Bright Mountain Media, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2023. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below, and those discussed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, and in any subsequent filing we make with the SEC. Business Overview Organization and Nature of Operations Bright Mountain Media, Inc. (together with its wholly-owned subsidiaries, the “Company,” “Bright Mountain” or “we”) has an end-to-end digital media and advertising services platform that efficiently connects brands with targeted consumer demographics. We focus on digital publishing, advertising technology, consumer insights, creative and media services. During the year ended December 31, 2023, the Company completed the acquisition of two business units of Big Village (Big Village Insights, Inc., and Big Village Agency LLC (together, referred to as the "Big Village Entities")), in an all-cash transaction funded by the Centre Lane Senior Secured Credit Facility (the "Big Village Acquisition"). Digital Publishing Our digital publishing division focuses on developing content that attracts an audience and monetizes that audience through advertising. The current portfolio of owned and operated websites is focused on moms, parenting, families, and more broadly, women. The portfolio consists of popular websites including Mom.com, Cafemom.com, LittleThings.com, and MamasLatinas.com. This demographic is highly sought after by brands and their advertising agencies. We use internal and external technologies to constantly improve the effectiveness and efficiency of the content we create. Our publishing division monetizes its audiences through both direct and programmatic advertising sales. Advertising Technology Our advertising technology division focuses on delivering targeted ads to audiences on owned and operated sites as well as third-party publishers in a cost-effective manner through the deployment of proprietary technologies. By developing our own proprietary technology stack, we are able to pass along efficiencies to both the demand and supply side of the ecosystem. Our goal is to enable and support a streamlined, end-to-end advertising model that addresses both demand (buy side) and publisher supply (sell side) programmatic sales and delivery of digital advertisements using an array of audience targeting tools and advertising formats (display, audio, video, CTV, and in-app). Programmatic advertising relies on software programs that leverage data and proprietary algorithms to match the optimal selection of an ad with a bid price offered by advertisers. Consumer Insights Our consumer insights division focuses on providing primary and secondary research, competitive intelligence, and expert insight to address customers' strategic issues. We provide cutting-edge and dynamic research, offering clients a comprehensive perspective on their consumers. This insight extends to strategic guidance on the optimal timing and channels to effectively connect with target audiences. Our cutting-edge approach combines advanced data analytics and comprehensive market research, to uncover actionable insights that drive informed decision-making. Creative Services Our creative services division transforms data into award-winning campaigns. We are uniquely able to leverage insights teams with highly strategic media planning and buying teams to ensure brands not only position their advertising precisely, but also yield impactful business results. Our goal is to combine data-driven decisions with creativity fueled by a deep understanding of modern culture. 37 Table of Contents Media Services Our media services division focuses on advertisers and agencies by providing access to premium inventory, leveraging data to optimize programmatic campaigns. Our aim is to empower clients to access the most sought-after advertising spaces across diverse platforms tailored to their specific needs and preferences. Our data-driven approach ensures that ad placements are not only well-targeted, but also continuously optimized for maximum efficiency and return on investment. Our commitment to combining premium inventory access with data-driven programmatic campaign optimization makes us an indispensable partner in the success of our clients' advertising and marketing endeavors. The Company generates revenue through: • the selling of advertisements placed on our owned and managed sites and on partner websites where we earn a share of the revenue; • facilitating the seamless, real-time exchange of advertisements on a large scale, bridging networks of buyers (referred to as "DSPs") and networks of sellers (referred to as "SSPs"); • serving advertisers through providing access to premium resources and leveraging data to optimize programmatic campaigns, where revenue is derived from the planning and execution of creative and media marketing campaigns; and • providing primary and secondary research, competitive intelligence, and expert insights to address customers' strategic issues, where revenue is primarily derived from providing a single integrated service for such research. Key Factors Affecting Our Performance Seasonal Fluctuations . Typically advertising technology companies report a material portion of their revenues during the third and fourth calendar quarter as a result of back-to-school and holiday-related advertising spend. We continue to experience this trend in our advertising technology division. Because of seasonal fluctuations, there can be no assurance that the results of any quarter or full year will be indicative of results for future years or quarters. Limited Number of Customers . During the six months ended June 30, 2024 and 2023, one customer represented 14.2% and 12.7% of revenue, respectively. Managing Industry Dynamics . We operate in the rapidly evolving digital advertising industry. Advances in programmatic advertising technologies, and the efficient and automated method of purchasing ads online, has enabled publishers to auction their ad inventory to more buyers simultaneously, in real time. As advertisers stay ahead of evolving trends in consumer engagement with digital media, an expansive opportunity for innovation emerges. Our commitment to understanding customer needs empowers us, and our continuous pursuit of innovation enables swift adaptation to industry shifts. This approach not only facilitates the development of cutting-edge solutions, but also does so in a cost-effective manner. As regulatory concerns accelerate the impact on existing industry standards, companies are actively seeking new methods to finely tailor their messages to target audiences. Tech companies will be limited in how they monetize personal information for advertising purposes. This trend is exemplified by two imminent developments: (1) the anticipated erosion of Google's third-party cookies and (2) the data security measures integrated into Apple iPhones. Consequently, companies must explore innovative methods to better understand their target audiences and have the tools to effectively engage with them. 38 Table of Contents Key Operating and Financial Metrics We monitor the following key financial and operational metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. The following is our analysis for the three and six months ended June 30, 2024 and 2023: (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue $ 13,003 $ 12,616 $ 25,450 $ 14,114 Cost of revenue 9,581 8,408 18,892 9,378 Gross margin 3,422 4,208 6,558 4,736 General and administrative expenses 5,310 8,128 10,552 11,556 Financing and other expense, net (3,320) (2,151) (5,980) (3,047) Net loss from operations (5,208) (6,071) (9,974) (9,867) Adjusted EBITDA ( 1) $ (920) $ (1,856) $ (2,023) $ (3,942) (1) - For a reconciliation of net loss to Adjusted EBITDA see “Use of Non-GAAP Financial Measures” below. Revenue The Company generates revenue through: • the selling of advertisements placed on our owned and managed sites and on partner websites where we earn a share of the revenue; • facilitating the seamless, real-time exchange of advertisements on a large scale, bridging networks of buyers (referred to as "DSPs") and networks of sellers (referred to as "SSPs"); • serving advertisers through providing access to premium resources and leveraging data to optimize programmatic campaigns, where revenue is derived from the planning and execution of creative and media marketing campaigns; and • providing primary and secondary research, competitive intelligence, and expert insights to address customers' strategic issues, where revenue is primarily derived from providing a single integrated service for such research. Revenue increased $387,000, or 3%, for the three months ended June 30, 2024, compared to the same period in 2023. Revenue increased $11.3 million, or 80%, for the six months ended June 30, 2024, compared to the same period in 2023. See below for a detailed analysis of revenue for the three and six months ended June 30, 2024, and 2023. Cost of Revenue Cost of revenue includes internal labor and payment to third parties for services performed to drive revenue, which includes the publisher cost paid for ad exchange on third party sites, advertising fees, personnel costs, technology and data related costs, fees paid for content creation, influencers, writers, and sales commission. Cost of revenue increased approximately $1.2 million, or 14%, for the three months ended June 30, 2024 compared to the same period in 2023. Cost of revenue increased approximately $9.5 million, or 101%, for the six months ended June 30, 2024 compared to the same period in 2023. See below for a detailed analysis of cost of revenue for the three and six months ended June 30, 2024, and 2023. General and Administrative Expenses General and administrative expenses consist primarily of (i) personnel and related costs for our executive, finance and accounting, human resources, and, administrative personnel, including salaries, benefits, bonuses, and stock-based 39 Table of Contents compensation; (ii) legal, accounting, and other professional service fees; (iii) other corporate expenses; (iv) information technology costs; and (v) facility costs. General and administrative expenses decreased approximately $2.8 million, or 35%, for the three months ended June 30, 2024 compared to the same period in 2023. General and administrative expenses decreased approximately $1.0 million, or 9%, for the six months ended June 30, 2024 compared to the same period in 2023. See below for a detailed analysis of general and administrative expenses for the three and six months ended June 30, 2024 and 2023. Results of Operations The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q. Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 Net loss from operations for the quarter ended June 30, 2024 was $5.2 million as compared to a net loss of $6.1 million for the same period in 2023. The following is our analysis for the period. (in thousands) Three Months Ended June 30, 2024 2023 Change % Change Revenue $ 13,003 $ 12,616 $ 387 3 % increased Cost of revenue 9,581 8,408 1,173 14 % increased Gross margin 3,422 4,208 (786) (19) % decreased General and administrative expense 5,310 8,128 (2,818) (35) % decreased Loss from operations (1,888) (3,920) 2,032 (52) % decreased Financing and other expense, net (3,320) (2,151) (1,169) 54 % increased Net loss from operations $ (5,208) $ (6,071) $ 863 (14) % decreased Gross margin % 26 % 33 % (7) % (21) % decreased Revenue Our revenue showed an overall increase of $387,000, or 3%, for the three months ended June 30, 2024, compared to the same period in 2023. Revenue in our digital publishing division was significantly impacted by macroeconomic factors, which reduced traffic to our website, coupled with an overall reduction in spending by some customers related to inflationary concerns and reduction in website traffic. This reduction was offset by an increase in our advertising technology division which was driven by our ability to leverage our resources to attract top advertisers, which in turn has allowed us to onboard premium publishers. This led to an increase in volume, as well as rates and overall revenue. 40 The Company focuses on digital publishing, advertising technology, consumer insights, creative and media services. Revenue generated by each such division is set forth below: (in thousands) Three Months Ended June 30, 2024 2023 Change % Change Digital publishing $ 516 $ 1,444 $ (928) (64) % decreased Advertising technology 3,587 1,961 1,626 83 % increased Consumer insights 6,677 6,896 (219) (3) % decreased Creative services 1,657 1,666 (9) (1) % decreased Media services 566 649 (83) (13) % decreased $ 13,003 $ 12,616 $ 387 3 % increased Digital Publishing Digital publishing revenue decreased by $928,000, or 64%, for the three months ended June 30, 2024,compared to the same period in 2023. Approximately $516,000, or 4%, of the Company’s revenue for the three months ended June 30, 2024, was generated from our digital publishing customers, compared to $1.4 million, or 11%, for the same period in 2023. This division was significantly impacted by macroeconomic factors, which reduced traffic to our website, coupled with an overall reduction in spending by some customers related to inflationary concerns and reduction in website traffic. Advertising Technology Advertising technology revenue increased by $1.6 million, or 83%, for the three months ended June 30, 2024, compared to the same period in 2023. Approximately $3.6 million, or 28%, of the Company’s revenue for the three months ended June 30, 2024, was generated from our advertising technology customers compared to $2.0 million, or 16%, for the same period in 2023. This growth was driven by our ability to leverage our resources to attract top advertisers, which in turn has allowed us to onboard premium publishers. This led to an increase in volume, as well as rates and overall revenue. 41 Consumer Insights Consumer insights revenue decreased by $219,000, or 3%, for the three months ended June 30, 2024, compared to the same period in 2023. Approximately $6.7 million, or 51%, of the Company’s revenue for the three months ended June 30, 2024, was generated from our consumer insights customers compared to $6.9 million, or 55%, for the same period in 2023. Creative Services Creative services revenue remained consistent for the three months ended June 30, 2024, compared to the same period in 2023. Approximately $1.7 million, or 13%, of the Company’s revenue for the three months ended June 30, 2024 and 2023, was generated from our creative services customers. Media Services Media services revenue decreased by $83,000, or 13%, for the three months ended June 30, 2024, compared to the same period in 2023. Approximately $566,000, or 4%, of the Company’s revenue for the three months ended June 30, 2024, was generated from our consumer insights customers compared to $649,000, or 5%, for the same period in 2023. Cost of Revenue (in thousands) Three Months Ended June 30, 2024 2023 Change % Change Direct salaries and labor cost $ 2,146 $ 2,528 $ (382) (15) % decreased Direct project cost 3,050 2,576 474 18 % increased Non-direct project cost 1,616 1,636 (20) (1) % decreased Publisher cost 2,300 1,131 1,169 103 % increased Content creation 160 307 (147) (48) % decreased Sales commission 246 196 50 26 % increased Other 63 34 29 85 % increased $ 9,581 $ 8,408 $ 1,173 14 % increased Cost of revenue increased $1.2 million, or 14%, for the three months ended June 30, 2024, compared to the same period for 2023. Direct Salaries and Labor Cost Direct salaries and labor cost decreased $382,000, or 15%, for the three months ended June 30, 2024, when compared to the same period in 2023. Approximately $2.1 million, or 22%, of the Company's cost of revenue for the three months ended June 30, 2024, was a result of direct salaries and labor cost compared to $2.5 million, or 31% the same period in 2023. These costs represent salary and labor cost of employees that work directly on customer projects for our consumer insights, creative and media services divisions. Direct Project Cost Direct project cost increased $474,000, or 18%, for the three months ended June 30, 2024 when compared to the same period in 2023. Approximately $3.1 million, or 32%, of the Company's cost of revenue for the three months ended June 30, 2024, was a result of direct project cost compared to $2.6 million, or 31%, during the same period in 2023. These costs include payments made to third-parties that are directly attributable to the completion of projects that allow for revenue recognition for our consumer insights, creative and media services divisions. Non-Direct Project Cost Non-direct cost was $1.6 million, or 17%, of the Company's cost of revenue for the three months ended June 30, 2024, compared to $1.6 million, or 19%, for the same period in 2023. These costs represent overall client service costs that 42 are not specifically related to a particular project, but relate to services for our consumer insights, creative and media services divisions. Publisher Cost Publisher cost was $2.3 million, which represents 24% of overall cost of revenue, and $1.1 million, or 13%, of overall cost of revenue, for the three months ended June 30, 2024 and 2023, respectively. We experienced an increase of $1.2 million, or 103%, for the three months ended June 30, 2024, compared to the same period in 2023. This increase is consistent with the increase noted in revenue for our advertising technology division. These costs represent payments to media providers and website publishers. Gross Margin Gross margin was $3.4 million, and $4.2 million for the three months ended June 30, 2024 and 2023, respectively. Our gross margin decreased $786,000, or 19%, for the three months ended June 30, 2024, when compared to the same period of 2023. Gross margin as a percentage of revenue decreased to 26% for the three months ended June 30, 2024 compared to 33% for the same period of 2023. General and Administrative Expenses (in thousands) Three Months Ended June 30, 2024 2023 Change % Change Personnel cost $ 2,385 $ 2,771 $ (386) (14) % decreased Legal expense 508 607 (99) (16) % decreased Professional fees 757 2,789 (2,032) (73) % decreased Insurance 211 272 (61) (22) % decreased Depreciation and amortization expense 516 766 (250) (33) % decreased Data processing 296 164 132 80 % increased Website expense 379 378 1 — % increased Other 258 381 (123) (32) % decreased Total $ 5,310 $ 8,128 $ (2,818) (35) % decreased Gross margin as a percentage of general and administrative expense 64 % 52 % 12 % 23 % General and administrative expenses decreased by $2.8 million, or 35%, for the three months ended June 30, 2024, compared to the same period in 2023. The reduction is due to a combination of factors as discussed below. Personnel Cost Personnel cost decreased by approximately $386,000, or 14%, for the three months ended June 30, 2024, compared to the same period in 2023. This change is mainly driven by a decrease in the Company's head count by a net change of 24 employees, including 13 employees that were terminated as a reduction in force. The Company incurred severance cost of approximately $75,000 in connection with this reduction. The Company incurred severance cost of approximately $114,000 associated with a headcount reduction during the three months ended June 30, 2023. The Company employee's headcount was 150 and 232 at June 30, 2024 and 2023, respectively. Legal Fees Legal fees decreased by $99,000, or 16%, for the three months ended June 30, 2024, compared to the same period in 2023. Approximately $359,000 of legal fees for the three months ended June 30, 2023, represented costs associated with the Big Village Acquisition. 43 Professional Fees Professional fees decreased by $2.0 million, or 73%, for the three months ended June 30, 2024, compared to the same period in 2023. Approximately $685,000 of professional fees for the three months ended June 30, 2023, represented costs associated with the Big Village Acquisition. Data Processing Data processing increased by $132,000, or 80%, for the three months ended June 30, 2024, compared to the same period in 2023. The Big Village Acquisition was completed in April 2023, and is the main driver of the increase in data processing. Financing and Other Expense, Net (in thousands) Three Months Ended June 30, 2024 2023 Change % Change Interest expense $ 3,372 $ 2,254 $ 1,118 50 % increased Other expense (income) (53) (103) 50 (49) % decreased Total financing and other expense, net $ 3,319 $ 2,151 $ 1,168 54 % increased Financing and other expense, net increased by $1.2 million, or 54%, for the three months ended June 30, 2024, compared to the same period in 2023. This increase was largely attributable to a $1.1 million increase in interest expense related to the Centre Lane Senior Secured Credit Facility, which reflected higher principal and fees due to the Centre Lane Senior Secured Credit Facility amendments during the year ended December 31, 2023. Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 Net loss from operations for the six months ended June 30, 2024 was $10.0 million as compared to a net loss of $9.9 million for the same period in 2023. The following is our analysis for the period. (in thousands) Six Months Ended June 30, 2024 2023 Change % Change Revenue $ 25,450 $ 14,114 $ 11,336 80 % increased Cost of revenue 18,892 9,378 9,514 101 % increased Gross margin 6,558 4,736 1,822 38 % increased General and administrative expense 10,552 11,556 (1,004) (9) % decreased Loss from operations (3,994) (6,820) 2,826 (41) % decreased Financing and other expense, net (5,980) (3,047) (2,933) 96 % increased Net loss $ (9,974) $ (9,867) $ (107) 1 % increased Gross margin % 26 % 34 % (8) % (23) % decreased Revenue Our revenue showed an overall increase of $11.3 million, or 80%, for the six months ended June 30, 2024 compared to the same period in 2023. For the six months ended June 30, 2024, revenue includes $18.3 million, which represents the impact of the Big Village Acquisition, which was completed in April 2023. This compares to $9.2 million for the same 44 period in 2023. As a result, the acquisition contributed to revenue for three months of the prior period and for the full six months of the current period and is the main driver of the increase in revenue for the six months ended June 30, 2024. The Company focuses on digital publishing, advertising technology, consumer insights, creative and media services. Revenue generated by each division are set forth below: (in thousands) Six Months Ended June 30, 2024 2023 Change % Change Digital publishing $ 950 $ 2,399 $ (1,449) (60) % decreased Advertising technology 6,212 2,504 3,708 148 % increased Consumer insights 13,367 6,896 6,471 94 % increased Creative services 3,715 1,666 2,049 123 % increased Media services 1,206 649 557 86 % increased $ 25,450 $ 14,114 $ 11,336 80 % increased Digital Publishing Digital publishing revenue decreased by $1.5 million, or 60%, for the six months ended June 30, 2024, compared to the same period in 2023. Approximately $950,000, or 4%, of the Company’s revenue for the six months ended June 30, 2024, was generated from our digital publishing customers compared to $2.4 million, or 17%, for the same period in 2023. This division was significantly impacted by macroeconomic factors, which reduced traffic to our website, coupled with an overall reduction in spending by some customers related to inflationary concerns and reduction in website traffic. Advertising Technology Advertising technology revenue increased by $3.7 million, or 148%, for the six months ended June 30, 2024, compared to the same period in 2023. Approximately $6.2 million, or 24%, of the Company’s revenue for the six months ended June 30, 2024, was generated from our advertising technology customers compared to $2.5 million, or 18%, for the same period in 2023. This growth was driven by our ability to leverage our resources to attract top advertisers, which in turn has allowed us to onboard premium publishers. This led to an increase in volume, as well as rates and overall revenue. Consumer Insights Consumer insights revenue increased by $6.5 million, or 94%, for the six months ended June 30, 2024, compared to the same period in 2023. Approximately $13.4 million, or 53%, of the Company’s revenue for the six months ended June 30, 2024 was generated from our consumer insights customers compared to $6.9 million, or 49%, for the same period in 2023. As discussed above, the Big Village Acquisition was completed in April 2023, and contributed to revenue for three months of the prior period and for the full six months of the current period and is the main driver of the increase in consumer insights revenue for the six months ended June 30, 2024. Creative Services Creative services revenue increased by $2.0 million, or 123%, for the six months ended June 30, 2024, compared to the same period in 2023. Approximately $3.7 million, or 15%, of the Company’s revenue for the six months ended June 30, 2024, was generated from our creative services customers compared to $1.7 million, or 12%, for the same period in 2023. As discussed above, the Big Village Acquisition was completed in April 2023, and contributed to revenue for three months of the prior period and for the full six months of the current period and is the main driver of the increase in creative services revenue for the six months ended June 30, 2024. Media Services Media services revenue increased by $557,000, or 86%, for the six months ended June 30, 2024, compared to the same period in 2023. Approximately $1.2 million, or 5%, of the Company’s revenue for the six months ended June 30, 2024, was generated from our media services customers compared to $649,000, or 5%, for the same period in 2023. As discussed above, the Big Village Acquisition was completed in April 2023, and contributed to revenue for three months of 45 the prior period and for the full six months of the current period and is the main driver of the increase in media services revenue for the six months ended June 30, 2024. Cost of Revenue (in thousand s ) Six Months Ended June 30, 2024 2023 Change % Change Direct salaries and labor cost $ 4,076 $ 2,528 $ 1,548 61 % increased Direct project cost 6,199 2,576 3,623 141 % increased Non-direct project cost 3,704 1,636 2,068 126 % increased Publisher cost 4,098 1,617 2,481 153 % increased Content creation 353 598 (245) (41) % decreased Sales commission 347 247 100 40 % increased Other 115 176 (61) (35) % decreased $ 18,892 $ 9,378 $ 9,514 101 % increased Cost of revenue increased $9.5 million, or 101%, for the six months ended June 30, 2024, compared to the same period of 2023. For the six months ended June 30, 2024, cost of revenue includes $14.0 million, or 74% from the impact of the Big Village Acquisition, which was completed in April 2023. This compares to $6.7 million, or 72%, for the same period in 2023. As a result, the acquisition contributed to cost of revenue for three months of the prior period and for the full six months of the current period and is the main driver of the increase in cost of revenue for the six months ended June 30, 2024. Direct Salaries and Labor Cost Direct salaries and labor cost increased $1.5 million, or 61%, for the six months ended June 30, 2024, when compared to the same period in 2023. Approximately $4.1 million, or 22%, of the Company's cost of revenue for the six months ended June 30, 2024 was a result of direct salaries and labor cost compared to $2.5 million, or 27%, for the same period in 2023. As discussed above, the Big Village Acquisition, was completed in April 2023, and contributed to cost of revenue for three months of the prior period and for the full six months of the current period and is the main driver of the increase in direct salaries and labor cost for the six months ended June 30, 2024. These costs represent salary and labor cost of employees that work directly on customer projects for our consumer insights, creative and media services divisions. Direct Project Cost Direct project cost increased $3.6 million, or 141%, for the six months ended June 30, 2024 when compared to the same period in 2023. Approximately $6.2 million, or 33%, of the Company's cost of revenue for the six months ended June 30, 2024, was a result of direct project cost compared to $2.6 million, or 27%, for the same period in 2023. As discussed above, the Big Village Acquisition, was completed in April 2023, and contributed to cost of revenue for three months of the prior period and for the full six months of the current period and is the main driver of the increase in direct project cost for the six months ended June 30, 2024. These costs include payments made to third-parties that are directly attributable to the completion of projects that allow for revenue recognition for our consumer insights, creative and media services divisions. Non-Direct Project Cost Non direct project cost increased $2.1 million, or 126%, for the six months ended June 30, 2024, when compared to the same period in 2023. Approximately $3.7 million, or 20%, of the Company's cost of revenue for the six months ended June 30, 2024, was a result of direct project cost compared to $1.6 million, or 17%, for the same period in 2023. As discussed above, the Big Village Acquisition, was completed in April 2023, and contributed to cost of revenue for three months of the prior period and for the full six months of the current period and is the main driver of the increase in non- 46 direct project cost for the six months ended June 30, 2024. These costs represent overall client service costs that are not specifically related to a particular project. Publisher Cost Publisher cost was $4.1 million, which represents 22% of overall cost of revenue, and $1.6 million, or 17%, of overall cost of revenue for the six months ended June 30, 2024 and 2023, respectively. We experienced an increase of $2.5 million, or 153%, for the six months ended June 30, 2024 compared to the same period in 2023. This increase is consistent with the increase noted in revenue for our advertising technology division. These costs represent payments to media providers and website publishers which drive revenue for our advertising technology division. Gross Margin Our gross margin increased $1.8 million, or 38%, for the six months ended June 30, 2024, compared to the same period for 2023. Gross margin as a percentage of revenue decreased to 26% for the six months ended June 30, 2024, compared to 34% for the same period of 2023. General and Administrative Expenses (in thousands) Six Months Ended June 30, 2024 2023 Change % Change Personnel cost $ 4,877 $ 4,516 $ 361 8 % increased Legal fees 788 660 128 19 % increased Professional fees 1,602 3,574 (1,972) (55) % decreased Insurance 414 431 (17) (4) % decreased Depreciation and amortization 1,037 1,160 (123) (11) % decreased Data processing 710 198 512 259 % increased Website expense 676 687 (11) (2) % decreased Other 448 330 118 36 % increased Total $ 10,552 $ 11,556 $ (1,004) (9) % decreased Gross margin as a percentage of general and administrative expense 62 % 41 % 21 % 51 % increased General and administrative expenses decreased by $1.0 million, or 9%, for the six months ended June 30, 2024, compared to the same period in 2023. The reduction is primarily due to a combination of factors as discussed below. Personnel Cost Personnel cost increased by $361,000, or 8%, for the six months ended June 30, 2024 compared to the same period in 2023. The Company reduced its head count by 44 employees including 22 employees that were terminated as a reduction in force. The Company incurred severance cost of approximately $93,000 in connection with this reduction. The Company incurred severance cost of approximately $236,000 associated with a head count reduction during the same period for 2023. Legal Expense Legal fees increased by $128,000, or 19%, for the six months ended June 30, 2024, compared to the same period in 2023. Approximately $359,000 of legal expense for the six months ended June 30, 2023 represented costs associated with the Big Village Acquisition. Professional Fees 47 Professional fees decreased by $2.0 million or 55% for the six months ended June 30, 2024, compared to the same period in 2023. Approximately $685,000 of professional fees for the six months ended June 30, 2023 represented costs associated with the Big Village Acquisition. Data Processing Data processing increased by $512,000, or 259%, for the six months ended June 30, 2024, compared to the same period of 2023. As discussed above, the Big Village Acquisition, was completed in April 2023, and contributed to data processing for three months of the prior period and for the full six months of the current period and is the main driver of the increase in data processing for the six months ended June 30, 2024. Financing and Other Expense, Net (in thousands) Six Months Ended June 30, 2024 2023 Change % Change Interest expense $ 6,377 $ 3,428 $ 2,949 86 % increased Other expense (income) (397) (381) (16) 4 % increased Total financing and other expense, net $ 5,980 $ 3,047 $ 2,933 96 % increased Financing and other expense, net increased by $2.9 million, or 96%, for the six months ended June 30, 2024, compared to the same period during 2023. This increase was largely attributable to $2.9 million or 86% , increase in interest expense related to the Centre Lane Senior Secured Credit Facility which reflected higher principal and fees due to the Centre Lane Senior Secured Credit Facility amendments during the year ended December 31, 2023. Use of Non-GAAP Financial Measure Non-GAAP results are presented only as a supplement to the financial statements and for use within management's discussion and analysis based on U.S. generally accepted accounting principles ("GAAP"). The non-GAAP financial information is provided to enhance the reader's understanding of the Company's financial performance, but non-GAAP measures should not be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. All of the items included in the reconciliation from net loss before taxes to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, etc.) or (ii) items that management does not consider to be useful in assessing the Company's ongoing operating performance (e.g., M&A costs, income taxes, gain on sale of investments, loss on disposal of assets, etc.). In the case of the non-cash items, management believes that investors can better assess the Company's operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company's ability to generate free cash flow or invest in its business. We use, and we believe investors benefit from the presentation of, EBITDA and Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company's operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Because not all companies use identical calculations, the Company's presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company's performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures. 48 A reconciliation of net loss before taxes to non-GAAP EBITDA and Adjusted EBITDA is as follows: (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2024 2023 2024 2023 Net loss before tax plus: $ (5,208) $ (6,071) $ (9,974) $ (9,867) Depreciation expense 35 39 75 46 Amortization of intangibles 481 728 962 1,114 Amortization of debt discount 936 540 1,552 844 Other interest expense 11 8 21 10 Interest expense - Centre Lane Senior Secured Credit Facility and Convertible Promissory Notes - related party 2,426 1,709 4,804 2,573 EBITDA (1,319) (3,047) (2,560) (5,280) Stock compensation expense 70 33 135 58 Non-restructuring severance expense 75 114 93 236 Non-recurring professional fees — 685 — 685 Non-recurring legal fees 254 359 309 359 Adjusted EBITDA $ (920) $ (1,856) $ (2,023) $ (3,942) Liquidity and Capital Resources Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. The following table summarizes total current assets, total current liabilities, and net working capital (deficit) as of June 30, 2024, as compared to December 31, 2023. (in thousands) June 30, 2024 December 31, 2023 Total current assets $ 15,959 $ 19,737 Total current liabilities 29,239 30,802 Net working capital deficit $ (13,280) $ (11,065) As of June 30, 2024, we had a cash balance of $2.7 million compared with a cash balance of $4.0 million as of December 31, 2023. The Company’s liquidity needs, and a discussion of how it intends to meet those needs, is discussed below. See –“Going Concern.” Going Concern Historically, the Company has incurred losses, which have resulted in an accumulated deficit of approximately $159.8 million as of June 30, 2024. Cash flows used in operating activities were $385,000 and $3.6 million for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, the Company had a working capital deficit of approximately $13.3 million, inclusive of $2.7 million in cash and cash equivalents. The Company’s ability to continue as a going concern is dependent upon its ability to meet its liquidity needs through a combination of factors. During the next year, we anticipate that we will need approximately $6.6 million to meet our contractual obligations in addition to amounts needed for our working capital needs. The Company is currently exploring several strategic alternatives, including restructuring, or refinancing its debt, or seeking additional debt, including borrowing under the Centre Lane Senior Secured Credit Agreement, or raising equity capital. The ability to access the capital markets depends, in part, upon the volume and market price of the Company's stock, which cannot be assured. Other measures include reducing or delaying certain business activities, and reducing general and administrative expenses, including a reduction in headcount. The ultimate success of these plans is not guaranteed. The Company's current cash and working capital, as of the filing of this Quarterly Report on Form 10-Q, is not expected to be sufficient to fund its anticipated level of operations over the next twelve months. As a result, such matters 49 create a substantial doubt regarding the Company’s ability to meet its financial obligations and continue as a going concern. The accompanying unaudited consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about the Company’s ability to continue as a going concern. Financing Arrangement Summary Centre Lane Senior Secured Credit Facility On June 5, 2020, the Company and its subsidiaries entered into to the Amended and Restated Senior Secured Credit Agreement between themselves, the lenders party thereto and Centre Lane Partners Master Credit Fund II, L.P., as Administrative Agent and Collateral Agent (“Centre Lane Partners”), as amended (the “Credit Agreement”). The Credit Agreement has been amended numerous times to change the terms, including the amounts outstanding, the interest rate, the maturity date and other payment terms. The outstanding principal owed to Centre Lane Partners was $74.6 million and $70.2 million as of June 30, 2024 and December 31, 2023, respectively, and matures on April 20, 2026. Of the amount outstanding at June 30, 2024, approximately $2.3 million is due by December 31, 2024 with $1.9 million due by June 30, 2025. The balance of $70.4 million is due in 2025 or later. The amount due under the Credit Agreement bears interest at 7.0% per annum plus the Secured Overnight Financing Rate ("SOFR"). At June 30, 2024, the SOFR was 5.30%, thus the overall interest rate on this facility was 12.30% per annum at June 30, 2024. Interest is paid in kind at 12.30% per annum on approximately $35.4 million of the amount owed under the Credit Agreement, and at 15% per annum on $32.1 million of the amount owed under the Credit Agreement. With respect to the remaining $7.1 million owed under the facility, interest is paid in kind at 4% per annum and in cash at the SOFR plus 3.0% (for a total interest rate of 8.30% per annum at June 30, 2024). In connection with the Twentieth Amendment, adjustments were made to the interest rate for outstanding loans as follows: • Changing the last out term loan PIK rate to the SOFR plus 7% until December 31, 2024, and to the SOFR plus 2% (previously 5%) thereafter; • Conversion of interest payable on the Seventeenth Amendment loans from April 2024 until June 30, 2025 from a combination of cash and PIK to solely PIK at the rate of 15%, with an option to maintain such terms after June 30, 2025 in exchange for an additional 2% PIK fee or transition to payments made 10% PIK and 5% in cash; • Extending the due date for the 5% exit fee with respect to the Nineteenth Amendment to December 31, 2024; For a full description of the Centre Lane Senior Secured Credit Facility, see Note 10, "Centre Lane Senior Secured Credit Facility," to the consolidated financial statements. 10% Convertible Promissory Note During November 2018, the Company issued a 10% convertible promissory note (the "Convertible Note") in the amount of $80,000 to the former Chairman of the Board, a related party. The Convertible Note is unsecured, matured five years from issuance and was convertible at the option of the holder into shares of our common stock at any time prior to maturity at a conversion price of $0.40 per share. The outstanding principal and interest on the Convertible Note was due and payable in November 2023. At June 30, 2024, approximately $123,000 inclusive of principal and interest is due and payable, and the outstanding principal continues to accrue interest. The amount was paid subsequent to the period end. For a full description of the Convertible Note, see Note 11, "10% Convertible Promissory Note" to the consolidated financial statements. 50 Summary of Cash Flows The following table summarizes cash flow activities during the six months ended June 30, 2024 and 2023: (in thousands) Six Months Ended June 30, 2024 2024 2023 Cash flow used in operating activities $ (385) $ (3,594) Cash flow used in investing activities (85) (4) Cash flow (used in) provided by financing activities (886) 6,627 Net (decrease) increase in cash and cash equivalents, net of impact of exchange rates $ (1,340) $ 3,039 Operating Activities Our largest source of operating cash is cash collections from customers from revenue. Our primary uses of our operating cash, are for cost of revenue expenses, personnel-related expenditures and other general administrative expenses. For the six months ended June 30, 2024, used in operating activities was $385,000. The primary factors affecting our operating cash flows during the period were our net loss of $10.0 million, adjusted for non-cash charges of $962,000 for amortization of intangible assets, $1.6 million of amortization of debt discount, $4.5 million in interest paid in kind on the Centre Lane Senior Secured Credit Facility, $135,000 for stock compensation expense, and a $2.3 million net change in operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities were a $2.6 million decrease in accounts receivable and a $1.2 million increase in deferred revenue. partially offset by a $993,000 decrease in accounts payable, and a $613,000 decrease in other liabilities. For the six months ended June 30, 2023, cash used in operating activities was $3.6 million. The primary factors affecting our operating cash flows during the period were our net loss of $9.9 million, adjusted for non-cash charges of $1.1 million for amortization of intangible assets, $844,000 of amortization of debt discount, $2.4 million in interest paid in kind on the Centre Lane Senior Secured Credit Facility, $58,000 of stock-based compensation expense, and a $1.8 million net change in operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities were a $3.3 million increase in accounts receivable offset by a $2.3 million increase in accounts payable and accrued expense, an increase in other liabilities of $1.5 million, and a $627,000 increase in deferred revenue. Investing Activities Cash used in investing activities of $85,000 and $4,000 for the six months ended June 30, 2024 and 2023, respectively, was due to $14,000 and $4,000, respectively, for the purchase of property and equipment, and $71,000 for website enhancement during the six months ended June 30, 2024 . Financing Activities During the six months ended June 30, 2024, the Company used cash of $886,000 in financing activities, which is largely attributable to repayment of principal on the Centre Lane Senior Secured Credit Facility of $879,000. During the six months ended June 30, 2024 and 2023, the Company raised $0 and $6.6 million of debt financing from the Centre Lane Senior Secured Credit Facility, which was used primarily to fund our working capital. Contractual Obligations and Commitments The Company leases its corporate offices in Boca Raton, Florida under a long-term non-cancellable lease agreement which was signed on June 14, 2022, with a lease term of five years beginning upon completion of improvements to the office space by the landlord, which was completed on September 12, 2022. The annual base rent is $100,000, with a provision for a 3% increase on each anniversary of the rent commencement date. The Company has the option to renew the lease for one additional five-year term. As of June 30, 2024, the Company entered into two sublease agreements of its Boca Raton corporate offices. The subleases will continue for the remaining term on the initial lease agreement of 3 years with no option to extend. The 51 aggregate minimum annual rental income under the subleases is approximately $137,000 with 3% escalations per annum. See Note 12, “ Leases ,” to the Company's consolidated financial statements for details regarding the Company’s lease. On June 30, 2024, the Company also entered into the Twentieth Amendment to the Credit Facility, which, among other things, restructured certain payments such that the amounts due within the next 12 months were reduced. See Note 10, “ Centre Lane Senior Secured Credit Facility ,” to the Company’s consolidated financial statements for details regarding the Twentieth Amendment. There were no other material changes in our contractual obligations and commitments from those disclosed above and in the Annual Report on Form 10-K for the year ended December 31, 2023. Off-Balance Sheet Arrangements As of June 30, 2024 and December 31, 2023, there were no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of our unaudited consolidated financial statements as well as reported amounts of revenue and expenses during the periods presented. Our unaudited consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Significant estimates included in the accompanying consolidated financial statements include, valuation of goodwill and intangible assets, allowance for current expected credit losses, the determination of the relative selling prices of our services, percentage of completion for revenue recognition, estimates of amortization period for intangible assets, estimates of depreciation period for property and equipment, discount rates used in the valuation of right-of-use assets and lease liabilities, litigation reserves, the valuation of equity-based transactions, valuation of the Center Lane Senior Secured Facility carrying value regarding debt modification or extinguishment, and the valuation allowance on deferred tax assets. Critical accounting policies are those policies that management believes are very important to the portrayal of our financial position and results of operations, and that require management to make estimates that are difficult, subjective or otherwise complex. For further information on all of our significant accounting policies, see the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Recent Accounting Pronouncements Recent accounting pronouncements are detailed in the “Summary of Significant Accounting Policies” in Note 2 to our unaudited consolidated financial statements. Smaller Reporting Company Status We are a “smaller reporting company” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may continue to be a smaller reporting company even though we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter. 52 Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are not required to include information otherwise required by this Item 3 to Form 10-Q.