Fluent, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.   You should read the following discussion in conjunction with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, the outcome of litigation, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 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. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.   Overview   Fluent, Inc. ("we," "us," "our," "Fluent," or the "Company"), is an industry leader in data-driven digital marketing services. We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach. We deliver 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. 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.   Once users have registered with our sites, we integrate proprietary direct marketing technologies to engage them with surveys, polls and other experiences, through which we learn about their lifestyles, preferences and purchasing histories. Based on these insights, we serve targeted, relevant offers to them on behalf of our clients. As new users register and engage with our sites and existing registrants re-engage, we believe 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, and in our lead generation offerings to provide our clients with users' contact information so that our clients may communicate with the users directly. We continue to leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising.   Second Quarter Financial Summary   Three months ended June 30, 2021 compared to three months ended June 30, 2020:   • Revenue increased 3% to $73.4 million, from $71.5 million.   • Net loss was $5.2 million, or $0.06 per share, compared to net income of $0.5 million or $0.01 per share.   • Media margin decreased 19% to $20.1 million, from $24.8 million, representing 27.4% of revenue.   • Adjusted EBITDA decreased 80% to $1.9 million, based on net loss of $5.2 million, from $9.4 million, based on net income of $0.5 million.   • Adjusted net loss was $1.9 million, or $0.02 per share, compared to adjusted net income of $4.2 million, or $0.05 per share.   Six months ended June 30, 2021 compared to six months ended June 30, 2020:   • Revenue decreased 5% to $143.5 million, from $150.4 million.   • Net loss was $11.4 million, or $0.14 per share, compared to net income of $0.9 million or $0.01 per share.   • Media margin decreased 8% to $45.0 million, from $48.7 million, representing 31.4% of revenue.   • Adjusted EBITDA decreased 64% to $6.6 million, based on net loss of $11.4 million, from $18.4 million, based on net income of $0.9 million.   • Adjusted net loss was $1.6 million, or $0.02 per share, compared to adjusted net income of $8.0 million, or $0.10 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 media margin.   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, and continue to make smaller adjustments as appropriate. 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 testing and scaling various media channels, strategies and partners to generate consumer traffic meeting our quality requirements. Some of these strategies tested in the second quarter of 2021 involved increased media spend with major digital media platforms and revised bidding strategies for affiliate traffic, each of which were expected to yield lower margins, with the intent to optimize spend for improved profitability in future periods. The mix and profitability of our media channels, strategies and partners is likely to be dynamic and reflect evolving market dynamics and the impact of our Traffic Quality Initiative. 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. As we test 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. 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’ businesses. 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   On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. At this time, our operations have not been significantly impacted by the global economic impact of COVID-19, and we have taken appropriate measures to ensure that we are able to conduct our business remotely without significant disruptions. 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, 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 have 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. With the proliferation of COVID-19 vaccinations in the U.S. during the second quarter of 2021, we have seen a substantial recovery in the staffing and recruitment vertical. There may continue to be additional shifts in pricing and/or demand among our clients, as the trajectory of the pandemic and future economic outlook remain uncertain.   17 Table of Contents   We implemented company-wide work-from-home beginning on March 13, 2020. During the second quarter of 2021, we began to open our headquarters to employees that meet health protocols and voluntarily choose to work in the office. We expect to implement a more formal policy regarding working from home later in the third quarter. 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 " for further discussion of the possible impact of the COVID-19 pandemic on our business.   Definitions, Reconciliations and Uses of Non-GAAP Financial Measures   We report the following non-GAAP measures:   Media margin is defined as revenue minus cost of revenue (exclusive of depreciation and amortization) attributable to variable costs paid for media and related expenses. Media margin is also presented as percentage of revenue.   Adjusted EBITDA is defined as net (loss) income excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) share-based compensation expense, (5) loss on early extinguishment of debt, (6) accrued compensation expense for Put/Call Consideration, (7) goodwill impairment, (8) write-off of intangible assets, (9) acquisition-related costs, (10) restructuring and other severance costs, and (11) certain litigation and other related costs.   Adjusted net income is defined as net (loss) income excluding (1) Share-based compensation expense, (2) loss on early extinguishment of debt, (3) accrued compensation expense for Put/Call Consideration, (4) goodwill impairment,  (5) write-off of intangible assets, (6) acquisition-related costs, (7) restructuring and other severance costs, and (8) certain litigation and other related costs. 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 June 30,     Six Months Ended June 30,       2021     2020     2021     2020   Net (loss) income   $ (5,179 )   $ 452     $ (11,437 )   $ 860   Income tax benefit     —       —       (1 )     —   Interest expense, net     427       1,333       1,435       2,865   Depreciation and amortization     3,366       3,853       6,739       7,586   Loss on early extinguishment of debt     —       —       2,964       —   Goodwill impairment     —       817       —       817   Write-off of intangible assets     199       —       199       —   General and administrative     11,527       10,044       23,226       21,120   Product development     3,433       3,115       6,867       5,846   Sales and marketing     3,000       2,888       5,961       5,718   Non-media cost of revenue (1)     3,363       2,312       9,053       3,915   Media margin   $ 20,136     $ 24,814     $ 45,006     $ 48,727   Revenue   $ 73,378     $ 71,509     $ 143,548     $ 150,443   Media margin % of revenue     27.4 %     34.7 %     31.4 %     32.4 %   (1) 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) income, which we believe is the most directly comparable GAAP measure:       Three Months Ended June 30,     Six Months Ended June 30,       2021     2020     2021     2020   Net (loss) income   $ (5,179 )   $ 452     $ (11,437 )   $ 860   Income tax benefit     —       —       (1 )     —   Interest expense, net     427       1,333       1,435       2,865   Depreciation and amortization     3,366       3,853       6,739       7,586   Share-based compensation expense     1,201       1,281       2,432       3,678   Loss on early extinguishment of debt     —       —       2,964       —   Accrued compensation expense for Put/Call Consideration     881       530       2,627       530   Goodwill impairment     —       817       —       817   Write-off of intangible assets     199       —       199       —   Acquisition-related costs     500       15       500       62   Restructuring and other severance costs     97       —       97       —   Certain litigation and other related costs     359       1,115       1,027       2,022   Adjusted EBITDA   $ 1,851     $ 9,396     $ 6,582     $ 18,420     18 Table of Contents   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 June 30,     Six Months Ended June 30,   (In thousands, except share data)   2021     2020     2021     2020   Net (loss) income   $ (5,179 )   $ 452     $ (11,437 )   $ 860   Share-based compensation expense     1,201       1,281       2,432       3,678   Loss on early extinguishment of debt     —       —       2,964       —   Accrued compensation expense for Put/Call Consideration     881       530       2,627       530   Goodwill impairment     —       817       —       817   Write-off of intangible assets     199       —       199       —   Acquisition-related costs     500       15       500       62   Restructuring and other severance costs     97       —       97       —   Certain litigation and other related costs     359       1,115       1,027       2,022   Adjusted net (loss) income   $ (1,942 )   $ 4,210     $ (1,591 )   $ 7,969   Adjusted net (loss) income per share:                                 Basic   $ (0.02 )   $ 0.05     $ (0.02 )   $ 0.10   Diluted   $ (0.02 )   $ 0.05     $ (0.02 )   $ 0.10   Weighted average number of shares outstanding:                                 Basic     79,962,275       78,510,383       79,560,643       78,557,331   Diluted     79,962,275       78,666,776       79,560,643       78,905,792     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:   Media margin, as defined above, is a measure of the efficiency of the Company’s operating model. We use media margin and the related measure of media margin as a percentage of revenue as primary metrics to measure the financial return on our media and related costs, specifically to measure the degree by which the revenue generated from our digital marketing services exceeds the cost to attract the consumers to whom offers are made through our services. Media margin is used extensively by our management to manage our operating performance, including evaluating operational performance against budgeted media margin and understanding the efficiency of our media and related expenditures. We also use media margin for performance evaluations and compensation decisions regarding certain personnel.   Adjusted EBITDA, as defined above, is another primary metric by which we evaluate the operating performance of our business, on which certain operating expenditures and internal budgets are based and by which, in addition to media margin and other factors, our senior management is compensated. The first three adjustments represent the conventional definition of EBITDA, and the remaining adjustments are items recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. These adjustments include certain litigation and other related costs associated with legal matters outside the ordinary course of business, including costs and accruals related to 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. 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. 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 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.   19 Table of Contents   Results of Operations   Three months ended June 30, 2021 compared to three months ended June 30, 2020   Revenue. Revenue increased $1.9 million, or 3%, to $73.4 million for the three months ended June 30, 2021, from $71.5 million for the three months ended June 30, 2020. The increase was primarily attributable to relatively higher levels of monetization of consumer traffic overall and higher volumes of traffic sourced from major digital media platforms in the second quarter of 2021. This was somewhat offset by reduced volumes of affiliate traffic, stemming from our Traffic Quality Initiative, which sharply curtailed the volume of lower quality affiliate traffic. While the relatively higher levels of monetization and increased traffic from major digital media platforms in the second quarter of 2021 were sufficient to offset reduced traffic volume, resulting in higher revenue compared to the second quarter of 2020, these trends may or may not continue into the third quarter of 2021 as we continue to test and scale media spend for profitability. See discussion below under "Cost of revenue (exclusive of depreciation and amortization)." We ultimately anticipate higher volumes of traffic in future periods as we seek to replace the loss of lower quality affiliate traffic, though the timing of such increases remains uncertain.    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. In the three months ended June 30, 2021, with the proliferation of COVID-19 vaccinations in the U.S. during the second quarter, we saw a substantial recovery in the staffing and recruitment vertical. 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 $7.6 million, or 16%, to $56.6 million for the three months ended June 30, 2021, from $49.0 million for the three months ended June 30, 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 increased to 77% for the three months ended June 30, 2021, compared to 69% in the corresponding period in 2020. In the normal course of executing paid media campaigns to source consumer traffic, we regularly test new channels, strategies and partners, in an effort to identify actionable opportunities which can then be optimized over time. Traffic acquisition costs incurred with the major digital media platforms from which we sourced increased traffic volumes have historically been higher than affiliate traffic sources. Through our Traffic Quality Initiative, we substantially curtailed the volume of lower quality affiliate traffic that we source. To replace this lower quality traffic, we are testing and scaling various media channels, strategies and partners to generate consumer traffic meeting our quality requirements. Some of these strategies tested in the second quarter of 2021 involved increased media spend with major digital media platforms and revised bidding strategies for affiliate traffic, each of which were expected to yield lower margins, with the intent is to optimize spend for improved profitability in future periods. The mix and profitability of our media channels, strategies and partners is likely to be dynamic and reflect evolving market dynamics and the impact of our Traffic Quality Initiative. As we test 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. 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. Past levels of cost of revenue (exclusive of depreciation and amortization) may therefore not be indicative of future costs, which may increase or decrease as these uncertainties in our business play out.   Sales and marketing. Sales and marketing expenses increased $0.1 million, or 4%, to $3.0 million for the three months ended June 30, 2021, from $2.9 million for the three months ended June 30, 2020. For the three months ended June 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $2.6 million and $2.4 million, non-cash share-based compensation expense of $0.2 and $0.3 million, and advertising costs of $0.1 and $0.2 million, respectively. 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 $0.3, or 10%, to  $3.4 million for the three months ended June 30, 2021, from $3.1 million for the three months ended June 30, 2020.  F or the three months ended June 30, 2021 and 2020, the amounts consisted mainly of salaries and benefits of $2.4 million and $2.2 million, software license and maintenance costs of $0.3 million and $0.3 million, professional fees of $0.3 million and $0.1 million, and non-cash share-based compensation expense of $0.2 million and $0.3 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 increased $1.5 million, or 15%, to $11.5 million for the three months ended June 30, 2021, from $10.0 million for the three months ended June 30, 2020. For the three months ended June 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $5.0 million and $4.3 million , professional fees of $1.2   million and $1.2 million, office overhead of $1.1   million and $1.2 million , software license and maintenance costs of $0.9 million and $0.4 million, accrued compensation expense for Put/Call Consideration from the Winopoly Acquis ition of $0.9 million and $0.5 milli on (see Note 11,  Business acquisition, in the Notes to Consolidated Financial Statements),  non-cash share-based compensation expense of  $0.8  million and $0.7  million, acquisition-related costs of $0.5 million and $0.0 million,  and certain litigation and related costs of $0.4 million and $1.1 million , respectively. The increase was mainly the result of increased employee salaries and benefits, acquisition related costs related to Winopoly, and accrued compensation expense for the Winopoly Put/Call Consideration, partially offset by reduced litigation and related costs.    Depreciation and amortization.   Depreciation and amortization expenses decreased $0.5 million, or 13%, to $3.4 million for the three months ended June 30, 2021, from $3.9 million for the three months ended June 30, 2020.    Write-off of intangible assets.   During the three months ended June 30, 2021, we recognized $0.2 million of write-off of intangible assets related to software developed for internal use, with no corresponding charge in the prior period.   Interest expense, net. Interest expense, net, decreased $0.9 million, or 68%, to $0.4 million for the three months ended June 30, 2021, from $1.3 million for the three months ended June 30, 2020. The decrease was attributable to a lower interest rate on the New Credit Facility Term Loan as compared to the Refinanced Term Loan.    (Loss) income before income taxes . For the three months ended June 30, 2021, net loss before income taxes was $5.2 million, compared to net income before income taxes of $0.5 million for the three months ended June 30, 2020. The decrease of $5.6 million was primarily due to an increase in cost of revenue of $7.6 million, an increase in general and administrative expense of $1.5 million, an increase in product development of  $0.3  million, and an increase in sales and marketing of $0.1 million, partially offset by an increase in revenue of $1.9 million, a decrease in interest expense of $0.9 million and a decrease in depreciation and amortization expense of $0.5 million, as discussed above.    20 Table of Contents   Income taxes. There was no income tax recorded for the three months ended June 30, 2021 and 2020, respectively.   As of June 30, 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. Based on various factors, including our history of losses, current income, estimated future taxable income, exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and consideration of available tax planning strategies, we believe there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance may be released. Release of some or all of the valuation allowance would result in the recognition of certain deferred tax assets and an increase in deferred tax benefit for any period in which such a release may be recorded, however, the exact timing and amount of any valuation allowance release are subject to change, depending on the profitability that we are able to achieve and the net deferred tax assets available.   Net (loss) income . Net loss of $5.2 million and net income of $0.5 million were recognized for the three months ended June 30, 2021 and 2020, respectively, as a result of the foregoing.   Six months ended June 30, 2021 compared to six months ended June 30, 2020   Revenue. Revenue decreased $6.9 million, or 5%, to $143.5 million for the six months ended June 30, 2021, from $150.4 million for the six months ended June 30, 2020. The decrease was primarily attributable to reduced volumes of affiliate traffic, stemming from our Traffic Quality Initiative, which sharply curtailed the volume of lower quality affiliate traffic, somewhat offset by higher levels of monetization of consumer traffic overall and higher volumes of traffic sourced from major digital media platforms. Relatively higher levels of monetization and increased traffic from major digital media platforms in the first six months of 2021 were not sufficient to offset reduced affiliate traffic volume, resulting in lower revenue compared to the first six months of 2020.   Cost of revenue (exclusive of depreciation and amortization) . Cost of revenue increased $2.0 million, or 2%, to $107.6 million for the six months ended June 30, 2021, from $105.6 million for the six months ended June 30, 2020.    The total cost of revenue as a percentage of revenue increased to 75% for the six months ended June 30, 2021, compared to 70% in the corresponding period in 2020 with the increase due to the traffic acquisition factors discussed above.   Sales and marketing. Sales and marketing expenses increased $0.2 million, or 4%, to $6.0 million for the six months ended June 30, 2021, from $5.7 million for the six months ended June 30, 2020. For the six months ended June 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $5.1 million and $4.6 million, non-cash share-based compensation expense of $0.4 and $0.5 million, and advertising costs of $0.3 and $0.4 million, respectively.    Product development.   Product development increased $1.0, or 17%, to $6.9  million for the six months ended June 30, 2021, from $5.8 million for the six months ended June 30, 2020.  F or the six months ended June 30, 2021 and 2020, the amounts consisted mainly of salaries and benefits of $5.0 million and $4.4 million, software license and maintenance costs of $0.7 million and $0.4 million, non-cash share-based compensation expense of $0.5 million and $0.5 million, and professional fees of $0.5 million and $0.2 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 increased $2.1 million, or 10%, to $23.2 million for the six months ended June 30, 2021, from $21.1 million for the six months ended June 30, 2020. For the six months ended June 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $9.9 million and $8.8 million , professional fees of $2.7   million and $2.5 million, accrued compensation expense for Put/Call Consideration from the Winopoly Acquis ition of $2.6 million and $0.5 milli on (see Note 11,  Business acquisition, in the Notes to Consolidated Financial Statements),  office overhead of  $2.2  million and $2.0 million , non-cash share-based compensation expense of  $1.6 million and  $2.7  million,  IT and website related costs of $1.5 million and $0.7 million, certain litigation and related costs of $1.0 million and $2.0 million , and acquisition-related costs of $0.5 million and $0.1 million, respectively. The increase was mainly the result of accrued compensation expense for the Winopoly Put/Call Consideration, IT and IT website costs and increased employee salaries and benefits, partially offset by a decline in non-cash share based compensation expense and reduced litigation and other costs.    Depreciation and amortization.   Depreciation and amortization expenses decreased $0.8 million, or 11%, to $6.7 million for the six months ended June 30, 2021, from $7.6 million for the six months ended June 30, 2020.    Goodwill impairment.   During the six months ended June 30, 2020, we recognized $0.8 million of goodwill impairment related to the All Other reporting unit, with no corresponding impairment charge in the current period.   Write-off of intangible assets.   During the six months ended June 30, 2021, we recognized $0.2 million of a write-off of intangible assets related to software developed for internal use, with no corresponding charge in the prior period.   Interest expense, net. Interest expense, net, decreased $1.4 million, or 50%, to $1.4 million for the six months ended June 30, 2021, from $2.9 million for the six months ended June 30, 2020. The decrease was attributable to a lower interest rate on the New Credit Facility Term Loan as compared to the Refinanced Term Loan.    Loss on early extinguishment of debt.   During the six months ended June 30, 2021, we recognized $3.0 million of loss due to the early extinguishment of debt, described below under "Liquidity and Capital Resources," with no corresponding charge in the prior period.    (Loss) income before income taxes . For the six months ended June 30, 2021, loss before income taxes was $11.4 million, compared to net income before income taxes of $0.9 million for the six months ended June 30, 2020. The decrease of $12.3 million was primarily due to a decrease in revenue of $6.9 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 $1.0 million, an increase in general and administrative expense of $2.1 million and an increase in sales and marketing of $0.2 million, partially offset by a decrease in cost of revenue of $2.0 million, a decrease in interest expense of $1.4 million and a decrease in depreciation and amortization expense of $0.8 million, as discussed above.    21 Table of Contents   Income taxes. There was a $1 and $0 income tax benefit for the six months ended June 30, 2021 and 2020, respectively.   Net (loss) income . Net loss of $11.4 million and net income of $0.9 million were recognized for the six months ended June 30, 2021 and 2020, respectively, as a result of the foregoing.     Liquidity and Capital Resources   Cash flows (used in) provided by operating activities . For the six months ended June 30, 2021, net cash used in operating activities was $0.7 million and for the six months ended June 30, 2020, net cash provided by operating activities was and $9.8 million. Net loss in the current period of $11.4 million represents a decrease of $12.3 million, as compared with net income of $0.9 million in the prior period. Adjustments to reconcile net income to net cash used in operating activities of $14.6 million in the current period increased by $1.2 million, as compared with $13.4 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 consumed cash of $3.8 million in the current period, as compared with consuming cash of $4.5 million in the prior period, primarily due to ordinary-course changes in working capital.    Cash flows used in investing activities . For the six months ended June 30, 2021 and 2020, net cash used in investing activities was $1.6 million and $2.7 million, respectively. The decrease was mainly due to the Winopoly business acquisition that occurred in the prior year.   Cash flows provided by (used in) financing activities. Net cash provided by financing activities for the six months ended June 30, 2021 was $6.3 million and net cash used in financing activities was $5.6 million for the prior period. The increase of  $11.9  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 $39.1 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 $0.3 million.   As of June 30, 2021, we had noncancelable operating lease commitments of $9.6 million and long-term debt with $50.0 million principal balance. For the six months ended June 30, 2021, we funded our operations using available cash.   As of June 30, 2021, we had cash, cash equivalents and restricted cash of approximately $26.6 million, an increase of $4.0 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.   We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business. We are continuing to identify and prioritize additional technologies, which we may wish to develop internally or through licensing or acquisition from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to shareholders.   On 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 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 June 30, 2021, the Credit Agreement has an outstanding principal balance of $48.8 million and matures on March 31, 2026. Principal amortization of the Credit Agreement is $1.3 million per quarter, which commenced with the fiscal quarter ended June 30, 2021.   Borrowings under the Credit Agreement bear interest at a rate per annum equal to an applicable margin, plus, at the Company's option, either a base rate or a 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 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 June 30, 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.    22 Table of Contents   Off-Balance Sheet Arrangements   As of June 30, 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   Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We periodically evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation 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, 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. There have been no additional material changes to Critical Accounting Policies and Estimates disclosed in the 2020 Form 10-K.   Recently issued accounting and adopted standards   See Note 1(b), " Recently issued and adopted accounting standards," in the Notes to Consolidated Financial Statements.   Item 3. Quantitative and Qualitative Disclosures About Market Risk.   As a smaller reporting company, we are not required to provide the information required by this Item.