5,775 Total revenues $ 8,157 $ 22,275 Operating loss by business segment reconciled to loss before income taxes is as follows (in thousands): Three Months Ended March 31, 2025 2024 Sell-side advertising $ ( 992 ) $ 962 Buy-side advertising 821 293 Corporate office expenses ( 3,753 ) ( 4,062 ) Total operating loss ( 3,924 ) ( 2,807 ) Corporate other expense ( 2,016 ) ( 1,212 ) Loss before income taxes $ ( 5,940 ) $ ( 4,019 ) Total assets by business segment are as follows (in thousands): March 31, 2025 December 31, 2024 Sell-side advertising $ 3,473 $ 3,755 Buy-side advertising 18,849 18,664 Corporate office 1,495 3,587 Total assets $ 23,817 $ 26,006 Note 8 — Net Loss Per Share The Company has two classes of common stock, Class A and Class B. Shares of the Company’s Class B Common Stock do not share in the earnings or losses attributable to Direct Digital Holdings, Inc. and are therefore not participating securities. The following table sets forth the computation of the Company’s basic and diluted net loss per share (in thousands, except per share amounts): Three Months Ended March 31, 2025 2024 Net loss allocated to Class A shareholders $ ( 2,355 ) $ ( 775 ) Weighted average common shares outstanding - basic 6,710 3,509 Class B Common Stock — — Options to purchase common stock — — Unvested restricted stock units — — Weighted average common shares outstanding - diluted 6,710 3,509 Net loss per common share, basic $ ( 0.35 ) $ ( 0.22 ) Net loss per common share, diluted $ ( 0.35 ) $ ( 0.22 ) 22 Table of Contents The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (in thousands): Three Months Ended March 31, 2025 2024 Class B Common Stock 10,864 10,868 Options to purchase common stock 477 367 Restricted stock units 560 535 Total excludable from net loss per share attributable to common stockholders - diluted 11,901 11,770 Note 9 — Commitments and Contingencies Litigation We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. As of the date hereof, except as set forth below, we are not a party to any material legal or administrative proceedings nor are there any proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention. On May 10, 2024, the Company was the subject of a defamatory article / blog post. In connection with this post, one of the Company’s sell-side customers paused its connection to the Company while the allegations were investigated. 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. The Company is actively working with its partners to achieve prior volume levels. In May 2024, the Company, as plaintiff, filed a lawsuit against the author of the defamatory article. On March 5, 2025, the United States District Court for the District of Maryland denied the defendant’s motion to dismiss in its entirety, and the Company will continue to vigorously pursue its claims and rights and any defenses against counterclaims. The Company cannot make any predictions about the final outcome of this litigation matter or the timing thereof. On May 23, 2024, an alleged stockholder, purportedly on behalf of the persons or entities who purchased or acquired publicly traded securities of the Company between April 2023 and March 2024, filed a putative class action against the Company, certain of our officers and directors, and other defendants in the U.S. District Court for the Southern District of Texas, alleging violations of federal securities laws related to alleged false or misleading disclosures made by the Company in its public filings. On July 9, 2024, another alleged stockholder filed a similar securities class action against the Company, certain of our officers and directors, also in the Southern District of Texas. The two actions have been consolidated. Each of these complaints seeks unspecified damages, plus costs, fees, and attorneys’ fees. The Company cannot make any predictions about the final outcome of this matter or the timing thereof but believes that plaintiffs’ claims lack merit and intends to vigorously defend these lawsuits. Operating Leases During the three months ended March 31, 2025 and 2024, the Company incurred fixed rent expense associated with operating leases for real estate of $ 0.1 million. The Company did not have any finance leases, short-term leases nor variable leases over this time period. During the three months ended March 31, 2025 and 2024, the Company had the following cash and non-cash activities associated with leases (in thousands): Three Months Ended March 31, 2025 2024 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflow for operating leases $ 65 $ 37 Non-cash changes to the operating lease ROU assets and operating lease liabilities: Additions and modifications to ROU asset obtained from new operating liabilities $ 52 $ — 23 Table of Contents The weighted-average remaining lease term and discount rate for the Company’s operating leases is 4.3 years and 8.2 %, respectively, as of March 31, 2025. The weighted-average remaining lease term and discount rate for the Company's operating leases is 5.3 years and 8.3 %, respectively, as of March 31, 2024 . The future payments due under operating leases as of March 31, 2025 are as follows (in thousands): 2025 $ 203 2026 278 2027 282 2028 180 2029 185 Thereafter 31 Total undiscounted lease payments 1,159 Less effects of discounting ( 181 ) Less current lease liability ( 202 ) Total operating lease liability, net of current portion $ 776 Note 10 — Property, Equipment and Software, net Property, equipment and software, net consists of the following (in thousands): Useful Life (Years) March 31, 2025 December 31, 2024 Furniture and fixtures 5 $ 138 $ 138 Computer equipment 3 20 20 Leasehold improvements 15 58 43 Capitalized software 3 702 702 Property, equipment and software, gross 918 903 Less: accumulated depreciation and amortization ( 630 ) ( 562 ) Total property, equipment and software, net $ 288 $ 341 The following table summarizes depreciation and amortization expense related to property, equipment and software by line item for the three months ended March 31, 2025 and 2024 (in thousands): Three Months Ended March 31, 2025 2024 Cost of revenue $ 42 $ 42 General and administrative 26 29 Total depreciation and amortization $ 68 $ 71 Note 11 — Intangible Assets, net The Company records amortization expense on a straight-line basis over the life of the identifiable intangible assets related to an acquisition in September 2020. For the three months ended March 31, 2025 and 2024, amortization expense of $ 0.5 million was recognized. As of March 31, 2025 and December 31, 2024, intangible assets net of accumulated amortization was $ 9.2 million and $ 9.7 million, respectively. 24 Table of Contents As of March 31, 2025, intangible assets and the related accumulated amortization, weighted-average remaining life and future amortization expense are as follows (in thousands): March 31, 2025 Weighted-Average Original Accumulated Net Remaining Life (Years) Amount Amortization Total Customer Lists 5.5 $ 13,028 $ ( 5,863 ) $ 7,165 Trademarks and tradenames 5.5 3,501 ( 1,575 ) 1,926 Non-compete agreements 0.5 1,505 ( 1,354 ) 151 Total intangible assets, net $ 18,034 $ ( 8,792 ) $ 9,242 December 31, 2024 Weighted-Average Original Accumulated Net Remaining Life (Years) Amount Amortization Total Customer Lists 5.8 $ 13,028 $ ( 5,537 ) $ 7,491 Trademarks and tradenames 5.8 3,501 ( 1,488 ) 2,013 Non-compete agreements 0.8 1,505 ( 1,279 ) 226 Total intangible assets, net $ 18,034 $ ( 8,304 ) $ 9,730 Total 2025 $ 1,390 2026 1,653 2027 1,653 2028 1,653 2029 1,653 Thereafter 1,240 Total future amortization expense $ 9,242 25 Table of Contents