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, 2024 filed with the Securities and Exchange Commission (the "SEC") on March 31, 2025 (the "2024 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 2024 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 a commerce media solutions provider connecting top-tier brands with highly engaged consumers. Leveraging diverse ad inventory, robust first-party data, and proprietary machine learning, Fluent unlocks additional revenue streams for partners and empowers advertisers to acquire their most valuable customers at scale. 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 commerce media solutions marketplace ("Commerce Media Solutions"), and our owned and operated digital media properties ("O&O Sites"). Since the beginning of 2024, we have delivered data and performance-based customer acquisition services for over 400 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 operate our Commerce Media Solutions on partner sites and mobile apps where we embed our proprietary ad-serving technology to identify and acquire 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 post-transaction solution connects our advertisers to consumers on e-commerce websites and apps after a purchase or similar transaction. These syndicated Commerce Media Solutions generate meaningful income for our media partners, while driving high-quality customer acquisition for our advertiser clients. We sign agreements with our media partners with one to five year terms, typically remunerating them on a revenue share and/or impression basis. We also attract consumers at scale to our O&O Sites primarily through promotional offers, through which consumers are rewarded for completing activities on our sites. When registering on our sites, consumers provide their name, contact information, and opt-in permission for telemarketing and email marketing. 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 users targeted, relevant offers 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 advertiser client base and improves the effectiveness of our performance-based campaigns. 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 O&O Sites or other partner sites through our commerce media marketplace 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). 25 Table of Contents Additionally, we operate a call center-supported performance marketplace ("Call Solutions") that provides live, call-based performance campaigns to help clients increase engagement. The Call Solutions business serves clients across an array of industries but has had a heavy focus on the health insurance sector. We generate revenue by delivering measurable marketing results to our clients. We differentiate ourselves from other marketing alternatives by our ability 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. For our O&O Sites and Call Solutions business, we bear the responsibility and cost of acquiring consumers from media partners that ultimately generate qualified clicks, leads, calls, app downloads, or customers for our clients. Our Commerce Media Solutions business does not bear media inventory risk. Through AdParlor, LLC ("AdParlor"), our wholly owned subsidiary, we conduct our non-core business which offers advertiser clients a managed service for creator marketing and media buying on different social platforms. First Quarter Financial Summary Three months ended March 31, 2025, compared to three months ended March 31, 2024: • Revenue decreased 16% to $55.2 million, compared to $66.0 million • Net loss was $8.3 million, or $0.39 per share, compared to net loss of $6.3 million or $0.45 per share • Gross profit (exclusive of depreciation and amortization) decreased 39% to $11.4 million, representing 21% of revenue for the three months ended March 31, 2025, from $18.6 million, representing 28% of revenue for the three months ended March 31, 2024 • Media margin decreased 38% to $13.7 million, representing 24.9% of revenue for the three months ended March 31, 2025, from $22.1 million, representing 33.6% of revenue for the three months ended March 31, 2024 • Adjusted EBITDA was negative $3.1 million, compared to positive $0.7 million • Adjusted net loss was $6.7 million, or $0.31 per share, compared to $4.2 million, or $0.30 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 legacy owned and operated business depends on identifying and accessing high quality media sources and on our ability to attract targeted users to our offers. As our business grew, we attracted larger and more sophisticated advertiser 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 ("TQI") in 2020 and established our Commerce Media Solutions business 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. 26 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 per consumer with existing user traffic volume by attracting users to our O&O Sites using email and SMS messages. In addition, we have focused on improved monetization of consumer traffic through improved customer relationship management that allows us to re-engage consumers who have registered on our O&O Sites. 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 consumers driven to our O&O Sites. Better quality users lead to increased user participation rates and higher conversion rates for our advertiser clients, resulting in increased monetization, and ultimately increased revenue and media margin per consumer. 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 acquiring and maintaining traffic volume to our O&O Sites, primarily due to the Federal Trade Commission ("FTC") inquiry and subsequent Joint Motion for Entry of Proposed Stipulated Order (the "FTC Consent Order") filed by the Company and FTC in the United States District Court for the Southern District of Florida that mandated that we tighten our standards for media sourcing and put us at a competitive disadvantage to our competitors in the performance marketing market. Other factors that affected our traffic volume have included the volatility and attrition of affiliate supply sources, changes in search engine algorithms, social media pricing and policies, 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 O&O Sites. However, these efforts have not fully offset the decrease in volume to our O&O Sites and increasing costs for acquiring that traffic, and as a result we have seen lower revenue and lower gross profit in our owned and operated business. In 2023, we launched our Commerce Media Solutions business to access additional high value consumers for our advertiser clients and help media owners and ecommerce businesses generate additional revenue from their existing consumer traffic. Fluent’s Commerce Media Solutions embeds proprietary ad-serving technology in the post-action and post-transaction inventory on partner sites and mobile apps across a range of industries, including retail, ticketing and quick service restaurants. In 2024, we served ads to over 100 million consumers in the post-action and post-transaction moment for top-tier publishers and brands. These consumers are the highest intent consumers and drive significantly higher ROAS for our advertiser clients than those from our O&O Sites. 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. 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 2024, both data and performance-based spend were challenged by general economic uncertainty, but revenue declined largely due to media supply challenges in our O&O Sites, an ongoing effect of the FTC Consent Order on our owned and operated business, and declines related to the divestiture of the Company's subscription business in May 2024. For the full year ending December 31, 2025, we expect that the growth of our Commerce Media Solutions business will offset the year-over-year revenue decline in our owned and operated business related to continued media supply challenges and the declines related to the divestiture of the Company's subscription business in May 2024 and the discontinuation of our Affordable Care Act business in September 2024. We continue to work with select advertiser clients to define high performing consumer segments on both our O&O Sites and Commerce Media Solutions marketplace and strategically price paid conversions accordingly. This initiative has helped clients drive higher ROAS and driven increased spend from clients across the Media & Entertainment industry, which represents a large component of our revenue mix. Our performance is subject to fluctuations related to seasonality and cyclicality in our clients' businesses and fluctuations in media sources. Specifically, our retail specific media partners in our Commerce Media Solutions marketplace experience high seasonality based on fourth quarter consumer spending and our Call Solutions business benefits from Medicare open enrollment periods ("OEPs") in the first and 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. While we were not directly impacted by the changes to U.S. tariff and trade policies, the first quarter of 2025 continued to be characterized by media supply uncertainty in the O&O Sites marketplaces and rising media costs in the Call Solutions business that have depressed gross profit in recent quarters. To confront these headwinds, we have continued to invest in expanding supply channels for our O&O sites. We have also made continued progress in driving the adoption of Commerce Media Solutions among enterprise media partners during the current quarter and anticipate securing additional long-term contracts as the market continues to expand. However, we observed a contraction in gross margin for Commerce Media Solutions as we ventured into placements beyond post-transaction and faced increasing market competition. We expect further margin pressure in the second quarter due to competitive dynamics and the introduction of channel partnerships, but we are confident that margins will improve and lift consolidated margin in the long term. In parallel, we also continue to develop our ROAS program across additional segments of advertisers in an effort to gain additional allocations and pricing increases to further improve our user monetization. While we do believe that a prolonged period of economic downturn could negatively influence both our advertiser spend and our commerce media traffic volumes, conversely, we believe it would drive accelerated media partner adoption of our Commerce Media Solutions. Business Practices & Compliance We have continued to be affected by slowed economic conditions and the impacts of the FTC Consent Order (as described in Note 10, Contingencies , in the Notes to the consolidated financial statements) on our O&O Sites and programmatic advertising business. The industry-leading compliance measures we implemented on our O&O Sites in response to such FTC Consent Order, in addition to the TQI, continue to negatively impact our revenues and gross profit. 27 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. Considering the uncertain 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 2024 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 with related parties (see Note 4, Long-term debt, net ), (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 with related parties, (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 months ended March 31, 2025 and 2024, which we believe is the most directly comparable U.S. GAAP measure: Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Revenue $ 55,210 $ 65,983 Less: Cost of revenue (exclusive of depreciation and amortization) 43,775 47,348 Gross profit (exclusive of depreciation and amortization) $ 11,435 $ 18,635 Gross profit (exclusive of depreciation and amortization) % of revenue 21 % 28 % Non-media cost of revenue (1) 2,296 3,504 Media margin $ 13,731 $ 22,139 Media margin % of revenue 24.9 % 33.6 % (1) Represents the portion of cost of revenue (exclusive of depreciation and amortization) not attributable to variable costs paid for media and related expenses. 28 Table of Contents Below is a reconciliation of adjusted EBITDA from net loss for the three months ended March 31, 2025 and 2024, which we believe is the most directly comparable U.S. GAAP measure: Three Months Ended March 31, (In thousands) 2025 2024 Net loss $ (8,269 ) $ (6,276 ) Income tax expense 233 908 Interest expense, net 880 1,415 Depreciation and amortization 2,461 2,571 Share-based compensation expense 335 600 Fair value adjustment of Convertible Notes with related parties 80 — Acquisition-related costs (1) (119 ) 782 Restructuring and other severance costs 1,315 665 Adjusted EBITDA $ (3,084 ) $ 665 (1) Balance includes compensation expense related to non-compete agreements and earn-out expense incurred as a result of business combinations. The earn-out expense was ($119) and $151 for the three months ended March 31, 2025 and 2024, respectively. Below is a reconciliation of adjusted net loss and adjusted net loss per share from net loss for the three months ended March 31, 2025 and 2024, which we believe is the most directly comparable U.S. GAAP measure. Three Months Ended March 31, (In thousands, except share and per share data) 2025 2024 Net loss $ (8,269 ) $ (6,276 ) Share-based compensation expense 335 600 Fair value adjustment of Convertible Notes with related parties 80 — Acquisition-related costs (1) (119 ) 782 Restructuring and other severance costs 1,315 665 Adjusted net loss $ (6,658 ) $ (4,229 ) Adjusted net loss per share: Basic $ (0.31 ) $ (0.30 ) Diluted $ (0.31 ) $ (0.30 ) Weighted average number of shares outstanding: Basic 21,211,439 13,902,165 Diluted 21,211,439 13,902,165 (1) Balance includes compensation expense related to non-compete agreements and earn-out expense incurred as a result of business combinations. The earn-out expense was ($119) and $151 for the three months ended March 31, 2025 and 2024, respectively. 29 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 10, 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. 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 Months Ended March 31, 2025 and 2024 Revenue Three Months Ended March 31, (In thousands) 2025 2024 % Change Revenue $ 55,210 $ 65,983 (16 %) 30 Table of Contents Three months ended March 31, 2025 compared to the three months ended March 31, 2024 For the three months ended March 31, 2025 and 2024, revenue was comprised of owned and operated marketplaces of $31.1 million and $44.7 million, Commerce Media Solutions of $12.7 million and $6.4 million, and other streams of $11.4 million and $14.9 million, respectively. The decrease in owned and operated marketplaces revenue was primarily attributable to a decrease in media supply resulting from changes in our business practices to comply with the FTC Consent Order, which drove a reduction in spend from key clients in the Media & Entertainment and Staffing & Recruitment sectors. Partially offsetting that decline, our Commerce Media Solutions business continued to add long-term contracts with new media partners which drove up revenue from advertiser clients in the Retail & Consumer and Financial Products & Services sectors. Within our other streams, we experienced a decrease related to the True North business we exited in the second quarter of 2024 and the cessation of our ACA business in the third quarter of 2024. Cost of revenue (exclusive of depreciation and amortization) Three Months Ended March 31, (In thousands) 2025 2024 % Change Cost of revenue (exclusive of depreciation and amortization) $ 43,775 $ 47,348 (8 %) Three months ended March 31, 2025 compared to the three months ended March 31, 2024 For the three months ended March 31, 2025 and 2024, cost of revenue (exclusive of depreciation and amortization) consisted mainly of owned and operated media and related fulfillment costs of $24.8 million and $35.0 million, Commerce Media Solutions media and related costs of $9.8 million and $4.6 million, and media enablement and other indirect costs related to our other revenue streams of $9.2 million and $7.7 million, respectively. Our owned and operated marketplaces cost of revenue (exclusive of depreciation and amortization) primarily consisted of media and related costs associated with acquiring traffic from third-party publishers, digital media platforms, and influencers for our O&O Sites and fulfillment costs related to rewards earned by consumers. The decrease in O&O Sites 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. Such costs increased slightly as a percentage of revenue. Commerce Media Solutions cost of revenue consisted of fees and revenue share payments made to media partners for ads served on their digital properties and associated hosting costs. The increase in cost of revenue (exclusive of depreciation and amortization) in Commerce Media Solutions was driven by increased revenue generated from impressions from new media partners added over the period. Cost of revenue (exclusive of depreciation and amortization) for Commerce Media Solutions increased as a percentage of revenue, due to the growth of certain lower margin commerce media placements. The increase in cost of revenue (exclusive of depreciation and amortization) for other revenue streams, including media costs, enablement costs and tracking costs related to our consumer data associated with our call centers, was attributable to an increase in the cost of acquiring media for our Call Solutions business due to increased market demand in anticipation of regulations that were expected to go into effect during the first quarter of 2025, partly offset by our exit from the True North business in the second quarter of 2024 and cessation of new ACA business in the third quarter of 2024. The regulations that had affected the cost of media for our Call Solutions business have been postponed until at least January 2026. Cost of revenue (exclusive of depreciation and amortization) for other revenue streams increased materially as a percentage of revenue. For the three months ended March 31, 2025, the total cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue increased to 79% as compared to 72% for the three months ended March 31, 2024. The increase was primarily driven by the aforementioned reasons and shifts in revenue mix related to the discontinuation of certain businesses in 2024. 31 Table of Contents In the normal course of executing paid media campaigns to source consumer traffic for our O&O Sites, we regularly evaluate new channels, strategies, and partners. For the three months ended March 31, 2025, O&O Sites 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 TQI, 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 modify the practices of, such sources, which could reduce profitability further. Commerce Media Solutions media partners are generally renumerated on a per impression or revenue share basis, leading to higher and more consistent profitability. Ultimately, we believe improved traffic quality is the foundation to support sustainable long-term growth and position us as an industry leader and Commerce Media Solutions is key to that goal. Although past levels of cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue are not indicative of future percentages in the owned and operated and Call Solutions businesses, we expect revenue share agreements in the Commerce Media Solutions to create more gross margin stability in the long-term. Sales and marketing Three Months Ended March 31, (In thousands) 2025 2024 % Change Sales and marketing $ 4,070 $ 4,812 (15 %) Three months ended March 31, 2025 compared to the three months ended March 31, 2024 For the three months ended March 31, 2025 and 2024, sales and marketing expenses consisted mainly of employee salaries and benefits of $3.1 million and $4.1 million, restructuring and severance costs of $0.4 million and $0.2 million, advertising costs of $0.3 million and $0.0 million, and professional fees of $0.1 million and $0.2 million, respectively. The decrease was primarily due to lower salaries and other employee related costs driven by a decline in headcount, partly offset by an increase in restructuring and severance costs driven by the current year reductions in workforce, as described below, and an increase in advertising costs due to increased spend on conferences as the Company further invests into the growth of Commerce Media Solutions. Product development Three Months Ended March 31, (In thousands) 2025 2024 % Change Product development $ 3,398 $ 4,840 (30 %) Three months ended March 31, 2025 compared to the three months ended March 31, 2024 For the three months ended March 31, 2025 and 2024, product development expenses consisted mainly of salaries and benefits of $2.3 million and $3.2 million, professional fees of $0.5 million and $0.4 million, software license and maintenance costs of $0.4 million and $0.5 million, and restructuring and severance costs of $0.1 million and $0.4 million, respectively. The decrease was primarily due to a decline in salaries driven by lower headcount and lower spend on IT-related vendors, along with the decrease in restructuring and severance costs in the current year period due to the timing of the reductions in product development workforce. 32 Table of Contents General and administrative Three Months Ended March 31, (In thousands) 2025 2024 % Change General and administrative $ 8,582 $ 10,365 (17 %) Three months ended March 31, 2025 compared to the three months ended March 31, 2024 For the three ended March 31, 2025 and 2024, general and administrative expenses consisted mainly of employee salaries and benefits of $3.5 million and $4.7 million, professional fees of $1.6 million and $1.7 million, office overhead of $1.0 million and $1.0 million, software license and maintenance costs of $0.9 million and $0.7 million, restructuring and severance costs of $0.8 million and $0.1 million, non-cash share-based compensation expense of $0.3 million and $0.5 million, and acquisition-related costs of ($0.1) million and $0.8 million, respectively. General and administrative expenses decreased primarily due to lower salary and benefits from reduced headcount, reduced acquisition-related costs pursuant to amended non-compete agreements in the first quarter of 2025 related to the 2021 acquisition of Winopoly, LLC, and decreased share-based compensation from fewer grants. The decrease in general and administrative expenses was partially offset by an increase in restructuring or severance costs in connection with the reduction in workforce, as described below. During the first, second, and third quarters of 2024 and the first quarter of 2025, we implemented reductions in the workforce that resulted in the termination of 20, 19, 29, and 24 employees, respectively, following management's determination to more effectively align resources with our strategic initiatives. In connection with the first quarter 2024 reductions, we 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, we incurred $0.6 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, fully settled in cash by December 31, 2024. In connection with the third quarter 2024 reductions, we 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 15, 2025. In connection with the first quarter of 2025 reductions, we incurred $1.3 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, 2026. 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 March 31, (In thousands) 2025 2024 % Change Depreciation and amortization $ 2,461 $ 2,571 (4 %) Three months ended March 31, 2025 compared to the three months ended March 31, 2024 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 March 31, 2024. Interest expense, net Three Months Ended March 31, (In thousands) 2025 2024 % Change Interest expense, net $ 880 $ 1,415 (38 %) Three months ended March 31, 2025 compared to the three months ended March 31, 2024 The decrease in interest expense was driven by consulting fees capitalized and amortized over a shortened period of time during the prior period that related to the term loan with Citizens Bank N.A., partly offset by the overall higher average interest rate on the SLR (as defined herein) term loan in the current period. Fair value adjustment of Convertible Notes with related parties Three Months Ended March 31, (In thousands) 2025 2024 % Change Fair value adjustment of Convertible Notes with related parties $ 80 $ — 100 % Three months ended March 31, 2025 compared to the three months ended March 31, 2024 The change was due to a Company recognized $0.1 million of an unrealized loss related to the fair value of Convertible Notes entered into in August 2024 and therefore none in the prior period. 33 Table of Contents Loss before income taxes Three Months Ended March 31, (In thousands) 2025 2024 % Change Loss before income taxes $ (8,036 ) $ (5,368 ) 50 % Three months ended March 31, 2025 compared to the three months ended March 31, 2024 The decline in loss before income taxes of $2.7 million was a result of the foregoing. Income tax expense Three Months Ended March 31, (In thousands) 2025 2024 % Change Income tax expense $ (233 ) $ (908 ) (74 %) Three months ended March 31, 2025 compared to the three months ended March 31, 2024 For the three months ended March 31, 2025, the effective income tax rate of 2.9% 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 March 31, 2024, the Company's effective income tax rate of 16.9% was 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 March 31, 2025 and 2024, 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 valuation 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 March 31, (In thousands) 2025 2024 % Change Net loss $ (8,269 ) $ (6,276 ) 32 % 34 Table of Contents T hree m onths ended March 31, 2025 compared to the three months ended March 31, 2024 For the three months ended March 31, 2025 and 2024, net loss was $8.3 million and $6.3 million, respectively, as a result of the foregoing. Liquidity and Capital Resources Cash provided by (used in) operating activities . For the three months ended March 31, 2025, net cash provided by operating activities was $2.1 million, compared to net cash used in operating activities of $0.1 million for the three months ended March 31, 2024. Net loss in the current year period of $8.3 million represents an increase of $2.0 million, as compared with net loss of $6.3 million in the prior period. Adjustments to reconcile net loss to net cash provided by operating activities of $3.0 million in the current year period decreased by $1.0 million, as compared with $4.0 million in the prior period, primarily due to a decrease in amortization of debt and lower share-based compensation expense. Changes in assets and liabilities generated cash of $7.3 million in the current year period, as compared with $2.2 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 three months ended March 31, 2025 and 2024, net cash used in investing activities was $1.6 million and $1.8 million, respectively. The decrease was due to a decrease in investment in capitalized software in the current year period. Cash used in financing activities. For the three months ended March 31, 2025, net cash used in financing activities was $5.2 million, compared to $2.2 million for the three months ended March 31, 2024. The change was mainly due to net repayments on the SLR debt revolver, which was partly offset by the net proceeds received from the issuance of pre-funded warrants and lower debt financing costs. As of March 31, 2025, we had noncancelable operating lease commitments of $1.2 million and long-term debt with a $25.2 million principal balance. As of March 31, 2025, we had cash, cash equivalents, and restricted cash of $6.1 million, a decrease of $4.6 million from $10.7 million as of December 31, 2024. Going concern As of March 31, 2025, we were in compliance with our financial covenants under the SLR Credit Agreement (as defined below). However, our current forecasts indicate that compliance with our financial covenants may be at risk in the next twelve months. If, 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 (as defined below) the right to accelerate maturities. In such case, we would not have sufficient funds to repay the SLR Term Loan (as defined below) under the SLR Credit Agreement and any outstanding balance on the SLR Revolver (as defined below). On May 15, 2025, the Company entered into securities purchase agreements, pursuant to which the purchasers agreed to invest expected gross aggregate proceeds of $4.1 million (refer to Note 12 of the Notes to our consolidated financial statements included in this Form 10-Q). Even with the proceeds of such raise, there is no assurance that the available cash, plus availability under the borrowing base on the SLR Revolver will be sufficient to fund operations over the next twelve months, and, if needed, we would expect to raise additional capital. If we are not able to raise sufficient capital to fund operations at their current levels, we will consider implementing cost-saving measures, but there is no guarantee that such plans will be successfully executed or have the expected benefits. As a result, management has concluded that there is substantial doubt about our ability to continue as a going concern for one year after the date of issuance of this Quarterly Report on Form 10-Q. See Item 1A. Risk Factors –— "There is substantial doubt about our ability to continue as a going concern." in this Quarterly Report on Form 10-Q. Workforce reductions and divestitures Given the continued challenges we have faced achieving profitability, we have made reductions in workforce, including during the first quarter of 2025 and will 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. Additionally, we have restructured certain long-term contracts to better align with our results and needs . We will continue to review additional other business units to determine the impact of potential divestments. Capital resources and cash requirements Our sources of capital include cash on hand, cash from operations to the extent available and borrowings from the SLR Credit Facility (as defined below) to the extent available. We have no other committed sources of capital. Our material cash requirements from known contractual and other obligations consist of our term loan and obligations under operating leases for office space. For more information regarding our SLR Credit Facility, refer to Note 4 of the Notes to our consolidated financial statements included in this Form 10-Q. Our future cash requirements will depend on many factors, including employee-related expenditures from expansion of our headcount, costs to support the growth in our client and partner accounts and continued client expansion, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced solutions, features, and functionality, and litigation. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, technologies, and intellectual property rights. In order to finance such acquisitions or investments, it may be necessary for us to raise additional funds through public or private financings or draw upon our revolving facility. If we do not meet the conditions to draw, or additional financing is not accessible from outside sources, we may not be able to raise additional capital on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected. 35 Table of Contents SLR Credit Agreement 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 March 31, 2025, the SLR Credit Facility had an outstanding principal balance of $21.8 million (of which $1.8 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. 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 changed to 10.33% (SOFR + CSA+5.75%) as of March 31, 2025. On March 10, 2025, we entered into the Fourth Amendment to the SLR Credit Agreement, which, among other things, required that we raise at least $5.0 million of additional capital by March 20, 2025. On March 19, 2025, we entered into securities purchase agreements with certain officers' and/or directors and other existing stockholders of the Company, including our largest stockholder and an institutional investor, pursuant to which we raised gross proceeds of $5.1 million, before deducting offering expenses payable by us of $0.1 million (See Note 7, Equity in the Notes to the consolidated financial statements). In addition, the Fourth Amendment waived non-compliance with the financial covenants as of December 31, 2024, extended the duration of the call protection applicable to the loans, and modified the financial covenants, among other things (See Note 4 , Long-term debt, net in the Notes to the consolidated financial statements). As of March 31, 2025, we were in compliance with the financial covenants under the SLR Credit Agreement, as discussed above. Sales of securities On March 20, 2025, the Company issued pre-funded warrants to purchase up to 2,332,104 shares of the Company's common stock, at a purchase price of $2.174 per warrant. The aggregate gross proceeds totaled $5.1 million before deducting offering expenses payable by the Company. See Note 7, Equity in the Notes to the consolidated financial statements. 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 consolidated financial statements requires us to make certain 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 intangible assets, fair value of Convertible Notes, 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. 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. 36 Table of Contents For additional information, please refer to our 2024 Form 10-K. There have been no additional material changes to Critical Accounting Estimates disclosed in the 2024 Form 10-K. Recently issued accounting and adopted standards See Note 1(b), " 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, the Company is not required to provide the information required by this Item.