What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-10-30 · 126 added, 183 removed, 94 unchanged (77% of the section changed)

6 unchanged sentences

Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 13, 2020 ("2019 Form 10-K"), and other filings we make with the Securities and Exchange Commission (the "SEC").

These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 16, 2021 ("2020 Form 10-K"), and other filings we make with the Securities and Exchange Commission (the "SEC").

We do not undertake any obligation to update forward-looking statements, except as required by law.

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We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach.

We deliver data and performance-based marketing executions to our clients, which in 2019 included over 500 consumer brands, direct marketers and agencies across a wide range of industries, including Financial Products & Services, Retail & Consumer, Media & Entertainment, Staffing & Recruitment and Marketing Services.

We deliver performance-based marketing executions and lead generation data records to our clients, which in 2020 included over 500 consumer brands, direct marketers and agencies across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer, and Staffing & Recruitment.

We attract consumers at scale to our owned digital media properties primarily through promotional offerings and employment opportunities.

On average, our websites receive over 900,000 first-party user registrations daily, which include users’

names, contact information and opt-in permission to present them with offers on behalf of our clients.

According to comScore, we reach 13% of the U.S.

digital population on a monthly basis through our owned media properties.

Nearly 90% of these users engage with our media on their mobile devices or tablets.

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

Our always-on, real-time capabilities enable users to access our media whenever and wherever they choose.

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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, home address, telephone, push notifications and SMS text messaging.

We leverage our data primarily to serve advertisements that we believe will be relevant to users based on the information they have provided.

We have also begun to leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising, as well as services-based models, such as marketing research and insights.

Third Quarter Financial Summary

Three months ended September 30, 2020 compared to three months ended September 30, 2019:

Revenue increased 21% to $78.3 million, from $64.6 million.

Net income was $1.2 million, or $0.01 per share, compared to net loss of $4.5 million or $0.06 per share.

We have permission to contact the majority of users in our database through multiple channels, such as email, home address, telephone, push notifications and SMS text messaging. We leverage this data in our performance offerings primarily to serve advertisements that we believe will be relevant to users based on the information they provide, and in our lead generation offerings to provide our clients with users' contact information so that our clients may communicate with them directly. We have also begun to leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising.

First Quarter Financial Summary

Three months ended March 31, 2021 compared to three months ended March 31, 2020:

Revenue decreased 11% to $70.2 million, from $78.9 million.

Net loss was $6.3 million, or $0.08 per share, compared to net income of $0.4 million or $0.01 per share.

Media margin increased 4% to $24.9 million, from $23.9 million, representing 35.4% of revenue.

Adjusted EBITDA increased 167% to $11.6 million, based on net income of $1.2 million, from $4.3 million, based on a net loss of $4.5 million.

Adjusted net income was $6.3 million, or $0.08 per share, compared to adjusted net loss of $1.0 million, or $0.01 per share.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019:

Revenue increased 13% to $228.7 million, from $201.7 million.

Net income was $2.0 million, or $0.03 per share, compared to net loss of $2.7 million or $0.03 per share.

Media margin increased 17% to $78.4 million, from $67.3 million, representing 34.3% of revenue.

Adjusted EBITDA increased $6.9 to $30.0 million, based on net income of $2.0 million, from $23.2 million, based on a net loss of $2.7 million.

Adjusted net income was $14.3 million, or $0.18 per share, compared to $7.7 million, or $0.10 per share.

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

Adjusted EBITDA decreased 48% to $4.7 million, based on net loss of $6.3 million, from $9.0 million, based on net income of $0.4 million.

Adjusted net income was $0.4 million, or $0.00 per share, compared to adjusted net income of $3.8 million, or $0.05 per share.

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

Trends Affecting our Business

Development, Acquisition and Retention of High-Quality Targeted Media Traffic

A key challenge for our business is identifying and accessing media sources that are of high quality and able to attract targeted users to our media properties.

As our business has grown, we have attracted larger and more sophisticated clients to our platform.

To further increase our value proposition to clients and to fortify our leadership position in relation to the evolving regulatory landscape of our industry, we commenced a traffic quality initiative (the "Traffic Quality Initiative") in 2020.

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

Through this initiative, we substantially curtailed the volume of lower quality affiliate traffic that we source, particularly during the fourth quarter of 2020 and the first quarter of 2021.

See "Results of Operations" below for additional detail on the impact to our revenue during the first quarter of 2021.

To replace this lower quality traffic, we are working to source traffic that meets our quality requirements through new suppliers, channels and media buying strategies.

Consolidation of media sources, changes in search engine, email and text message blocking algorithms and increased competition for available media have made the process of sourcing new traffic challenging during 2021 and may continue to do so in the future. However, we believe the Traffic Quality Initiative will benefit the Company over time, providing the foundation to support sustainable long-term growth and positioning us as an industry leader.

Seasonality and Cyclicality

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

For example, our fourth fiscal quarter ending December 31 is typically characterized by higher advertiser budgets, which can be somewhat offset by seasonal challenges of lower availability and/or higher pricing for some forms of media during the holiday period.

Further, as reflected in historical data from the Interactive Advertising Bureau (IAB), industry spending on internet advertising has generally declined sequentially in the first quarter of the calendar year from the fourth quarter.

Similar to the industry overall, some of our clients have lower advertising budgets during our first fiscal quarter ending March 31;

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

In addition to variations in budgets from quarter to quarter, certain clients have budgets that start stronger at the beginning of quarterly or monthly periods, may reach limits during such periods and then may have needs to satisfy their performance objectives at the end of such periods.

Beyond these budgetary constraints and buying patterns of clients, other factors affecting our business may include macroeconomic conditions affecting the digital media industry and the various client verticals we serve.

COVID-19 Update

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The economic uncertainty caused by COVID-19 has had varying degrees of impact on certain of our advertiser clients in certain industry verticals over the course of the pandemic.

For example, the staffing and recruitment vertical has generally exhibited reduced pricing and/or demand since the onset of the pandemic, whereas other verticals, such as financial products and services, experienced similar dynamics earlier on but have since recovered. We have taken steps to manage our costs of acquiring traffic and to match available consumers with those advertiser clients in the various industries we serve who have exhibited appropriate demand during different periods, thereby enabling us to more effectively manage our margins during this time.

We anticipate additional shifts in pricing and/or demand among affected clients, as the trajectory of the pandemic and future economic outlook remain uncertain.

For example, industry verticals such as staffing and recruitment and financial products and services exhibited reduced pricing and/or demand following the onset of the pandemic and subsequently recovered to varying degrees since that time.

On the other hand, demand from certain advertisers in other verticals, such as streaming services and mobile gaming, increased during the pandemic and has since remained strong.

There may be additional shifts in pricing and/or demand among our clients, as the trajectory of the pandemic and future economic outlook remain uncertain.

We implemented company-wide work-from-home beginning on March 13, 2020.

While we believe we have adapted well to a work-from-home environment, COVID-19 increases the likelihood of certain risks of disruption to our business, such as the incapacity of certain employees or system interruptions, which could lead to diminishment of our regular business operations, technological capacity and cybersecurity capabilities, as well as operational inefficiencies and reputational harm.

Please see " Results of Operations " and Item 1A.

Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

Please see " Results of Operations " for further discussion of the possible impact of the COVID-19 pandemic on our business.

Definitions, Reconciliations and Uses of Non-GAAP Financial Measures

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Media margin is also presented as percentage of revenue.

Adjusted EBITDA is defined as net income (loss) excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) goodwill impairment, (5) write-off of long-lived assets, (6) accrued compensation expense for Put/Call Consideration, (7) share-based compensation expense, (8) acquisition-related costs, (9) restructuring and certain severance costs, (10) certain litigation and other related costs, and (11) one-time items.

Adjusted net income (loss) is defined as net income (loss) excluding (1) goodwill impairment, (2) write-off of long-lived assets, (3) accrued compensation expense for Put/Call Consideration, (4) share-based compensation expense, (5) acquisition-related costs, (6) restructuring and certain severance costs, (7) certain litigation and other related costs, and (8) one-time items.

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

Below is a reconciliation of media margin from net income (loss), which we believe is the most directly comparable GAAP measure.

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Income tax expense (benefit)

Adjusted EBITDA is defined as net (loss) income excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) Loss on early extinguishment of debt (5) accrued compensation expense for Put/Call Consideration, (6) share-based compensation expense, (7) acquisition-related costs, and (8) certain litigation and other related costs.

Adjusted net income is defined as net (loss) income excluding (1) Loss on early extinguishment of debt (2) accrued compensation expense for Put/Call Consideration, (3) share-based compensation expense, (4) acquisition-related costs, and (5) certain litigation and other related costs.

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

Below is a reconciliation of media margin from net (loss) income, which we believe is the most directly comparable GAAP measure.

Three Months Ended March 31,

Net (loss) income

Income tax benefit

Loss on early extinguishment of debt

Interest expense, net

Goodwill impairment

Write-off of long-lived assets

Depreciation and amortization

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

Below is a reconciliation of adjusted EBITDA from net income (loss), which we believe is the most directly comparable GAAP measure:

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Income tax expense (benefit)

Below is a reconciliation of adjusted EBITDA from net (loss) income, which we believe is the most directly comparable GAAP measure:

Three Months Ended March 31,

Net (loss) income

Income tax benefit

Interest expense, net

Depreciation and amortization

Goodwill impairment

Write-off of long-lived assets

Loss on early extinguishment of debt

Accrued compensation expense for Put/Call Consideration

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Acquisition-related costs

Restructuring and certain severance costs

Certain litigation and other related costs

One-time items

Adjusted EBITDA

Below is a reconciliation of adjusted net income (loss) and adjusted net income (loss) per share from net income (loss), which we believe is the most directly comparable GAAP measure.

Three Months Ended September 30,

Nine Months Ended September 30,

Below is a reconciliation of adjusted net income and adjusted net income per share from net (loss) income, which we believe is the most directly comparable GAAP measure.

Three Months Ended March 31,

(In thousands, except share data)

Net income (loss)

Goodwill impairment

Write-off of long-lived assets

Net (loss) income

Loss on early extinguishment of debt

Accrued compensation expense for Put/Call Consideration

1 unchanged sentence

Acquisition-related costs

Restructuring and certain severance costs

Certain litigation and other related costs

One-time items

Adjusted net income (loss)

Adjusted net income (loss) per share:

Adjusted net income

Adjusted net income per share:

Weighted average number of shares outstanding:

We present media margin, 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.

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

More specifically:

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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.

These adjustments include certain severance costs associated with department-specific reorganizations and certain litigation and other related costs associated with legal matters outside the ordinary course of business.

The first three adjustments represent the conventional definition of EBITDA, and the remaining adjustments are items recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. These adjustments include certain litigation and other related costs associated with legal matters outside the ordinary course of business, including costs and accruals related to the NY AG and FTC matters described below under Part II, Item 1 —

Legal Proceedings.

Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules.

Adjusted EBITDA for the nine months ended September 30, 2019 excluded as one-time items $0.2 million of costs associated with the move of our corporate headquarters.

There were no other adjustments for one-time items in the current period presented.

Adjusted net income (loss) , as defined above, and the related measure of adjusted net income  (loss) 

There were no adjustments for one-time items in the periods presented.

Adjusted net income, as defined above, and the related measure of adjusted net  

income  

per share exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded.

Adjusted net income for the nine months ended September 30, 2019 excluded as one-time items $0.2 million of costs associated with the move of our corporate headquarters.

There were no other adjustments for one-time items in the current period presented.

We believe adjusted net income (loss) affords investors a different view of the overall financial performance of the Company than 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 not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, net income (loss) as indicators of operating performance.

We believe adjusted net income affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the GAAP measure of net (loss) income.

Media margin, adjusted EBITDA, adjusted net income and adjusted net income per share are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, net (loss) income as indicators of operating performance.

None of these metrics are presented as measures of liquidity.

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.

The way we measure media margin, adjusted EBITDA and adjusted net income may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements.

Results of Operations

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Revenue increased $13.7 million, or 21%, to $78.3 million for the three months ended September 30, 2020, from $64.6 million for the three months ended September 30, 2019. The increase was primarily attributable to higher monetization of the consumer traffic to our websites through improved matching of offers with consumers and an increase in consumers’

completing offers presented. The increase also reflected more effective re-engagement of consumers after their initial experience on our websites, through SMS text messaging and push notifications. As the trajectory of the pandemic and governmental, business and individual responses to the same remain dynamic and unpredictable, we are unable to assess the availability of consumer traffic to our websites in future quarters.

At the onset of the continuing COVID-19 pandemic, certain advertisers in industry verticals such as staffing and recruitment and financial products and services reduced their spend with us, while certain advertisers in other verticals such as streaming services and mobile gaming increased their demand. In the third quarter, we experienced an improvement in spend from clients in our financial products and services vertical, though not fully to pre-COVID levels.

While changes in demand and pricing among clients in various industry verticals did not result in a significant disruption to our business in the quarter ended September 30, 2020, the trajectory of these trends is uncertain.

Three months ended March 31, 2021 compared to three months ended March 31, 2020

Revenue decreased $8.8 million, or 11%, to $70.2 million for the three months ended March 31, 2021, from $78.9 million for the three months ended March 31, 2020. The decrease was primarily attributable to reduced traffic volumes, stemming from our Traffic Quality Initiative, which sharply curtailed the volume of lower quality affiliate traffic.

Relatively higher levels of monetization in the first quarter of 2021 were not sufficient to offset reduced traffic volume, resulting in lower revenue compared to the first quarter of 2020, and these trends are currently continuing into the second quarter of 2021. We anticipate higher volumes of traffic in future periods as we seek to replace the loss of lower quality traffic, though the timing of such increases remains uncertain.

We are working to source traffic that meets our quality requirements through new suppliers, channels and media buying strategies.

At the onset of the continuing COVID-19 pandemic, certain advertisers in industry verticals such as staffing and recruitment and financial products and services exhibited reduced pricing and/or demand following the onset of the pandemic and subsequently recovered to varying degrees since that time.

On the other hand, demand from certain advertisers in other verticals, such as streaming services and mobile gaming, increased during the pandemic and has since remained strong. While changes in demand and pricing among clients in various industry verticals did not result in a significant disruption to our business, the trajectory of these trends is uncertain.

Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $8.2 million, or 18%, to $52.8 million for the three months ended September 30, 2020, from $44.6 million for the three months ended September 30, 2019.

Cost of revenue decreased $5.6 million, or 10%, to $51.0 million for the three months ended March 31, 2021, from $56.6 million for the three months ended March 31, 2020.

Our cost of revenue primarily consists of media and related costs associated with acquiring traffic from third-party publishers and digital media platforms for our owned and operated websites and, historically, on behalf of third-party advertisers, as well as the costs of fulfilling rewards earned by consumers who complete the requisite number of advertiser offers.

The total cost of revenue as a percentage of revenue decreased to 67% for the three months ended September 30, 2020, compared to 69% in the corresponding period in 2019, attributable to lower growth in our cost of media as compared with growth in revenues, partly offset by increased reward fulfillment expense. Certain new promotional campaigns yielded higher reward fulfillment costs during the quarter, generating relatively higher monetization that more than offset the incremental fulfillment costs.

The total cost of revenue as a percentage of revenue increased to 73% for the three months ended March 31, 2021, compared to 72% in the corresponding period in 2020.

 Higher reward fulfillment costs were partially offset by increased monetization achieved through improvements to our ad serving and higher responsiveness to promotional campaigns.

We are actively managing our traffic acquisition and reward fulfillment expenditures to reflect evolving market dynamics and the impact of our Traffic Quality Initiative.

As a result, past levels of cost of revenue (exclusive of depreciation and amortization) may not be indicative of future costs, which may increase or decrease as these uncertainties in our business play out.

Sales and marketing.

Sales and marketing expenses increased $0.2 million, or 8%, to $2.9 million for the three months ended September 30, 2020, from $2.7 million for the three months ended September 30, 2019. For the three months ended September 30, 2020 and 2019, the amounts consisted mainly of employee salaries and benefits of $2.5 million and $1.9 million, non-cash share-based compensation expense of $0.2 million and $0.3 million, and advertising costs of $0.2 million and $0.3 million, respectively.

We are actively managing our sales and marketing expenditures to reflect the rapidly shifting market dynamics associated with the impact of COVID-19 on our and our advertiser clients’

businesses. As a result, past levels of sales and marketing expenditures may not be indicative of future expenditures, which may increase or decrease as these uncertainties in our business play out.

Sales and marketing expenses increased $0.1 million, or 5%, to $3.0 million for the three months ended March 31, 2021, from $2.8 million for the three months ended March 31, 2020. For the three months ended March 31, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $2.5 million and $2.2 million, respectively, and non-cash share-based compensation expense of $0.2 million in both periods and advertising costs of $0.2 million in both periods.

As business travel and in-person meetings and events begin to resume, we anticipate that our sales and marketing expenditures may increase in future periods. As a result, past levels of sales and marketing expenditures may not be indicative of future expenditures, which may increase or decrease as these uncertainties in our business play out.

Product development.

Product development increased $0.7, or 26%, to 

$3.4 million for the three months ended September 30, 2020, from $2.0 million for the three months ended September 30, 2019. 

F or the three months ended September 30, 2020 and 2019, the amounts consisted mainly of salaries and benefits of $2.5 million and $1.8 million, non-cash share-based compensation expense of $0.3 million in both periods, and software license and maintenance costs of $0.3 million and $0.0 million, respectively. The increase in product development expenses reflects, in part, the development of new media properties.

We have not implemented any material changes to our product development strategy as a result of the COVID-19 pandemic.

$3.4 million for the three months ended March 31, 2021, from $2.7 million for the three months ended March 31, 2020. 

F or the three months ended March 31, 2021 and 2020, the amounts consisted mainly of salaries and benefits of $2.6 million and $2.1 million, non-cash share-based compensation expense of $0.3 million and $0.2 million, and software license and maintenance costs of $0.3 million and $0.1 million, respectively. The increase in product development expenses reflects, in part, the development of new app-based media properties, expanding beyond our traditional focus on web-based media properties.

General and administrative.

General and administrative expenses decreased $1.3 million, or 9%, to $12.8 million for the three months ended September 30, 2020, from $14.0 million for the three months ended September 30, 2019.

For the three months ended September 30, 2020 and 2019, the amounts consisted mainly of employee salaries and benefits of $4.3 million and $5.6 million , certain litigation and related costs of $2.7 million and $0.4 million, professional fees of $1.4  

million in both periods , office overhead of 

million in both periods , non-cash share-based compensation expense of  $0.7 million and 

$2.2  million, accrued compensation expense for Put/Call Consideration from the Winopoly Acquis ition of $0.7 million and $0.0 milli on (see Note 11, 

Business acquisitions, in the Notes to Consolidated Financial Statements), and provision for bad debt of $0.0 million and $1.9 million, respectively.

The decrease was mainly the result of reduced provision for bad debt expense, non-cash share-based compensation expense and salaries and benefits expense, partially offset by an increase in certain litigation and related costs year over year, as well as accrued compensation expense for the Put/Call Consideration.

The increase in certain litigation and related costs reflects an accrual of $1.45 million in connection with the New York Attorney General matter detailed in Note 10, Contingencies , as well as legal representation costs in connection with that and other matters detailed in Note 10.

At this time, we do not anticipate material changes to our general and administrative expenditures due to the COVID-19 pandemic.

See “Item 1A Risk Factors ”

General and administrative expenses increased $0.6 million, or 6%, to $11.7 million for the three months ended March 31, 2021, from $11.1 million for the three months ended March 31, 2020.

For the three months ended March 31, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $4.9 million and $4.5 million , professional fees of $1.5  

million and $1.3 million, accrued compensation expense for Put/Call Consideration from the Winopoly Acquis ition of $1.7 million and $0.0 milli on (see Note 11, 

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

office overhead of 

million and $0.9 million , non-cash share-based compensation expense of  $0.8 million and 

$1.9  million,  and certain litigation and related costs of $0.7 million and $0.9 million , respectively.

The increase was mainly the result of accrued compensation expense for the Winopoly Put/Call Consideration and increased employee salaries and benefits, partially offset by non-cash share based compensation expense. 

Depreciation and amortization.

Depreciation and amortization expenses increased $0.3 million, or 7%, to $3.9 million for the three months ended September 30, 2020, from $3.6 million for the three months ended September 30, 2019. 

Write-off of long-lived asset.

During the three months ended September 30, 2019, we recognized $0.3 million of impairment loss related to software capitalized for internal use, with no corresponding charge in the current period. 

Depreciation and amortization expenses decreased $0.4 million, or 10%, to $3.4 million for the three months ended March 31, 2021, from $3.7 million for the three months ended March 31, 2020. 

Interest expense, net.

Interest expense, net, decreased $0.4 million, or 23%, to $1.3 million for the three months ended September 30, 2020, from $1.7 million for the three months ended September 30, 2019.

Income (loss) before income taxes .

For the three months ended September 30, 2020, income before income taxes increased $5.7 million to $1.2 million, compared to net loss before income taxes of $4.5 million for the three months ended September 30, 2019.

The change was primarily due to an increase in revenue of $13.7 million, a decrease in general and administrative expense of $1.3 million, a decrease in interest expense of $0.4 million and the absence of the write-off of long-lived assets of $0.3 million from the prior period, partially offset by an increase in cost of revenue of $8.2 million, an increase in product development of 

$1.3  million, an increase in depreciation and amortization expense of $0.3 million and an increase in sales and marketing of $0.2 million, discussed above. 

Interest expense, net, decreased $0.5 million, or 34%, to $1.0 million for the three months ended March 31, 2021, from $1.5 million for the three months ended March 31, 2020.

The decrease was attributable to a lower interest rate environment, as well as lower average debt balance outstanding on the Refinanced Term Loan described below under "Liquidity and Capital Resources." Going forward, we expect our interest expense to be lower than in prior periods as a result of the Refinanced Term Loan.

Loss on early extinguishment of debt.

During the three months ended March 31, 2021, we recognized $3.0 million of loss due to the early extinguishment of debt, described below under "Liquidity and Capital Resources," with no corresponding charge in the prior period. 

(Loss) income before income taxes .

For the three months ended March 31, 2021, loss before income taxes was $6.3 million, compared to net income before income taxes of $0.4 million for the three months ended March 31, 2020.

The decrease of $6.7 million was primarily due to a decrease in revenue of $8.8 million, the loss on early extinguishment of debt recorded in the first quarter of 2021 of $3.0 million, an increase in product development of 

$0.7  million, an increase in general and administrative expense of $0.6 million and an increase in sales and marketing of $0.1 million, partially offset by a decrease in cost of revenue of $5.6 million, a decrease in interest expense of $0.5 million and a decrease in depreciation and amortization expense of $0.4 million, as discussed above. 

Income taxes.

Income tax expense was $65.0 thousand and $0.0 thousand for the three months ended September 30, 2020 and 2019, respectively. 

As of September 30, 2020 and 2019, we recorded a full valuation allowance against our net deferred tax assets.

There was a $1 and $0 income tax benefit for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021 and 2020, we recorded a full valuation allowance against our net deferred tax assets.

We intend to maintain a full valuation allowance against the net deferred tax assets until there is sufficient evidence to support the release of all or some portion of this allowance.

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Release of some or all of the valuation allowance would result in the recognition of certain deferred tax assets and an increase in deferred tax benefit for any period in which such a release may be recorded, however, the exact timing and amount of any valuation allowance release are subject to change, depending on the profitability that we are able to achieve and the net deferred tax assets available.

Net income (loss) .

Net income of $1.2 million and net loss of $4.5 million were recognized for the three months ended September 30, 2020 and 2019, respectively, as a result of the foregoing.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

Revenue increased $27.1 million, or 13%, to $228.7 million for the nine months ended September 30, 2020, from $201.7 million for the nine months ended September 30, 2019. The increase in revenue was primarily attributable to higher monetization of traffic to our websites, supported by advertiser demand for our performance-based marketing services and increased consumer traffic to our websites.

At the onset of the COVID-19 pandemic, certain advertisers in industry verticals such as staffing and recruitment and financial products and services reduced their spend with us, while certain advertisers in other verticals such as streaming services and mobile gaming increased their demand. In the third quarter, we experienced an improvement in spend from clients in our financial products and services vertical, though not fully to pre-COVID levels.

Trends in advertiser verticals, in aggregate, did not result in a significant disruption to our business in the nine months ended September 30, 2020.

Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $19.9 million, or 14%, to $158.4 million for the nine months ended September 30, 2020, from $138.5 million for the nine months ended September 30, 2019.

The total cost of revenue as a percentage of revenue remained flat at 69% for the nine months ended September 30, 2020.

While the cost of media increased less than the increase in revenue, this was offset by increased reward fulfillment expense, as we tested certain changes to the consumer flows and experience during the second quarter and expanded certain promotional campaigns that yielded higher reward fulfillment costs in the third quarter.

Sales and marketing.

Sales and marketing expenses decreased $0.6 million, or 6%, to $8.6 million for the nine months ended September 30, 2020, from $9.2 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020 and 2019, the amounts consisted mainly of employee salaries and benefits of $7.0 million and $6.6 million, non-cash share-based compensation expense of $0.7 million and $0.8 million, and advertising costs of $0.6 million and $1.1 million, respectively.

The reduction in sales and marketing expenses derived primarily from reduced advertising costs. 

Product development.

Product development increased $2.7, or 42%, to $9.2 million for the nine months ended September 30, 2020, from 

$6.5 million for the nine months ended September 30, 2019, partly owing to the development of new media properties. 

F or the nine months ended September 30, 2020 and 2019, the amounts consisted mainly of salaries and benefits of $6.9 million and $5.5 million, non-cash share-based compensation expense of $0.8 million and $0.8 million, and software license and maintenance costs of $0.7 million and $0.0 million, respectively. 

General and administrative.

General and administrative expenses decreased $0.5 million, or 1%, to $33.9 million for the nine months ended September 30, 2020, from $34.4 million for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020 and 2019, the amounts consisted mainly of employee salaries and benefits of $13.0 million and $13.5 million,  certain litigation and related costs of $4.7 million and $1.1 million, professional fees of $3.9 million and  $4.5 

million, non-cash share-based compensation expense of  $3.4 

million and $6.4 million, office overhead of $3.0  

million and $2.8 million, accrued compensation expense for Put/Call Consideration from the Winopoly Acquisition o f $1.2 million and $0.0 million , and provision for bad debt expense of $0.2 million and $2.1 million, respectively.

The decrease was mainly the result of lower non-cash share-based compensation expense, provision for bad debt expense, 

professional fees and salaries and benefits expense, partially offset by increases in certain litigation and related costs year over year and accrued compensation expense for Put/Call Consideration. 

Depreciation and amortization.

Depreciation and amortization expenses increased $1.2 million, or 12%, to $11.5 million for the nine months ended September 30, 2020, from $10.3 million for the nine months ended September 30, 2019, due to the timing of the AdParlor Acquisition, which was completed on July 1, 2019.

Goodwill impairment.

During the second quarter of 2020, we recognized $0.8 million of goodwill impairment related to the All Other reporting unit, with no corresponding impairment charge in the prior period.  

Write-off of long-lived asset.

During the nine months ended September 30, 2019, we recognized $0.3 million of impairment loss related to software capitalized for internal use, with no corresponding charge in the current period.

Interest expense, net.

Interest expense, net, decreased $1.1 million, or 21%, to $4.2 million for the nine months ended September 30, 2020, from $5.3 million for the nine months ended September 30, 2019.

The decrease was attributable to a lower interest rate environment and a lower average debt balance outstanding on the Refinanced Term Loan described below under "Liquidity and Capital Resources".

Income (loss) before income taxes .

For the nine months ended September 30, 2020, income before income taxes increased $4.8 million to $2.1 million for the nine months ended September 30, 2020, from a loss of $2.7 million for the nine months ended September 30, 2019.

The change was primarily due to an increase in revenue of $27.1 million, decrease in interest expense of $1.1 million, decrease in sales and marketing of $0.6, decrease in general and administrative expense of $0.5 million and the absence of the write-off of long-lived assets of $0.3 million from prior period, partially offset by increased cost of revenue of $19.9 million, increased product development of 

$2.7 million, increased depreciation and amortization expense of $1.2 million and a goodwill impairment charge of $0.8 million in the current year, discussed above.

Income taxes.

Income tax expense was $65.0 thousand and income tax benefit was $35.0 thousand for the nine months ended September 30, 2020 and 2019, respectively. 

Net income (loss) .

Net income of $2.0 million and net loss of $2.7 million was recognized for the nine months ended September 30, 2020 and 2019, respectively, as a result of the foregoing.

Effect of Inflation

The rates of inflation experienced in recent years have had no material impact on our financial statements.

We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and the competitive environment within our industry.

Net (loss) income .

Net loss of $6.3 million and net income of $0.4 million were recognized for the three months ended March 31, 2021 and 2020, respectively, as a result of the foregoing.

Liquidity and Capital Resources

Cash flows provided by operating activities .

For the nine months ended September 30, 2020 and 2019, net cash provided by operating activities was $12.9 million and $26.6 million, respectively. Net income in the current period of $2.0 million represents an increase of $4.7 million, as compared with net loss of $2.7 million in the prior period. Adjustments to reconcile net income to net cash provided by operating activities of $19.7 million in the current period declined by $1.9 million, as compared with $21.6 million in the prior period, primarily due to reductions in share-based compensation expense and provision for bad debt, partly offset by the inclusion of an accrual for Put/Call Consideration in the current period, with no corresponding amount in the prior period. Changes in assets and liabilities consumed cash of $8.8 million in the current period, as compared with providing a source of cash of $7.7 million in the prior period, primarily due to changes in working capital. 

Cash flows provided by (used in) operating activities .

For the three months ended March 31, 2021, net cash provided by operating activities was $5.0 million and for the three months ended March 31, 2020, net cash used in operating activities was and $0.2 million. Net loss in the current period of $6.3 million represents a decrease of $6.7 million, as compared with net income of $0.4 million in the prior period. Adjustments to reconcile net income to net cash provided by operating activities of $8.7 million in the current period increased by $2.0 million, as compared with $6.7 million in the prior period, primarily due to the inclusion of a non-cash loss on early extinguishment of debt and accrual for Put/Call Consideration in the current period, partially offset by reductions in share-based compensation expense, depreciation and provision for bad debt. Changes in assets and liabilities provided a source of cash of $2.6 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. 

Cash flows used in investing activities .

For the nine months ended September 30, 2020 and 2019, net cash used in investing activities was $3.4 million and $11.2 million, respectively.

The decline was mainly due to reduced cash paid for business acquisitions of $5.8 million and reduced capital expenditures of $2.0 million year over year.

Cash flows used in financing activities.

Net cash used in financing activities for the nine months ended September 30, 2020 and 2019 was $12.7 million and $8.9 million, respectively.

The increase in cash used for the nine months ended September 30, 2020 was mainly due to an increase in the repayment of long-term debt of $5.0 million and the repurchase of treasury stock as part of a stock repurchase program of $1.3 million in 2020, which was not in effect in the prior period, partially offset by a $2.6 million decrease in statutory taxes paid related to the net share settlement of vested restricted stock units.

As of September 30, 2020, we had noncancelable operating lease commitments of $11.3 million and long-term debt with $43.9 million principal balance.

For the nine months ended September 30, 2020, we funded our operations using available cash.

As of September 30, 2020, we had cash, cash equivalents and restricted cash of approximately $16.9 million, a decrease of $3.3 million from $20.2 million as of December 31, 2019.

For the three months ended March 31, 2021 and 2020, net cash used in investing activities was $0.8 million and $0.6 million, respectively.

The increase was mainly due to increased capitalized costs included in intangible assets of $0.2 million year over year.

Cash flows provided by (used in) financing activities.

Net cash provided by financing activities for the three months ended March 31, 2021 was $7.4 million and net cash used in financing activities was $4.7 million for the prior period.

The increase of  $12.1 

million in cash provided by financing activities in the current period was mainly due to the net proceeds from issuance of long-term debt of $49.6 million, the repurchase of stock as part of a stock repurchase program in the prior period of $1.3 million, and the exercise of stock options by a former key executive of $0.9 million, partially offset by an increase in the repayment of long-term debt of $38.7 million, the prepayment penalty on early debt extinguishment of $0.8 million and an increase in statutory taxes paid related to the net share settlement of vested restricted stock units of $0.2 million.

As of March 31, 2021, we had noncancelable operating lease commitments of $10.2 million and long-term debt with $51.3 million principal balance.

For the three months ended March 31, 2021, we funded our operations using available cash.

As of March 31, 2021, we had cash, cash equivalents and restricted cash of approximately $34.1 million, an increase of $11.5 million from $22.6 million as of December 31, 2020.

We believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months and beyond.

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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 July 1, 2019, we acquired substantially all of the assets of AdParlor Holdings, Inc.

and certain affiliates for $7.3 million in cash, using cash on hand, and a $2.4 million promissory note to the sellers.

On April 1, 2020, we acquired a 50% membership interest in Winopoly, LLC, for a deemed purchase price of $2.6 million, comprised of $1.6 million in upfront cash paid to the seller parties and contingent consideration with a fair value of $1.0 million, payable based upon the achievement of specified revenue targets over the eighteen-month period following the completion of the acquisition. See Note 11, 

Business acquisitions, in the Notes to Consolidated Financial Statements.

As of September 30, 2020, the Refinanced Term Loan has an outstanding principal balance of $42.6 million and matures on March 26, 2023.

The Credit Agreement, along with the related Amendment No.

6 governing the Refinanced Term Loan and subsequent amendments, contain restrictive covenants which impose limitations on the way we conduct our business, including limitations on the amount of additional debt we are able to incur and our ability to make certain investments and other restricted payments. The restrictive covenants and prepayment penalties in the Credit Agreement, as amended, may limit our strategic and financing options and our ability to return capital to our shareholders through dividends or stock buybacks.

Business acquisition, in the Notes to Consolidated Financial Statements.

During the first quarter of 2021, Fluent, LLC redeemed $38.3 million aggregate principal amount of our Refinanced Term Loan due March 26, 2023, prior to maturity, resulting in a loss of $2,964 as a cost of early extinguishment of debt.

On March 31, 2021, Fluent, LLC entered into a credit agreement (the “Credit Agreement”) by and among, Fluent, LLC, certain subsidiaries of Fluent, LLC as guarantors, Citizens Bank, N.A., as administrative agent, lead arranger and bookrunner, and BankUnited, N.A.

and Silicon Valley Bank.

The Credit Agreement provides for a term loan in the aggregate principal amount of $50.0 million funded on the Closing Date (the “Term Loan”), along with an undrawn revolving credit facility of up to $15.0 million (the "Revolving Loans," and together with the Term Loan, the "New Credit Facility").

As of March 31, 2021, the Credit Agreement has an outstanding principal balance of $50.0 million and matures on March 31, 2026.

Principal amortization of the Credit Agreement is $1.3 million per quarter, which will commence with the fiscal quarter ended June 30, 2021.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to an applicable margin, plus, at the Company's option, either a base rate or a London Inter-bank Offered Rate (“LIBOR”) rate (subject to a floor of 0.25%).

The applicable margin is between 0.75% and 1.75% for base rate borrowings and 1.75% and 2.75% for LIBOR rate borrowings, depending upon the Company' consolidated leverage ratio. The anticipated opening interest rate of the New Credit Facility is 2.50% (LIBOR + 2.25%). 

The Credit Agreement contain restrictive covenants which impose limitations on the way we conduct our business, including limitations on the amount of additional debt we are able to incur and our ability to make certain investments and other restricted payments. The restrictive covenants may limit our strategic and financing options and our ability to return capital to our shareholders through dividends or stock buybacks.

Furthermore, we may need to incur additional debt to meet future financing needs.

The Refinanced Term Loan is guaranteed by us and our direct and indirect subsidiaries and is secured by substantially all of our assets and those of our direct and indirect subsidiaries, including Fluent, LLC, in each case, on an equal and ratable basis.

The Refinanced Term Loan accrues interest at the rate of either, at Fluent's option, (a) LIBOR (subject to a floor of 0.50%) plus 7.00% per annum, or (b) base rate (generally equivalent to the U.S.

prime rate) plus 6.0% per annum, payable in cash.

Principal amortization of the Refinanced Term Loan is $0.9 million per quarter, which commenced with the fiscal quarter ended June 30, 2018.

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

While we were in 

compliance with the financial and other covenants at September 30, 2020, we cannot assure that we will be able to maintain compliance with such financial or other covenants.

The Credit Agreement is guaranteed by us and our direct and indirect subsidiaries and is secured by substantially all of our assets and those of our direct and indirect subsidiaries, including Fluent, LLC, in each case, on an equal and ratable basis.

The Credit Agreement requires us to maintain and comply with certain financial and other covenants. While we were in compliance with the financial and other covenants at March 31, 2021, we cannot guarantee that we will be able to maintain compliance with such financial or other covenants in future periods.

Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would materially adversely affect our financial health if we are unable to access sufficient funds to repay all the outstanding amounts.

Moreover, if we are unable to meet our debt obligations as they come due, we could be forced to restructure or refinance such obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms, or at all.

In addition, the Credit Agreement includes certain prepayment provisions, including mandatory quarterly prepayments of the Refinanced Term Loan with a portion of our excess cash flow and prepayment penalties if we prepay the Refinanced Term Loan before the fourth anniversary of Amendment No.

As long as the Refinanced Term Loan remains outstanding, the restrictive covenants and mandatory quarterly prepayment provisions and prepayment penalties could impair our ability to expand or pursue our business strategies or obtain additional funding.

Off-Balance Sheet Arrangements

As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

As of March 31, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies and Estimates

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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We periodically evaluate our estimates, including those related to revenue recognition, allowance for doubtful receivables, lease commitments, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation and income taxes.

We periodically evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation and income taxes.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

During the three months ended March 31, 2020, we determined that the decline in market value of our publicly traded stock and the macroeconomic conditions arising from the global COVID-19 pandemic constituted an impairment triggering event for our two reporting units, Fluent and All Other.

As such, we conducted an interim test of the fair value of our goodwill for potential impairment as of March 31, 2020. Based on the results of this interim impairment test, which used a combination of income and market approaches to determine the fair value of our two reporting units, we concluded that Fluent's goodwill of $159,791 and All Other's goodwill of $4,983 were not impaired, since the results of the interim test indicated that the estimated fair values exceeded their carrying values by approximately 18% and 4%, respectively.

We believe that the assumptions utilized in the interim impairment testing over our two reporting units, including the determination of an appropriate discount rate of 13.0% for Fluent and 16.5% for All Other, long-term profitability growth projections, and estimated future cash flows, are reasonable.

The risk of future impairment of goodwill exists if actual results, such as lower than expected revenue, profitability, cash flows, market multiples, discount rates and control premiums, differ from the assumptions used in our interim impairment test. In addition, a sustained decline in the market value of our publicly traded stock could impact the fair value assessment.

During the three months ended June 30, 2020, we determined that the effects of the macroeconomic conditions arising from the global COVID-19 pandemic and the social unrest throughout the United States during June 2020, which changed the media buying patterns of certain customers directly impacting the All Other reporting unit, constituted an impairment triggering event.

As such, we conducted an interim test of the fair value of its goodwill for potential impairment as of June 30, 2020. The results of this interim impairment test, which used a combination of income and market approaches to determine the fair value of the All Other reporting unit, indicated that its carrying value exceeded its estimated fair value by 8.9%.

We thereby concluded that All Other's goodwill of $5.0 million was impaired by $0.8 million.

We believe that the assumptions utilized in the interim impairment testing, including the determination of an appropriate discount rate of 16%, long-term profitability growth projections, and estimated future cash flows, are reasonable. The interim goodwill impairment test reflected management's best estimate of the economic impact to its business, end market conditions and recovery timelines.

While no further triggering events were identified by management as of June 30, 2020, if the ongoing economic uncertainty proves to be more severe than estimated, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in future impairment charges.

During the three months ended March 31, 2021, we determined that the reduction in operating results of the Fluent reporting unit, along with a decline in the market value of its publicly-traded stock, collectively constituted a triggering event. As such, we conducted an interim test of the fair value of its goodwill for potential impairment as of March 31, 2021.

Based on the results of this interim impairment test, which used a combination of the income and market approaches to determine the fair value of the Fluent reporting unit, we concluded its goodwill of $160.9 million was not impaired since the results of the interim test indicated that the estimated fair value exceeded its carrying value by approximately 17%.

We believe that the assumptions utilized in its interim impairment testing, including the determination of an appropriate discount rate of 14.5%, long-term profitability growth projections, and estimated future cash flows, are reasonable. The risk of future impairment of goodwill exists if actual results, such as lower than expected revenue, profitability, cash flows, market multiples, discount rates and control premiums, differ from the assumptions used in our interim impairment test.

For additional information, please refer to our 2020 Form 10-K.

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Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

As a smaller reporting company, we are not required to provide the information required by this Item.

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