What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-09 · 127 added, 109 removed, 176 unchanged (57% of the section changed)

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Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made.

These forward-looking statements can be identified by the use of terminology such as “anticipate, ”

“believe," "estimate," "expect," "intend," "project," "will," 

or the negative thereof or other variations thereon or comparable terminology.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements.

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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:

Third Quarter Financial Summary

Three months ended September 30, 2021 compared to three months ended September 30, 2020:

Revenue increased 10% to $85.9 million, from $78.3 million.

Net loss was $2.5 million, or $0.03 per share, compared to net income of $1.2 million or $0.01 per share.

Gross profit (exclusive of depreciation and amortization) of $22.1 million, a decrease of 13% over Q3 2020 and representing 25.7% of revenue.

Media margin decreased 19% to $24.2 million, from $29.7 million, representing 28.1% of revenue.

Adjusted EBITDA decreased 45% to $6.4 million, based on net loss of $2.5 million, from $11.6 million, based on net income of $1.2 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.

Adjusted net income was $2.8 million, or $0.03 per share, compared to adjusted net income of $6.3 million, or $0.08 per share.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020:

Revenue was relatively similar at $229.4 million, as compared with $228.7 million.

Net loss was $13.9 million, or $0.17 per share, compared to net income of $2.0 million or $0.03 per share.

Gross profit (exclusive of depreciation and amortization) decreased 17% to $58.0 million, from $70.3 million, representing 25.3% of revenue.

Media margin decreased 12% to $69.2 million, from $78.4 million, representing 30.2% of revenue.

Adjusted EBITDA decreased 57% to $12.9 million, based on net loss of $13.9 million, from $30.0 million, based on net income of $2.0 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.

Adjusted net income was $1.2 million, or $0.01 per share, compared to adjusted net income of $14.3 million, or $0.18 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

Traffic Quality Initiative and Increased Monetization

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.

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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.

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.

Our Traffic Quality Initiative 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 we continue to make smaller adjustments as appropriate.

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. We are also pursuing various revenue initiatives that enable us to grow revenue with existing user traffic volume. In the third quarter of 2021, we increased the monetization of consumer traffic through multiple channels, including growth in the Winopoly business (d/b/a Fluent Sales Solutions), strong client demand in the staffing and recruitment vertical, and an internally-developed email capability which enables us to re-engage consumers who have registered on our owned media properties. These new and/or improved revenue streams offset reductions in traffic volume year-over-year from our Traffic Quality Initiative.

Through these initiatives, our business has become less dependent on traffic volume to generate revenue growth.

These strategies yielded lower margins initially, with the intent to optimize spend for improved profitability in future periods.

In the third quarter of 2021, we both increased our spend and improved profitability with major digital media platforms compared to the second quarter, though profitability was still below our historical levels achieved through affiliate marketing.

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.

Volatility of affiliate supply sources, 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 growing our traffic under our evolving quality standards challenging during 2021 and may continue to do so in the future.

Seasonality and Cyclicality

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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.

During the second quarter of 2021, we opened our headquarters to employees that meet health protocols and voluntarily choose to work in the office.

We continue to monitor evolving trends and guidance for COVID-19 safety protocols and our office remains open for those who voluntarily choose to work there.

In addition, in light of the historically dynamic and competitive market for hiring and retaining employees, we have monitored evolving trends in flexible workplace choices for employees.

In light of the forgoing factors, we anticipate maintaining a flexible approach to workplace choices in the near term. 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.

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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 defined as that portion of gross profit (exclusive of depreciation and amortization) reflecting variable costs paid for media and related expenses and excluding non-media cost of revenue.

Gross profit (exclusive of depreciation and amortization) represents revenue minus cost of revenue (exclusive of depreciation and amortization).

Media margin is also presented as percentage of revenue.

Adjusted EBITDA is defined as net (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.

(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 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,

Net (loss) income

Income tax benefit

Interest expense, net

Depreciation and amortization

Loss on early extinguishment of debt

Goodwill impairment

Write-off of intangible assets

General and administrative

Product development

Sales and marketing

Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization), which we believe is the most directly comparable GAAP measure.

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue (exclusive of depreciation and amortization)

Gross Profit (exclusive of depreciation and amortization)

Gross Profit (exclusive of depreciation and amortization) % of revenue

Non-media cost of revenue (1)

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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,

Three Months Ended September 30,

Nine Months Ended September 30,

Net (loss) income

Income tax benefit

Income tax (benefit) expense

Interest expense, net

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Adjusted EBITDA

Included in the three and nine months ended September 30, 2021 is a net expense of $2,796 related to the Full Winopoly Acquisition.

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,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands, except share data)

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Certain litigation and other related costs

Adjusted net (loss) income

Adjusted net (loss) income 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 and adjusted net income per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors.

Included in the three and nine months ended September 30, 2021 is a net expense of $2,796 related to the Full Winopoly Acquisition.

We present media margin, media margin as a percentage of revenue, 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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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.

Media margin, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures with certain limitations regarding their usefulness.

They do not reflect our financial results in accordance with GAAP, as they do not include the impact of certain expenses that are reflected in our condensed consolidated statements of operations.

Accordingly, these metrics are not indicative of our overall results or indicators of past or future financial performance.

Further, they are not financial measures of profitability and are neither intended to be used as a proxy for the profitability of our business nor to imply profitability. The way we measure media margin, adjusted EBITDA and adjusted net income 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 June 30, 2021 compared to three months ended June 30, 2020

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.

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Revenue increased $7.6 million, or 10%, to $85.9 million for the three months ended September 30, 2021, from $78.3 million for the three months ended September 30, 2020. The increase was largely attributable to growth in the Winopoly business (d/b/a Fluent Sales Solutions), which considerably expanded its operating scale year-over-year through increased use of contracted call center personnel.

This expanded capacity enabled higher volumes of outbound consumer contacts, including consumers who have registered on Fluent's owned media properties, as well as consumer leads sourced from third parties.

The increase in revenue also reflects strong client demand in the staffing and recruitment vertical, resulting in improvements in both pricing and volume in the 2021 quarter compared to the 2020 quarter.

The increase in revenue also reflected an internally-developed email capability which enables us to re-engage consumers who have already registered on our owned media properties.

This revenue stream, which comes at high margins, was nascent in the second quarter of 2021 and not existent in the third quarter of 2020.

Each of the foregoing factors has served to increase monetization of consumer traffic, which has more than offset reductions in traffic volume year-over-year, stemming from our Traffic Quality Initiative.

Through these initiatives, our business has become less dependent on traffic volume to generate revenue growth.

In tandem with the forgoing, we continued to source higher volumes of traffic from major digital media platforms in the third quarter, with year-over-year reductions in lower-quality affiliate traffic.

These trends are anticipated to continue into the fourth quarter of 2021 as we continue to test and scale media channels, strategies and partnerships.

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.

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 and subsequently recovered and expanded to varying degrees since that time.

Demand from certain advertisers in other verticals, such as streaming services and mobile gaming, increased during the pandemic and has 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 $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.

Cost of revenue increased $11.0 million, or 21%, to $63.8 million for the three months ended September 30, 2021, from $52.8 million for the three months ended September 30, 2020.

The total cost of revenue as a percentage of revenue increased to 74% for the three months ended September 30, 2021, compared to 67% 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.

In the third quarter of 2021, we continued some of the strategies tested in the second quarter of 2021, involving increased media spend with major digital media platforms and revised bidding strategies for affiliate traffic. These strategies yielded lower margins initially, with the intent to optimize spend for improved profitability in future periods.

In the third quarter 2021, we both increased our spend and improved profitability with our major digital media platforms compared to the second quarter, though profitability was still below our historical levels achieved through affiliate marketing. 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.

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.

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.

Sales and marketing expenses increased $0.1 million, or 4%, to $3.0 million for the three months ended September 30, 2021, from $2.9 million for the three months ended September 30, 2020. For the three months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $2.7 million and $2.5 million, non-cash share-based compensation expense of $0.2 and $0.2 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.

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Product development increased $1.1, or 33%, 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.

$4.5 million for the three months ended September 30, 2021, from $3.4 million for the three months ended September 30, 2020. 

F or the three months ended September 30, 2021 and 2020, the amounts consisted mainly of salaries and benefits of $2.8 million and $2.5 million, acquisition-related costs of $0.6 million and $0.0 million, professional fees of $0.5 million and $0.2 million, software license and maintenance costs of $0.2 million and $0.3 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 along with acquisition-related costs in connection with the Full Winopoly Acquisition described below under the heading "Liquidity and Capital Resources."

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. 

General and administrative expenses increased $0.5 million, or 4%, to $13.3 million for the three months ended September 30, 2021, from $12.8 million for the three months ended September 30, 2020.

For the three months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $5.1 million and $4.3 million , acquisition-related costs of $2.3 million and $0.1 million, professional fees of $1.4  

million and $1.4 million, software license and maintenance costs of $1.2 million and $0.5 million, office overhead of $1.1  

million and $1.0 million, non-cash share-based compensation expense of  $0.8 

million and $0.7  million, accrued compensation expense for Put/Call Consideration from the Initial Winopoly Acquis ition described below under the heading "Liquidity and Capital Resources" of $0.6 million and $0.7 milli on (see Note 11, 

Business acquisition, in the Notes to Consolidated Financial Statements), and certain litigation and related costs of $0.3 million and $2.7 million , respectively.

The increase was mainly the result of increased acquisition-related costs in connection with the Full Winopoly Acquisition, employee salaries and benefits and software costs, largely 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. 

Depreciation and amortization expenses decreased $0.7 million, or 18%, to $3.2 million for the three months ended September 30, 2021, from $3.9 million for the three months ended September 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.

During the three months ended September 30, 2021, we recognized $0.1 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.

Interest expense, net, decreased $0.9 million, or 69%, to $0.4 million for the three months ended September 30, 2021, from $1.3 million for the three months ended September 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.

For the three months ended September 30, 2021, net loss before income taxes was $2.5 million, compared to net income before income taxes of $1.2 million for the three months ended September 30, 2020.

The decrease of $3.7 million was primarily due to an increase in cost of revenue of $11.0 million, an increase in general and administrative expense of $0.5 million, an increase in product development of 

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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.

Income tax expense was $0.0 million and $0.1 million, respectively, for the three months ended September 30, 2021 and 2020, respectively.

As of September 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.

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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 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.

Net loss of $2.5 million and net income of $1.2 million were recognized for the three months ended September 30, 2021 and 2020, respectively, as a result of the foregoing.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Revenue increased $0.7 million, or less than 0.5%, to $229.4 million for the nine months ended September 30, 2021, from $228.7 million for the nine months ended September 30, 2020.

The revenue was relatively similar due the growth in the Winopoly business (d/b/a Fluent Sales Solutions), strengthened client demand in the staffing and recruitment vertical, and the development of email re-engagement capabilities described above, largely offset by the reduced volumes of affiliate traffic, stemming from our Traffic Quality Initiative.

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.

Cost of revenue increased $13.0 million, or 8%, to $171.4 million for the nine months ended September 30, 2021, from $158.4 million for the nine months ended September 30, 2020. 

The total cost of revenue as a percentage of revenue increased to 75% for the nine months ended September 30, 2021, compared to 69% 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. 

Sales and marketing expenses increased $0.4 million, or 4%, to $9.0 million for the nine months ended September 30, 2021, from $8.6 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $7.8 million and $7.0 million, non-cash share-based compensation expense of $0.6 and $0.7 million, and advertising costs of $0.4 and $0.6 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.

Product development increased $2.1, or 23%, to $11.3  million for the nine months ended September 30, 2021, from $9.2 million for the nine months ended September 30, 2020. 

F or the nine months ended September 30, 2021 and 2020, the amounts consisted mainly of salaries and benefits of $7.8 million and $6.9 million, professional fees of $1.0 million and $0.4 million, software license and maintenance costs of $0.9 million and $0.7 million, non-cash share-based compensation expense of $0.7 million and $0.8 million, and acquisition-related costs of $0.6 million and $0.0 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] along with the acquisition-related costs in connection with the Full Winopoly Acquisition.

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, 

General and administrative expenses increased $2.6 million, or 8%, to $36.5 million for the nine months ended September 30, 2021, from $33.9 million for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021 and 2020, the amounts consisted mainly of employee salaries and benefits of $15.0 million and $13.0 million , professional fees of $4.1  

million and $3.9 million, office overhead of 

million and $3.0 million , accrued compensation expense for Put/Call Consideration from the Initial Winopoly Acquis ition of $3.2 million and $1.2 milli on (see Note 11, 

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

office overhead of 

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. 

acquisition-related costs of $2.8 million and $0.2 million, IT and website related costs of $2.7 million and $1.2 million, 

non-cash share-based compensation expense of  $2.3 million and 

$3.4  million,  and 

certain litigation and related costs of $1.3 million and $4.7 million , respectively.

The increase was mainly the result of acquisition-related costs in connection with the Full Winopoly Acquisition, accrued compensation expense for the Initial Winopoly Put/Call Consideration, increased employee salaries and benefits, and IT and IT website costs, partially offset by a reduced litigation and other costs and a decline in non-cash share-based compensation expense. 

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. 

Depreciation and amortization expenses decreased $1.6 million, or 14%, to $9.9 million for the nine months ended September 30, 2021, from $11.5 million for the nine months ended September 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.

During the nine months ended September 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.

During the nine months ended September 30, 2021, we recognized $0.3 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.

Interest expense, net, decreased $2.3 million, or 56%, to $1.8 million for the nine months ended September 30, 2021, from $4.2 million for the nine months ended September 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. 

During the nine months ended September 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. 

For the nine months ended September 30, 2021, loss before income taxes was $13.9 million, compared to net income before income taxes of $2.1 million for the nine months ended September 30, 2020.

The decrease of $16.0 million was primarily due to an increase in cost of revenue of $13.0 million, the loss on early extinguishment of debt recorded in the first quarter of 2021 of $3.0 million, an increase in general and administrative expense of $2.6 million, an increase in product development of $2.1 million, and an increase in sales and marketing of $0.4 million, partially offset by a decrease in interest expense of $2.3 million, a decrease in depreciation and amortization expense of $1.6 million, and an increase in revenue of $0.7 million, as discussed above. 

Income taxes.

There was a $1 and $0 income tax benefit for the six months ended June 30, 2021 and 2020, respectively.

There was a $0.0 million income tax benefit and $0.1 million income tax expense for the nine months ended September 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.

Net loss of $13.9 million and net income of $2.0 million were recognized for the nine months ended September 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. 

For the nine months ended September 30, 2021, net cash used in operating activities was $6.9 million, as compared with $12.9 million of net cash provided by operating activities in the nine months ended September 30, 2020. Net loss in the current period of $13.9 million represents a decrease of $15.9 million, as compared with net income of $2.0 million in the prior period. Adjustments to reconcile net income to net cash used in operating activities of $19.1 million in the current period increased by $0.6 million, as compared with $19.7 million in the prior period, primarily due to the inclusion of a non-cash loss on early extinguishment of debt and an accrual for Put/Call Consideration in the current period through September 1, 2021, partially offset by reductions in share-based compensation expense and depreciation and amortization. Changes in assets and liabilities consumed cash of $12.2 million in the current period, as compared with consuming cash of $8.8 million in the prior period, primarily due to ordinary-course changes in working capital, largely involving the timing of receipt of amounts owing from clients and disbursements of amounts payable to vendors. 

Cash 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.

For the nine months ended September 30, 2021 and 2020, net cash used in investing activities was $2.3 million and $3.4 million, respectively.

The decrease was mainly due to the Initial Winopoly Acquisition that occurred in the prior year, with the consideration for the Full Winopoly Acquisition reflected in product development and general and administrative expenses as disclosed above.

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.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $3.7 million and net cash used in financing activities was $12.7 million for the prior period.

The increase of  $16.4 

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 $34.6 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 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.

As of September 30, 2021, we had noncancelable operating lease commitments of $9.1 million and long-term debt with $47.5 million principal balance.

For the nine months ended September 30, 2021, we funded our operations using available cash.

As of September 30, 2021, we had cash, cash equivalents and restricted cash of approximately $17.1 million, a decrease of $5.5 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 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, 

On April 1, 2020, we acquired a 50% membership interest in Winopoly, LLC (the "Initial Winopoly Acquisition"), 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.

On September 1, 2021, we acquired the remaining 50% membership interest in Winopoly, LLC ("the Full Winopoly Acquisition") in a negotiated transaction.

The consideration was $7.8 million, which consisted of $3.4 million of cash at closing, $2.0 million of cash due on January 31, 2022, and $0.5 million of deferred payments due at each of the first and second anniversaries of the closing.

We also issued 500,000 shares of fully-vested stock under the Fluent, Inc.

2018 Stock Incentive Plan to certain Winopoly personnel valued at $1.4 million. 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.

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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.

As of September 30, 2021, the Credit Agreement has an outstanding principal balance of $47.5 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.

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's consolidated leverage ratio. The anticipated opening interest rate of the New Credit Facility is 2.50% (LIBOR + 2.25%). 

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

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 September 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.

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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.

As of September 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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis