Fluent, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.     You should read the following discussion in conjunction with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. 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. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements 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. 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. We intend that all forward-looking statements be subject to the safe harbor provisions of 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.   Overview   Fluent, Inc. ("we," "us," "our," "Fluent," or the "Company"), is an industry leader in data-driven digital marketing services. We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach. We deliver performance-based marketing executions and lead generation data records to our clients, which in 2021 included over 500 consumer brands, direct marketers, and agencies across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer, and Staffing & Recruitment.   We attract consumers at scale to our owned digital media properties primarily through promotional offerings and employment opportunities. To register on our sites, consumers provide their names, contact information and opt-in permission to present them with offers on behalf of our clients. Approximately 90% of these users engage with our media on their mobile devices or tablets. 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 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. As new users register and engage with our sites and existing registrants re-engage, we believe the enrichment of our database expands our addressable 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 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.   21 Table of Contents   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 $2.0 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.   Media margin, adjusted EBITDA and adjusted net income are non-GAAP financial measures.   Trends Affecting our Business   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, 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.   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. 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 fluctuations as a result of seasonality and cyclicality in our and our clients’ businesses. 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.   22 Table of Contents   In addition to variations in budgets from quarter to quarter, certain clients have budgets that start stronger at the beginning of quarterly or monthly periods, may reach limits during such periods and then may have needs to satisfy their performance objectives at the end of such periods. Beyond these budgetary constraints and buying patterns of clients, other factors affecting our business may include macroeconomic conditions affecting the digital media industry and the various client verticals we serve.   COVID-19 Update   On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. At this time, our operations have not been significantly impacted by the global economic impact of COVID-19, and we have taken appropriate measures to ensure that we are able to conduct our business remotely without significant disruptions. 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. 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.   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 percentage of revenue.   Adjusted EBITDA is defined as net (loss) income 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) write-off of intangible assets, (9) acquisition-related costs, (10) restructuring and other severance costs, and (11) certain litigation and other related costs.   Adjusted net income is defined as net (loss) income 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) write-off of intangible assets, (6) acquisition-related costs, (7) restructuring and other severance costs, and (8) certain litigation and other related costs. Adjusted net income 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), which we believe is the most directly comparable GAAP measure.       Three Months Ended March 31,       2022     2021   Revenue   $ 89,063     $ 70,170   Less: Cost of revenue (exclusive of depreciation and amortization)     67,562       50,990   Gross profit (exclusive of depreciation and amortization)   $ 21,501     $ 19,180   Gross profit (exclusive of depreciation and amortization) % of revenue     24 %     27 % Non-media cost of revenue (1)     4,449       5,690   Media margin   $ 25,950     $ 24,870   Media margin % of revenue     29.1 %     35.4 %   (1) Represents the portion of cost of revenue (exclusive of depreciation and amortization) not attributable to variable costs paid for media and related expenses.   23 Table of Contents   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,       2022     2021   Net loss   $ (2,013 )   $ (6,258 ) Income tax expense (benefit)     —       (1 ) Interest expense, net     384       1,008   Depreciation and amortization     3,307       3,373   Share-based compensation expense     988       1,231   Loss on early extinguishment of debt     —       2,964   Accrued compensation expense for Put/Call Consideration     —       1,746   Write-off of intangible assets     128       —   Acquisition-related costs (1)     558       —   Certain litigation and other related costs     1,402       668   Adjusted EBITDA   $ 4,754     $ 4,731     (1) 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)   2022     2021   Net loss   $ (2,013 )   $ (6,258 ) Share-based compensation expense     988       1,231   Loss on early extinguishment of debt     —       2,964   Accrued compensation expense for Put/Call Consideration     —       1,746   Write-off of intangible assets     128       —   Acquisition-related costs (1)     558       —   Certain litigation and other related costs     1,402       668   Adjusted net income   $ 1,063     $ 351   Adjusted net income per share:                 Basic   $ 0.01     $ 0.00   Diluted   $ 0.01     $ 0.00   Weighted average number of shares outstanding:                 Basic     80,889,052       81,892,593   Diluted     80,889,052       84,144,209     (1) 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:   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.   24 Table of Contents   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 Tax Department, NY AG and FTC matters described below under Part II, Item 1 — Legal Proceedings. Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. There were no adjustments for one-time items in the periods presented.   Adjusted net income, as defined above, and the related measure of adjusted net   income   per share exclude certain items that are 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. We believe adjusted net income affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the GAAP measure of net (loss) income.   Media margin, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures with certain limitations regarding their usefulness. They do not reflect our financial results in accordance with GAAP, as they do not include the impact of certain expenses that are reflected in our condensed 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 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.   Results of Operations   Three months ended March 31, 2022 compared to three months ended March 31, 2021   Revenue. 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. 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 $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. 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 advertisers offers.   25 Table of Contents   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. 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. We believe the Traffic Quality Initiative will benefit the Company over time, providing the foundation to support sustainable long-term growth and positioning us as an industry leader. Past levels of cost of revenue (exclusive of depreciation and amortization) may therefore not be indicative of future costs, which may increase or decrease as these uncertainties in our business play out.   Sales and marketing. 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 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 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 $0.1 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 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 $0.6 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.   26 Table of Contents   (Loss) income before income taxes . 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 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. Based on various factors, including our history of losses, current income, estimated future taxable income, exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and consideration of available tax planning strategies, we believe there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance may be released. 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 on the profitability that we are able to achieve and the net deferred tax assets available.   Net (loss) income . 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 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 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 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.   27 Table of Contents   We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business. We are continuing to identify and prioritize additional technologies, which we may wish to develop internally or through licensing or acquisition from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to shareholders.   On April 1, 2020, we acquired a 50% membership interest in Winopoly, LLC (the "Initial Winopoly Acquisition"), for a deemed purchase price of $2.6 million, comprised of $1.6 million in upfront cash paid to the seller parties and contingent consideration with a fair value of $1.0 million, payable based upon the achievement of specified revenue targets over the eighteen-month period following the completion of the acquisition. See Note 11,  Business acquisition, in the Notes to Consolidated Financial Statements. On September 1, 2021, we acquired the remaining 50% membership interest in Winopoly, LLC ("the Full Winopoly Acquisition") in a negotiated transaction. The consideration was $7.8 million, which consisted of $3.4 million of cash at closing, $2.0 million of cash due on January 31, 2022, and $0.5 million of deferred payments due at each of the first and second anniversaries of the closing. We also issued 500,000 shares of fully-vested stock under the Fluent, Inc. 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.   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. and Silicon Valley Bank. 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 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 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. Furthermore, we may need to incur additional debt to meet future financing needs. 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 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. Moreover, if we are unable to meet our debt obligations as they come due, we could be forced to restructure or refinance such obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms, or at all.    28 Table of Contents   Off-Balance Sheet Arrangements   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   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 accounting principles generally accepted in the United States ("US GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We periodically evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation and income taxes. 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.   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   See Note 1(b), " Recently issued and adopted accounting standards," in the Notes to Consolidated Financial Statements.   Item 3. Quantitative and Qualitative Disclosures About Market Risk.   As a smaller reporting company, we are not required to provide the information required by this Item.