Fluent, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, the outcome of litigation, or prospects. Forward-looking statements are those that do not relate strictly to historical or current matters, but instead relate to anticipated or expected events, activities, trends, or results as of the date they are made. These forward-looking statements can be identified by the use of terminology such as "anticipate," "believe," "estimate," "expect," "intend," "project," "will," or the negative thereof or other variations thereon or comparable terminology. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements , including, without limitation, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the "SEC") on April 2, 2024 (the "2023 Form 10-K"), those contained in this Quarterly Report on Form 10-Q, and such other factors contained in our other filings we make with the SEC. We do not undertake any obligation to update forward-looking statements, except as required by law and intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance. The following discussion should be read in conjunction with the 2023 Form 10-K and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. Overview Fluent, Inc. ("we," "us," "our," "Fluent," or the "Company") is an industry leader in digital marketing services. We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach. We access these consumers through both our owned and operated digital media properties and Commerce Media Solutions marketplace. Since the beginning of 2023, we delivered data and performance-based customer acquisition services for over 500 consumer brands, direct marketers, and agencies across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Life Sciences, Retail & Consumer, and Staffing & Recruitment. We attract consumers at scale to our owned and operated digital media properties primarily through promotional offerings where they are rewarded for completing activities within the platforms. When registering on our sites, consumers provide their name, contact information, and opt-in permission to present them with relevant offers on behalf of our clients. Approximately 90% of these users engage with our media on their mobile devices or tablets. Once users have registered on our sites, we integrate our proprietary direct marketing technologies and analytics to engage them with surveys, polls, and other experiences, through which we learn about their lifestyles, preferences, and purchasing histories, among other matters. Based on these insights, we serve targeted, relevant offers to them on behalf of our clients. As new users register and engage with our sites and existing registrants re-engage, the enrichment of our database expands our addressable client base and improves the effectiveness of our performance-based campaigns. We also operate our Commerce Media Solutions platform on partner sites where we embed our proprietary ad-serving technology to identify and acquire additional consumers for our advertiser clients. Our technology is integrated at key moments in the consumer experience to capitalize on high engagement and improve conversion. For example, our Adflow product connects our advertisers to consumers on e-commerce websites after check-out. These syndicated Commerce Media Solutions generate meaningful income for our media partners, while driving high-quality customer acquisition for our advertiser clients. In contrast to the media agreements we enter into to attract users to our owned and operated websites, which can be paused or cancelled on short notice, we sign agreements with media partners for our Commerce Media Solutions platform with terms of at least one year and up to five years. We typically remunerate our media partners on a revenue share and/or impression basis. Additionally, we operate a call center-supported performance marketplace that provides live call-based performance campaigns to help clients increase engagement and in some cases sell products and services directly on behalf of our clients. The call solutions marketplace serves clients across an array of industries but has had a heavy focus on the health insurance sector. 28 Table of Contents Since our inception, we have amassed a large, proprietary database of first-party, self-declared user information and preferences. We solicit our users' consent to be contacted by us and/or our advertisers via various contact methods including email, telephone, SMS/text, and push messaging. We then leverage their self-declared data in our array of performance offerings primarily in two ways: (1) to serve advertisements that we believe will be relevant to users based on the information they provide when they engage on our sites or other partner sites through our syndicated performance marketplaces and (2) to provide our clients with users' contact information so that such clients may communicate with them directly. We may also leverage our existing technology and database to drive new revenue streams, including utilization-based models ( e.g. , programmatic advertising). We generate revenue by delivering measurable marketing results to our clients. We differentiate ourselves from other marketing alternatives by our abilities to provide clients with a cost-effective and measurable return on advertising spend ("ROAS"), a measure of profitability of sales compared to the money spent on ads, and to manage highly targeted and highly fragmented online media sources. We are predominantly paid on a negotiated or market-driven "per click," "per lead," or other "per action" basis that aligns with the customer acquisition cost targets of our clients. We bear the costs of acquiring traffic from publishers' performance marketplaces that ultimately generate qualified clicks, leads, calls, app downloads, or customers for our clients. Through AdParlor, LLC ("AdParlor"), we conduct our non-core business which offers clients various social media strategies through the planning and buying of media on different platforms. Third Quarter Financial Summary Three months ended September 30, 2024, compared to three months ended September 30, 2023: • Revenue decreased 3% to $64.5 million, compared to $66.2 million • Net loss was $7.9 million, or $0.48 per share, compared to net loss of $33.6 million or $2.43 per share • Gross profit (exclusive of depreciation and amortization) decreased 3% to $15.7 million, representing 24% of revenue for the three months ended September 30, 2024, from $16.1 million, representing 24% of revenue for the three months ended September 30, 2023 • Media margin decreased 6% to $18.2 million, representing 28.1% of revenue for the three months ended September 30, 2024, from $19.3 million, representing 29.2% of revenue for the three months ended September 30, 2023 • Adjusted EBITDA was negative $0.1 million, compared to negative $1.7 million • Adjusted net loss was $3.7 million, or $0.22 per share, compared to adjusted net loss of $4.1 million, or $0.30 per share Nine months ended September 30, 2024, compared to nine months ended September 30, 2023: • Revenue decreased 16% to $189.2 million, compared to $225.6 million • Net loss was $25.8 million, or $1.75 per share, compared to $61.3 million or $4.46 per share • Gross profit (exclusive of depreciation and amortization) decreased 19% to $46.9 million, representing 25% of revenue for the nine months ended September 30, 2024, from $57.7 million, representing 26% of revenue for the nine months ended September 30, 2023 • Media margin decreased 17% to $56.0 million, representing 29.6% of revenue for the nine months ended September 30, 2024, from $67.2 million, representing 29.8% of revenue for the nine months ended September 30, 2023 • Adjusted EBITDA was negative $3.9 million, compared to positive $4.3 million • Adjusted net loss was $15.2 million, or $1.03 per share, compared to $6.8 million, or $0.49 per share Media margin, adjusted EBITDA, and adjusted net income (loss) are non-GAAP financial measures. See "Definitions, Reconciliations and Uses of Non-GAAP Financial Measures" below. Trends Affecting our Business Development, Acquisition and Retention of High-Quality Targeted Media Traffic Our business depends on identifying and accessing high quality media sources and on our ability to attract targeted users to our owned and operated media properties. As our business has grown, we have attracted larger and more sophisticated clients to our marketplaces. To further increase our value proposition to clients and to fortify our leadership position in the evolving regulatory landscape of our industry, we implemented a Traffic Quality Initiative in 2020 and established new syndicated performance marketplaces in 2023 to access more higher value consumers. Sourcing high quality traffic will remain a focus and part of a broader initiative to improve customer acquisition for our clients. 29 Table of Contents Starting in 2022, we increased our spend with major digital media platforms, revised our bidding strategies for affiliate traffic, and developed partnerships to expand traffic from social media platforms, including the growing influencer sector. We have pursued strategic initiatives that enable us to grow revenue with existing user traffic volume by attracting users to our owned media properties via email and SMS messages. In addition, we have focused on improved monetization of consumer traffic through improved customer relationship management and internal capabilities that allow us to re-engage consumers who have registered on our owned media properties. Through these initiatives, our business has become less dependent on the volume of users to generate revenue growth. We believe that significant value has been, and will continue to be, created by improving the quality of traffic and value of consumers sourced to our media properties and commerce media marketplace. Increased user participation rates lead to higher conversion rates, resulting in increased monetization, and ultimately increased revenue and media margin. Media margin, a non-GAAP measure, is the portion of gross profit (exclusive of depreciation and amortization) reflecting variable costs paid for media and related expenses and excluding non-media cost of revenue. Since 2022, however, we have experienced challenges growing traffic volume to our owned and operated properties, primarily due to the FTC inquiry and subsequent FTC Consent Order that tightened our standards for media sourcing and put us at a competitive disadvantage versus the market. Other factors that affected our traffic volume have included the volatility of affiliate supply sources, changes in search engine algorithms, and email and text message blocking algorithms. In response to these challenges, we have invested in strategic and internal efforts to secure additional traffic from the growing influencer sector and to expand our ad network beyond our owned and operated marketplaces to new syndicated commerce media marketplaces. The mix and profitability of our media channels, strategies, and partners is likely to continue to be dynamic and reflect evolving market trends and the regulatory environment. Advertiser Trends & Seasonality We deliver data and performance-based marketing executions to our clients across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Life Sciences, Retail & Consumer, and Staffing & Recruitment. In 2023, we experienced slowdowns in certain sectors of the Media & Entertainment, Staffing & Recruitment, and Financial Products & Services industries. Both data and performance-based spend has continued to be challenged in 2024 by general economic uncertainty. In the first nine months of 2024 revenue declined due to media supply challenges in our owned and operated marketplaces and regulatory pressure on the insurance sector in our call solutions marketplace. In the fourth quarter of 2024, we expect that growth of our Commerce Media Solutions business will partially or completely offset the year over year revenue decline related to media supply challenges in our owned and operated marketplaces and within our AdParlor unit. To offset individual advertiser pull-back, we continue to work with select advertisers to define high performing consumer segments and strategically price paid conversions to help clients drive higher ROAS. This initiative has driven increased budgets from clients across the Media & Entertainment industry, which represents a large component of our revenue mix. Additionally, our performance is subject to fluctuations as a result of seasonality and cyclicality in our clients' businesses and fluctuations in media sources. Specifically, our retail specific media partners in our commerce media marketplace and our call solutions business that benefits from Medicare open enrollment period experience increased volume in the fourth quarters. Other factors affecting our business may include macroeconomic conditions that impact the digital advertising industry, the various client verticals we serve, and general market conditions. We believe the fourth quarter of 2024 will continue to be characterized by tepid economic conditions and potential media supply uncertainty in the owned and operated marketplaces. To confront these headwinds, we are continuing to invest into securing additional media partners for our commerce media marketplace and diversify our client base. We also continue to develop our "ROAS program" across additional segments of advertisers in an effort to gain additional budget allocations and further improve our user monetization. Business Practices & Compliance We have continued to be affected by slowed economic conditions and the impacts of the FTC Consent Order (the "FTC Consent Order") (as described in Note 11, Contingencies , in the Notes to the consolidated financial statements) on our owned and operated marketplaces and programmatic advertising business. The industry-leading compliance measures we implemented on our owned and operated marketplaces continue to negatively impact our revenues and media margin. Although we have not yet experienced it, we continue to believe that the increased regulatory scrutiny on the broader industry will eventually eliminate the advantage that less compliance-focused competitors currently benefit from, enabling us to recapture market share. 30 Table of Contents Current Economic Conditions We are subject to risks and uncertainties caused by events with significant macroeconomic impacts. Inflation, rising interest rates, and reduced consumer confidence have caused our clients and their customers to be cautious in their spending. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain. In light of the challenging macro-economic environment, we continue to prioritize strategic investments that have near-term benefits to revenue while also streamlining our organization through targeted workforce reductions. Please see Item 1A. Risk Factors in the 2023 Form 10-K —"Economic or political instability could adversely affect our business, financial condition, and results of operations," and "We are exposed to credit risks from our clients, and we may not be able to collect on amounts owed to us", for further discussion of the possible impact of unfavorable conditions on our business. Definitions, Reconciliations and Uses of Non-GAAP Financial Measures We report the following non-GAAP measures: Media margin is defined as that portion of gross profit (exclusive of depreciation and amortization) reflecting variable costs paid for media and related expenses and excluding non-media cost of revenue. Gross profit (exclusive of depreciation and amortization) represents revenue minus cost of revenue (exclusive of depreciation and amortization). Media margin is also presented as a percentage of revenue. Adjusted EBITDA is defined as net income (loss), excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) share-based compensation expense, (5) loss on early extinguishment of debt, (6) accrued compensation expense for Put/Call Consideration, (7) goodwill impairment, (8) impairment of intangible assets, (9) loss (gain) on disposal of property and equipment, (10) fair value adjustment of Convertible Notes, (11) acquisition-related costs, (12) restructuring and other severance costs, and (13) certain litigation and other related costs. Adjusted net income (loss) is defined as net income (loss), excluding (1) share-based compensation expense, (2) loss on early extinguishment of debt, (3) accrued compensation expense for Put/Call Consideration, (4) goodwill impairment, (5) impairment of intangible assets, (6) loss (gain) on disposal of property and equipment, (7) fair value adjustment of Convertible Notes, (8) acquisition-related costs, (9) restructuring and other severance costs, and (10) certain litigation and other related costs. Adjusted net income (loss) is also presented on a per share (basic and diluted) basis. Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization) for the three and nine months ended September 30, 2024 and 2023, which we believe is the most directly comparable GAAP measure: Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except percentages) 2024 2023 2024 2023 Revenue $ 64,516 $ 66,239 $ 189,216 $ 225,638 Less: Cost of revenue (exclusive of depreciation and amortization) 48,861 50,148 142,318 167,960 Gross profit (exclusive of depreciation and amortization) $ 15,655 $ 16,091 $ 46,898 $ 57,678 Gross profit (exclusive of depreciation and amortization) % of revenue 24 % 24 % 25 % 26 % Non-media cost of revenue (1) 2,505 3,229 9,066 9,510 Media margin $ 18,160 $ 19,320 $ 55,964 $ 67,188 Media margin % of revenue 28.1 % 29.2 % 29.6 % 29.8 % (1) Represents the portion of cost of revenue (exclusive of depreciation and amortization) not attributable to variable costs paid for media and related expenses. 31 Table of Contents Below is a reconciliation of adjusted EBITDA from net loss for the three and nine months ended September 30, 2024 and 2023, which we believe is the most directly comparable GAAP measure: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 2024 2023 Net loss $ (7,944 ) $ (33,627 ) $ (25,847 ) $ (61,319 ) Income tax expense (benefit) (35 ) (1,243 ) 98 551 Interest expense, net 1,281 936 3,711 2,420 Depreciation and amortization 2,369 2,658 7,507 8,112 Share-based compensation expense 460 961 1,490 2,958 Loss on early extinguishment of debt — — 1,009 — Goodwill impairment — 29,705 1,261 55,405 Impairment of intangible assets — — 980 — Fair value adjustment of Convertible Notes, with related parties 2,810 — 2,810 — Acquisition-related costs (1) 443 516 1,250 1,701 Restructuring and other severance costs 545 (24 ) 1,821 456 Certain litigation and other related costs — (1,624 ) — (5,982 ) Adjusted EBITDA $ (71 ) $ (1,742 ) $ (3,910 ) $ 4,302 (1) Balance includes compensation expense related to non-competition agreements and earn-out expense incurred as a result of business combinations (see Note 12, Variable Interest Entity , in the Notes to the consolidated financial statements). The earn-out expense was $30 and ($21) for the three months ended September 30, 2024 and 2023, respectively, and $167 and $89 for the nine months ended September 30, 2024 and 2023, respectively. Below is a reconciliation of adjusted net loss and adjusted net loss per share from net loss for the three and nine months ended September 30, 2024 and 2023, which we believe is the most directly comparable GAAP measure. Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except share and per share data) 2024 2023 2024 2023 Net loss $ (7,944 ) $ (33,627 ) $ (25,847 ) $ (61,319 ) Share-based compensation expense 460 961 1,490 2,958 Loss on early extinguishment of debt — — 1,009 — Goodwill impairment — 29,705 1,261 55,405 Impairment of intangible assets — — 980 — Fair value adjustment of Convertible Notes, with related parties 2,810 — 2,810 — Acquisition-related costs (1) 443 516 1,250 1,701 Restructuring and other severance costs 545 (24 ) 1,821 456 Certain litigation and other related costs — (1,624 ) — (5,982 ) Adjusted net loss $ (3,686 ) $ (4,093 ) $ (15,226 ) $ (6,781 ) Adjusted net loss per share: Basic $ (0.22 ) $ (0.30 ) $ (1.03 ) $ (0.49 ) Diluted $ (0.22 ) $ (0.30 ) $ (1.03 ) $ (0.49 ) Weighted average number of shares outstanding: Basic 16,452,273 13,813,423 14,783,253 13,751,910 Diluted 16,452,273 13,813,423 14,783,253 13,751,910 (1) Balance includes compensation expense related to non-competition agreements and earn-out expense incurred as a result of business combinations (see Note 12, Variable Interest Entity , in the Notes to the consolidated financial statements). The earn-out expense was $30 and ($21) for the three months ended September 30, 2024 and 2023, respectively, and $167 and $89 for the nine months ended September 30, 2024 and 2023, respectively. 32 Table of Contents We present media margin, media margin as a percentage of revenue, adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors. More specifically: Media margin, as defined above, is a measure of the efficiency of the Company's operating model. We use media margin and the related measure of media margin as a percentage of revenue as primary metrics to measure the financial return on our media and related costs, specifically to measure the degree by which the revenue generated from our digital marketing services exceeds the cost to attract the consumers to whom offers are made through our services. Media margin is used extensively by our management to manage our operating performance, including evaluating operational performance against budgeted media margin and understanding the efficiency of our media and related expenditures. We also use media margin for performance evaluations and compensation decisions regarding certain personnel. Adjusted EBITDA, as defined above, is another primary metric by which we evaluate the operating performance of our business, on which certain operating expenditures and internal budgets are based and by which, in addition to media margin and other factors, our senior management is compensated. The first three adjustments represent the conventional definition of EBITDA, and the remaining adjustments are items recognized and recorded under U.S. GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. These adjustments include certain litigation and other related costs associated with legal matters outside the ordinary course of business, including costs and accruals related to matters as described below (see Note 11, Contingencies , in the Notes to the consolidated financial statements). We consider items one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. There were no adjustments for one-time items in the periods presented in this Quarterly Report on Form 10-Q. Adjusted net income (loss), as defined above, and the related measure of adjusted net income (loss) per share exclude certain items that are recognized and recorded under U.S. GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income (loss) affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the U.S. GAAP measure of net income (loss). Media margin, adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share are non-GAAP financial measures with certain limitations regarding their usefulness. They do not reflect our financial results in accordance with U.S. GAAP, as they do not include the impact of certain expenses that are reflected in our consolidated statements of operations. Accordingly, these metrics are not indicative of our overall results or indicators of past or future financial performance. Further, they are not financial measures of profitability and are neither intended to be used as a proxy for the profitability of our business nor to imply profitability. The way we measure media margin, adjusted EBITDA, and adjusted net income (loss) may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements. Comparison of Our Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 Revenue Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Revenue $ 64,516 $ 66,239 (3 %) $ 189,216 $ 225,638 (16 %) 33 Table of Contents Three months ended September 30, 2024 compared to the three months ended September 30, 2023 For the three months ended September 30, 2024 and 2023, revenue was comprised of owned and operated marketplaces $43.5 million and $53.1 million, Commerce Media Solutions $10.4 million and $2.3 million, and other streams $10.6 million and $10.8 million, respectively. The decrease in owned and operated revenue was primarily attributable to a challenging macro-economic environment and a decrease in media supply resulting from changes in our business practices to comply with the FTC Consent Order, which in effect drove a reduction in spend from key clients in the Media & Entertainment and Staffing & Recruitment sectors. It was further negatively impacted by the enormous social media advertising spend driven by the US Presidential election, which started in late August and impacted our ability to buy media at acceptable margins for our demand. Partially offsetting that decline, our Commerce Media Solutions business added long-term contracts with new media partners which drove revenue up in the Retail & Consumer sector. Within our other streams, our call solutions business also grew based on increased demand from the healthcare sector, offset by a decrease related to the True North business we exited in the second quarter of 2024. Although we have seen stabilization in owned and operated media supply, we expect year-over-year declines in that marketplace to continue; however, we expect such declines to be offset by the continued growth of Commerce Media Solutions. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 For the nine months ended September 30, 2024 and 2023, revenue was comprised of owned and operated marketplaces $130.2 million and $185.8 million, Commerce Media Solutions $24.0 million and $3.5 million, and other streams $35.0 million and $36.3 million, respectively. The decrease in owned and operated revenue and increase in Commerce Media Solutions were mainly attributable to the items noted above. The decrease in other streams was related an increase in AdParlor offset by the decrease related to the True North business we exited in the second quarter of 2024. Cost of revenue (exclusive of depreciation and amortization) Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Cost of revenue (exclusive of depreciation and amortization) $ 48,861 $ 50,148 (3 %) $ 142,318 $ 167,960 (15 %) Three months ended September 30, 2024 compared to the three months ended September 30, 2023 For the three months ended three months ended September 30, 2024 and 2023, cost of revenue (exclusive of depreciation and amortization) consisted mainly of owned and operated media and fulfillment costs of $34.0 million and $40.3 million, Commerce Media Solutions media cost of $6.9 million and $2.1 million, media and enablement costs related to our other revenue streams of $6.9 million and $6.8 million, and indirect costs of revenue of $1.1 and $0.9 million, respectively. Our owned and operated cost of revenue primarily consists of media and related costs associated with acquiring traffic from third-party publishers, digital media platforms, and influencers for our owned and operated websites and fulfillment costs related to rewards earned by consumers. The decrease in owned and operated media cost was largely attributable to the challenges in acquiring media due to changes in our business practices to comply with the FTC Consent Order. Our Commerce Media Solutions cost of revenue consists of fees and revenue share payments made to media partners for revenue generated on their properties. The increase in cost of revenue in the Commerce Media Solutions was driven by increased media from new media partners added over the period. The increase in cost of revenue for other revenue streams, which includes, in addition to media costs, enablement costs and tracking costs related to our consumer data associated with our call centers, was attributable to these added costs needed to support the increased demand from the healthcare sector offset by a decrease related to our exit from the True North business in the second quarter of 2024. Indirect costs of revenue increased as a result of escalated hosting costs. For the three months ended September 30, 2024 the total cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue remained consistent at 76% compared to 76% for the three months ended September 30, 2023. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 For the nine months ended September 30, 2024 and 2023, cost of revenue (exclusive of depreciation and amortization) consisted mainly of owned and operated media and fulfillment costs of $100.6 million, and $137.1 million, Commerce Media Solutions media cost of $16.5 million and $4.0 million, media and enablement costs related to other revenue streams of $22.0 million and $24.0 million, and indirect costs of $3.2 million and $2.9 million, respectively. The decrease in owned and operated costs and increase in Commerce Media Solutions costs were attributable to the items noted above. The decrease in all other streams was related to the True North business we exited in the second quarter of 2024, partly offset by an increase associated with our call centers, as noted above. The increase in indirect costs was also due to the reason noted above. For the nine months ended September 30, 2024, the total cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue increased minimally to 75% compared to 74% for the nine months ended September 30, 2023. 34 Table of Contents In the normal course of executing paid media campaigns to source consumer traffic, we regularly evaluate new channels, strategies, and partners. For the three and nine months ended September 30, 2024, owned and operated digital media spend continued to be a mix of affiliate traffic, paid media from major digital platforms, influencer activations, and inventory from strategic media partners. Traffic acquisition costs incurred with the major digital media platforms have historically been higher than affiliate traffic sources and the mix and profitability of our media channels, strategies, and partners reflect evolving market dynamics, the impact of our Traffic Quality Initiative, and the increased compliance obligations from the FTC Consent Order. As we evaluate and scale new media channels, strategies, and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of such sources which could reduce profitability. We believe improved traffic quality is the foundation to support sustainable long-term growth and position us as an industry leader. Past levels of cost of revenue (exclusive of depreciation and amortization) are not indicative of future costs, which may increase or decrease as a percentage of revenue as these uncertainties in our business play out. Sales and marketing Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Sales and marketing $ 3,983 $ 4,426 (10 %) $ 13,400 $ 13,454 (0 %) Three months ended September 30, 2024 compared to the three months ended September 30, 2023 For the three months ended September 30, 2024 and 2023, sales and marketing expenses consisted mainly of employee salaries and benefits of $3.3 million and $3.9 million, restructuring and severance costs of $0.2 million and $0.0 million, advertising costs of $0.2 million and $0.1 million, professional fees of $0.1 million and $0.1 million, and non-cash share-based compensation expense of $0.0 million and $0.1 million, respectively. The decrease in salaries and benefits was primarily due to lower salaries and other employee related costs driven by lower headcount, partly offset by an increase in restructuring costs due to the current year period reductions in workforce, as described below. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 For the nine months ended September 30, 2024 and 2023, sales and marketing expenses consisted mainly of employee salaries and benefits of $11.3 million and $11.4 million, restructuring and severance costs of $0.6 million and $0.1 million, professional fees of $0.4 million and $0.3 million, advertising costs of $0.4 million and $0.7 million, travel and entertainment of $0.3 million and $0.3 million, and non-cash share-based compensation expense of $0.2 million and $0.4 million, respectively. The relatively consistent sales and marketing was primarily due to the decline of third-party referral fees and lower non-cash share-based compensation due to lower grants and performance, mainly offset by the increase in restructuring costs due to the current year period reductions in workforce, as described below, and higher professional fees related to consulting. Product development Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Product development $ 4,124 $ 4,511 (9 %) $ 13,681 $ 14,064 (3 %) Three months ended September 30, 2024 compared to the three months ended September 30, 2023 For the three months ended September 30, 2024 and 2023, product development expenses consisted mainly of salaries and benefits of $3.1 million and $3.4 million, professional fees of $0.4 million and $0.3 million, software license and maintenance costs of $0.3 million and $0.5 million, restructuring and severance costs of $0.1 million and $0.0 million, and non-cash share-based compensation expense of $0.1 million and $0.2 million, respectively. The decrease in salaries and benefits was primarily due to lower salaries and other employee related costs due in part to lower headcount and spend on IT-related vendors, partly offset by an increase in restructuring and severance costs in the current year period due to the reductions in workforce, as described below. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 For the nine months ended September 30, 2024 and 2023, product development expenses consisted mainly of salaries and benefits of $9.8 million and $10.3 million, professional fees of $1.4 million and $1.3 million, software license and maintenance costs of $1.2 million and $1.4 million, restructuring and severance costs of $0.7 million and $0.1 million, and non-cash share-based compensation expense of $0.2 million and $0.5 million, respectively. The decrease in product development expense was primarily due to changes as described above. 35 Table of Contents General and administrative Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change General and administrative $ 9,067 $ 8,725 4 % $ 28,288 $ 24,991 13 % Three months ended September 30, 2024 compared to the three months ended September 30, 2023 For the three ended September 30, 2024 and 2023, general and administrative expenses consisted mainly of employee salaries and benefits of $3.9 million and $4.4 million, professional fees of $1.5 million and $2.1 million, office overhead of $1.1 million and $1.0 million, software license and maintenance costs of $0.8 million and $0.7 million, acquisition-related costs of $0.4 million and $0.5 million, non-cash share-based compensation expense of $0.4 million and $0.7 million, and certain litigation and related costs of $0.0 million and a credit of ($1.6) million, respectively. The increase in general and administrative expenses was primarily related to the absence of the credit for certain litigation and related costs due to insurance reimbursements for previously incurred legal fees and lower than expected regulatory settlement and an increase in restructuring or severance costs. This was partially offset by a reduction in salaries and benefits due to lower headcount, a decrease in professional fees, and a decline in share-based compensation expense. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 For the nine months ended September 30, 2024 and 2023, general and administrative expenses consisted mainly of employee salaries and benefits of $12.8 million and $13.9 million, professional fees of $4.9 million and $5.0 million, office overhead of $3.1 million and $3.2 million, software license and maintenance costs of $2.3 million and $1.9 million, acquisition-related costs of $1.2 million and $1.7 million, non-cash share-based compensation expense of $1.1 million and $2.1 million, and certain litigation and related costs of $0.0 million and a credit of ($6.0) million, respectively. The increase in general and administrative expenses was primarily related to the absence of the credit for certain litigation and related costs, which was partially offset by a reduction in salaries and benefits due to lower headcount, a decline in share-based compensation expense, and a decrease in acquisition related costs mainly due to the conveyance of True North, LLC and its direct and indirect subsidiaries. During the first quarter of 2023 and the first, second, and third quarters of 2024, the Company implemented reductions in the workforce that resulted in the termination of 20, 20, 19, and 29 employees, respectively, following management's determination to more effectively align resources with the Company's strategic initiatives. In connection with the first quarter 2023 reductions, the Company incurred $0.5 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, fully settled in cash by March 31, 2024. In connection with the first quarter 2024 reductions, the Company incurred $0.7 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, fully settled in cash by September 30, 2024. In connection with the second quarter 2024 reductions, the Company incurred $0.6 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, to be fully settled in cash by December 31, 2024. In connection with the third quarter 2024 reductions, the Company incurred $0.5 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, to be fully settled in cash by March 31, 2025. Apart from these exit-related restructuring costs, these reductions in workforce are expected to result in corresponding reductions in future salary and benefits within sales and marketing, product development, and general and administrative expenses. Depreciation and amortization Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Depreciation and amortization $ 2,369 $ 2,658 (11 %) $ 7,507 $ 8,112 (7 %) Three months ended September 30, 2024 compared to the three months ended September 30, 2023 The decrease in depreciation and amortization costs was mainly due to the full amortization of certain intangible assets as compared to the three months ended September 30, 2023. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 The decrease in depreciation and amortization costs was driven by the same factors discussed above as compared to the nine months ended September 30, 2023. 36 Table of Contents Goodwill impairment and write-off of intangible assets Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Goodwill impairment and impairment of intangible assets $ — $ 29,705 (100 %) $ 2,241 $ 55,405 (96 %) Three months ended September 30, 2024 compared to the three months ended September 30, 2023 The Company recognized no goodwill impairment in the current year period, compared to $29.7 million goodwill impairment loss related to both the Fluent and All Other Reporting Unit for the prior period. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 The Company recognized a $1.3 million goodwill impairment in the current year period related to the All Other reporting unit and a $1.0 million impairment on its software developed for internal use related to the Fluent reporting unit and customer relationships related to the All Other reporting unit in the current year period, compared to the goodwill impairment of $55.4 million for the Fluent and All Other Reporting Unit for the nine months ended September 30, 2023. Interest expense, net Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Interest expense, net $ 1,281 $ 936 37 % $ 3,711 $ 2,420 53 % Three months ended September 30, 2024 compared to the three months ended September 30, 2023 The increase in interest expense was driven by a higher average interest rate on the SLR (as defined herein) term loan in the current year period as compared to the prior period's Citizens Bank, N.A. term loan described below under "Liquidity and Capital Resources" below along with increased loan amortization. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 The increase in interest expense was driven by the same factors discussed above. Fair value adjustment of Convertible Notes with related parties Three Months Ended September 30, As of the Three Months Ended September 30, 2023 (In thousands) 2024 2023 % Change 2024 2023 % Change Fair value adjustment of Convertible Notes, with related parties $ 2,810 $ — 100 % $ 2,810 $ — 100 % Three months ended September 30, 2024 compared to the three months ended September 30, 2023 The Company recognized $2.8 million of an unrealized loss related to the fair value of Convertible Notes entered into in the current period and therefore none in the prior period. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 The Company recognized $2.8 million of an unrealized loss related to the fair value of Convertible Notes, as described above. Loss on early extinguishment of debt Three Months Ended September 30, As of the Nine Months Ended September 30, 2023 (In thousands) 2024 2023 % Change 2024 2023 % Change Loss on early extinguishment of debt $ — $ — — $ 1,009 $ — 100 % 37 Table of Contents Three months ended September 30, 2024 compared to the three months ended September 30, 2023 The Company recognized no loss on early extinguishment of debt in the current year period or prior period. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 The Company recognized a $1.0 million loss on early extinguishment of debt related to the Citizens Credit Agreement due on September 30, 2025, as compared to no loss on debt extinguishment in the prior period. Loss before income taxes Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Loss before income taxes $ (7,979 ) $ (34,870 ) (77 %) $ (25,749 ) $ (60,768 ) (58 %) Three months ended September 30, 2024 compared to the three months ended September 30, 2023 The decline in loss before income taxes of $26.9 million was primarily driven by the decrease in goodwill impairment of $29.7 over the prior year period, a decline in cost of revenue of $1.3 million, and a decrease in operating expenses of $0.5 million driven mainly by the lower reductions in workforce, described above, partly offset by the $2.8 million unrealized loss for the fair value adjustment of the convertible notes and the decrease in revenue of $1.7 million. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 The decline in loss before income taxes of $35.0 million was primarily due to a decrease in goodwill impairment of $54.1 over the prior year period and a decline in cost of revenue of $25.6 million, partly offset by a decline in revenue of $36.4 million, an increase in operating expenses of $2.9 million driven mainly by the prior year period legal fee reimbursement and settlement of the FTC inquiry for less than expected, along with the impact of the unrealized loss related to the fair value adjustment of the convertible notes and loss on the early extinguishment of debt. Income tax (expense) benefit Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Income tax (expense) benefit $ 35 $ 1,243 (97 %) $ (98 ) $ (551 ) (82 %) Three months ended September 30, 2024 compared to the three months ended September 30, 2023 For the three months ended September 30, 2024, the effective income tax rate of 0.4% differed from the statutory federal income tax rate of 21% primarily due to state and local tax expense and losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. For the three months ended September 30, 2023, the Company's effective income tax rate of 3.6% primarily driven by the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses offset by the benefit of federal research and development credits. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 For the nine months ended September 30, 2024, the effective income tax rate of 0.4% differed from the statutory federal income tax rate of 21% primarily due to state and local tax expense and losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. For the nine months ended September 30, 2023, the Company's effective income tax rate of 0.9% primarily driven by the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses offset by the benefit of federal research and development credits. As of September 30, 2024 and 2023, the Company recorded full valuation allowances against its net deferred tax assets. The Company intends to maintain full valuation allowances against the net deferred tax assets until there is sufficient evidence to support the release of all or some portion of such allowances. Release of some or all of the valuation allowance would result in the recognition of certain deferred tax assets and an increase in deferred tax benefit for any period in which such a release may be recorded; however, the exact timing and amount of any valuation allowance release are subject to change, depending upon the level of profitability that the Company is able to achieve and the net deferred tax assets available. Net loss Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2024 2023 % Change 2024 2023 % Change Net loss $ (7,944 ) $ (33,627 ) (76 %) $ (25,847 ) $ (61,319 ) (58 %) 38 Table of Contents T hree m onths ended September 30, 2024 compared to the three months ended September 30, 2023 For the three months ended September 30, 2024 and 2023, net loss was $7.9 million and $33.6 million, respectively, as a result of the foregoing. Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 For the nine months ended September 30, 2024 and 2023, net loss was $25.8 million and $61.3 million, respectively, as a result of the foregoing. Liquidity and Capital Resources Cash (used in) provided by operating activities . For the nine months ended September 30, 2024, net cash used in operating activities was $12.0 million, compared to net cash provided by operating activities of $9.7 million for the nine months ended September 30, 2023. Net loss in the current year period of $25.8 million represents a decrease of $35.5 million, as compared with net loss of $61.3 million in the prior period. Adjustments to reconcile net loss to net cash provided by operating activities of $16.4 million in the current year period decreased by $50.4 million, as compared with $66.8 million in the prior period, primarily due to a goodwill impairment of $1.3 million and intangible impairment of $1.0 million in the current year period as compared to the goodwill impairment of $55.4 million in the prior period, partly offset by the current year period loss on the fair value adjustment of Convertible Notes of $2.8, loss on early extinguishment of debt of $1.0 million, and an increase in amortization of debt. There were changes in assets and liabilities consuming cash of $2.5 million in the current year period, as compared with sourcing of cash of $4.3 million in the prior period, primarily due to ordinary-course changes in working capital, largely involving the timing of receipt of amounts owing from clients and disbursements of amounts payable to vendors. Cash used in investing activities . For the nine months ended September 30, 2024 and 2023, net cash used in investing activities was $4.7 million and $5.4 million, respectively. The decrease was mainly due to the impact of the 2023 TAPP consolidation, compared to the increase in investment in capitalized software in the current year period. Cash (used in) provided by financing activities. For the nine months ended September 30, 2024, net cash provided by financing activities was $8.7 million, compared to net cash used in financing activities of $9.4 million for the nine months ended September 30, 2023. The increase was mainly due to the sale of warrants, the net proceeds received from the issuance of the new debt, and the Convertible Notes, which was partly offset by repayment of the prior debt and repayments on the new debt revolver as well as debt financing costs. As of September 30, 2024, we had noncancelable operating lease commitments of $2.3 million and long-term debt with a $34.2 million principal balance. For the nine months ended September 30, 2024, we funded our operations using available cash. As of September 30, 2024, we had cash, cash equivalents, and restricted cash of $7.8 million, a decrease of $8.0 million from $15.8 million as of December 31, 2023. As of September 30, 2024, w e were not in compliance with our financial covenants under our credit facility. On April 2, 2024, Fluent, LLC, as Borrower, entered into a credit agreement (as amended, the "SLR Credit Agreement") with the Company and certain subsidiaries of the Borrower as guarantors, Crystal Financial LLC D/B/A SLR Credit Solutions, as administrative agent, lead arranger and bookrunner ("SLR"), and the lenders from time to time party thereto. The SLR Credit Agreement provides for a $20.0 million term loan (the "SLR Term Loan") and a revolving credit facility of up to $30.0 million (the "SLR Revolver" and, together with the SLR Term Loan, the "SLR Credit Facility"). We used a portion of the net proceeds of the SLR Credit Facility to repay our then-outstanding obligations under the Citizens Credit Agreement dated March 31, 2021, prior to its maturity. As of September 30, 2024 , the SLR Credit Facility had an outstanding principal balance of $32.5 million (of which $12.5 million relates to the SLR Revolver) and matures on April 2, 2029 (the "Maturity Date"). The SLR Credit Facility is secured by substantially all of our assets and those of certain of our direct and indirect subsidiaries, including Fluent, LLC. The SLR Credit Agreement contains restrictive covenants which impose limitations on the way we conduct our business, including, but not limited to, limitations on the amount of additional debt we are able to incur and our ability to make certain investments or to pay dividends or other restricted payments. The SLR Credit Agreement also contains certain affirmative covenants and customary events of default provisions, including, subject to grace periods, among others, payment default, covenant default and judgment default. 39 Table of Contents On May 15, 2024, we entered into the First Amendment to the SLR Credit Agreement, pursuant to which SLR (1) waived any required prepayments on the SLR Revolver from the proceeds from the Private Placement; (2) required that the Credit Parties (as defined in the SLR Credit Agreement) retain a financial advisor to assist in preparing the Company's projections, (3) increased the minimum excess availability covenant following the Private Placement; (4) amended the definition of borrowing base (as defined in the SLR Credit Agreement); and (5) amended certain post-closing obligations. We entered into two letter agreements with SLR, one on July 31, 2024, and another on August 14, 2024, pursuant to which SLR extended the deadline for delivery of the compliance certificate required for the fiscal month ended June 30, 2024 , and the related notice of event of default, to August 21, 2024. On August 19, 2024, we entered into the Second Amendment to the SLR Credit Agreement, which, among other things, required that we raise $2.0 million in additional capital. To raise the capital, we entered into convertible subordinated notes (See Note 5 , Long-term debt, net in the Notes to the consolidated financial statements) raising an aggregate of $2.1 million. In addition, the Second Amendment (1) waived non-compliance with the financial covenants as of June 30, 2024, (2) modified the financial covenants through December 31, 2025, (3) ended a requirement to engage a financial advisor, (4) increased the interest rate margin from 5.25% to 5.75%, and (5) and waived any required prepayments from the proceeds from the convertible subordinated notes financing. As a result of our economic downward trends as described above in "Advertiser Trends & Seasonality", we updated our projections in the fourth quarter of 2024 to reflect the continued pressure on our operating results. On October 30, 2024, we entered into a letter agreement with SLR, pursuant to which SLR extended the deadline for delivery of the compliance certificate required for the fiscal month ended September 30, 2024 , and the related notice of event of default, to November 19, 2 024. On November 15, 2024, we entered into the Third Amendment to the SLR Credit agreement, which, among other things, required that we raise at least $7.5 million of additional capital by November 29, 2024. In addition, the Third Amendment waived non-compliance with the financial covenants as of September 30, 2024, extended the duration of the call protection applicable to the loans, and modified the cash dominion provisions to remain in effect on an indefinite basis.  (See Note 5 , Long-term debt, net in the Notes to the consolidated financial statements). We may voluntarily prepay the SLR Term Loan, in whole or in part, at any time, subject to a premium payable on the aggregate principal amount of any such voluntary prepayments within the first three years following the closing date. There is no principal amortization prior to maturity under the SLR Credit Agreement, except for certain mandatory prepayments to be made with the net cash proceeds of certain asset sales, casualty events, and other extraordinary receipts and upon the occurrence of certain other events, in each case, subject to certain reinvestment rights, thresholds and other exceptions. Unfunded commitments under the SLR Revolver will be subject to an unused facility fee, which will be payable monthly in arrears, as of the month following the closing, at a rate of 0.50% per annum. All amounts owed under the SLR Credit Facility will be due and payable on the Maturity Date, or earlier following a change in control or other event of default, unless otherwise extended in accordance with the terms of the SLR Credit Agreement. Borrowings under the SLR Credit Agreement currently bear interest at a rate per annum equal to a 3-month term SOFR plus 0.26161%, subject to a 1.50% floor, plus 5.75% (the "Applicable Margin"). The Applicable Margin will be reduced to 5.0% when our fixed charge coverage ratio is greater than 1.10 to 1. The opening interest rate of the SLR Credit Facility was 10.81% (SOFR + CSA + 5.25%), which increased to 11.03% (SOFR + CSA+5.75%) as of September 30, 2024 . Given the continued challenges we have faced achieving profitability, we made reductions in workforce throughout 2024 and continue to further consider cost reduction measures and focus resources on opportunities that will enable us to meet our projected budget and cash flow requirements. We had divested a non-core business unit (see Note 12 , Variable Interest Entity, in the Notes to the consolidated financial statements), transferred another business unit (see Note 3 , Intangible assets, net in the Notes to the consolidated financial statements), and are reviewing other business units to determine the impact of potential divestments. We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business. We continue to identify and prioritize additional technologies, which we may wish to develop internally or through licensing or acquisition from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurance that any such acquisitions will be made or that we will be able to successfully integrate any acquired business with our then current business or realize anticipated cost synergies. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to shareholders. 40 Table of Contents Based on current projections, we expect to be in compliance with the new financial covenants for each of the quarters in the twelve months following the issuance date of this Quarterly Report on Form 10-Q. However, we have not met our projections for certain recent quarters, so there can be no assurance that we will meet our projections in the future. I f during any fiscal quarter, we do not comply with any of our financial covenants, such non-compliance would result in an event of default that would give SLR the right to accelerate maturities. Additionally, if we fail to raise capital in at least the amount required under the Third Amendment by November 29, 2024, such failure would also result in an event of default that would give SLR the right to accelerate maturities. In such case, we would not have sufficient funds to repay the SLR Term Loan and the SLR Revolver (as described above). In addition, even if we are able to raise capital as required by the Third Amendment, there is no assurance that such capital plus borrowing base on the SLR Revolver will be sufficient to fund operations over the next twelve months. If needed, we will consider implementing other cost saving measures, but there is no guarantee that such plans would be successfully executed or have the expected benefits. As a result, management concluded that there is substantial doubt about our ability to continue as a going concern for one year after the date of this Quarterly Report on Form 10-Q. Critical Accounting Estimates Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As disclosed in Note 3, Intangible assets, net, we conducted an interim test of recoverability of its long-lived assets for the three months ended June 30, 2024. We compared the undiscounted cash flows to the carrying value of the asset group. If we were to experience sales declines, a significant change in operating margins which may impact our cash flows, and/or a decrease in our projected long-term growth rates, there would be an increased risk of impairment of other assets. Based on the results of this approach as of June 30, 2024, we concluded that the long-lived asset was not recoverable and an impairment loss was calculated. We assessed the fair value taking into account the market and the impact of the asset on the forecast and determined that the full remaining balance was impaired. As such, we recorded a non-cash impairment charge of $383 in the second quarter of 2024. As disclosed in Note 4, Goodwill, we conducted an interim test of the fair value of its goodwill for potential impairment for the three months ended June 30, 2024. We considered a combination of income and market approaches to determine the fair value of the All Other reporting unit and determined the income approach provided the best indication of fair value. The critical assumptions in the income approach include forecasted revenues and profitability, long-term growth rates, and discount rates. If we were to experience sales declines, a significant change in operating margins which may impact our cash flows, an increase in our discount rates, and/or a decrease in our projected long-term growth rates, there would be an increased risk of impairment of goodwill. Based on the results of this approach as of June 30, 2024, we concluded that its carrying value exceeded its estimated fair value by 58%. As such, we concluded that its goodwill of $1,261 for the All Other reporting unit was impaired and recorded a non-cash impairment charge of its remaining balance in the second quarter of 2024. As disclosed in Note 5, Long-term debt, net, we evaluated the terms of our convertible notes to determine whether the debt instrument contained an embedded derivative, and therefore a hybrid instrument, in which then the fair value option can be elected. The determination is based on judgment when considering the terms of the agreement. To then determine the fair value of the convertible notes, we considered the length of the term until conversion and then applied a discount rate based on that. We then applied the Black Scholes methodology to determine the conversion date stock price based on assumptions for volatility, risk free-rate, the current stock price, and term, noting that if any were to change driven by macro-economic factors as well as Company specific results, the impact to the fair value may be significant. As such, we concluded that its fair value was $4,860 as of the third quarter of 2024. Further details of the Company's accounting policies are available in Item 1, Financial Statements, Note 1, Summary of significant accounting policies , to the consolidated financial statements. 41 Table of Contents For additional information, please refer to our 2023 Form 10-K. There have been no additional material changes to Critical Accounting Estimates disclosed in the 2023 Form 10-K. Recently issued accounting and adopted standards See Note 1(d), " Recently issued and adopted accounting standards," in the Notes to consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, we are not required to provide the information required by this Item.