What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-04 · 92 added, 159 removed, 144 unchanged (64% of the section changed)

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Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 16, 2021 ("2020 Form 10-K"), and other filings we make with the Securities and Exchange Commission (the "SEC").

These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed on March 9, 2022 ("2021 Form 10-K") including without limitation, those discussed in Item 1A.

"Risk Factors." in part I.

of the 2021 Form 10-K, and other filings we make with the Securities and Exchange Commission (the "SEC").

We do not undertake any obligation to update forward-looking statements, except as required by law.

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Our always-on, real-time capabilities enable users to access our media whenever and wherever they choose.

Once users have registered with our sites, we integrate proprietary direct marketing technologies to engage them with surveys, polls and other experiences, through which we learn about their lifestyles, preferences and purchasing histories.

Once users have registered with our sites, we integrate proprietary direct marketing technologies to engage them with surveys and other experiences, through which we learn about their lifestyles, preferences and purchasing histories.

Based on these insights, we serve targeted, relevant offers to them on behalf of our clients.

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We have permission to contact the majority of users in our database through multiple channels, such as email, direct mail, telephone, push notifications and SMS text messaging. We leverage this data in our performance offerings primarily to serve advertisements that we believe will be relevant to users based on the information they provide, and in our lead generation offerings to provide our clients with users' contact information so that our clients may communicate with the users directly. We continue to leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising.

Third Quarter Financial Summary

Three months ended September 30, 2021 compared to three months ended September 30, 2020:

First Quarter Financial Summary

Three months ended March 31, 2022 compared to three months ended March 31, 2021:

Revenue increased 27% to $89.1 million, from $70.2 million.

Net loss was $2.5 million, or $0.03 per share, compared to net income of $1.2 million or $0.01 per share.

Gross profit (exclusive of depreciation and amortization) of $22.1 million, a decrease of 13% over Q3 2020 and representing 25.7% of revenue.

Media margin decreased 19% to $24.2 million, from $29.7 million, representing 28.1% of revenue.

Adjusted EBITDA decreased 45% to $6.4 million, based on net loss of $2.5 million, from $11.6 million, based on net income of $1.2 million.

Net loss was $2.0 million, or $0.02 per share, compared to net loss of $6.3 million or $0.08 per share.

Gross profit (exclusive of depreciation and amortization) of $21.5 million, an increase of 12% over Q1 2021 and representing 24.1% of revenue for the three months ended March 31, 2022

Media margin increased 4% to $26.0 million, from $24.9 million, representing 29.1% of revenue for the three months ended in March 31, 2022

Adjusted EBITDA increased to $4.8 million, based on net loss of $2.0 million, from $4.7 million, based on net loss of $6.3 million.

Adjusted net income was $1.1 million, or $0.01 per share, compared to adjusted net income of $0.4 million, or $0.00 per share.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020:

Revenue was relatively similar at $229.4 million, as compared with $228.7 million.

Net loss was $13.9 million, or $0.17 per share, compared to net income of $2.0 million or $0.03 per share.

Gross profit (exclusive of depreciation and amortization) decreased 17% to $58.0 million, from $70.3 million, representing 25.3% of revenue.

Media margin decreased 12% to $69.2 million, from $78.4 million, representing 30.2% of revenue.

Adjusted EBITDA decreased 57% to $12.9 million, based on net loss of $13.9 million, from $30.0 million, based on net income of $2.0 million.

Adjusted net income was $1.2 million, or $0.01 per share, compared to adjusted net income of $14.3 million, or $0.18 per share.

Media margin, adjusted EBITDA and adjusted net income are non-GAAP financial measures.

Trends Affecting our Business

Traffic Quality Initiative and Increased Monetization

A key challenge for our business is identifying and accessing media sources that are of high quality and able to attract targeted users to our media properties.

Development, Acquisition and Retention of High-Quality Targeted Media Traffic

Our business depends on identifying and accessing media sources that are of high quality and on our ability to attract targeted users to our media properties.

As our business has grown, we have attracted larger and more sophisticated clients to our platform.

To further increase our value proposition to clients and to fortify our leadership position in relation to the evolving regulatory landscape of our industry, we commenced a traffic quality initiative (the "Traffic Quality Initiative") in 2020.

Our Traffic Quality Initiative curtailed the volume of lower quality affiliate traffic that we source, particularly during the fourth quarter of 2020 and the first quarter of 2021, and we continue to make smaller adjustments as appropriate.

We believe that significant value can be created by improving the quality of traffic we source to our media properties, through higher participation rates on our sites, leading to higher conversion rates, resulting in increased monetization and ultimately increasing revenue and media margin. We are also pursuing various revenue initiatives that enable us to grow revenue with existing user traffic volume. In the third quarter of 2021, we increased the monetization of consumer traffic through multiple channels, including growth in the Winopoly business (d/b/a Fluent Sales Solutions), strong client demand in the staffing and recruitment vertical, and an internally-developed email capability which enables us to re-engage consumers who have registered on our owned media properties. These new and/or improved revenue streams offset reductions in traffic volume year-over-year from our Traffic Quality Initiative.

Through these initiatives, our business has become less dependent on traffic volume to generate revenue growth.

These strategies yielded lower margins initially, with the intent to optimize spend for improved profitability in future periods.

In the third quarter of 2021, we both increased our spend and improved profitability with major digital media platforms compared to the second quarter, though profitability was still below our historical levels achieved through affiliate marketing.

The mix and profitability of our media channels, strategies and partners is likely to be dynamic and reflect evolving market dynamics and the impact of our Traffic Quality Initiative.

Volatility of affiliate supply sources, consolidation of media sources, changes in search engine, email and text message blocking algorithms and increased competition for available media have made the process of growing our traffic under our evolving quality standards challenging during 2021 and may continue to do so in the future.

As we test 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.

Our Traffic Quality Initiative curtailed the volume of lower quality affiliate traffic that we source, beginning in the fourth quarter of 2020 and into the year 2021 as we took a strategic course in building high quality traffic.

Our strategy of focusing on high quality targeted media traffic continued into the first quarter of 2022.

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.

We have also been pursuing strategic initiatives that enable us to grow revenue with existing user traffic volume, while attracting new users to our media properties. For the first quarter of 2022, we continued to see improved monetization of consumer traffic through improved customer relationship management, new streams of traffic 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 traditional, low-quality sources of traffic volume to generate revenue growth.

In the first quarter of 2022, we increased our spend with major digital media platforms and revised our bidding strategies for affiliate traffic.

While these strategies yielded lower margins initially and below our historical levels achieved through affiliate marketing, we intend to optimize spend for improved profitability in future periods. The mix and profitability of our media channels, strategies and partners is likely to continue to be dynamic and reflect evolving market dynamics as well as the impact of our Traffic Quality Initiative.

Volatility of affiliate supply sources, consolidation of media sources, changes in search engine, email and text message blocking algorithms, and increased competition for available media had made the process of growing our traffic under our evolving quality standards challenging during 2021 and has continued into the first quarter of 2022. As we test 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.

Seasonality and Cyclicality

Our results are subject to fluctuation as a result of seasonality and cyclicality in our and our clients’

For example, our fourth fiscal quarter ending December 31 is typically characterized by higher advertiser budgets, which can be somewhat offset by seasonal challenges of lower availability and/or higher pricing for some forms of media during the holiday period.

Further, as reflected in historical data from the Interactive Advertising Bureau ("IAB"), industry spending on internet advertising has generally declined sequentially in the first quarter of the calendar year from the fourth quarter.

Similar to the industry overall, some of our clients have lower advertising budgets during our first fiscal quarter ending March 31;

Our results are subject to fluctuations as a result of seasonality and cyclicality in our and our clients’

As reflected in historical data reported by the Interactive Advertising Bureau, an industry trade association, industry spending on internet advertising has generally declined sequentially in the first quarter of the calendar year compared to the fourth quarter.

Similar to the industry overall, some of our clients had lower advertising budgets during the first fiscal quarter ending March 31, 2022.

This is different than the fourth quarter, typically characterized by higher advertiser budgets, which can be somewhat offset by seasonal challenges of lower availability and/or higher pricing for some forms of media during the holiday period.

However, we believe that the breadth of industries in which our clients operate provides us with some insulation from these fluctuations.

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The economic uncertainty caused by COVID-19 has had varying degrees of impact on certain of our advertiser clients in certain industry verticals over the course of the pandemic.

For example, industry verticals such as staffing and recruitment and financial products and services exhibited reduced pricing and/or demand following the onset of the pandemic and have subsequently recovered to varying degrees since that time.

On the other hand, demand from certain advertisers in other verticals, such as streaming services and mobile gaming, increased during the pandemic and has since remained strong.

With the proliferation of COVID-19 vaccinations in the U.S.

during the second quarter of 2021, we have seen a substantial recovery in the staffing and recruitment vertical. There may continue to be additional shifts in pricing and/or demand among our clients, as the trajectory of the pandemic and future economic outlook remain uncertain.

We implemented company-wide work-from-home beginning on March 13, 2020.

During the second quarter of 2021, we opened our headquarters to employees that meet health protocols and voluntarily choose to work in the office.

We continue to monitor evolving trends and guidance for COVID-19 safety protocols and our office remains open for those who voluntarily choose to work there.

In addition, in light of the historically dynamic and competitive market for hiring and retaining employees, we have monitored evolving trends in flexible workplace choices for employees.

In light of the forgoing factors, we anticipate maintaining a flexible approach to workplace choices in the near term. While we believe we have adapted well to a work-from-home environment, COVID-19 increases the likelihood of certain risks of disruption to our business, such as the incapacity of certain employees or system interruptions, which could lead to diminishment of our regular business operations, technological capacity and cybersecurity capabilities, as well as operational inefficiencies and reputational harm.

There may continue to be additional shifts in pricing and/or demand among our clients, as the trajectory of the pandemic and future economic outlook remain uncertain.

On March 13, 2020, we implemented a company-wide work-from-home policy.

On April 1, 2022, we implemented a hybrid approach to have our employees in the office two days a week, but only if employees are comfortable to do so. While we believe we have adapted well to a work-from-home environment, COVID-19 increases the likelihood of certain risks of disruption to our business, such as the incapacity of certain employees or system interruptions, which could lead to diminishment of our regular business operations, technological capacity and cybersecurity capabilities, as well as operational inefficiencies and reputational harm.

Please see " Results of Operations " for further discussion of the possible impact of the COVID-19 pandemic on our business.

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Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization), which we believe is the most directly comparable GAAP measure.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of revenue (exclusive of depreciation and amortization)

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Represents the portion of cost of revenue (exclusive of depreciation and amortization) not attributable to variable costs paid for media and related expenses.

Below is a reconciliation of adjusted EBITDA from net (loss) income, which we believe is the most directly comparable GAAP measure:

Three Months Ended September 30,

Nine Months Ended September 30,

Net (loss) income

Income tax (benefit) expense

Below is a reconciliation of adjusted EBITDA from net loss, which we believe is the most directly comparable GAAP measure:

Three Months Ended March 31,

Income tax expense (benefit)

Interest expense, net

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Accrued compensation expense for Put/Call Consideration

Goodwill impairment

Write-off of intangible assets

Acquisition-related costs (1)

Restructuring and other severance costs

Certain litigation and other related costs

Adjusted EBITDA

Included in the three and nine months ended September 30, 2021 is a net expense of $2,796 related to the Full Winopoly Acquisition.

Below is a reconciliation of adjusted net income and adjusted net income per share from net (loss) income, which we believe is the most directly comparable GAAP measure.

Three Months Ended September 30,

Nine Months Ended September 30,

Includes compensation expense related to non-competition agreements entered into as a result of acquisitions (Note 11)

Below is a reconciliation of adjusted net income and adjusted net income per share from net loss, which we believe is the most directly comparable GAAP measure.

Three Months Ended March 31,

(In thousands, except share data)

Net (loss) income

Share-based compensation expense

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Accrued compensation expense for Put/Call Consideration

Goodwill impairment

Write-off of intangible assets

Acquisition-related costs (1)

Restructuring and other severance costs

Certain litigation and other related costs

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Weighted average number of shares outstanding:

Included in the three and nine months ended September 30, 2021 is a net expense of $2,796 related to the Full Winopoly Acquisition.

We present media margin, media margin as a percentage of revenue, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors.

Includes compensation expense related to non-competition agreements entered into as a result of an acquisitions (Note 11)

We present media margin, as a percentage of revenue, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors.

More specifically:

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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 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 the NY AG and FTC matters described below under Part II, Item 1 —

The first three adjustments represent the conventional definition of EBITDA, and the remaining adjustments are items recognized and recorded under 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 the Tax Department, NY AG and FTC matters described below under Part II, Item 1 —

Legal Proceedings.

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Results of Operations

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Revenue increased $7.6 million, or 10%, to $85.9 million for the three months ended September 30, 2021, from $78.3 million for the three months ended September 30, 2020. The increase was largely attributable to growth in the Winopoly business (d/b/a Fluent Sales Solutions), which considerably expanded its operating scale year-over-year through increased use of contracted call center personnel.

This expanded capacity enabled higher volumes of outbound consumer contacts, including consumers who have registered on Fluent's owned media properties, as well as consumer leads sourced from third parties.

The increase in revenue also reflects strong client demand in the staffing and recruitment vertical, resulting in improvements in both pricing and volume in the 2021 quarter compared to the 2020 quarter.

The increase in revenue also reflected an internally-developed email capability which enables us to re-engage consumers who have already registered on our owned media properties.

This revenue stream, which comes at high margins, was nascent in the second quarter of 2021 and not existent in the third quarter of 2020.

Each of the foregoing factors has served to increase monetization of consumer traffic, which has more than offset reductions in traffic volume year-over-year, stemming from our Traffic Quality Initiative.

Three months ended March 31, 2022 compared to three months ended March 31, 2021

Revenue increased $18.9 million, or 27%, to $89.1 million for the three months ended March 31, 2022, from $70.2 million for the three months ended March 31, 2021. The increase was largely attributable to growth in the Rewards business, driven by expanding media footprint in both U.S and international markets, increased client demand in Fluent Sales Solution, and expanded CRM capabilities which enables us to re-engage consumers who have already registered on our owned media properties. 

Each of the foregoing factors has served to increase monetization of consumer traffic, which has offset reductions in traffic volume year-over-year, stemming from our Traffic Quality Initiative.

Through these initiatives, our business has become less dependent on traffic volume to generate revenue growth.

In tandem with the forgoing, we continued to source higher volumes of traffic from major digital media platforms in the third quarter, with year-over-year reductions in lower-quality affiliate traffic.

These trends are anticipated to continue into the fourth quarter of 2021 as we continue to test and scale media channels, strategies and partnerships.

See discussion below under "Cost of revenue (exclusive of depreciation and amortization)." We ultimately anticipate higher volumes of traffic in future periods as we seek to replace the loss of lower-quality affiliate traffic, though the timing of such increases remains uncertain. 

At the onset of the continuing COVID-19 pandemic, certain advertisers in industry verticals such as staffing and recruitment and financial products and services exhibited reduced pricing and/or demand and subsequently recovered and expanded to varying degrees since that time.

Demand from certain advertisers in other verticals, such as streaming services and mobile gaming, increased during the pandemic and has remained strong.

While changes in demand and pricing among clients in various industry verticals did not result in a significant disruption to our business, the trajectory of these trends is uncertain.

We also continued to source higher volumes of traffic from major digital media platforms in the first quarter, with year-over-year reductions in lower-quality affiliate traffic.

These trends are anticipated to continue in the near future as we test and scale media channels, strategies and partnerships. See discussion below under "Cost of revenue (exclusive of depreciation and amortization).

Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $11.0 million, or 21%, to $63.8 million for the three months ended September 30, 2021, from $52.8 million for the three months ended September 30, 2020.

Our cost of revenue primarily consists of media and related costs associated with acquiring traffic from third-party publishers and digital media platforms for our owned and operated websites and, historically, on behalf of third-party advertisers, as well as the costs of fulfilling rewards earned by consumers who complete the requisite number of advertiser offers.

The total cost of revenue as a percentage of revenue increased to 74% for the three months ended September 30, 2021, compared to 67% in the corresponding period in 2020. In the normal course of executing paid media campaigns to source consumer traffic, we regularly test new channels, strategies and partners, in an effort to identify actionable opportunities which can then be optimized over time. Traffic acquisition costs incurred with the major digital media platforms from which we sourced increased traffic volumes have historically been higher than affiliate traffic sources.

Through our Traffic Quality Initiative, we substantially curtailed the volume of lower quality affiliate traffic that we source. To replace this lower quality traffic, we are testing and scaling various media channels, strategies and partners to generate consumer traffic meeting our quality requirements.

In the third quarter of 2021, we continued some of the strategies tested in the second quarter of 2021, involving increased media spend with major digital media platforms and revised bidding strategies for affiliate traffic. These strategies yielded lower margins initially, with the intent to optimize spend for improved profitability in future periods.

In the third quarter 2021, we both increased our spend and improved profitability with our major digital media platforms compared to the second quarter, though profitability was still below our historical levels achieved through affiliate marketing. The mix and profitability of our media channels, strategies and partners is likely to be dynamic and reflect evolving market dynamics and the impact of our Traffic Quality Initiative.

Cost of revenue increased $16.6 million, or 33%, to $67.6 million for the three months ended March 31, 2022, from $51.0 million for the three months ended March 31, 2021.

The total cost of revenue as a percentage of revenue increased to 76% for the three months ended March 31, 2022, compared to 73% for the three months ended March 31, 2021.

In the normal course of executing paid media campaigns to source consumer traffic, we regularly test new channels, strategies and partners, in an effort to identify actionable opportunities which can then be optimized over time.

Traffic acquisition costs incurred with the major digital media platforms from which we sourced increased traffic volumes have historically been higher than affiliate traffic sources.

In the first quarter of 2022, we continued to increase our spend and improve profitability with our major digital media platforms compared to last year, though profitability was still below our historical levels achieved through affiliate marketing. The mix and profitability of our media channels, strategies and partners is likely to be dynamic and reflect evolving market dynamics and the impact of our Traffic Quality Initiative.

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Sales and marketing.

Sales and marketing expenses increased $0.1 million, or 4%, to $3.0 million for the three months ended September 30, 2021, from $2.9 million for the three months ended September 30, 2020. For the three months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $2.7 million and $2.5 million, non-cash share-based compensation expense of $0.2 and $0.2 million, and advertising costs of $0.1 and $0.2 million, respectively.

As business travel and in-person meetings and events begin to resume, we anticipate that our sales and marketing expenditures may increase in future periods. As a result, past levels of sales and marketing expenditures may not be indicative of future expenditures, which may increase or decrease as these uncertainties in our business play out.

Sales and marketing expenses increased $0.9 million, or 30%, to $3.9 million for the three months ended March 31, 2022, from $3.0 million for the three months ended March 31, 2021. For the three months ended March 31, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $3.3 million and $2.5 million, advertising costs of $0.3 and $0.2 million, and non-cash share-based compensation expense of $0.2 and $0.2 million respectively.

As business travel and in-person meetings and events have resumed, we anticipate that our sales and marketing expenditures may increase in future periods. As a result, past levels of sales and marketing expenditures may not be indicative of future expenditures, which may increase or decrease as these uncertainties in our business play out.

Product development.

Product development increased $1.1, or 33%, to 

$4.5 million for the three months ended September 30, 2021, from $3.4 million for the three months ended September 30, 2020. 

F or the three months ended September 30, 2021 and 2020, the amounts consisted mainly of salaries and benefits of $2.8 million and $2.5 million, acquisition-related costs of $0.6 million and $0.0 million, professional fees of $0.5 million and $0.2 million, software license and maintenance costs of $0.2 million and $0.3 million, and non-cash share-based compensation expense of $0.2 million and $0.3 million, respectively. The increase in product development expenses reflects, in part, the development of new app-based media properties, expanding beyond our traditional focus on web-based media properties along with acquisition-related costs in connection with the Full Winopoly Acquisition described below under the heading "Liquidity and Capital Resources."

Product development increased $1.1 million, or 33%, to 

$4.6 million for the three months ended March 31, 2022, from $3.4 million for the three months ended March 31, 2021. 

F or the three months ended March 31, 2022 and 2021, the amounts consisted mainly of salaries and benefits of $3.3 million and $2.6 million, professional fees of $0.7 million and $0.2 million, software license and maintenance costs of $0.4 million and $0.3 million, and non-cash share-based compensation expense of $0.2 million and $0.3 million, respectively. The increase in product development expenses reflects, in part, the development of new app-based media properties, expanding beyond our traditional focus on web-based media properties.

General and administrative.

General and administrative expenses increased $0.5 million, or 4%, to $13.3 million for the three months ended September 30, 2021, from $12.8 million for the three months ended September 30, 2020.

For the three months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $5.1 million and $4.3 million , acquisition-related costs of $2.3 million and $0.1 million, professional fees of $1.4  

million and $1.4 million, software license and maintenance costs of $1.2 million and $0.5 million, office overhead of $1.1  

million and $1.0 million, non-cash share-based compensation expense of  $0.8 

million and $0.7  million, accrued compensation expense for Put/Call Consideration from the Initial Winopoly Acquis ition described below under the heading "Liquidity and Capital Resources" of $0.6 million and $0.7 milli on (see Note 11, 

Business acquisition, in the Notes to Consolidated Financial Statements), and certain litigation and related costs of $0.3 million and $2.7 million , respectively.

The increase was mainly the result of increased acquisition-related costs in connection with the Full Winopoly Acquisition, employee salaries and benefits and software costs, largely offset by reduced litigation and related costs. 

General and administrative expenses decreased by $0.4 million, or 4%, to $11.3 million for the three months ended March 31, 2022, from $11.7 million for the three months ended March 31, 2021.

For the three months ended March 31, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $4.9 million and $4.9 million , professional fees of $1.4  

million and $1.5 million, certain litigation and related costs of $1.4 million and $0.7 million , office overhead of $1.1  million and $1.1 million, non-cash share-based compensation expense of  $0.7 

million and $0.8 million, software license and maintenance costs of $0.6 million and $0.6 million, acquisition-related costs of $0.6 million and $0.0 million, and 

accrued compensation expense for Put/Call Consideration from the Initial Winopoly Acquis ition described below under the heading "Liquidity and Capital Resources" of $0.0 million and $1.7 milli on (see Note 11, 

Business acquisition, in the Notes to Consolidated Financial Statements), respectively.

The decrease was mainly the result of the Put/Call consideration related to the Initial Winopoly acquisition, offset by increased litigation and related costs due to the Tax Department settlement and the acquisition-related costs in connection with the True North Acquisition and the Full Winopoly Acquisition

Depreciation and amortization.

Depreciation and amortization expenses decreased $0.7 million, or 18%, to $3.2 million for the three months ended September 30, 2021, from $3.9 million for the three months ended September 30, 2020. 

Depreciation and amortization expenses decreased $0.1 million, or 2%, to $3.3 million for the three months ended March 31, 2022, from $3.4 million for the three months ended March 31, 2021. 

Write-off of intangible assets.

During the three months ended September 30, 2021, we recognized $0.1 million of write-off of intangible assets related to software developed for internal use, with no corresponding charge in the prior period.

During the three months ended March 31, 2022, we recognized $0.1 million of write-off of intangible assets related to software developed for internal use, with no corresponding charge in the prior period.

Interest expense, net.

Interest expense, net, decreased $0.9 million, or 69%, to $0.4 million for the three months ended September 30, 2021, from $1.3 million for the three months ended September 30, 2020.

The decrease was attributable to a lower interest rate on the New Credit Facility Term Loan as compared to the Refinanced Term Loan. 

Interest expense, net, decreased $0.6 million, or 62%, to $0.4 million for the three months ended March 31, 2022, from $1.0 million for the three months ended March 31, 2021.

The decrease was attributable to a lower interest rate on the New Credit Facility Term Loan as compared to the Refinanced Term Loan, described below under "Liquidity and Capital Resources." 

Loss on early extinguishment of debt.

 During the three months ended March 31, 2021, we recognized $3.0 million of loss due to the early extinguishment of debt, described below under "Liquidity and Capital Resources," with no corresponding charge in the three months ended March 31, 2022.

(Loss) income before income taxes .

For the three months ended September 30, 2021, net loss before income taxes was $2.5 million, compared to net income before income taxes of $1.2 million for the three months ended September 30, 2020.

The decrease of $3.7 million was primarily due to an increase in cost of revenue of $11.0 million, an increase in general and administrative expense of $0.5 million, an increase in product development of 

$1.1  million, and an increase in sales and marketing of $0.1 million, partially offset by an increase in revenue of $7.6 million, a decrease in interest expense of $0.9 million and a decrease in depreciation and amortization expense of $0.7 million, as discussed above. 

For the three months ended March 31, 2022, net loss before income taxes was $2.0 million, compared to net loss before income taxes of $6.3 million for the three months ended March 31, 2021.

The improvement of $4.2 million was primarily due to an increase in revenue of $18.9 million, a decrease of $3.0 million related to the loss on the extinguishment of debt, a decrease in interest expense of $0.6 million, and a decrease in general and administrative expense of $0.4 million, partially offset by an increase in the cost of revenue of $16.6 million, an increase in product development of 

$1.1  million, and an increase in sales and marketing of $0.9 million, as discussed above. 

Income taxes.

Income tax expense was $0.0 million and $0.1 million, respectively, for the three months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021 and 2020, we recorded a full valuation allowance against our net deferred tax assets.

Income tax expense was $0.0 million and $0.1 million, respectively, for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022 and 2021, we recorded a full valuation allowance against our net deferred tax assets.

We intend to maintain a full valuation allowance against the net deferred tax assets until there is sufficient evidence to support the release of all or some portion of this allowance.

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Net (loss) income .

Net loss of $2.5 million and net income of $1.2 million were recognized for the three months ended September 30, 2021 and 2020, respectively, as a result of the foregoing.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Revenue increased $0.7 million, or less than 0.5%, to $229.4 million for the nine months ended September 30, 2021, from $228.7 million for the nine months ended September 30, 2020.

The revenue was relatively similar due the growth in the Winopoly business (d/b/a Fluent Sales Solutions), strengthened client demand in the staffing and recruitment vertical, and the development of email re-engagement capabilities described above, largely offset by the reduced volumes of affiliate traffic, stemming from our Traffic Quality Initiative.

Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $13.0 million, or 8%, to $171.4 million for the nine months ended September 30, 2021, from $158.4 million for the nine months ended September 30, 2020. 

The total cost of revenue as a percentage of revenue increased to 75% for the nine months ended September 30, 2021, compared to 69% in the corresponding period in 2020 with the increase due to the traffic acquisition factors discussed above.

Sales and marketing.

Sales and marketing expenses increased $0.4 million, or 4%, to $9.0 million for the nine months ended September 30, 2021, from $8.6 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $7.8 million and $7.0 million, non-cash share-based compensation expense of $0.6 and $0.7 million, and advertising costs of $0.4 and $0.6 million, respectively. 

Product development.

Product development increased $2.1, or 23%, to $11.3  million for the nine months ended September 30, 2021, from $9.2 million for the nine months ended September 30, 2020. 

F or the nine months ended September 30, 2021 and 2020, the amounts consisted mainly of salaries and benefits of $7.8 million and $6.9 million, professional fees of $1.0 million and $0.4 million, software license and maintenance costs of $0.9 million and $0.7 million, non-cash share-based compensation expense of $0.7 million and $0.8 million, and acquisition-related costs of $0.6 million and $0.0 million, respectively.

[The increase in product development expenses reflects, in part, the development of new app-based media properties, expanding beyond our traditional focus on web-based media properties] along with the acquisition-related costs in connection with the Full Winopoly Acquisition.

General and administrative.

General and administrative expenses increased $2.6 million, or 8%, to $36.5 million for the nine months ended September 30, 2021, from $33.9 million for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $15.0 million and $13.0 million , professional fees of $4.1  

million and $3.9 million, office overhead of 

million and $3.0 million , accrued compensation expense for Put/Call Consideration from the Initial Winopoly Acquis ition of $3.2 million and $1.2 milli on (see Note 11, 

Business acquisition, in the Notes to Consolidated Financial Statements),  

acquisition-related costs of $2.8 million and $0.2 million, IT and website related costs of $2.7 million and $1.2 million, 

non-cash share-based compensation expense of  $2.3 million and 

$3.4  million,  and 

certain litigation and related costs of $1.3 million and $4.7 million , respectively.

The increase was mainly the result of acquisition-related costs in connection with the Full Winopoly Acquisition, accrued compensation expense for the Initial Winopoly Put/Call Consideration, increased employee salaries and benefits, and IT and IT website costs, partially offset by a reduced litigation and other costs and a decline in non-cash share-based compensation expense. 

Depreciation and amortization.

Depreciation and amortization expenses decreased $1.6 million, or 14%, to $9.9 million for the nine months ended September 30, 2021, from $11.5 million for the nine months ended September 30, 2020. 

Goodwill impairment.

During the nine months ended September 30, 2020, we recognized $0.8 million of goodwill impairment related to the "All Other" reporting unit, with no corresponding impairment charge in the current period.

Write-off of intangible assets.

During the nine months ended September 30, 2021, we recognized $0.3 million of a write-off of intangible assets related to software developed for internal use, with no corresponding charge in the prior period.

Interest expense, net.

Interest expense, net, decreased $2.3 million, or 56%, to $1.8 million for the nine months ended September 30, 2021, from $4.2 million for the nine months ended September 30, 2020.

The decrease was attributable to a lower interest rate on the New Credit Facility Term Loan as compared to the Refinanced Term Loan. 

Loss on early extinguishment of debt.

During the nine months ended September 30, 2021, we recognized $3.0 million of loss due to the early extinguishment of debt, described below under "Liquidity and Capital Resources," with no corresponding charge in the prior period. 

(Loss) income before income taxes .

For the nine months ended September 30, 2021, loss before income taxes was $13.9 million, compared to net income before income taxes of $2.1 million for the nine months ended September 30, 2020.

The decrease of $16.0 million was primarily due to an increase in cost of revenue of $13.0 million, the loss on early extinguishment of debt recorded in the first quarter of 2021 of $3.0 million, an increase in general and administrative expense of $2.6 million, an increase in product development of $2.1 million, and an increase in sales and marketing of $0.4 million, partially offset by a decrease in interest expense of $2.3 million, a decrease in depreciation and amortization expense of $1.6 million, and an increase in revenue of $0.7 million, as discussed above. 

Income taxes.

There was a $0.0 million income tax benefit and $0.1 million income tax expense for the nine months ended September 30, 2021 and 2020, respectively.

Net (loss) income .

Net loss of $13.9 million and net income of $2.0 million were recognized for the nine months ended September 30, 2021 and 2020, respectively, as a result of the foregoing.

Net loss of $2.0 million and $6.3 million were recognized for the three months ended March 31, 2022 and 2021, respectively, as a result of the foregoing.

Liquidity and Capital Resources

Cash flows (used in) provided by operating activities .

For the nine months ended September 30, 2021, net cash used in operating activities was $6.9 million, as compared with $12.9 million of net cash provided by operating activities in the nine months ended September 30, 2020. Net loss in the current period of $13.9 million represents a decrease of $15.9 million, as compared with net income of $2.0 million in the prior period. Adjustments to reconcile net income to net cash used in operating activities of $19.1 million in the current period increased by $0.6 million, as compared with $19.7 million in the prior period, primarily due to the inclusion of a non-cash loss on early extinguishment of debt and an accrual for Put/Call Consideration in the current period through September 1, 2021, partially offset by reductions in share-based compensation expense and depreciation and amortization. Changes in assets and liabilities consumed cash of $12.2 million in the current period, as compared with consuming cash of $8.8 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. 

For the three months ended March 31, 2022, net cash used in operating activities was $1.8 million, as compared with $5.0 million of net cash provided by operating activities in the three months ended March 31, 2021. Net loss in the current period of $2.0 million represents a decrease of $4.2 million, as compared with net loss of $6.3 million in the prior period. Adjustments to reconcile net loss to net cash used in operating activities of $4.6 million in the current period decreased by $4.1 million, as compared with $8.7 million in the prior period, primarily due to the inclusion of a non-cash loss on early extinguishment of debt and an accrual for Put/Call Consideration in the prior period. Changes in assets and liabilities consumed cash of $4.3 million in the current period, as compared with sourcing cash of $2.6 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 flows used in investing activities .

For the nine months ended September 30, 2021 and 2020, net cash used in investing activities was $2.3 million and $3.4 million, respectively.

The decrease was mainly due to the Initial Winopoly Acquisition that occurred in the prior year, with the consideration for the Full Winopoly Acquisition reflected in product development and general and administrative expenses as disclosed above.

For the three months ended March 31, 2022 and 2021, net cash used in investing activities was $2.0 million and $0.8 million, respectively.

The increase was mainly due to the True North Acquisition that occurred in the current year. 

Cash flows provided by (used in) financing activities.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $3.7 million and net cash used in financing activities was $12.7 million for the prior period.

The increase of  $16.4 

million in cash provided by financing activities in the current period was mainly due to the net proceeds from issuance of long-term debt of $49.6 million, the repurchase of stock as part of a stock repurchase program in the prior period of $1.3 million, and the exercise of stock options by a former key executive of $0.9 million, partially offset by an increase in the repayment of long-term debt of $34.6 million, the prepayment penalty on early debt extinguishment of $0.8 million and an increase in statutory taxes paid related to the net share settlement of vested restricted stock units of $0.2 million.

As of September 30, 2021, we had noncancelable operating lease commitments of $9.1 million and long-term debt with $47.5 million principal balance.

For the nine months ended September 30, 2021, we funded our operations using available cash.

As of September 30, 2021, we had cash, cash equivalents and restricted cash of approximately $17.1 million, a decrease of $5.5 million from $22.6 million as of December 31, 2020.

Net cash used by financing activities for the three months ended March 31, 2022 was $1.7 million and net cash provided by financing activities was $7.4 million for the prior period.

The change of  -$9.1 

million in cash used in financing activities in the current period was mainly due to the decrease in the repayment of long term debt of $40.5 million, mainly offset by the net proceeds from issuance of long-term debt of $49.6 million in the prior period, the exercise of stock options by a former key executive of $0.9 million in the prior period, and the prepayment penalty on early debt extinguishment of $0.8 million.

As of March 31, 2022, we had noncancelable operating lease commitments of $8.1 million and long-term debt with a $45.0 million principal balance.

For the three months ended March 31, 2022, we funded our operations using available cash.

As of March 31, 2022, we had cash and cash equivalents of approximately $28.9 million, a decrease of $5.6 million from $34.5 million as of December 31, 2021.

We believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months and beyond.

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2018 Stock Incentive Plan to certain Winopoly personnel valued at $1.4 million. See Note 11, 

Business acquisition, in the Notes to Consolidated Financial Statements. On January 1, 2022, we acquired a 100% membership interest in True North Loyalty, LLC.

(“True North Acquisition”) for a deemed purchase price of $2.3 million, which consisted of $1.0 million of cash at closing, $0.5 million of deferred payments due at both the first and second anniversary of the closing, and contingent consideration with a fair value of $0.3 million, payable based upon the achievement of specified revenue targets over the five-year period following the completion of the acquisition.

The Company also issued 100,000 shares of fully vested stock under the Fluent, Inc. 2018 Stock Incentive Plan to the sellers valued at $0.2 million.

See Note 11 

Business acquisition, in the Notes to Consolidated Financial Statements.

During the first quarter of 2021, Fluent, LLC redeemed $38.3 million aggregate principal amount of our Refinanced Term Loan due March 26, 2023, prior to maturity, resulting in a loss of $2,964 as a cost of early extinguishment of debt.

On March 31, 2021, Fluent, LLC entered into a credit agreement (the “Credit Agreement”) by and among, Fluent, LLC, certain subsidiaries of Fluent, LLC as guarantors, Citizens Bank, N.A., as administrative agent, lead arranger and bookrunner, and BankUnited, N.A.

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The Credit Agreement provides for a term loan in the aggregate principal amount of $50.0 million funded on the Closing Date (the “Term Loan”), along with an undrawn revolving credit facility of up to $15.0 million (the "Revolving Loans," and together with the Term Loan, the "New Credit Facility").

As of September 30, 2021, the Credit Agreement has an outstanding principal balance of $47.5 million and matures on March 31, 2026.

As of March 31, 2022, the Credit Agreement has an outstanding principal balance of $45.0 million and matures on March 31, 2026.

Principal amortization of the Credit Agreement is $1.3 million per quarter, which commenced with the fiscal quarter ended June 30, 2021.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to an applicable margin, plus, at the Company's option, either a base rate or a London Inter-bank Offered Rate (“LIBOR”) rate (subject to a floor of 0.25%).

The applicable margin is between 0.75% and 1.75% for base rate borrowings and 1.75% and 2.75% for LIBOR rate borrowings, depending upon the Company's consolidated leverage ratio. The anticipated opening interest rate of the New Credit Facility is 2.50% (LIBOR + 2.25%). 

The applicable margin is between 0.75% and 1.75% for base rate borrowings and 1.75% and 2.75% for LIBOR rate borrowings, depending upon the Company's consolidated leverage ratio. The opening interest rate of the New Credit Facility was 2.50% (LIBOR + 2.25%) and as of March 2022, the interest rate increased to 2.75% (LIBOR + 2.50%)

The Credit Agreement contains restrictive covenants which impose limitations on the way we conduct our business, including limitations on the amount of additional debt we are able to incur and our ability to make certain investments and other restricted payments. The restrictive covenants may limit our strategic and financing options and our ability to return capital to our shareholders through dividends or stock buybacks.

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The Credit Agreement is guaranteed by us and our direct and indirect subsidiaries and is secured by substantially all of our assets and those of our direct and indirect subsidiaries, including Fluent, LLC, in each case, on an equal and ratable basis.

The Credit Agreement requires us to maintain and comply with certain financial and other covenants. While we were in compliance with the financial and other covenants at September 30, 2021, we cannot guarantee that we will be able to maintain compliance with such financial or other covenants in future periods.

The Credit Agreement requires us to maintain and comply with certain financial and other covenants. While we were in compliance with the financial and other covenants as of March 31, 2022, we cannot guarantee that we will be able to maintain compliance with such financial or other covenants in future periods.

Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would materially adversely affect our financial health if we are unable to access sufficient funds to repay all the outstanding amounts.

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Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

As of March 31, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies and Estimates

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Actual results may differ from these estimates under different assumptions or conditions.

During the three months ended March 31, 2021, we determined that the reduction in operating results of the Fluent reporting unit, along with a decline in the market value of its publicly-traded stock, collectively constituted a triggering event. As such, we conducted an interim test of the fair value of its goodwill for potential impairment as of March 31, 2021.

Based on the results of this interim impairment test, which used a combination of the income and market approaches to determine the fair value of the Fluent reporting unit, we concluded its goodwill of $160.9 million was not impaired since the results of the interim test indicated that the estimated fair value exceeded its carrying value by approximately 17%.

We believe that the assumptions utilized in its interim impairment testing, including the determination of an appropriate discount rate of 14.5%, long-term profitability growth projections, and estimated future cash flows, are reasonable. The risk of future impairment of goodwill exists if actual results, such as lower than expected revenue, profitability, cash flows, market multiples, discount rates and control premiums, differ from the assumptions used in our interim impairment test.

For additional information, please refer to our 2020 Form 10-K.

There have been no additional material changes to Critical Accounting Policies and Estimates disclosed in the 2020 Form 10-K.

For additional information, please refer to our 2021 Form 10-K.

There have been no additional material changes to Critical Accounting Policies and Estimates disclosed in the 2021 Form 10-K.

Recently issued accounting and adopted standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis