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 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 2022 Form 10-K,  the factors contained in this Quarterly Report on Form 10-Q, and such other factors contained in our  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.   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.   20 Table of Contents   Through AdParlor, LLC, we conduct our non-core business which offers clients various social media strategies through the planning and buying of media on different platforms.   Second Quarter Financial Summary   Three months ended June 30, 2023, compared to three months ended June 30, 2022: • Revenue decreased 16% to $82.1 million, compared to $98.4 million • Net income was $4.3 million, or $0.05 per share, compared to net loss of $56.9 million or $0.70 per share • Gross profit (exclusive of depreciation and amortization) was $22.6 million, a decrease of 20% as compared to the three months ended June 30, 2022, and representing 28% of revenue for the three months ended June 30, 2023 • Media margin decreased   20% to $25.9 million, compared to $32.3 million, representing 31.5% of revenue for the three months ended June 30, 2023 • Adjusted EBITDA decreased to $5.6 million, representing 6.8% of revenue, based on net income of $4.3 million, compared to $9.4 million, based on net loss of $56.9 million • Adjusted net income was $0.0 million, or $0.00 per share, compared to adjusted net income of $0.6 million, or $0.01 per share   Six months ended June 30, 2023, compared to six months ended June 30, 2022: • Revenue decreased 15% to $159.4 million, compared to $187.4 million • Net loss was $27.7 million, or $0.34 per share, compared to net loss of $59.0 million or $0.73 per share • Gross profit (exclusive of depreciation and amortization) was $41.6 million, a decrease of 17% as compared to six months ended June 30, 2022, and representing 26% of revenue for the six months ended June 30, 2023 • Media margin decreased 18%   to $47.9 million, compared to $58.3 million, representing 30.0% of revenue for the six months ended June 30, 2023 • Adjusted EBITDA decreased to $6.0 million, representing 3.8% of revenue, based on net loss of $27.7 million, compared to $14.2 million, based on net loss of $59.0 million • Adjusted net loss was $2.7 million, or $0.03 per share, compared to adjusted net income of $1.6 million, or $0.02 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 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 half 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.   21 Table of Contents   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, and have continued to be a factor into the first half of 2023. In an effort to offset these challenges, we invested in strategic internal efforts to secure additional traffic from the influencer and social media segments and continue to 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 and the regulatory environment.   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. Both data and performance-based spend continued to be challenged in 2023 by general economic uncertainty. We experienced slowdowns in the first half of 2023 in certain segments of the Media & Entertainment, Staffing & Recruitment, and Financial Products & Services sectors. Additionally, in the third quarter we experienced pricing pressure from clients in certain segments of the Media & Entertainment sector that will add pressure to the marketplace in the short term.   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. This initiative has driven increased budgets from clients in the gaming, streaming, and subscription segments, which, collectively, represents a large component of our revenue mix.   Additionally, our results are subject to fluctuations as a result of seasonality and cyclicality in 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.   Business Practices & Compliance   During the first half of 2023, we continued to be impacted by slowing economic conditions and uncertainty. Additionally, as a result of the FTC Consent Order described in Part II, Item 1 – Legal Proceedings, below, we have made additional changes to our employment opportunities marketplace and programmatic advertising businesses and have implemented industry-leading compliance measures across the entire business, which will have a negative impact on our revenues and media margin in the third quarter and beyond. In the medium term, we expect that the increased industry-wide regulatory scrutiny will eliminate the competitive advantage that less compliance-focused platforms currently enjoy as a result of the changes we have implemented, and that our industry-leading compliance will be a competitive advantage enabling us to recapture market share from our competitors, but we cannot assure you that the adverse impact on our revenues and media margin will not continue longer than expected. Additionally, we anticipate decreased legal fees related to the inquiry on an ongoing basis. In response to the regulatory requirements, we will refocus investment into businesses unaffected by the FTC Consent Order, such as the Rewards business and Adflow, and our e-commerce post sales solution.   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.   22 Table of Contents   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 and six months ended June 30, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:       Three Months Ended June 30,     Six Months Ended June 30,       2023     2022     2023     2022   Revenue   $ 82,145     $ 98,361     $ 159,399     $ 187,424   Less: Cost of revenue (exclusive of depreciation and amortization)     59,540       70,026       117,812       137,589   Gross profit (exclusive of depreciation and amortization)   $ 22,605     $ 28,335     $ 41,587     $ 49,835   Gross profit (exclusive of depreciation and amortization) % of revenue     28 %     29 %     26 %     27 % Non-media cost of revenue (1)     3,300       3,974       6,281       8,423   Media margin   $ 25,905     $ 32,309     $ 47,868     $ 58,258   Media margin % of revenue     31.5 %     32.8 %     30.0 %     31.1 %   (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 and six months ended June 30, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:       Three Months Ended June 30,     Six Months Ended June 30,       2023     2022     2023     2022   Net income (loss)   $ 4,251     $ (56,944 )   $ (27,692 )   $ (58,957 ) Income tax expense     1,693       5,122       1,794       5,122   Interest expense, net     795       430       1,484       814   Depreciation and amortization     3,095       3,332       5,454       6,639   Share-based compensation expense     936       863       1,997       1,851   Goodwill impairment     —       55,400       25,700       55,400   Write-off of intangible assets     —       —       —       128   Loss on disposal of property and equipment     —       21       —       21   Acquisition-related costs(1)(2)     562       579       1,185       1,137   Restructuring and other severance costs     —       38       480       38   Certain litigation and other related costs     (5,736 )     596       (4,358 )     1,998   Adjusted EBITDA   $ 5,596     $ 9,437     $ 6,044     $ 14,191     (1) Balance includes compensation expense related to non-competition agreements entered into as a result of certain acquisitions. (2) Balance includes earn-out expense of $24 and $110 for the three and six months ended June 30, 2023, respectively, as a result of certain acquisitions.   Below is a reconciliation of adjusted net income (loss) and adjusted net income (loss) per share from net loss for the three and six months ended June 30, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure.       Three Months Ended June 30,     Six Months Ended June 30,   (In thousands, except share and per share data)   2023     2022     2023     2022   Net income (loss)   $ 4,251     $ (56,944 )   $ (27,692 )   $ (58,957 ) Share-based compensation expense     936       863       1,997       1,851   Goodwill impairment     —       55,400       25,700       55,400   Write-off of intangible assets     —       —       —       128   Loss on disposal of property and equipment     —       21       —       21   Acquisition-related costs(1)(2)     562       579       1,185       1,137   Restructuring and other severance costs     —       38       480       38   Certain litigation and other related costs     (5,736 )     596       (4,358 )     1,998   Adjusted net income (loss)   $ 13     $ 553     $ (2,688 )   $ 1,616   Adjusted net income (loss) per share:                                 Basic   $ 0.00     $ 0.01     $ (0.03 )   $ 0.02   Diluted   $ 0.00     $ 0.01     $ (0.03 )   $ 0.02   Weighted average number of shares outstanding:                                 Basic     82,727,971       81,493,821       82,323,854       81,193,107   Diluted     82,752,646       81,575,329       82,323,854       81,233,586     (1) Balance includes compensation expense related to non-competition agreements entered into as a result of certain acquisitions. (2) Balance includes earn-out expense of $24 and $110 for the three and  six months ended June 30, 2023, respectively, as a result of certain acquisitions.   24 Table of Contents   We present media margin, media margin as a percentage of revenue, adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors. More specifically:   Media margin, as defined above, is a measure of the efficiency of the Company’s operating model. We use media margin and the related measure of media margin as a percentage of revenue as primary metrics to measure the financial return on our media and related costs, specifically to measure the degree by which the revenue generated from our digital marketing services exceeds the cost to attract the consumers to whom offers are made through our services. Media margin is used extensively to manage our operating performance, including evaluating operational performance against budgeted media margin and understanding the efficiency of our media and related expenditures. We also use media margin for performance evaluations and compensation decisions regarding certain personnel.   Adjusted EBITDA, as defined above, is another primary metric by which we evaluate the operating performance of our business, on which certain operating expenditures and internal budgets are based and by which, in addition to media margin and other factors, our senior management is compensated. The first three adjustments represent the conventional definition of EBITDA, and the remaining adjustments are items recognized and recorded under 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 and Six Months Ended June 30, 2023 and 2022   Revenue       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Revenue   $82,145   $98,361   (16%)   $159,399   $187,424   (15%)     25 Table of Contents   Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Revenue for the three months ended June 30, 2023 decreased $16.2 million, or 16%, to $82.1 million, compared to $98.4 million for the three months ended June 30, 2022. The decrease was largely attributable to declines in the US Rewards business due to a reduction in client spend. In addition, revenue from the employment opportunities marketplace declined due to the challenging labor market and changes in business practices to reflect recently imposed regulatory requirements in connection with the FTC Consent Order described in Part II, Item 1 – Legal Proceedings, below. The revenue decline was partially offset by growth in our call solutions business and our influencer based business.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Revenue for the six months ended June 30, 2023 decreased $28.0 million, or 15%, to $159.4 million, compared to $187.4 million for the six months ended June 30, 2022. The decrease was largely attributable to declines in the US Rewards business due to a reduction in client spend. In addition, revenue from the employment opportunities marketplace declined due to the challenging labor market and changes in business practices to reflect increased regulatory scrutiny and recently imposed regulatory requirements in connection with the FTC Consent Order described in Part II, Item 1 – Legal Proceedings, below. The revenue decline was partially offset by continued growth in our call solutions business and our Influencer based business. We also saw an increase in 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 June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Cost of revenue (exclusive of depreciation and amortization)   $59,540   $70,026   (15%)   $117,812   $137,589   (14%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Cost of revenue for the three months ended June 30, 2023 (exclusive of depreciation and amortization) decreased $10.5 million, or 15%, to $59.5 million, compared to $70.0 million for the three months ended June 30, 2022. The decrease was attributable to the same factors causing the decline in revenue for the quarter over quarter period. 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.     26 Table of Contents   The total cost of revenue for the three months ended June 30, 2023 (exclusive of depreciation and amortization) as a percentage of revenue increased to 72% compared to 71% for the three months ended June 30, 2022. The increase was largely attributable to the increase in the cost of media as a percentage of revenue.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Cost of revenue for the six months ended June 30, 2023 (exclusive of depreciation and amortization) decreased $19.8 million, or 14% to $117.8 million, compared to $137.6 million for the six months ended June 30, 2022. The decrease was primarily attributable to the same factors causing the decline in revenue for the year over year period. The total cost of revenue for the six months ended June 30, 2023 (exclusive of depreciation and amortization) as a percentage of revenue increased to 74% compared to 73% for the six months ended June 30, 2022. The increase was largely attributable to the increase in the cost of media 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 six months ended June 30, 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 will likely 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 June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Sales and marketing   $4,215   $4,484   (6%)   $9,028   $8,336   8%     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Sales and marketing expenses for the three months ended June 30, 2023 decreased $0.3 million, or 6%, to $4.2 million, compared to $4.5 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, sales and marketing expense consisted mainly of employee salaries and benefits of $3.6 million and $3.8 million, advertising costs of $0.3 and $0.3 million, and non-cash share-based compensation expenses of $0.1 and $0.1 million, respectively. The decrease was primarily due to the decline in headcount from restructurings in the first quarter of 2023 and fourth quarter of 2022.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Sales and marketing expenses for the six months ended June 30, 2023 increased $0.7 million, or 8%, to $9.0 million, compared to $8.3 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, sales and marketing expense consisted mainly of employee salaries and benefits of $7.4 million and $7.1 million, advertising costs of $0.6 and $0.6 million, and non-cash share-based compensation expenses of $0.3 and $0.3 million, respectively. The increase was primarily due to annual salary increases partially offset by reductions in headcount from restructuring during the prior periods.   Product development       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Product development   $4,615   $4,802   (4%)   $9,553   $9,357   2%     27 Table of Contents   Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Product development expense  for the three months ended June 30, 2023  decreased $0.2 million, or 4%, to  $4.6 million , compared to $4.8 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, product and development expense consisted mainly of salaries and benefits of $3.4 million and $3.5 million, software license and maintenance costs of $0.5 million and $0.4 million, professional fees of $0.4 million and $0.7 million, and non-cash share-based compensation expense of $0.1 million and $0.1 million, respectively. The decrease in product development expense is primarily due to lower consulting fees, along with a decrease in headcount from restructuring.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Product development expense  for the six months ended June 30, 2023  increased   $0.2 million, or 2% , to $9.6 million, compared to $9.4 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, product and development expense consisted mainly of salaries and benefits of $6.9 million and $6.8 million, professional fees of $1.0 million and $1.4 million, software license and maintenance costs of $0.9 million and $0.7 million, and non-cash share-based compensation expense of $0.3 million and $0.3 million, respectively. The increase in product development expenses reflects an increase in software license and maintenance costs and other operating costs.   General and administrative       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   General and administrative   $3,941   $11,688   (66%)   $16,266   $22,975   (29%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 General and administrative expenses for the three months ended June 30, 2023 decreased by $7.7 million, or 66%, to $3.9 million, compared to $11.7 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, general and administrative expense consisted mainly of employee salaries and benefits of $4.6 million and $6.0 million, professional fees of $1.3 million and $1.3 million, office overhead of $1.0 million and $1.2 million, non-cash share-based compensation expense of $0.7 million and $0.6 million, software license and maintenance costs of $0.7 million and $0.6 million, acquisition-related costs of $0.6 million and $0.6 million, and certain litigation and related costs of ($5.7) million and $0.6 million, respectively. The decrease was mainly the result of headcount and certain employee salary reductions along with a decrease in litigation related costs due to the lower than previously accrued regulatory settlement amount and insurance reimbursement related to previously incurred legal fees, even as legal fees had increased in the second quarter of 2023.    Six months ended June 30, 2023  compared to the six months ended June 30, 2022 General and administrative expenses for the six months ended June 30, 2023 decreased by $6.7 million, or 29%, to $16.3 million, compared to $23.0 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, general and administrative expense consisted mainly of employee salaries and benefits of $9.5 million and $10.9 million, professional fees of $2.9 million and $2.7 million, office overhead of $2.2 million and $2.3 million, non-cash share-based compensation expense of $1.4 million and $1.3 million, software license and maintenance costs of $1.2 million and $1.2 million, acquisition-related costs of $1.2 million and $1.1 million, and certain litigation and related costs of ($4.4) million and $2.0 million, respectively. The decrease was mainly the result of both lower salary costs due to restructuring in the first quarter of 2023 and fourth quarter of 2022, along with a decline in litigation related costs due to the lower than expected regulatory settlement amount in the second quarter of 2023, although legal fees to reach the settlement increased, as well as insurance reimbursement related to previously incurred legal fees. These increases were partly offset by 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 20 employees. These reductions in workforce were implemented following management’s determination to reduce headcount and decrease the Company's overhead to more effectively align resources to the Company's 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.    28 Table of Contents   Depreciation and amortization       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Depreciation and amortization   $3,095   $3,332   (7%)   $5,454   $6,639   (18%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Depreciation and amortization expenses for the three months ended June 30, 2023 decreased $0.2 million, or 7%, to $3.1 million, compared to $3.3 million for the three months ended June 30, 2022. This decrease was mainly due to certain intangible assets that fully amortized as compared to the three months ended June 30, 2022, partly offset by the amortization of the acquired intangibles related to TAPP, LLC.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Depreciation and amortization expenses for the six months ended June 30, 2023 decreased $1.2 million, or 18%, to $5.5 million, compared to $6.6 million for the six months ended June 30, 2022. This decrease was mainly due to certain intangible assets that had fully amortized as compared to the six months ended June 30, 2022, partly offset by the amortization of the acquired intangibles related to TAPP, LLC.   Goodwill impairment       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Goodwill impairment   —   $55,400   (100%)   $25,700   $55,400   (54%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 For the three months ended June 30, 2023, the Company did not recognize an impairment loss related to goodwill, compared to $55.4 million for the three months ended June 30, 2022.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 For the six months ended June 30, 2023, the Company recognized a $25.7 million impairment loss related to goodwill, compared to $55.4 million for the six months ended June 30, 2022.   Write-off of intangible assets       Three   Months   Ended   June   30,   Six Months Ended June   30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Write-off of intangible assets   —   —   —   —   $128   (100%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 For the three months ended June 30, 2023 and 2022, the Company did not recognize write-offs of intangible assets.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 For the six months ended June 30, 2023, the Company did not recognize write-offs of intangible assets, compared to $0.1 million for the write-offs of intangible assets related to software developed for internal use for the six months ended June 30, 2022.   Loss on disposal of property and equipment       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Loss on disposal of property and equipment   —   $21   (100%)   —   $21   (100%)     29 Table of Contents   Three months ended June 30, 2023  compared to the three months ended June 30, 2022 The Company recognized no loss on disposal of property and equipment for the three months ended June 30, 2023, compared to $0.02 million for the three months ended June 30, 2022.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 The Company recognized no loss on disposal of property and equipment for the  six months ended June 30, 2023, compared to $0.02 million for the  six months ended June 30, 2022.   Interest expense, net       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Interest expense, net   $795   $430   85%   $1,484   $814   82%     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Interest expense, net, for the three months ended June 30, 2023 increased $0.4 million, compared to the three months ended June 30, 2022, which was driven by a higher average interest rate on the Term Loan described below under "Liquidity and Capital Resources" below.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Interest expense, net, for the six months ended June 30, 2023 increased   $0.7 million, compared to the six months ended June 30, 2022 , which was driven by a higher average interest rate on the Term Loan described below under "Liquidity and Capital Resources".   Income (loss) before income taxes       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Income (loss) before income taxes   $5,944   ($51,822)   (111%)   ($25,898)   ($53,835)   (52%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Income before income taxes for the three months ended June 30, 2023 was $5.9 million, compared to loss before income taxes of $51.8 million for the three months ended June 30, 2022. The change in income (loss) before income taxes of $57.8 million was primarily due to a goodwill impairment of $55.4 million that occurred in the prior period, a decline in cost of revenue of $10.5 million, and an overall decrease in operating expenses of $ 8.2 million driven in part by the contra-expense related to the insurance reimbursement or prior legal fees, offset by the decline in revenues of $16.2 million.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Loss before income taxes for the six months ended June 30, 2023 was $25.9 million, compared to loss before income taxes of $53.8 million for the six months ended June 30, 2022. The decrease in loss before income taxes of $27.9 million was primarily due to a decrease in goodwill impairment and write-off of intangibles of $29.8 million, a decline in cost of revenue of $19.8 million, and a slight decrease in operating expenses of $5.8 million driven in part by the contra-expense related to the insurance reimbursement or prior legal fees, offset by the decline in revenues of $28.0 million.   Income tax expense       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Income tax expense   (1,693)   (5,122)   (67%)   ($1,794)   ($5,122)   (65%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Income tax expense for the three months ended June 30, 2023, was $1.7 compared to $5.1 for the three months ended June 30, 2022, primarily driven by the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses offset by the benefit of federal research and development credits.   30 Table of Contents   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Income tax expense for the six months ended June 30, 2023 was $1.8 million, compared to $5.1 for the six months ended June 30, 2022, primarily driven by the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses offset by the benefit of federal research and development credits.   As of June 30, 2023 and 2022, 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 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 we are able to achieve and the net deferred tax assets available.   Net income (loss)       Three Months Ended June 30,   Six Months Ended June 30, (In thousands)   2023   2022   % Change   2023   2022   % Change   Net income (loss)   $4,251   ($56,944)   (107%)   ($27,692)   ($58,957)   (53%)     Three months ended June 30, 2023  compared to the three months ended June 30, 2022 Net income for the three months ended June 30, 2023 was $4.3 million compared to net loss of $56.9 million for the three months ended June 30, 2022 due to a goodwill impairment and write-off of intangibles that occurred in the prior period and declines in cost of revenue, operating expenses, and income tax, partly offset by the decline in revenues as discussed above.   Six months ended June 30, 2023  compared to the six months ended June 30, 2022 Net loss for the six months ended June 30, 2023 was $27.7 million compared to net loss of $59.0 million for the six months ended June 30, 2022 due to a decrease in goodwill impairment and write-off of intangibles, a decline in cost of revenue, a decrease in operating expenses, and lower income tax expense, offset by the decline in revenues, as discussed above.   Liquidity and Capital Resources   Cash provided by (used in) operating activities . For the six months ended June 30, 2023, net cash provided by operating activities was $2.1 million, compared to net cash used by operating activities of $1.9 million for the six months ended June 30, 2022. Net loss in the current period of $27.7 million represents a decrease of $31.3 million, as compared with net loss of $59.0 million in the prior period. Adjustments to reconcile net loss to net cash provided by operating activities of $33.2 million in the current period decreased by $31.1 million, as compared with $64.3 million in the prior period, primarily due to a lower goodwill impairment and depreciation and amortization in the current period as compared to the prior period. Changes in assets and liabilities sourcing cash of $3.4 million in the current period, as compared with consuming cash of $7.3 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 six months ended June 30, 2023 and 2022, net cash used in investing activities was $3.6 million and $3.2 million, respectively. The increase was mainly due to the impact of the TAPP, LLC consolidation that occurred in the current period ended June 30, 2023, compared to the True North Loyalty, LLC acquisition that occurred in the prior period ended June 30, 2022.    Cash used in financing activities. Net cash used in financing activities for the six months ended June 30, 2023 and 2022 was $3.0 million and $2.9 million, respectively. The slight change was due to the cash paid related to the debt modification, mainly offset by the decline in taxes paid related to share settlements of vesting of restricted stock units.   As of June 30, 2023, we had noncancelable operating lease commitments of $5.4 million and long-term debt with a $38.8 million principal balance. For the six months ended June 30, 2023, we funded our operations using available cash.   As of June 30, 2023, we had cash and cash equivalents of $21.0 million, a decrease of $4.5 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 Revolving Loans described below.   As of June 30, 2023, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.   31 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 ("Borrower"), 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. ("Citizens Bank") as administrative agent, lead arranger and bookrunner. The Credit Agreement provides for a term loan in the aggregate principal amount of $50,000 funded on the closing date (the "Term Loan"), along with an undrawn revolving credit facility of up to $15,000 (the "Revolving Loans," and together with the Term Loan, the "Credit Facility"). On May 15, 2023, the parties entered into a third amendment to the Credit Agreement, which amended certain provisions by adding an additional tier of applicable margin to the selected rates and providing for additional notice of certain material events and, for the remaining fiscal quarters of 2023: (i) established the applicable pricing floor; (ii) modified and adjusted certain EBITDA add-backs; (iii) added monthly financial reporting; (iv) provided additional financial covenant testing conditions on Fluent’s ability to draw on the Revolving Loans; (v) added tiers to certain financial covenants and added a minimum cash liquidity financial covenant; (vi) provided additional restrictions on the ability to make loans and advances to officers, directors and employees; (vii) provided additional restrictions on the ability to invest in certain subsidiaries and joint ventures; (viii) provided additional restrictions on the ability to make additional loans, investments or permitted acquisitions; and (ix) added unrestricted cash requirements before the Company is permitted to pay dividends, make distributions or redeem or repurchase equity interests, in each case pursuant to the terms and conditions under the Credit Agreement. Additionally, on August 21, 2023, in order to avoid a projected violation of certain financial covenants for the third and fourth quarters of 2023, Fluent, LLC entered into a fourth amendment to the Credit Agreement which (i) adjusted certain financial covenants for the remaining fiscal quarters of 2023, (ii) temporarily adjusted interest rates, (iii) permitted the Citizens Bank to retain a business consultant at Fluent, LLC’s expense to advise on the credit parties’ financial and operating performance; (iv) required weekly liquidity reports to Citizens Bank, (iv) required a $5 million prepayment of the Term Loan, and (v) adjusted the Revolving Loans by the same amount to $10 million. The $5 million prepayment amount is reflected as current portion of long-term debt at June 30, 2023 in the consolidated balance sheet included in this report.   The Credit Agreement matures on March 31, 2026, and interest is payable monthly. Scheduled principal amortization of the Term Loan is $1,250 per quarter, which commenced with the fiscal quarter ended June 30, 2021. As of June 30, 2023, the Company was in compliance with all of the financial and other covenants applicable to the Term Loan under the Credit Agreement.   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, (as defined in the Credit Agreement), LIBOR (as defined in the Credit Agreement) rate (subject to a floor of 0.25%) prior to the election as of December 31, 2022 or Term SOFR (as defined in the Credit Agreement) (subject to a floor of 0.00%) subsequent to the election, plus a margin applicable to the selected benchmark. The applicable margin is between 0.75% and 2.25% for borrowings based on the Alternative Base Rate and 1.75% and 3.25% for borrowings based on 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 7.95% (Term SOFR + 0.1% + 2.75%) as of June 30, 2023.   The Credit Agreement also contains certain customary conditions applicable to extensions of credit, including that representations and warranties made in the Credit Agreement be materially true and correct at the time of such extension. The third amendment added an additional condition consisting of two financial covenants with which the Company must comply in order to draw on the Revolving Loans during the balance of 2023. As of June 30, 2023, the Company was not in compliance with this additional condition and was therefore unable to draw on the Revolving Loans. These matters do not represent Events of Default (as defined in the Credit Agreement) and therefore do not affect the Term Loan.   With the fourth amendment management now expects to be in compliance with the covenant requirements of the Credit Agreement; however, the continuing impact from the FTC Consent Order on the Company’s business as well as other macro-economic factors could impact this compliance.  These items, as well others, could require the Company further amend its Credit Agreement, which may or may not be available on acceptable terms.   32 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, due to the decline in value of its publicly traded stock, provided the best indication of fair value of the Fluent reporting unit. Under the market approach, it considers the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium. If we were to experience an additional decline in market capitalization or assumptions in management's forecast, there would be an increased risk of impairment of goodwill. 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.    Additionally, 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, 2023. The Company determined that a combination of income approach and the market approach provided the best indication of fair value of the Fluent reporting unit. The income approach and market approach utilize accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. The critical assumptions in the income approach include forecasted revenues and profitability, long-term growth rates, and discount rates. The market approach considers the Company’s implied market multiple applied to management's forecasted profitability and is further adjusted for control premium. Management exercises judgment in developing these assumptions. If we were to experience sales declines, a significant change in operating margins which may impact our cash flows, an increase in our discount rates, a decline in the Company’s market capitalization, and/or a decrease in our projected long-term growth rates, there would be an increased risk of impairment of goodwill and/or other assets. Based on the results of this approach as of June 30, 2023, the Company concluded that its fair value exceeded its estimated carrying value by 5%. As such the Company concluded that its goodwill of $27,469 for the Fluent reporting unit was not impaired. If there is a reduction in operating results or a decline in the market value of the Company's publicly-traded stock, this could result in future impairment charges, which could affect the financial results.   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 elsewhere 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.   33 Table of Contents