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. 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. 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. 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, 2022 filed on March 15, 2023 ("2022 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 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 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, 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.   21 Table of Contents   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   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 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’ businesses. 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.   22 Table of Contents   Current Economic Conditions   We are subject to risks and uncertainties caused by events with significant macroeconomic impacts. Inflation, rising interest rates and reduced consumer confidence have caused our clients and their customers to be cautious in their spending. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain.   Please see  Item 1A. 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   We report the following non-GAAP measures:   Media margin is defined as that portion of gross profit (exclusive of depreciation and amortization) reflecting the 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 income (loss) excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) share-based compensation expense, (5) goodwill impairment, (6) write-off of intangible assets,   (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 months ended March 31, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:       Three Months Ended March 31,       2023     2022   Revenue   $ 77,254     $ 89,063   Less: Cost of revenue (exclusive of depreciation and amortization)     58,272       67,562   Gross profit (exclusive of depreciation and amortization)   $ 18,982     $ 21,501   Gross profit (exclusive of depreciation and amortization) % of revenue     25 %     24 % Non-media cost of revenue (1)     2,981       4,449   Media margin   $ 21,963     $ 25,950   Media margin % of revenue     28.4 %     29.1 %   (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 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,       2023     2022   Net loss   $ (31,943 )   $ (2,013 ) Income tax expense     101       —   Interest expense, net     689       384   Depreciation and amortization     2,359       3,307   Share-based compensation expense     1,061       988   Goodwill impairment     25,700       —   Write-off of intangible assets     —       128   Acquisition-related costs (1)(2)     623       558   Restructuring and other severance costs     480       —   Certain litigation and other related costs     1,378       1,402   Adjusted EBITDA   $ 448     $ 4,754     (1) 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) (2) 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)   2023     2022   Net loss   $ (31,943 )   $ (2,013 ) Share-based compensation expense     1,061       988   Goodwill impairment     25,700       —   Write-off of intangible assets     —       128   Acquisition-related costs (1)(2)     623       558   Restructuring and other severance costs     480       —   Certain litigation and other related costs     1,378       1,402   Adjusted net income (loss)   $ (2,701 )   $ 1,063   Adjusted net income (loss) per share:                 Basic   $ (0.03 )   $ 0.01   Diluted   $ (0.03 )   $ 0.01   Weighted average number of shares outstanding:                 Basic     81,906,913       80,889,052   Diluted     81,906,913       81,021,030     (1) 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) (2) 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:   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 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 matters as described below (See Part II, Item 1 — Legal Proceedings). We consider items one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. There were no adjustments for one-time items in the periods presented by this Quarterly Report on Form 10-Q.   Adjusted net income (loss), as defined above, and the related measure of adjusted net   income (loss)   per share exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income (loss) affords investors a different view of the overall financial performance as compared to adjusted EBITDA and the GAAP measure of net income (loss).   Media margin, adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share are non-GAAP financial measures with certain limitations regarding their usefulness. They do not reflect our financial results in accordance with GAAP, as they do not include the impact of certain expenses that are reflected in our consolidated statements of operations. Accordingly, these metrics are not indicative of our overall results or indicators of past or future financial performance. Further, they are not financial measures of profitability and are neither intended to be used as a proxy for the profitability of our business nor to imply profitability. The way we measure media margin, adjusted EBITDA, and adjusted net income (loss) may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements.   Comparison of Our Results of Operations for the Three Months Ended March 31,  2023 and 2022   Revenue       Three Months Ended March 31, (In thousands)   2023   2022   % Change Revenue   $77,254   $89,063   (13%)   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)       Three Months Ended March 31, (In thousands)   2023   2022   % Change Cost of revenue (exclusive of depreciation and amortization)   $58,272   $67,562   (14%)   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.     25 Table of Contents   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 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. 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       Three Months Ended March 31, (In thousands)   2023   2022   % Change Sales and marketing   $4,813   $3,852   25%   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       Three Months Ended March 31, (In thousands)   2023   2022   % Change Product development   $4,938   $4,556   8%   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       Three Months Ended March 31, (In thousands)   2023   2022   % Change General and administrative   $12,325   $11,287   9%   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 $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.   26 Table of Contents   Depreciation and amortization       Three Months Ended March 31, (In thousands)   2023   2022   % Change Depreciation and amortization   $2,359   $3,307   (29%)   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       Three Months Ended March 31, (In thousands)   2023   2022   % Change Goodwill impairment   ($25,700)   —   —   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       Three Months Ended March 31, (In thousands)   2023   2022   % Change Write-off of intangible assets   —   $128   (100%)   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       Three Months Ended March 31, (In thousands)   2023   2022   % Change Interest expense, net   ($689)   ($384)   79%   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”.   27 Table of Contents   Loss before income taxes       Three Months Ended March 31, (In thousands)   2023   2022   % Change Loss before income taxes   ($31,842)   ($2,013)   1482%   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. The   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)   2023   2022   % Change Income tax expense   ($101)   —   —   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.   Net loss       Three Months Ended March 31, (In thousands)   2023   2022   % Change Net loss   ($31,943)   ($2,013)   1,486.8%   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 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 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.   28 Table of Contents   We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business. We continue to identify and prioritize additional technologies, which we may wish to develop internally or through licensing or acquisition from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurance that any such acquisitions will be made or that we will be able to successfully integrate any acquired business with our then current business or realize anticipated cost synergies. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to shareholders.   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 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. 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. 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.     29 Table of Contents   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 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, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. All amounts below are presented in thousands.   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 March 31, 2023. 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 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. 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   See Note 1(b), " Recently issued and adopted accounting standards," in the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.   Item 3. Quantitative and Qualitative Disclosures About Market Risk.   As a smaller reporting company, we are not required to provide the information required by this Item.