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Stockholders’ Deficit and Stock-Based Compensation | 3 Months Ended
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Mar. 31, 2024
Stockholders' Equity and Stock-Based Compensation |
Stockholders’ Deficit and Stock-Based Compensation | 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 August 2022 and December 2023, DDM tendered 100,000 and 410,000, respectively, 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, 2024, DDM held 10,868,000 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. On February 15, 2022, the Company completed its initial public offering of 2,800,000 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 warrants became immediately exercisable upon issuance and were exercisable for a period of five years after the issuance date. The shares of Class A Common Stock and warrants were immediately transferable separately upon issuance. At March 31, 2024, none of these warrants were outstanding. The underwriters in our initial public offering were granted a 45-day option to purchase up to an additional 420,000 shares and/or warrants, or any combination thereof, to cover over-allotments, which they initially exercised, in part, electing to purchase warrants to purchase an additional 420,000 shares of Class A Common Stock. As of March 31, 2024, none of these warrants were outstanding. In connection with the Company’s initial public offering, 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 and exercised 70,000 Units and 10,500 warrants in February 2024. The warrants had a fair value of $0 that was calculated using the Black-Scholes option-pricing model. 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. On August 29, 2023, the Company filed a Tender Offer Statement on Schedule TO pursuant to which the Company offered to purchase all of its outstanding warrants for $1.20 per warrant in cash. The Tender Offer expired at one minute after 11:59 PM, Eastern Time on September 28, 2023. The Company accepted all validly tendered warrants for purchase and settlement on October 2, 2023. As a result of the Tender Offer, a total of 2,213,652 warrants were tendered and not validly withdrawn prior to the expiration of the tender offer for a total purchase price of approximately $2.7 million. On October 23, 2023, the Company distributed a notice of redemption to the registered holders of the remaining outstanding warrants announcing the redemption of those warrants for $0.35 per warrant. The redemption closed on October 30, 2023, and all remaining 1,004,148 warrants were purchased for an aggregate price of approximately $0.4 million. Noncontrolling Interest Direct Digital Holdings, Inc. is the sole managing member of DDH LLC, and consolidates the financial results of 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 1,500,000 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, 2024 and 2023, the Company recognized $0.5 million and $0.1 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 as of March 31, 2024:
| Stock Options
| Shares |  | Weighted Average Exercise Price |  | Weighted Average Contractual Life (in years) |  | Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2024 | 371,116 |  | $ | 2.51 |  |  | 8.77 |  | $ | 4,591 |
Granted | — |  |  | $ | — |  |  | — |  |  | $ | — |
Exercised | (8,338) |  | $ | 2.62 |  |  | — |  | $ | 172 |
Forfeited | (1,416) |  | $ | 2.69 |  |  | — |  | $ | 15 |
Outstanding at March 31, 2024 | 361,362 |  | $ | 2.51 |  |  | 8.53 |  | $ | 4,596 |
Vested and exercisable at March 31, 2024 | 103,072 |  | $ | 2.55 |  |  | 8.48 |  | $ | 1,308 |
As of March 31, 2024, unrecognized stock-based compensation of $0.3 million related to 258,290 of unvested stock options which will be recognized on a straight-line basis over a weighted-average vesting period of 1.02 years. 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, 2024 and related information is as follows:
| Restricted Stock Units
| Number of Shares |  | Weighted Average Grant Date Fair Value per Share
Unvested- January 1, 2024 | 542,396 |  | $ | 2.87 |
Granted | 99,474 |  | $ | 16.90 |
Vested | (228,898) |  | $ | 11.83 |
Forfeited | (917) |  | $ | 3.28 |
Unvested- March 31, 2024 | 412,055 |  | $ | 2.53 |
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 70,835 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, 2024, there was unrecognized stock-based compensation of $0.8 million related to unvested RSUs which will be recognized on a straight-line basis over a weighted average period of 1.01 years.

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