What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-07 · 215 added, 203 removed, 102 unchanged (80% of the section changed)

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In addition to historical information, 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.

Forward-looking statements are those that 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.

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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 includes 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.

We deliver data and performance-based marketing executions to our clients, which include 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 where they are rewarded for completing activities within our platforms.

To register on our sites, consumers provide their names, contact information and opt-in permission to present them with relevant offers on behalf of our clients. Approximately 90% of these users engage with our media on their mobile devices or tablets.

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 apply our proprietary direct marketing technologies to engage them with surveys and other experiences, through which we gather information about their lifestyles, preferences, purchasing histories and other matters.

Based on our proprietary analytics applied to this information, we serve targeted, relevant offers to them on behalf of our clients.

As new users register and engage on our sites and existing registrants re-engage, we believe the enrichment of our database through the new registrations or re-engagements expands our addressable client base and improves the effectiveness of our performance-based campaigns.

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

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

As new users register and engage on our sites and existing registrants re-engage, the enrichment of our database expands our addressable client base and improves the effectiveness of our performance-based campaigns.

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 or SMS text messaging. We leverage this data in our performance offerings primarily to serve advertisements that we believe will be relevant to our registered 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, 2022, compared to three months ended September 30, 2021:

Revenue increased 4% to $89.0 million, compared to $85.9 million

Net income was $3.1 million, or $0.04 per share, compared to net loss of $2.5 million or $0.03 per share

Gross profit (exclusive of depreciation and amortization) was $23.8 million, an increase of 8% as compared to the three months ended September 30, 2021, and representing 27% of revenue for the three months ended September 30, 2022

Media margin increased 16% to $28.1 million, compared to $24.2 million, representing 31.5% of revenue for the three months ended September 30, 2022

Adjusted EBITDA decreased to $5.9 million representing 6.6% of revenue, based on net income of $3.1 million, compared to $6.4 million, based on net loss of $2.5 million

Adjusted net income was $5.0 million, or $0.06 per share, compared to adjusted net income of $2.8 million, or $0.03 per share

Nine months ended September 30, 2022, compared to nine months ended September 30, 2021:

Revenue increased 21% to $276.5 million, compared to $229.4 million

Net loss was $55.8 million, or $0.69 per share, compared to net loss of $13.9 million or $0.17 per share

Gross profit (exclusive of depreciation and amortization) was $73.6 million, an increase  

of 27% as compared to the nine months ended September 30, 2021, and representing 27% of revenue for the nine months ended September 30, 2022

Media margin increased 25% to $86.3 million, compared to $69.2 million, representing 31.2% of revenue for the nine months ended September 30, 2022

Adjusted EBITDA increased to $20.1 million, representing 7.3% of revenue, based on net loss of $55.8 million, compared to $12.9 million, based on net loss of $13.9 million

Adjusted net income was $6.6 million, or $0.08 per share, compared to adjusted net income of $1.2 million, or $0.01 per share

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

See "Definitions, Reconciliations and Uses of Non-GAAP Financial Measures" below.

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 when they engage with our sites, and in our data offerings to provide our clients with users' contact information so that our clients may communicate with them directly. We may also leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising and call centers.

We generate revenue by delivering measurable online marketing results to our clients.

We differentiate ourselves from other marketing alternatives by our abilities to provide clients with a cost-effective and measurable return on advertising spend ("ROAS", a measure of profitability of sales compared to the money spent on ads), to manage highly targeted and highly fragmented online media sources and to provide access to our owned digital media properties and technology platforms.

We are predominantly paid on a negotiated or market-driven “per click,”

“per lead,”

or other “per action”

basis that aligns with the customer acquisition cost targets of our clients.

We bear the costs of sourcing traffic from publishers for our owned digital media properties that ultimately generate qualified clicks, leads, calls, app downloads or customers for our clients.

Through AdParlor Holdings, Inc., we conduct our non-core business which offers clients various social media strategies through the planning and buying of media on different platforms.

First Quarter Financial Summary

Three months ended March 31, 2023, compared to three months ended March 31, 2022:

Revenue decreased 13% to $77.3 million, compared to $89.1 million

Net loss was $31.9 million, or $0.39 per share, compared to net loss of $2.0 million or $0.02 per share

Gross profit (exclusive of depreciation and amortization) was $19.0 million, a decrease of 12% as compared to three months ended March 31, 2022, and representing 25% of revenue for the three months ended March 31, 2023

Media margin decreased  

15% to $22.0 million, compared to $26.0 million, representing 28.4% of revenue for the three months ended March 31, 2023

Adjusted EBITDA decreased to $0.4 million representing 0.6% of revenue, based on net loss of $31.9 million, compared to $4.8 million, based on net loss of $2.0 million

Adjusted net loss was $2.7 million, or $0.03 per share, compared to adjusted net income of $1.1 million, or $0.01 per share

Media margin, adjusted EBITDA, and adjusted net income (loss) are non-GAAP financial measures. See "Definitions, Reconciliations and Uses of Non-GAAP Financial Measures" below.

Trends Affecting our Business

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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. Our traffic quality initiative (the "Traffic Quality Initiative"), which commenced in 2020, curtailed the volume of lower quality affiliate traffic that we source as we took a strategic course to focus on building high quality traffic to increase our value proposition to clients and to fortify our leadership positions in the industry in relation to the evolving regulatory landscape.

Our strategy of focusing on high quality targeted media traffic continues.

We believe that significant value can be created by improving the quality of traffic sourced to our media properties, through increased user participation rates on our sites, leading to higher conversion rates, resulting in increased monetization, and 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.

During the third quarter of 2022, we continued to focus on 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.

During 2022, we have 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 have optimized our spend for improved profitability and intend to continue to do so 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 algorithms, 

email and text message blocking algorithms, and increased competition for available media made the process of growing our traffic under our evolving quality standards challenging during 2021. As we evaluate and scale new media channels, strategies, and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability.

Seasonality and Cyclicality

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

Other factors affecting our business may include macroeconomic conditions that impact the digital advertising industry, the various client verticals we serve, and general market conditions.

Current Economic Conditions and COVID-19 

We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including but not limited to, the COVID-19 pandemic.

Inflation, rising interest rates and reduced consumer confidence may cause our customers and/or clients to be cautious in their spending.

The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain.

On March 13, 2020, in response to the COVID-19 pandemic, we implemented a company-wide work-from-home policy.

Beginning in September 2022, we modified the policy to now require minimum in office attendance for employees. 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 Item 1A.

Risk Factors in the 2021 Form 10-K , for more information or further discussion of the possible impact of unfavorable conditions and COVID-19 pandemic on our business.

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 the evolving regulatory landscape of our industry, we implemented a Traffic Quality Initiative or TQI in 2020.

Generating high quality traffic will remain a focus moving forward, and it is now part of a broader initiative to improve the consumer experience.

Starting in 2022, we increased our spend with major digital media platforms, revised our bidding strategies for affiliate traffic, and developed partnerships to expand traffic from social media platforms, including the growing influencer segment.

We also pursued strategic initiatives that enable us to grow revenue with existing user traffic volume, while attracting new users to our media properties via email and SMS messages.

These efforts have continued into the first quarter of 2023, as we continue to focus on improved monetization of consumer traffic through improved customer relationship management and internal capabilities that allow us to re-engage consumers who have registered on our owned media properties.

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

We believe that significant value has been and will continue to be created by improving the quality of traffic sourced to our media properties, through increased user 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.

Volatility of affiliate supply sources, changes in search engine algorithms, email and text message blocking algorithms, and increased competition for available media made the process of growing our traffic volume under our evolving quality standards challenging, which we saw in 2022, have continued to be a factor in the first quarter of 2023. In an effort to offset these challenges, we are investing in internal efforts to secure additional traffic from the influencer segment and we will continue to strategically grow our e-commerce post sales solution.

In light of the challenging macro-economic environment, we have reviewed our strategic investments for 2023 and paused or eliminated lower priority projects while also streamlining our organization through targeted workforce reductions.

The mix and profitability of our media channels, strategies, and partners is likely to continue to be dynamic and reflect evolving market trends.

Advertiser Trends & Seasonality

We deliver data and performance-based marketing executions to our clients across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer, and Staffing & Recruitment.

Into 2023, both data and performance-based spend continued to be challenged by a slowing economy and general economic uncertainty. We experienced slowdowns in the first quarter in certain segments of the Media & Entertainment, Staffing & Recruitment, and Financial Products & Services sectors.

In an effort to offset these challenges, we continue to work with a select group of advertisers to define high performing consumer segments and strategically price paid conversions to help clients drive higher return on ad spend.

That initiative drove additional budgets from the gaming segment, which continues to represent a large and growing component of our revenue mix in 2023.

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

Other factors affecting our business may include macroeconomic conditions that impact the digital advertising industry, the various client verticals we serve, and general market conditions. For example, our fourth fiscal quarter ending December 31 has typically been 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, which we did not see in 2022 and we believe was due to economic uncertainty and other factors outside of our control.

Further, as reflected in historical data from the Interactive Advertising Bureau, 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 historically had lower advertising budgets during our first fiscal quarter ending March 31;

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

During the first quarter of 2023, we continued to be impacted by slowing economic conditions and uncertainty.

To confront these headwinds, we will continue efforts to diversify our client base and we intend to further develop our initiative to drive higher return on advertising spend across additional segments of advertisers in an effort to gain additional budget allocations and further improve our user monetization.

Current Economic Conditions

We are subject to risks and uncertainties caused by events with significant macroeconomic impacts.

Inflation, rising interest rates and reduced consumer confidence have caused our clients and their customers to be cautious in their spending.

The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain.

Please see 

Risk Factors in the 2022 Form 10-K , for more information or further discussion of the possible impact of unfavorable conditions on our business.

Definitions, Reconciliations and Uses of Non-GAAP Financial Measures

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Media margin is also presented as percentage of revenue.

Adjusted EBITDA is defined as net income (loss) excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) share-based compensation expense, (5) loss on early extinguishment of debt, (6) accrued compensation expense for the 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 (loss) is defined as net income (loss) excluding (1) share-based compensation expense, (2) loss on early extinguishment of debt, (3) accrued compensation expense for the 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.

(7) acquisition-related costs, (8) restructuring and other severance costs, and (9) certain litigation and other related costs.

Adjusted net income (loss) is defined as net income (loss) excluding (1) share-based compensation expense, (2) goodwill impairment, (3) write-off of intangible assets,  

(4) acquisition-related costs, (5) restructuring and other severance costs, and (6) certain litigation and other related costs.

Adjusted net income (loss) is also presented on a per share (basic and diluted) basis.

Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization) for the three and nine months ended September 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure:

Three Months Ended September 30,

Nine Months Ended September 30,

Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization) for the three months ended March 31, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:

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 for the three and nine months ended September 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure:

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Income tax expense (benefit)

Below is a reconciliation of adjusted EBITDA from net loss for the three months ended March 31, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:

Three Months Ended March 31,

Income tax expense

Interest expense, net

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Share-based compensation expense

Loss on early extinguishment of debt

Accrued compensation expense for Put/Call Consideration

Goodwill impairment

Write-off of intangible assets

Loss on disposal of property and equipment

Acquisition-related costs (1)(2)

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Adjusted EBITDA

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

Balance includes compensation expense related to non-competition agreements entered into as a result of acquisitions (see Note 11.

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

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 (loss) and adjusted net income (loss) per share from net loss for the three and nine months ended September 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure.

Three Months Ended September 30,

Nine Months Ended September 30,

Balance includes earn-out expense of $85 for the three months ended March 31, 2023 as a result of an acquisition.

Below is a reconciliation of adjusted net income (loss) and adjusted net income (loss) per share from net loss for the three months ended March 31, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure.

Three Months Ended March 31,

(In thousands, except share and per share data)

Net income (loss)

Share-based compensation expense

Loss on early extinguishment of debt

Accrued compensation expense for Put/Call Consideration

Goodwill impairment

Write-off of intangible assets

Loss on disposal of property and equipment

Acquisition-related costs (1)(2)

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Certain litigation and other related costs

Adjusted net income

Adjusted net income per share:

Adjusted net income (loss)

Adjusted net income (loss) per share:

Weighted average number of shares outstanding:

Includes compensation expense related to non-competition agreements entered into as part of an acquisition (Note 11.

Business acquisition, 

in the Notes to the Consolidated Financial Statements).

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

Balance includes compensation expense related to non-competition agreements entered into as a result of acquisitions (see Note 11.

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

Balance includes earn-out expense of $85

for the three months ended March 31, 2023 as a result of an acquisition.

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

More specifically:

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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.

We use media margin extensively to manage our operating performance, including evaluating operational performance against budgeted media margin and understanding the efficiency of our media and related expenditures.

Media margin is used extensively 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.

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Further, they are not financial measures of profitability and are neither intended to be used as a proxy for the profitability of our business nor to imply profitability. The way we measure media margin, adjusted EBITDA, and adjusted net income (loss) may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements.

Results of Operations

Three months ended September 30, 2022 compared to three months ended September 30, 2021

Revenue increased $3.2 million, or 4%, to $89.0 million for the three months ended September 30, 2022, compared to $85.9 million for the three months ended September 30, 2021. The increase was largely attributable to growth in the Rewards business, driven by expanding media footprint in the U.S, investment in organically building our social media strategy and footprint, and expanded customer relationship management ("CRM") capabilities which have enabled us to re-engage with users who have already registered on our owned media properties. Rewards revenue growth was partially offset by our employment opportunities marketplace, due to challenges we faced with our technology platform migration, coupled with difficult year-over-year industry comps.

Each of the foregoing factors has served to increase monetization of consumer traffic, which has partially 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.

During the third quarter of 2022, we continued with the major digital media platform customer acquisition growth initiatives that were accelerated to the second quarter of 2022 and deployed further strategic initiatives using our customer relationship management capabilities.

Moving forward, we will continue to assess the strategic relevancy of various initiatives and make adjustments as necessary. 

Comparison of Our Results of Operations for the Three Months Ended March 31, 

2023 and 2022

Three Months Ended March 31,

(In thousands)

Three months ended 

March 31, 2023 compared to three months ended March 31, 2022

Revenue for the three months ended March 31, 2023 decreased $11.8 million, or 13%, to $77.3 million, compared to $89.1 million for the three months ended March 31, 2022. The decrease was largely attributable to declines in the US Rewards business and employment opportunities marketplace, which in turn was due to reduction in client spending, challenging labor market, and changes in certain business practices to reflect increased regulatory scrutiny.

The revenue decline was partially offset by continued growth in our call solutions business and the international Rewards business which was driven by new affiliates, new advertisers, new campaigns, higher traffic, and accelerated creative testing.

Cost of revenue (exclusive of depreciation and amortization)

Cost of revenue increased $1.5 million, or 2%, to $65.3 million for the three months ended September 30, 2022, compared to $63.8 million for the three months ended September 30, 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, which historically were 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.

The total cost of revenue as a percentage of revenue decreased to 73% for the three months ended September 30, 2022 compared to 74% for the three months ended September 30, 2021.

Three Months Ended March 31,

(In thousands)

Cost of revenue (exclusive of depreciation and amortization)

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Cost of revenue for the three months ended March 31, 2023 (exclusive of depreciation and amortization) decreased $9.3 million, or 14%, to $58.3 million, compared to $67.6 million for the three months ended March 31, 2022.

The decrease was primarily attributable to client pullbacks and a continued reduction in spending for the US Rewards business, as well as changes in certain business practices to reflect increased regulatory scrutiny in the employment opportunities marketplace. 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.

The costs also include enablement costs associated with our call centers and tracking costs related to our consumer data.

In addition, there are indirect costs which include fulfillment costs related to rewards earned by consumers who complete the requisite number of advertisers' offers, along with call center software and hosting costs.

The total cost of revenue for the three months ended March 31, 2023 (exclusive of depreciation and amortization) as a percentage of revenue decreased to 75% compared to 76% for the three months ended March 31, 2022. The decrease was largely attributable to the decrease in fulfillment costs related as a percentage of revenue.

In the normal course of executing paid media campaigns to source consumer traffic, we regularly evaluate 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. We have continued to increase our spend and improve profitability with our major digital media platforms compared to the same period last year, driven by strategic and test and learn initiatives that began in the second quarter of 2022 and continued through the current quarter. 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.

Traffic acquisition costs incurred with the major digital media platforms have historically been higher than affiliate traffic sources.

For the three months ended March 31, 2023 digital media spend continued to be driven by strategic test and learn initiatives that began in the second quarter of 2022. 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 evaluate and scale new media channels, strategies, and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability.

We believe our 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.

The improved traffic quality being sourced is 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 $1.2 million, or 40%, to $4.3 million for the three months ended September 30, 2022, compared to $3.0 million for the three months ended September 30, 2021, due to increase in business travel and events, along with increased headcount to support the growing business.

For the three months ended September 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $3.6 million and $2.7 million, advertising costs of $0.3 and $0.1 million, and non-cash share-based compensation expenses of $0.1 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 expense increased $0.2 million, or 4%, to 

$4.6 million for the three months ended September 30, 2022, compared to $4.5 million for the three months ended September 30, 2021. 

F or the three months ended September 30, 2022 and 2021, the amounts consisted mainly of salaries and benefits of $3.3 million and $2.8 million, professional fees of $0.6 million and $0.5 million, software license and maintenance costs of $0.4 million and $0.2 million, and non-cash share-based compensation expense of $0.1 million and $0.2 million, respectively.

The increase in product development expenses reflect investments in our technology and analytics platform, as well as 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 $2.4 million, or 18%, to $10.9 million for the three months ended September 30, 2022, compared to $13.3 million for the three months ended September 30, 2021.

For the three months ended September 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $5.1 million and $5.1 million , professional fees of $1.6  

million and $1.4 million, 

office overhead of $1.1  million and $1.1 million, non-cash share-based compensation expense of  $0.6 

million and $0.8 million, software license and maintenance costs of $0.6 million and $1.2 million, acquisition-related costs of $0.5 million and $2.3 million, certain litigation and related costs of $0.5 million and $0.3 million ,  and had 

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

Business acquisition, in the Notes to Consolidated Financial Statements), for the three months ended September 30, 2021.

The decline was mainly the result of costs incurred related to the Full Winopoly acquisition during the quarter ended September 30, 2021, along with the termination of the Put/Call Consideration.

Depreciation and amortization.

Depreciation and amortization expenses increased $0.2 million, or 6%, to $3.4 million for the three months ended September 30, 2022, compared to $3.2 million for the three months ended September 30, 2021. 

Write-off of intangible assets.

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

Interest expense, net.

Interest expense, net, increased $0.1 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, which increase was driven by an increase in interest rates.

Net income (loss) before income taxes .

For the three months ended September 30, 2022, net income before income taxes was $0.1 million, compared to net loss before income taxes of $2.5 million for the three months ended September 30, 2021.

The increase in net income before income taxes of $2.6 million was primarily due to an increase in revenue of $3.2 million and a decrease in general and administrative expenses of $2.4 million, partially offset by an increase in cost of revenue of $1.5 million, an increase in sales and marketing of $1.2 million, and an increase in product development of $0.2 million, as discussed above.

Income tax benefit.

For the three months ended September 30, 2022, the Company had income tax benefit of $3.0 million, with no corresponding impact for the three months ended September 30, 2021 .

As of September 30, 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 loss, estimated future taxable loss, exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and consideration of available tax planning strategies, we believe it is unlikely 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 income (loss) .

Net income of $3.1 million and net loss of $2.5 million were recognized for the three months ended September 30, 2022 and 2021, respectively, as a result of the foregoing.

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

Revenue increased $47.1 million, or 21%, to $276.5 million for the nine months ended September 30, 2022, compared to $229.4 million for the nine months ended September 30, 2021. The increase was largely attributable to growth in the Rewards business, driven by our expanding media footprint in both the U.S and international markets, increased client demand in the Fluent Sales Solution business unit, 

a nd expanded CRM capabilities which have enabled us to re-engage with users who have already registered on our owned media properties. Rewards revenue growth was partially offset by our employment opportunities marketplace, due to challenges we faced with our technology platform migration, coupled with difficult year-over-year industry comps.

Each of the foregoing factors has contributed to the increase monetization of consumer traffic, which has partially 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 sourced higher volumes of traffic from major digital media platforms in the first nine months of 2022 compared to the first nine months of 2021, with year-over-year reductions in lower-quality affiliate traffic.

These trends are anticipated to continue in the near future as we evaluate and scale media channels, strategies and partnerships.

Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $31.5 million, or 18%, to $202.9 million for the nine months ended September 30, 2022, compared to $171.4 million for the nine months ended September 30, 2021. 

The total cost of revenue as a percentage of revenue decreased to 73% for the nine months ended September 30, 2022, compared to 75% for the nine months ended September 30, 2021. 

Three Months Ended March 31,

(In thousands)

Sales and marketing

Sales and marketing expenses increased $3.6 million, or 40%, to $12.6 million for the nine months ended September 30, 2022, compared to $9.0 million for the nine months ended September 30, 2021, due to increase in business travel, events and in-person meetings.

For the nine months ended September 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $10.7 million and $7.8 million, advertising costs of $0.8 and $0.4 million, non-cash share-based compensation expense of $0.4 and $0.6 million, and meals and entertainment of $0.3 million and $0.0 million, respectively.

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Sales and marketing expenses for the three months ended March 31, 2023 increased $0.9 million, or 25%, to $4.8 million, compared to $3.9 million for the three months ended March 31, 2022. For the three months ended March 31, 2023 and 2022, sales and marketing expense consisted mainly of employee salaries and benefits of $3.8 million and $3.3 million, advertising costs of $0.3 and $0.3 million, and non-cash share-based compensation expenses of $0.2 and $0.2 million. 

The increase is primarily reflective of an increase in headcount and annual salary increases.

Product development

Product development expense increased $2.6 million, or 23%, to $14.0  million for the nine months ended September 30, 2022, compared to $11.3 million for the nine months ended September 30, 2021. 

F or the nine months ended September 30, 2022 and 2021, the amounts consisted mainly of salaries and benefits of $10.1 million and $7.8 million, professional fees of $2.0 million and $1.0 million, software license and maintenance costs of $1.2 million and $0.9 million, non-cash share-based compensation expense of $0.4 million and $0.7 million, and acquisition related costs of $0.0 million and $0.6 million, respectively. The increase in product development expenses reflect investments in our technology and analytics platform, as well as the development of new app-based media properties, expanding beyond our traditional focus on web-based media properties.

Three Months Ended March 31,

(In thousands)

Product development

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Product development expense 

for the three months ended March 31, 2023 increased $0.4 million, or 8%, to 

$4.9 million , compared to $4.6 million for the three months ended March 31, 2022. 

F or the three months ended March 31, 2023 and 2022, product and development expense consisted mainly of salaries and benefits of $3.5 million and $3.3 million, professional fees of $0.5 million and $0.7 million, software license and maintenance costs of $0.5 million and $0.4 million, and non-cash share-based compensation expense of $0.2 million and $0.2 million, respectively. The increase in product development expenses reflects an increase in salaries and wages due to annual salary increases and investments in our technology and analytics platform.

General and administrative

General and administrative expenses decreased by $2.7 million, or 7%, to $33.9 million for the nine months ended September 30, 2022, compared to $36.5 million for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $16.0 million and $15.0 million , professional fees of $4.3  

Three Months Ended March 31,

(In thousands)

General and administrative

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

General and administrative expenses for the three months ended March 31, 2023 increased by $1.0 million, or 9%, to $12.3 million, compared to $11.3 million for the three months ended March 31, 2022.

For the three months ended March 31, 2023 and 2022, general and administrative expense consisted mainly of employee salaries and benefits of $4.9 million and $4.9 million , professional fees of $1.6  

million and $1.4 million, 

office overhead of $3.4  million and $3.3 million, certain litigation and related costs of $2.5 million and $1.3 million , non-cash share-based compensation expense of  $1.8 

million and $2.3 million, software license and maintenance costs of $1.8 million and $2.7 million, acquisition-related costs of $1.7 million and $2.8 million, and 

accrued compensation expense for the Put/Call Consideration from the Initial Winopoly Acquis ition described below under the heading "Liquidity and Capital Resources" of $0.0 million and $3.2 milli on (Note 11, 

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

The decrease was mainly the result of the termination of the Put/Call Consideration related to the Initial Winopoly Acquisition (as defined below) in the prior year, overall lower acquisition related costs in connection with the True North Acquisition and the Full Winopoly Acquisition (as defined below) and software license fees, offset by increased employee salaries and benefits and litigation and related costs due to the New York State Tax Department settlement . 

office overhead of $1.1  million and $1.1 million, certain litigation and related costs of $1.4 million and $1.4 million,  non-cash share-based compensation expense of  $0.8 

million and $0.7 million, software license and maintenance costs of $0.6 million and $0.6 million, and acquisition-related costs of $0.6 million and $0.6 milli on. The increase was mainly the result of increased professional fees and strategic company training expenses.

During the first quarter of 2023, the Company implemented reductions in the workforce that resulted in the termination of approximately twenty employees.

These reductions in workforce were implemented following management’s determination to reduce headcount and decrease the Company's costs to more effectively align resources to the core business operations.

In connection with these reductions in workforce, the Company incurred $0.5 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, to be fully settled in cash by March 31, 2024. Apart from these exit-related restructuring costs, these reductions in workforce are expected to result in corresponding reductions in future salary and benefit expenses primarily in product development and general and administrative expense.

Depreciation and amortization

Depreciation and amortization expenses increased $0.1 million, or 1%, to $10.0 million for the nine months ended September 30, 2022, compared to $9.9 million for the nine months ended September 30, 2021. 

Three Months Ended March 31,

(In thousands)

Depreciation and amortization

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Depreciation and amortization expenses for the three months ended March 31, 2023 decreased $0.9 million, or 29%, to $2.4 million, compared to $3.3 million for the three months ended March 31, 2022.

This decrease is due to certain intangible assets that fully amortized as compared to the prior three months ended March 31, 2022.

Goodwill impairment

 During the nine months ended September 30, 2022, we recognized a $55.4 million goodwill impairment related to the Fluent reporting unit, with no corresponding impairment charge in the prior period.

Three Months Ended March 31,

(In thousands)

Goodwill impairment

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

For the three months ended 

March 31, 2023, the Company recognized an impairment loss related to goodwill of $25.7 million with no corresponding charge in the prior period.

Write-off of intangible assets

During the nine months ended September 30, 2022, we recognized a $0.1 million write-off on intangible assets, compared to $0.3 million write-off of intangible assets for the nine months ended September 30, 2021 related to software developed for internal use.

Three Months Ended March 31,

(In thousands)

Write-off of intangible assets

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

For the three months ended March 31, 2023, the Company recognized $0.1 million for the write off of intangible assets related to software developed for internal use for the three months ended March 31, 2022, with no corresponding change in the current period.

Interest expense, net

Interest expense, net, decreased $0.5 million, or 28%, to $1.3 million for the nine months ended September 30, 2022, from $1.8 million for the nine months ended September 30, 2021.

The decrease was attributable to a lower interest rate on the New Credit Facility, described below under "Liquidity and Capital Resources," compared to the prior loan in place during the first quarter of 2021.

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 nine months ended September 30, 2022.

Net loss before income taxes .

For the nine months ended September 30, 2022, net loss before income taxes was $53.7 million, compared to net loss before income taxes of $13.9 million for the nine months ended September 30, 2021.

The change in net loss of $39.8 million was primarily due to the non-cash goodwill impairment charge of $55.4 million,  

an increase in the cost of revenue of $31.5 million, an increase in sales and marketing of $3.6 million, and an increase in product development of $2.6 million, partially offset by an increase in revenue of $47.1 million, as discussed above. 

Income tax (expense) benefit.

For the nine months ended September 30, 2022, the Company had income tax expense of $2.1 million, compared to $0.0 million income tax benefit for the nine months ended September 30, 2021 .

Net loss of $55.8 million and net loss of $13.9 million were recognized for the nine months ended September 30, 2022 and 2021, respectively, as a result of the foregoing.

Three Months Ended March 31,

(In thousands)

Interest expense, net

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Interest expense, net, for the three months ended March 31, 2023 increased $0.3 million, compared to the three months ended March 31, 2022, which was driven by a higher average interest rate on the Term Loan described below under “Liquidity and Capital Resources”.

Loss before income taxes

Three Months Ended March 31,

(In thousands)

Loss before income taxes

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Loss before income taxes for the three months ended March 31, 2023 was $31.8 million, compared to loss before income taxes of $2.0 million for the three months ended March 31, 2022.

increase in loss before income taxes of $29.8 million was primarily due to an increase of goodwill impairment and write-off of intangibles of $25.6 million, a decline in revenue of $11.8 million, and an increase in operating expenses, partially offset by the decline in cost of revenue of $9.3 million, as discussed above.

Income tax expense

Three Months Ended March 31,

(In thousands)

Income tax expense

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Income tax expense for the three months ended March 31, 2023 was $0.1 million, with no corresponding impact for the three months ended March 31, 2022 .

As of March 31, 2023 and 2022, we recorded a full valuation allowance against our net deferred tax assets. The Company intends 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 such allowances. Release of some or all of the valuation allowance would result in the recognition of certain deferred tax assets and an increase in deferred tax benefit for any period in which such a release may be recorded, however, the exact timing and amount of any valuation allowance release are subject to change, depending upon the level of profitability that the Company is able to achieve and the net deferred tax assets available.

Three Months Ended March 31,

(In thousands)

Three months ended  

March 31, 2023 compared to three months ended March 31, 2022

Net loss for the three months ended March 31, 2023 was $31.9 million compared to net loss of $2.0 million for the three months ended March 31, 2022 due to a net increase of goodwill impairment and write-off of intangibles of $25.6 million, the decline in revenue of $11.8 million, and an increase in operating expenses, partially offset by the decline in cost of revenue of $9.3 million, as discussed above.

Liquidity and Capital Resources

Cash provided by (used in) operating activities .

For the nine months ended September 30, 2022, net cash provided by operating activities was $7.1 million, compared to net cash used by operating activities of $6.9 million for the nine months ended September 30, 2021. Net loss in the current period of $55.8 million represents an increase of $42.0 million, as compared with net loss of $13.9 million in the prior period. Adjustments to reconcile net loss to net cash provided by operating activities of $70.8 million in the current period increased by $51.7 million, as compared with $19.1 million in the prior period, primarily due to a non-cash impairment loss related to goodwill of $55.4 million in the current period.

Changes in assets and liabilities consumed cash of $7.9 million in the current period, as compared with $12.2 million in the prior period, primarily due to ordinary-course changes in working capital, largely involving the timing of receipt of amounts owing from clients and disbursements of amounts payable to vendors. 

For the three months ended March 31, 2023, net cash provided by operating activities was $4.9 million, compared to net cash used by operating activities of $1.8 million for the three months ended March 31, 2022. Net loss in the current period of $31.9 million represents an increase of $29.9 million, as compared with net loss of $2.0 million in the prior period. Adjustments to reconcile net loss to net cash provided by operating activities of $29.1 million in the current period increased by $24.5 million, as compared with $4.6 million in the prior period, primarily due to a goodwill impairment in the first quarter of 2023 offset by lower depreciation and amortization in the current period.

Changes in assets and liabilities sourcing cash of $7.7 million in the current period, as compared with consuming cash of $4.3 million in the prior period, primarily due to ordinary-course changes in working capital, largely involving the timing of receipt of amounts owing from clients and disbursements of amounts payable to vendors. 

Cash used in investing activities .

For the nine months ended September 30, 2022 and 2021, net cash used in investing activities was $4.3 million and $2.3 million, respectively.

The increase was mainly due to the True North Acquisition that occurred in the current year along with continued investment in internally developed software. 

Cash (used in) provided by financing activities.

Net cash used in financing activities for the nine months ended September 30, 2022 was $4.2 million and net cash provided by financing activities was $3.7 million for the nine months ended September 30, 2021.

The change of  $7.9 

million in cash used by financing activities in the current period was mainly due to the decrease in the repayment of long term debt of $41.7 million in the current year, along with net proceeds from issuance of long-term debt, net of financing costs, of $49.6 million, the exercise of stock options by a former key executive of $0.9 million, and the prepayment penalty on early debt extinguishment of $0.8 million that occurred solely during the nine months ended September 30, 2021.

As of September 30, 2022, we had noncancelable operating lease commitments of $7.2 million and long-term debt with a $42.5 million principal balance.

For the nine months ended September 30, 2022, we funded our operations using available cash.

As of September 30, 2022, we had cash and cash equivalents of approximately $33.1 million, a decrease of $1.4 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.

For the three months ended March 31, 2023 and 2022, net cash used in investing activities was $2.4 million and $2.0 million, respectively.

The increase was mainly due to the impact of the TAPP consolidation that occurred in the period ended March 31, 2023, partially offset by the True North Acquisition that occurred in the period ended March 31, 2022. 

Cash used in financing activities.

Net cash used in financing activities for the three months ended March 31, 2023 and 2022 was $1.5 million $1.7 million, respectively.

The change was due to a decline in taxes paid related to share settlements of vesting of restricted stock units.

As of March 31, 2023, we had noncancelable operating lease commitments of $6.0 million and long-term debt with a $40.0 million principal balance.

For the three months ended March 31, 2023, we funded our operations using available cash.

As of March 31, 2023, we had cash and cash equivalents of approximately $26.6 million, a decrease of $1.1 million from $25.5 million as of December 31, 2022.

We believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months and beyond regardless of our inability to access the Credit Facility described below.

We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business.

2 unchanged sentences

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.

(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 (the "Prior Plan") to certain Winopoly personnel valued at $1.4 million. 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.

We also issued 100,000 shares of fully vested stock under the Prior Plan to the sellers valued at $0.2 million.

(Note 11 

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

On March 31, 2021, Fluent, LLC, our wholly-owned subsidiary, entered into a credit agreement (the “Credit Agreement”) with certain subsidiaries of Fluent, LLC as guarantors and Citizens Bank, N.A., as administrative agent, lead arranger and bookrunner.

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, 2022, the Credit Agreement has an outstanding principal balance of $42.5 million and matures on March 31, 2026.

On March 31, 2021, Fluent, LLC, our wholly-owned subsidiary, entered into a credit agreement (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “Credit Agreement”) with certain subsidiaries of Fluent, LLC as guarantors and Citizens Bank, N.A., as administrative agent, lead arranger and bookrunner, and BankUnited, N.A.

and Silicon Valley Bank ("SVB").

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 "Credit Facility").

On December 20, 2022, the Company entered into the second amendment to the Credit Agreement, which amended certain provisions to:

(i) reflect the replacement of the current benchmark settings with Term Overnight Financing Rate ("SOFR") pursuant to an early opt-in election;

(ii) acknowledge certain litigation matters;

and (iii) join additional subsidiaries of Borrower as guarantors of the loan facilities provided under the Credit Agreement.

 On May 15, 2023, the Company entered into the third amendment to the Credit Agreement, which amended certain provisions to:

(i) add an additional tier of applicable margin to the selected rates; (ii) establish the applicable pricing floor for the remaining fiscal quarters in 2023;

(iii) modify and adjust certain EBITDA add-backs for certain fiscal quarters in 2023;

(iv) add monthly financial reporting for the remaining fiscal quarters in 2023;

(v) provide additional financial covenant testing conditions on Fluent’s ability to draw on the Revolving Loans for the remaining fiscal quarters in 2023;

(vi) provide additional notice of certain material events;

(vii) add tiers to certain financial covenants and add a minimum cash liquidity financial covenant for the remaining fiscal quarters in 2023;

(viii) provide additional restrictions on the ability to make loans and advances to officers, directors and employees for the remaining fiscal quarters in 2023;

(ix) provide additional restrictions on the ability to invest in certain subsidiaries and joint ventures for the remaining fiscal quarters in 2023;

(x) provide additional restrictions on the ability to make additional loans, investments or permitted acquisitions for the remaining fiscal quarters in 2023;

and (xi) add unrestricted cash requirements in order for the Company to be permitted to pay dividends, make distributions or redeem or repurchase equity interests, for the remaining fiscal quarters in 2023, in each case pursuant to the terms and conditions under the Credit Agreement. As of March 31, 2023, the Credit Agreement has an outstanding principal balance of $40.0 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 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%), which increased to 4.87% (LIBOR + 1.75%) as of September 30, 2022.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to the benchmark selected by the Borrower, which may be based on the Alternative Base Rate, LIBOR rate (subject to a floor of 0.25%) prior to the election on January 3, 2023 or Term SOFR (Secured Overnight Financing Rate) (subject to a floor of 0.00%) subsequent to the election on January 3, 2023, plus a margin applicable to the selected benchmark. The applicable margin is between 0.75% and 1.75% for borrowings based on the Alternative Base Rate and 1.75% and 2.75% for borrowings based on LIBOR and Term SOFR, depending upon the Borrower's Total Leverage Ratio. The opening interest rate of the Credit Facility was 2.50% (LIBOR + 2.25%), which increased to 7.16% (Term SOFR + 0.1% + 2.25%) as of March 31, 2023.

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 stockholders 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 September 30, 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 condition 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. 

The Credit Agreement requires us to maintain and comply with certain financial and other covenants.

At March 31, 2023, we were in compliance with all of the financial and other covenants under the Credit Agreement.

The Credit Agreement also contains certain customary conditions to extensions of credit, including that representations and warranties made in the Existing Credit Agreement be materially true and correct at the time of such extension.

One of the customary conditions, including representation and warranties, related to the extension of credit is currently not true and correct as a result of certain legal matters involving the FTC and the PAAG, as described in FN 10, Contingencies , in the Notes to Consolidated Financial Statements above and Part II, Item 1 –

Legal Proceedings below. These matters do not represent events of default under the Credit Agreement, but we are currently unable to draw on the Revolving Loans due the representation and warranty requirement for an extension of credit. As noted above, SVB is a lender under the Credit Agreement, which was assumed by the newly created Silicon Valley Bridge Bank, N.A.

under the FDIC and was subsequently acquired by First-Citizens Bank & Trust Company.

We currently owe SVB approximately $11.1 million under the Term Loan, which is an obligation unaffected by the acquisition of SVB.

SVB has committed to approximately $4.0 million of the $15.0 million in Revolving Loan capacity, and at such time as we are eligible to draw upon the Revolver, that commitment is unaffected by the acquisition of SVB.

As a result, the Company does not believe the closure to have a material adverse effect on its liquidity.

Critical Accounting Policies and Estimates

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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.

As disclosed in Note 4, Goodwill, the Company engaged a third party to assist in conducting an interim test of the fair value of its goodwill for potential impairment for the three months ended June 30, 2022.

Actual results may differ from these estimates under different assumptions or conditions. All amounts below are presented in thousands.

The Company considered a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The Company determined that a market-based approach, which considered the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium, provided the best indication of fair value of the Fluent reporting unit.

Based on the results of this market-based approach as of June 30, 2022, the Company concluded that its carrying value exceeded its estimated fair value by 27%. As such the Company concluded that its goodwill of $162,000 for the Fluent reporting unit was impaired and recorded a non-cash impairment charge of $55,400 for the second quarter of 2022. 

Additionally, the Company engaged a third party to assist in conducting a test of the fair value of its goodwill for potential impairment for the three months ended September 30, 2022.

The Company considered a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The Company determined that a market-based approach, which considered the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium, and income approach together provided the best indication of fair value of the Fluent reporting unit.

Based on the results of this approach as of September 30, 2022, the Company concluded that its fair value exceeded it carrying value by 4%. As such the Company concluded that its goodwill of $106,600 for the Fluent reporting unit was not impaired.

These impairment tests involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates or assumptions.

The critical assumptions used in determining the fair value of the reporting unit are forecasted cash flows, market multiples, and control premiums.

Management exercises judgment in developing these assumptions.

Certain of these assumptions are based on facts specific to the reporting unit, market participant assumptions and management’s projected cash flows.

If actual cash flows were to decline from forecast, or market factors such as valuation multiples or interest rates were to trend in an unfavorable direction, there would be an increased risk of goodwill impairment for the Fluent reporting unit.

Based on the results of this market-based approach as of March 31, 2023, the Company concluded that its carrying value exceeded its estimated fair value by 20%. As such the Company concluded that its goodwill of $51,614 for the Fluent reporting unit was impaired and recorded a non-cash impairment charge of $25,700 for the first quarter of 2023. 

For additional information, please refer to our 2022 Form 10-K.

Except as set forth herein, there have been no additional material changes to Critical Accounting Policies and Estimates disclosed in the 2021 Form 10-K.

There have been no additional material changes to Critical Accounting Policies and Estimates disclosed in the 2022 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