Direct Digital Holdings Inc. - DRCT
Next stop zero?
On March 19th or a little over a month ago I pointed out shares of DRCT to subscribers. I asked the rather innocuous question of whether or not it was always good to have an Amazon (the company) as your primary customer and source of growth and how reliable that growth was going to be going forward.
The company had announced that they were going to announce their year-end Q4 results the following week, but ended up pushing out that report for a few extra days to give their auditors time to finalize those results. I once again pointed out what a bad sign this delay was likely to be, and the coming report was likely to contain some disturbing surprises.
Fast forward a few more days and we had the simple answer: a huge revenue miss, despite providing that guidance mid-way through the quarter, giving the impression that their financial processes and controls were completely inadequate and would certainly be leading to future problems. It also didn’t help that Marcum LLP was their auditor, a firm that has taken some hits from investors about some of the companies they choose to audit (hello, RILY).
The following week the company announced that their 10-K would not be filed on time, but believed that they would be able to file by the end of the 15 day grace period, or by April 16th. That did not happen, and it has been silence from the company ever since.
Well, turns out the company was withholding some information from investors for the past week.
The company filed an 8-K today after the market’s close and announced that Marcum LLP had resigned “effective immediately” back on April 17th. The whole mention:
“On April 17, 2024, Marcum LLP (“Marcum”), the Company’s independent registered public accounting firm, notified the Company and the Audit Committee of the Company’s board of directors (the “Audit Committee”) of Marcum’s decision to resign as the independent registered public accounting firm of the Company, effective immediately. Although their audit was not designed to identify or detect violations of law or fraud, Marcum’s resignation was not a result of any violation of law or fraud of the Company identified during its audit procedures to date.”
Notice that last bit of wording; I have read quite a few 8-K’s that announced an auditors resignation or dismissal and don’t recall ever seeing the passage about “detect violations of law or fraud” in any of them. For kicks, I even put that phrase into a search engine and it came back with only a single instance, which is this release. They go out of their way to put that line into their announcement for what reason?
In the same 8-K they also announced that they were no longer in compliance with NASDAQ filing requirements and had 60 days to tell them how they planned to regain compliance before being delisted.
What should be infuriating to shareholders is the press release that they distributed along with their 8-K, which is just ridiculously dishonest and should get these folks sued into nothingness. That release makes no mention of their auditor resignation at all, and only mentions being out of compliance with NASDAQ listing requirements. Of the two, the auditor resignation and the wording they chose to announce it is the much more troubling part of their 8-K from an investor’s perspective. Yet, they chose to highlight the one and not the other.
(As a rule, read the actual 8-K filing rather than simply the attachments; the attachments here were the press release and the auditor’s statement, but you actually had to read the 8-K to get the part about the auditor resignation. I saw the headlines on my screen regarding an 8-K being filed and the press release about being out of compliance with NASDAQ filing requirements, but nothing about their auditors.)
So now the company is tasked with finding an auditor that will be willing to step into this mess and sign off on a company that has already been faulted with material weaknesses in their internal controls. If they’re smart and acting in good faith they will pay up and go upstream and get a KPMG or Deloitte to sort out this mess, but my money is on them getting a much smaller and unknown firm hoping the process will be quicker and easier to resolve. That would not be a comfort to anyone.
Either way, until their 10-K gets filed, they will not be able to file the coming Q1 2024 10-Q that will be due in 3 weeks, which makes it unlikely we see any quarterly results until that comes to pass.
Next stop zero? Perhaps.