What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-15 compared with 2023-08-21 · 223 added, 196 removed, 183 unchanged (70% of the section changed)

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," 

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, but instead 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.

1 unchanged sentence

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 

, including, without limitation, those discussed in Part I, Item 1A of  

the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 15, 2023 (the "2022 Form 10-K"), those

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.

We do not undertake any obligation to update forward-looking statements, except as required by law and intend that all forward-looking statements be subject to the safe harbor provisions of the 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. 

The following discussion should be read in conjunction with the 2022 Form 10-K and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q

("we," "us," "our," "Fluent," or the "Company"), is an industry leader in data-driven digital marketing services.

7 unchanged sentences

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.

Since our inception, we have amassed a large, proprietary database of first-party, self-declared user information and preferences. We solicit our users’

consent to be contacted by us and/or our advertisers via various contact methods including email, telephone, SMS/text and push messaging.

We then leverage their self-declared data in our performance offerings primarily in two ways:

(1) to serve advertisements that we believe will be relevant to users based on the information they provide when they engage with our sites, and (2) to provide our clients that purchase access to our data with users' contact information so that such clients may communicate with them directly. We may also leverage our existing technology and database to drive new revenue streams, including syndication models, ( e.g.

, Adflow), and other revenue streams, including utilization-based models ( e.g.

, programmatic advertising).

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

3 unchanged sentences

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:

Third Quarter Financial Summary

Three months ended September 30, 2023, compared to three months ended September 30, 2022:

Revenue decreased 26% to $66.2 million, compared to $89.0 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

Net loss was $33.6 million, or $0.41 per share, compared to net income of $3.1 million or $0.04 per share

Gross profit (exclusive of depreciation and amortization) was $16.1 million, a decrease of 32% as compared to the three months ended September 30, 2022, and representing 24% of revenue for the three months ended September 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:

31% to $19.3 million, compared to $28.1 million, representing 29.2% of revenue for the three months ended September 30, 2023

Adjusted EBITDA decreased to negative $1.7 million, representing (2.6%) of revenue, based on net loss of $33.6 million, compared to positive $5.9 million, based on net income of $3.1 million

Adjusted net loss was $4.1 million, or $0.05 per share, compared to adjusted net income of $5.0 million, or $0.06 per share

Nine months ended September 30, 2023, compared to nine months ended September 30, 2022:

Revenue decreased 18% to $225.6 million, compared to $276.5 million

Net loss was $61.3 million, or $0.74 per share, compared to net loss of $55.8 million or $0.69 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

Gross profit (exclusive of depreciation and amortization) was $57.7 million, a decrease of 22% as compared to nine months ended September 30, 2022, and representing 26% of revenue for the nine months ended September 30, 2023

Media margin decreased 22%  

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

to $67.2 million, compared to $86.3 million, representing 29.8% of revenue for the nine months ended September 30, 2023

Adjusted EBITDA decreased to $4.3 million, representing 1.9% of revenue, based on net loss of $61.3 million, compared to $20.1 million, based on net loss of $55.8 million

Adjusted net lo ss was $6.8 million, or $0.08 per share, compared to adjusted net income of $6.6 million, or $0.08 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.

5 unchanged sentences

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.

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

These efforts have continued in 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, 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.

Since 2022, we have experienced challenges growing our traffic volume because of several factors including the volatility of affiliate supply sources, changes in search engine algorithms, email and text message blocking algorithms, and increased competition for available media.

In response to these challenges, we invested in strategic internal efforts to secure additional traffic from social media, including the growing influencer sector and Adflow, our e-commerce post-sales solution.

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.

1 unchanged sentence

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.

Both data and performance-based spend continued to be challenged in 2023 by general economic uncertainty. We experienced slowdowns in the first nine-months of 2023 in certain sectors of the Media & Entertainment, Staffing & Recruitment, and Financial Products & Services industries. Additionally, in the third quarter of 2023 our largest client in the gaming sector pulled back pricing and spend as they refocused on ROAS rather than growth.

Although the Company is addressing this pullback by scaling other clients in the marketplace from the gaming sector and other sectors of the Media & Entertainment industry, the gap was not fully absorbed by other bidders.

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 ROAS.

This initiative has driven increased budgets from clients in the Media & Entertainment industry, 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’

Specifically, Adflow and our businesses that benefit from Medicare and ACA open enrollment benefit from strong fourth quarters.

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.

During the current fiscal year, 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 made additional changes to our employment opportunities marketplace and programmatic advertising businesses and have implemented industry-leading compliance measures across the entire business, which have had negative impacts on our revenues and media margin in the third quarter of 2023. In the medium term, although there can be no assurance, we expect that the increased industry-wide regulatory scrutiny will eliminate the competitive advantage that less compliance-focused competitors 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.

Additionally, our legal fees related to the FTC Consent Order have continued to decrease, and we received an insurance reimbursement for prior legal fees incurred. In response to the regulatory requirements, we will continue to refocus investment into businesses unaffected by the FTC Consent Order, such as the Rewards and Adflow businesses.

Current Economic Conditions

2 unchanged sentences

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 

6 unchanged sentences

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.

(7) loss (gain) on disposal of property and equipment, (8) acquisition-related costs, (9) restructuring and other severance costs, and (10) 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.

(4) loss (gain) on disposal of property and equipment (5) acquisition-related costs, (6) restructuring and other severance costs, and (7) 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,

Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization) for the three and nine months ended September 30, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue (exclusive of depreciation and amortization)

4 unchanged sentences

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

Below is a reconciliation of adjusted EBITDA from net loss for the three and 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,

Below is a reconciliation of adjusted EBITDA from net income (loss) for the three and nine months ended September 30, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

5 unchanged sentences

Write-off of intangible assets

Loss on disposal of property and equipment

Loss (gain) on disposal of property and equipment

Acquisition-related costs(1)(2)

3 unchanged sentences

Balance includes compensation expense related to non-competition agreements entered into as a result of certain acquisitions.

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,

Balance includes earn-out expense of ($21) and $89 for the three and nine months ended September 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 income (loss) for the three and nine months ended September 30, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure.

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands, except share and per share data)

3 unchanged sentences

Write-off of intangible assets

Loss on disposal of property and equipment

Loss (gain) on disposal of property and equipment

Acquisition-related costs(1)(2)

6 unchanged sentences

Balance includes earn-out expense of ($21) and $89 for the three and 

six months ended June 30, 2023, respectively, as a result of certain acquisitions.

nine months ended September 30, 2023, respectively, as a result of certain acquisitions.

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.

17 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Comparison of Our Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

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 –

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Revenue for the three months ended September 30, 2023 decreased $22.8 million, or 26%, to $66.2 million, compared to $89.0 million for the three months ended September 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 changes in business practices that reflect the recently imposed regulatory requirements in connection with the FTC Consent Order described in Part II, Item 1 –

Legal Proceedings, below. 

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Revenue for the nine months ended September 30, 2023 decreased $50.8 million, or 18%, to $225.6 million, compared to $276.5 million for the nine months ended September 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 decreased demand related to the slowing labor market and changes in business practices that reflect the 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.

The revenue decline was partially offset by growth in our Influencer based platform and new initiatives. 

Cost of revenue (exclusive of depreciation and amortization)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Cost of revenue (exclusive of depreciation and amortization)

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.

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Cost of revenue for the three months ended September 30, 2023 (exclusive of depreciation and amortization) decreased $15.1 million, or 23%, to $50.1 million, compared to $65.3 million for the three months ended September 30, 2022.

The decrease was attributable to the same factors causing the decline in revenue for the quarter over quarter period.

1 unchanged sentence

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

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

The total cost of revenue for the three months ended 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 addition, there are indirect costs which include fulfillment costs related to rewards earned by consumers who complete the requisite number of advertiser offers, along with call center software and hosting costs.

The total cost of revenue for the three months ended September 30, 2023 (exclusive of depreciation and amortization) as a percentage of revenue increased to 76% compared to 73% for the three months ended September 30, 2022. The increase was largely attributable to the increase in the cost of media as a percentage of revenue.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Cost of revenue for the nine months ended September 30, 2023 (exclusive of depreciation and amortization) decreased $34.9 million, or 17% to $168.0 million, compared to $202.9 million for the nine months ended September 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 nine months ended September 30, 2023(exclusive of depreciation and amortization) as a percentage of revenue increased to 74% compared to 73% for the nine months ended September 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.

For the nine months ended September 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 and the increased compliance obligations as a result of the FTC Consent Order.

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.

2 unchanged sentences

Sales and marketing

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Sales and marketing

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.

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Sales and marketing expenses for the three months ended September 30, 2023 increased $0.2 million, or 4%, to $4.4 million, compared to $4.3 million for the three months ended September 30, 2022. For the three months ended September 30, 2023 and 2022, sales and marketing expense consisted mainly of employee salaries and benefits of $3.9 million and $3.6 million, advertising costs of $0.1 and $0.3 million, and non-cash share-based compensation expenses of $0.1 and $0.1 million, respectively. The increase was primarily due to salary increases partially offset by lower marketing costs incurred.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Sales and marketing expenses for the nine months ended September 30, 2023 increased $0.9 million, or 7%, to $13.5 million, compared to $12.6 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, sales and marketing expense consisted mainly of employee salaries and benefits of $11.4 million and $10.7 million, advertising costs of $0.7 and $0.8 million, non-cash share-based compensation expenses of $0.4 and $0.4 million, and travel and entertainment of $0.3 and $0.3 million, respectively. The increase was primarily due to salary increases partially offset by reductions in advertising costs.

Product development

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Product development

Three months ended June 30, 2023  compared to the three months ended June 30, 2022

Three months ended September 30, 2023  compared to the three months ended September 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

for the three months ended September 30, 2023  decreased $0.1 million, or 2%, to 

$4.5 million , compared to $4.6 million for the three months ended September 30, 2022. For the three months ended September 30, 2023 and 2022, product and development expense consisted mainly of salaries and benefits of $3.4 million and $3.3 million, software license and maintenance costs of $0.5 million and $0.4 million, professional fees of $0.3 million and $0.6 million, and non-cash share-based compensation expense of $0.2 million and $0.1 million, respectively. The decrease in product development expense is primarily due to lower consulting fees.

Nine months ended September 30, 2023  compared to the nine months ended September 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.

for the nine months ended September 30, 2023  increased  

$0.1 million, or 1% , to $14.1 million, compared to $14.0 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, product and development expense consisted mainly of salaries and benefits of $10.3 million and $10.1 million, software license and maintenance costs of $1.4 million and $1.2 million, professional fees of $1.3 million and $2.0 million, and non-cash share-based compensation expense of $0.5 million and $0.4 million, respectively. The slight increase in product development expenses reflects an increase in software license and maintenance costs and other operating costs, mainly offset by the decline in consulting fees.

General and administrative

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

General and administrative

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. 

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

General and administrative expenses for the three months ended September 30, 2023 decreased $2.2 million, or 20%, to $8.7 million, compared to $10.9 million for the three months ended September 30, 2022.

For the three months ended September 30, 2023 and 2022, general and administrative expense consisted mainly of employee salaries and benefits of $4.4 million and $5.1 million, professional fees of $2.1 million and $1.6 million, office overhead of $1.0 million and $1.1 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 $0.5 million and $0.5 million, and certain litigation and related costs of 

($1.6)million and $0.5 million, respectively. The decrease was mainly the result of a decrease in litigation related costs due to insurance reimbursements of previously incurred legal fees related to the FTC Consent Order and lower salaries due to a decline of headcount and certain employee salary reductions, partially offset by increased consulting fees.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

General and administrative expenses for the nine months ended September 30, 2023 decreased $8.9 million, or 26%, to $25.0 million, compared to $33.9 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023 and 2022, general and administrative expense consisted mainly of employee salaries and benefits of $13.9 million and $16.0 million, professional fees of $5.0 million and $4.3 million, office overhead of $3.2 million and $3.4 million, non-cash share-based compensation expense of $2.1 million and $1.8 million, software license and maintenance costs of $1.9 million and $1.8 million, acquisition-related costs of $1.7 million and $1.7 million, and certain litigation and related costs of  ($6.0) million and $2.5 million, respectively. The decrease was mainly the result of a decline in litigation related costs due to the lower-than-expected regulatory settlement reached in the second quarter of 2023, even as legal fees had increased to reach the settlement, along with insurance reimbursements for previously incurred legal fees related to the FTC Consent Order and lower salary costs due to restructuring in the first quarter of 2023 and fourth quarter of 2022.

These increases were partially offset by increased consulting fees and strategic employee training expenses. 

During the first quarter of 2023, the Company implemented reductions in the workforce that resulted in the termination of approximately 20 employees.

2 unchanged sentences

Depreciation and amortization

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Depreciation and amortization

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.

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Depreciation and amortization expenses for the three months ended September 30, 2023 decreased $0.7 million, or 22%, to $2.7 million, compared to $3.4 million for the three months ended September 30, 2022.

This decrease was mainly due to certain intangible assets that fully amortized as compared to the three months ended September 30, 2022, partly offset by the amortization of the acquired intangibles related to TAPP Influencers Corp ("TAPP").

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Depreciation and amortization expenses for the nine months ended September 30, 2023 decreased $1.9 million, or 19%, to $8.1 million, compared to $10.0 million for the nine months ended September 30, 2022.

This decrease was mainly due to certain intangible assets that had fully amortized as compared to the nine months ended September 30, 2022, partly offset by the amortization of the acquired intangibles related to TAPP.

Goodwill impairment

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Goodwill impairment

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.

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

For the three months ended September 30, 2023, the Company recognized $29.7 of goodwill impairment related to both the Fluent and All Other Reporting Unit, compared to none for the three months ended September 30, 2022.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

For the nine months ended September 30, 2023, the Company recognized a $55.4 million impairment loss related to goodwill related to both the Fluent and All Other Reporting Unit, compared to $55.4 million related to the Fluent reporting unit for the nine months ended September 30, 2022.

Write-off of intangible assets

Months  

Six Months Ended June  

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Write-off of intangible assets

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,

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

For the three months ended September 30, 2023 and 2022, the Company did not recognize write-offs of intangible assets.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

For the nine months ended September 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 nine months ended September 30, 2022.

Loss (gain) on disposal of property and equipment

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Loss on disposal of property and equipment

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.

Loss (gain) on disposal of property and equipment

Three months ended September 30, 2023

 compared to the three months ended September 30, 2022

The Company recognized no gain or loss on disposal of property and equipment for the three months ended September 30, 2023, compared to de minimis gain on disposal for the three months ended September 30, 2022.

Nine months ended September 30, 2023

 compared to the nine months ended September 30, 2022

The Company recognized no gain or loss on disposal of property and equipment for the 

nine months ended September 30, 2023, compared to de minimis loss on disposal for the 

nine months ended September 30, 2022.

Interest expense, net

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Interest expense, net

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".

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Interest expense, net, for the three months ended September 30, 2023 increased $0.4 million, compared to the three months ended September 30, 2022, which was driven by a higher average interest rate on the Term Loan described below under "Liquidity and Capital Resources" below.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Interest expense, net, for the nine months ended September 30, 2023 increased  

$1.1 million, compared to the nine months ended September 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,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Income (loss) before income taxes

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,

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Loss before income taxes for the three months ended September 30, 2023 was $34.9 million, compared to income before income taxes of $0.1 million for the three months ended September 30, 2022.

The change in income (loss) before income taxes of $35.0 million was primarily due to a decline in revenues of $22.8 million and goodwill impairment of $29.7 million that occurred in the current period, partially offset by a decline in cost of revenue of $15.1 million and an overall decrease in operating expenses of $2.1 million driven in part by the contra-expense related to the insurance reimbursement for prior legal fees.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Loss before income taxes for the nine months ended September 30, 2023 was $60.8 million, compared to loss before income taxes of $53.7 million for the nine months ended September 30, 2022.

The increase in loss before income taxes of $7.0 million was primarily due to a decline in revenues of $50.8, partially offset by a decline in cost of revenue of $34.9 million and a decrease in operating expenses of $7.9 million driven in part by the contra-expense related to the insurance reimbursement for prior legal fees.

Income tax (expense) benefit

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Income tax expense

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.

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.

Income tax (expense) benefit

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Income tax benefit for the three months ended September 30, 2023, was $1.2 compared to $3.0 for the three months ended September 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.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Income tax expense for the nine months ended September 30, 2023 was $0.6 million, compared to $2.1 for the nine months ended September 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 September 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,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Net income (loss)

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.

Three months ended September 30, 2023  compared to the three months ended September 30, 2022

Net loss for the three months ended September 30, 2023 was $33.6 million compared to net income of $3.1 million for the three months ended September 30, 2022 due to a decline in revenues and a goodwill impairment  that occurred in the current period, partly offset by declines in cost of revenue and operating expenses as discussed above.

Nine months ended September 30, 2023  compared to the nine months ended September 30, 2022

Net loss for the nine months ended September 30, 2023 was $61.3 million compared to net loss of $55.8 million for the nine months ended September 30, 2022, due to a decline in revenues, partially offset by a decline in cost of revenue and a decrease in operating expenses 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.

Cash provided by operating activities .

For the nine months ended September 30, 2023, net cash provided by operating activities was $9.7 million, compared to net cash provided by operating activities of $7.1 million for the nine months ended September 30, 2022. Net loss in the current period of $61.3 million represents a decrease of $5.5 million, as compared with net loss of $55.8 million in the prior period. Adjustments to reconcile net loss to net cash provided by operating activities of $66.8 million in the current period decreased by $1.9 million, as compared with $68.7 million in the prior period, primarily due to a lower depreciation and amortization in the current period as compared to the prior period.

Changes in assets and liabilities sourcing cash of $4.3 million in the current period, as compared with consuming cash of $5.7 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. 

For the nine months ended September 30, 2023 and 2022, net cash used in investing activities was $5.4 million and $4.3 million, respectively.

The increase was mainly due to the increase in investment in capitalized software along with the impact of the TAPP consolidation that occurred in the current period ended September 30, 2023, compared to the True North Loyalty, LLC acquisition that occurred in the prior period ended September 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.

Net cash used in financing activities for the nine months ended September 30, 2023 and 2022 was $9.4 million and $4.2 million, respectively.

The change was due to the $5.0 million prepayment made on the debt along with the fees paid related to the debt modification, slightly offset by the decline in taxes paid related to share settlements of vesting of restricted stock units.

As of September 30, 2023, we had noncancelable operating lease commitments of $4.8 million and long-term debt with a $32.5 million principal balance.

For the nine months ended September 30, 2023, we funded our operations using available cash.

As of September 30, 2023, we had cash and cash equivalents of $20.5 million, a decrease of $5.0 million from $25.5 million as of December 31, 2022.

Assuming maturity dates under the Credit Agreement are not accelerated, as noted below, 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 September 30, 2023, we were in compliance with our financial covenants except for the total leverage ratio covenant under the Credit Agreement.

See below for details related to the Temporary Waiver Under Credit Agreement (the “Waiver”) entered into related to such non-compliance.

We have projected a continued decline in our operating results, driven primarily by the continued economic slowdown and uncertainty, as well as the impacts of the recently imposed regulatory requirements.

Therefore, we do not expect be in compliance with certain of our financial covenants for the next twelve months.

If we are not in compliance with financial covenants, it will be an event of default that would give the lenders the right to accelerate maturities.

We had cash and cash equivalents of $20.5 million as of September 30, 2023, and had positive cash flow from operations in the prior two fiscal years and for the nine months ended September 30, 2023.

In addition, we plan to reduce costs and focus resources on new growth opportunities.

However, even with that, we may need to obtain additional liquidity if the debt were to become accelerated or we do not meet our 2024 budget, raising substantial doubt about the ability to continue as a going concern.

The Waiver requires that the Borrower provide a 2024 budget to Citizens Bank, that has been reviewed by the business consultant retained by counsel to Citizens Bank. 

We intend for that budget to inform modified financial covenant levels and other provisions, as needed, for the quarters ending December 31, 2023 through December 31, 2024, which would be accomplished with an amendment to the Credit Agreement.

We and Citizens Bank have previously entered into amendments to the Credit Agreement as needed, and we expect to be able to enter into a new amendment prior to the Termination Date (defined below).

While we believe our plans will alleviate the conditions or events that raise substantial doubt about our ability to continue as a going concern, successfully entering into a new amendment to the Credit Agreement with financial covenant levels we can satisfy is not entirely within our control.

In addition, there is no guarantee that the planned cost reductions or growth opportunities will be successfully executed or have the expected benefits.

As there can be no assurance that we will be able to effectively implement our plans within one year after the date of issuance of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, management concluded that there is substantial doubt about our ability to continue as a going concern through such one-year period.

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

2 unchanged sentences

Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to shareholders.

On 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.

On March 31, 2021, Fluent, LLC (the "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 the Borrower as guarantors, the lenders thereto, 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’

The original Credit Agreement provided 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 Borrower and Citizens Bank 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, established the following, in each case pursuant to the terms and conditions under the Credit Agreement, (i) adjustments to the pricing floor and certain EBITDA add-backs;

(ii) monthly financial reporting requirements;

(iii) additional financial covenant testing conditions on Fluent’s ability to draw on the Revolving Loans; (iv) additional tiers to certain financial covenants and added a minimum cash liquidity financial covenant;

(v) additional restrictions on the ability to (a) make loans and advances to officers, directors and employees;

(b) invest in certain subsidiaries and joint ventures;

and (c) make additional loans, investments or permitted acquisitions;

and (vi) additional unrestricted cash requirements before the Company is permitted to pay dividends, make distributions or redeem or repurchase equity interests. 

Additionally, on August 21, 2023, the Borrower and Citizens Bank entered into a fourth amendment to the Credit Agreement , which (i) adjusted certain financial covenants for the remaining fiscal quarters of 2023, including prohibiting the Company from drawing on the Revolving Loans until the issuance of the December 31, 2023 annual financial statements, (ii) temporarily adjusted interest rates, (iii) permitted the Citizens Bank to retain a business consultant at the Borrower'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.

(iv) required weekly liquidity reports to Citizens Bank, and (v) required a $5 million prepayment of the Term Loan and a $5 million reduction to the maximum availability of the Revolving Loans to $10 million.

The $5 million prepayment amount was paid as of September 30, 2023.

On November 15, 2023, the Borrower and Citizens Bank entered into a Waiver to the Credit Agreement, pursuant to which Citizens Bank agreed to waive through the earlier of January 15, 2024 or an occurrence of any other event of default (the “Termination date”) its rights and remedies arising from the Company’s breach of the total leverage covenant during the quarter ending September 30, 2023. 

The Waiver added new reporting requirements, temporarily increased the applicable margin, and extended the term of the business consultant through January 15, 2024. The Borrower must also provide a 2024 budget that has been reviewed by the business consultant retained by counsel to Citizens Bank. 

We intend for that to inform modified financial covenant levels and other provisions, as needed, for the quarters ending December 31, 2023 through December 31, 2024, which would be accomplished with an amendment to the Credit Agreement.

All obligations under the Credit Agreement currently mature 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. At September 30, 2023, the Company was in compliance with all of the financial covenants under the Credit Agreement except for the total leverage ratio covenant.

As discussed above, this covenant breach was waived through the Termination date by the Waiver.

However, based on projections, we do not expect to be in compliance with certain financial covenants during certain quarters in the next twelve months.

If the Company is not in compliance with financial covenants, it will be an event of default that would give the lenders the right to accelerate maturity. 

Accordingly, all borrowings under the Credit Agreement have been classified as current as of September 30, 2023.

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.

The opening interest rate of the Credit Facility was 2.50% (LIBOR + 2.25%), which increased to 8.92% (Term SOFR + 0.1% + 3.50%) as of

September 30, 2023.

Critical Accounting Policies and Estimates

5 unchanged sentences

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. 

The market approach 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.

5 unchanged sentences

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.

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.

Further, 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 September 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 and All Other.

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 for the Fluent reporting unit considers the Company’s implied market multiple applied to management's forecasted profitability and is further adjusted for control premium.

The market approach for All Other considers the enterprise values of comparable companies applied to management's forecasted profitability and is further adjusted for control premium.

Management exercises judgment in developing these assumptions.

The results of this approach indicated that the Fluent reporting unit’s carrying value and All Others carrying value exceeded its fair value by 32% and 29%, respectively. The Company therefore concluded that the Fluent reporting unit’s goodwill was impaired and recorded a non-cash impairment for the remainder of the goodwill balance of $27,469.

In addition, the All Other goodwill of $3,497 was also concluded to be impaired and the Company recorded a non-cash impairment charge of $2,236.

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

5 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis