Fluent, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.     You should read the following discussion in conjunction with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. In addition to historical information, this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, the outcome of litigation, or prospects. 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. These forward-looking statements can be identified by the use of terminology such as “anticipate, ” “believe," "estimate," "expect," "intend," "project," "will,"  or the negative thereof or other variations thereon or comparable terminology. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include 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, 2021 filed on March 9, 2022 ("2021 Form 10-K") including without limitation, those discussed in Item 1A. "Risk Factors." in Part I. of the 2021 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 includes 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 apply our proprietary direct marketing technologies to engage them with surveys and other experiences, through which we learn about their lifestyles, preferences and purchasing histories. Based on the insights gleaned, we serve targeted, relevant offers to them on behalf of our clients. As new users register and engage on our sites and existing registrants re-engage, we believe the enrichment of our database through the new registrations or re-engagements 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 or SMS text messaging. We leverage this data in our performance offerings primarily to serve advertisements that we believe will be relevant to our registered 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.   21 Table of Contents   Second Quarter Financial Summary   Three months ended June 30, 2022, compared to three months ended June 30, 2021: • Revenue increased 34% to $98.4 million, compared to $73.4 million. • Net loss was $56.9 million, or $0.70 per share, compared to net loss of $5.2 million or $0.06 per share. • Gross profit (exclusive of depreciation and amortization) was $28.3 million, an increase of 69% as compared to the three months ended June 30, 2021, and representing 29% of revenue for the three months ended June 30, 2022 • Media margin increased 60% to $32.3 million, compared to $20.1 million, representing 32.8% of revenue for the three months ended June 30, 2022 • Adjusted EBITDA increased to $9.4 million representing 9.6% of revenue, based on net loss of $56.9 million, compared to $1.9 million, based on net loss of $5.2 million. • Adjusted net income was $0.6 million, or $0.01 per share, compared to adjusted net loss of $1.9 million, or $0.02 per share.   Six months ended June 30, 2022, compared to six months ended June 30, 2021: • Revenue increased 31% to $187.4 million, compared to $143.5 million. • Net loss was $59.0 million, or $0.73 per share, compared to net loss of $11.4 million or $0.14 per share. • Gross profit (exclusive of depreciation and amortization) was $49.8 million, an increase of 39% as compared to the six months ended June 30, 2021, and representing 27% of revenue for the six months ended June 30, 2022 • Media margin increased 29% to $58.3 million, compared to $45.0 million, representing 31.1% of revenue for the six months ended June 30, 2022 • Adjusted EBITDA increased to $14.2 million, representing 7.6% of revenue, based on net loss of $59.0 million, compared to $6.6 million, based on net loss of $11.4 million. • Adjusted net income was $1.6 million, or $0.02 per share, compared to adjusted net loss of $1.6 million, or $0.02 per share.   Media margin, adjusted EBITDA and adjusted net income (loss) are non-GAAP financial measures.  See "Definitions, Reconciliations and Uses of Non-GAAP Financial Measures" below.   Trends Affecting our Business   Development, Acquisition and Retention of High-Quality Targeted Media Traffic   Our business depends on identifying and accessing media sources that are of high quality and on our ability to attract targeted users to our media properties. As our business has grown, we have attracted larger and more sophisticated clients to our platform. To further increase our value proposition to clients and to fortify our leadership position in relation to the evolving regulatory landscape of our industry, we commenced a traffic quality initiative (the "Traffic Quality Initiative") in 2020. Our Traffic Quality Initiative curtailed the volume of lower quality affiliate traffic that we source, beginning in the fourth quarter of 2020 as we took a strategic course in building high quality traffic. Our strategy of focusing on high quality targeted media traffic continued into the second quarter of 2022.   We believe that significant value can be created by improving the quality of traffic we source to our media properties, through increased user participation rates on our sites, leading to higher conversion rates, resulting in increased monetization, and ultimately increasing revenue and media margin. Media margin, a non-GAAP measure, is the portion of gross profit (exclusive of depreciation and amortization) reflecting variable costs paid for media and related expenses and excluding non-media cost of revenue. We have also been pursuing strategic initiatives that enable us to grow revenue with existing user traffic volume, while attracting new users to our media properties. During the second quarter of 2022, we continued to see improved monetization of consumer traffic through improved customer relationship management, new streams of traffic and internal capabilities that allow us to re-engage consumers who have registered on our owned media properties. Through these initiatives, our business has become less dependent on traditional, low-quality sources of traffic volume to generate revenue growth.   In the first six months of 2022, we increased our spend with major digital media platforms and revised our bidding strategies for affiliate traffic. While these strategies yielded lower margins initially and below our historical levels achieved through affiliate marketing, we better optimized our spend for improved profitability in the second quarter 2022 and intend to continue to do so in future periods. The mix and profitability of our media channels, strategies and partners is likely to continue to be dynamic and reflect evolving market dynamics as well as the impact of our Traffic Quality Initiative. 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 made the process of growing our traffic under our evolving quality standards challenging during 2021. As we evaluate and scale new media channels, strategies, and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability.   Seasonality and Cyclicality   Our results are subject to fluctuations as a result of seasonality and cyclicality in our and our clients’ businesses. Other factors affecting our business may include macroeconomic conditions that impact the digital advertising industry, the various client verticals we serve, and general market conditions.   22 Table of Contents   COVID-19    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.   On March 13, 2020, we implemented a company-wide work-from-home policy. On April 1, 2022, we implemented a hybrid approach to have our employees in the office two days a week, but only if employees are comfortable to do so. 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. The same hybrid approach continued into the second quarter of 2022.   Please see Item 1A. Risk Factors in the Form 10-K for the year ended December 31, 2021 , for more information or 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 that portion of gross profit (exclusive of depreciation and amortization) reflecting the variable costs paid for media and related expenses and excluding non-media cost of revenue. Gross profit (exclusive of depreciation and amortization) represents revenue minus cost of revenue (exclusive of depreciation and amortization). Media margin is also presented as percentage of revenue.   Adjusted EBITDA is defined as net income (loss) excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) share-based compensation expense, (5) loss on early extinguishment of debt, (6) accrued compensation expense for the 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 (loss) is defined as net income (loss) excluding (1) share-based compensation expense, (2) loss on early extinguishment of debt, (3) accrued compensation expense for the 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 (loss) is also presented on a per share (basic and diluted) basis.   Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization) for the three and six months ended June 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure.       Three Months Ended June 30,     Six Months Ended June 30,       2022     2021     2022     2021   Revenue   $ 98,361     $ 73,378     $ 187,424     $ 143,548   Less: Cost of revenue (exclusive of depreciation and amortization)     70,026       56,605       137,589       107,595   Gross profit (exclusive of depreciation and amortization)   $ 28,335     $ 16,773     $ 49,835     $ 35,953   Gross profit (exclusive of depreciation and amortization) % of revenue     29 %     23 %     27 %     25 % Non-media cost of revenue (1)     3,974       3,363       8,423       9,053   Media margin   $ 32,309     $ 20,136     $ 58,258     $ 45,006   Media margin % of revenue     32.8 %     27.4 %     31.1 %     31.4 %   (1) Represents the portion of cost of revenue (exclusive of depreciation and amortization) not attributable to variable costs paid for media and related expenses.   23 Table of Contents   Below is a reconciliation of adjusted EBITDA from net loss for the three and six months ended June 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure:       Three Months Ended June 30,     Six Months Ended June 30,       2022     2021     2022     2021   Net loss   $ (56,944 )   $ (5,179 )   $ (58,957 )   $ (11,437 ) Income tax expense (benefit)     5,122       —       5,122       (1 ) Interest expense, net     430       427       814       1,435   Depreciation and amortization     3,332       3,366       6,639       6,739   Share-based compensation expense     863       1,201       1,851       2,432   Loss on early extinguishment of debt     —       —       —       2,964   Accrued compensation expense for Put/Call Consideration     —       881       —       2,627   Goodwill impairment     55,400       —       55,400       —   Write-off of intangible assets     —       199       128       199   Loss on disposal of property and equipment     21       —       21       —   Acquisition-related costs (1)     579       500       1,137       500   Restructuring and other severance costs     38       97       38       97   Certain litigation and other related costs     596       359       1,998       1,027   Adjusted EBITDA   $ 9,437     $ 1,851     $ 14,191     $ 6,582     (1) Includes compensation expense related to non-competition agreements entered into as a result of acquisitions (See Note 11. Business acquisition, in the Notes to the Consolidated Financial Statements)   Below is a reconciliation of adjusted net income (loss) and adjusted net income (loss) per share from net loss for the three and six months ended June 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure.       Three Months Ended June 30,     Six Months Ended June 30,   (In thousands, except share data)   2022     2021     2022     2021   Net loss   $ (56,944 )   $ (5,179 )   $ (58,957 )   $ (11,437 ) Share-based compensation expense     863       1,201       1,851       2,432   Loss on early extinguishment of debt     —       —       —       2,964   Accrued compensation expense for Put/Call Consideration     —       881       —       2,627   Goodwill impairment     55,400       —       55,400       —   Write-off of intangible assets     —       199       128       199   Loss on disposal of property and equipment     21       —       21       —   Acquisition-related costs (1)     579       500       1,137       500   Restructuring and other severance costs     38       97       38       97   Certain litigation and other related costs     596       359       1,998       1,027   Adjusted net income (loss)   $ 553     $ (1,942 )   $ 1,616     $ (1,591 ) Adjusted net income (loss) per share:                                 Basic   $ 0.01     $ (0.02 )   $ 0.02     $ (0.02 ) Diluted   $ 0.01     $ (0.02 )   $ 0.02     $ (0.02 ) Weighted average number of shares outstanding:                                 Basic     81,493,821       79,962,275       81,193,107       79,560,643   Diluted     81,493,821       79,962,275       81,193,107       79,560,643     (1) Includes compensation expense related to non-competition agreements entered into as part of an acquisition (See Note 11. Business acquisition,  in the Notes to the Consolidated Financial Statements).   We present media margin, as a percentage of revenue, adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors. More specifically:   Media margin, as defined above, is a measure of the efficiency of the Company’s operating model. We use media margin and the related measure of media margin as a percentage of revenue as primary metrics to measure the financial return on our media and related costs, specifically to measure the degree by which the revenue generated from our digital marketing services exceeds the cost to attract the consumers to whom offers are made through our services. We use media margin extensively to manage our operating performance, including evaluating operational performance against budgeted media margin and understanding the efficiency of our media and related expenditures. We also use media margin for performance evaluations and compensation decisions regarding certain personnel.   24 Table of Contents   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 New York State Tax Department, New York Attorney General and Federal Trade Commission matters as described below (See Part II, Item 1 — Legal Proceedings). We consider items one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. There were no adjustments for one-time items in the periods presented by this Quarterly Report on Form 10-Q.   Adjusted net income (loss), as defined above, and the related measure of adjusted net   income (loss)   per share exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income (loss) affords investors a different view of the overall financial performance as compared to adjusted EBITDA and the GAAP measure of net income (loss).   Media margin, adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per share are non-GAAP financial measures with certain limitations regarding their usefulness. They do not reflect our financial results in accordance with GAAP, as they do not include the impact of certain expenses that are reflected in our consolidated statements of operations. Accordingly, these metrics are not indicative of our overall results or indicators of past or future financial performance. Further, they are not financial measures of profitability and are neither intended to be used as a proxy for the profitability of our business nor to imply profitability. The way we measure media margin, adjusted EBITDA and adjusted net income (loss) may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements.   Results of Operations   Three months ended June 30, 2022 compared to three months ended June 30, 2021   Revenue. Revenue increased $25.0 million, or 34%, to $98.4 million for the three months ended June 30, 2022, compared to $73.4 million for the three months ended June 30, 2021. The increase was largely attributable to growth in the Rewards business, driven by expanding media footprint in both U.S and international markets, increased client demand in the Fluent Sales Solution business unit, and expanded customer relationship management ("CRM") capabilities which have enabled us to re-engage with users who have already registered on our owned media properties.    Each of the foregoing factors has served to increase monetization of consumer traffic, which has partially 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. We also continued to source higher volumes of traffic from major digital media platforms in the second quarter of 2022, with year-over-year reductions in lower-quality affiliate traffic. The growth in Q2 2022 also reflects some of our Q3 2022 strategic initiatives that began earlier than planned. Moving forward, we will continue to assess the strategic relevancy of these initiatives to our core, while we determine where we make our long term bets. These trends are anticipated to continue in the near future as we test and scale media channels, strategies and partnerships.    Cost of revenue (exclusive of depreciation and amortization) . Cost of revenue increased $13.4 million, or 24%, to $70.0 million for the three months ended June 30, 2022, compared to $56.6 million for the three months ended June 30, 2021. 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 advertisers' offers.   25 Table of Contents   The total cost of revenue as a percentage of revenue decreased to 71% for the three months ended June 30, 2022, compared to 77% for the three months ended June 30, 2021. In the normal course of executing paid media campaigns to source consumer traffic, we regularly evaluate new channels, strategies and partners, in an effort to identify actionable opportunities which can then be optimized over time. Traffic acquisition costs incurred with the major digital media platforms from which we sourced increased traffic volumes have historically been higher than affiliate traffic sources.   In the second quarter of 2022, we continued to increase our spend and improve profitability with our major digital media platforms compared to the same period last year. The growth also reflects some of our Q3 2022 strategic and test and learn initiatives that began earlier than planned. Moving forward, we will continue to assess the strategic relevancy of these initiatives to our core, while we determine where we make our long term bets. 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 evaluate and scale new media channels, strategies and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability. We believe our 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 $1.5 million, or 49%, to $4.5 million for the three months ended June 30, 2022, compared to $3.0 million for the three months ended June 30, 2021, due to increase in business travel, events and in-person meetings.   For the three months ended June 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $3.8 million and $2.6 million, advertising costs of $0.3 and $0.1 million, and non-cash share-based compensation expenses of $0.1 and $0.2 million respectively. As business travel and in-person meetings and events have resumed, 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 expense increased $1.4 million, or 40%, to  $4.8 million for the three months ended June 30, 2022, compared to $3.4 million for the three months ended June 30, 2021.  F or the three months ended June 30, 2022 and 2021, the amounts consisted mainly of salaries and benefits of $3.5 million and $2.4 million, professional fees of $0.7 million and $0.3 million, software license and maintenance costs of $0.4 million and $0.3 million, and non-cash share-based compensation expense of $0.1 million and $0.2 million, respectively. The increase in product development expenses reflect investments in our technology and analytics platform, as well as 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 by $0.2 million, or 1%, to $11.7 million for the three months ended June 30, 2022, compared to $11.5 million for the three months ended June 30, 2021. For the three months ended June 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $6.0 million and $5.0 million , professional fees of $1.3   million and $1.2 million,  office overhead of $1.2  million and $1.1 million, certain litigation and related costs of $0.6 million and $0.4 million , non-cash share-based compensation expense of  $0.6  million and $0.8 million, software license and maintenance costs of $0.6 million and $0.9 million, acquisition-related costs of $0.6 million and $0.5 million, and  accrued compensation expense for the Put/Call Consideration from the Initial Winopoly Acquis ition described below under the heading "Liquidity and Capital Resources" of $0.0 million and $0.9 milli on (see Note 11,  Business acquisition, in the Notes to Consolidated Financial Statements), respectively. The increase was mainly the result of   continued investments in the business, along with increased employee salaries and benefits, certain litigation and related costs, partially offset by the decrease in accrued compensation expense for the Winopoly Put/Call Consideration .   Depreciation and amortization.   Depreciation and amortization expenses decreased $0.01 million, or 1%, to $3.3 million for the three months ended June 30, 2022, compared to $3.4 million for the three months ended June 30, 2021.    Write-off of intangible assets. For the three months ended June 30, 2022, the Company recognized an impairment loss related to goodwill of $55.4 million compared to $0.2 million recognized for the write off of intangible assets related to software developed for internal use for three months ended June 30, 2021.   Interest expense, net. Interest expense, remained flat at $0.4 million for the three months ended June 30, 2022 and 2021.   26 Table of Contents   Net loss before income taxes . For the three months ended June 30, 2022, net loss before income taxes was $51.8 million, compared to net loss before income taxes of $5.2 million for the three months ended June 30, 2021. The increase in net loss before income taxes of $46.6 million was primarily due to the non-cash impairment charge of $55.4 million, an increase in cost of revenue of $13.4 million, an increase in sales and marketing of $1.5 million, and an increase in product development of  $1.4  million, partially offset by an increase in revenue of $25.0 million, as discussed above.   Income tax expense. For the three months ended June 30, 2022, the Company had income tax expense of $5.1 million, with no corresponding impact for the three months ended June 30, 2021 .   As of June 30, 2022 and 2021, 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 loss, estimated future taxable loss, exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and consideration of available tax planning strategies, we believe it is unlikely 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 . Net loss of $56.9 million and net loss of $5.2 million were recognized for the three months ended June 30, 2022 and 2021, respectively, as a result of the foregoing.   Six months ended June 30, 2022 compared to six months ended June 30, 2021   Revenue. Revenue increased $43.9 million, or 31%, to $187.4 million for the six months ended June 30, 2022, compared to $143.5 million for the six months ended June 30, 2021. The increase was largely attributable to growth in the Rewards business, driven by expanding media footprint in both U.S and international markets, increased client demand in the Fluent Sales Solution business unit, and expanded CRM capabilities which have enabled us to re-engage with users who have already registered on our owned media properties.   Each of the foregoing factors has served to increase monetization of consumer traffic, which has partially 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. We also sourced higher volumes of traffic from major digital media platforms in the first six months of 2022 compared to the first six months of 2021, with year-over-year reductions in lower-quality affiliate traffic. These trends are anticipated to continue in the near future as we test and scale media channels, strategies and partnerships.   Cost of revenue (exclusive of depreciation and amortization) . Cost of revenue increased $30.0 million, or 28%, to $137.6 million for the six months ended June 30, 2022, compared to $107.6 million for the six months ended June 30, 2021.    27 Table of Contents   The total cost of revenue as a percentage of revenue decreased to 73% for the six months ended June 30, 2022, compared to 75% for the six months ended June 30, 2021.    Sales and marketing. Sales and marketing expenses increased $2.4 million, or 40%, to $8.3 million for the six months ended June 30, 2022, compared to $6.0 million for the six months ended June 30, 2021, due to increase in business travel, events and in-person meetings. For the six months ended June 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $7.1 million and $5.1 million, advertising costs of $0.6 and $0.3 million, and non-cash share-based compensation expense of $0.3 and $0.4 million respectively.   Product development.   Product development expense increased $2.5 million, or 36%, to $9.4  million for the six months ended June 30, 2022, compared to $6.9 million for the six months ended June 30, 2021.  F or the six months ended June 30, 2022 and 2021, the amounts consisted mainly of salaries and benefits of $6.8 million and $5.0 million, professional fees of $1.4 million and $0.5 million, software license and maintenance costs of $0.7 million and $0.7 million, and non-cash share-based compensation expense of $0.3 million and $0.5 million, respectively. The increase in product development expenses reflect investments in our technology and analytics platform, as well as the development of new app-based media properties, expanding beyond our traditional focus on web-based media properties.   General and administrative.   General and administrative expenses decreased by $0.3 million, or 1%, to $23.0 million for the six months ended June 30, 2022, compared to $23.2 million for the six months ended June 30, 2021. For the six months ended June 30, 2022 and 2021, the amounts consisted mainly of employee salaries and benefits of $10.9 million and $9.9 million , professional fees of $2.7   million and $2.7 million,  office overhead of $2.3  million and $2.2 million, certain litigation and related costs of $2.0 million and $1.0 million , non-cash share-based compensation expense of  $1.3  million and $1.6 million, software license and maintenance costs of $1.2 million and $1.5 million, acquisition-related costs of $1.1 million and $0.5 million, and  accrued compensation expense for the Put/Call Consideration from the Initial Winopoly Acquis ition described below under the heading "Liquidity and Capital Resources" of $0.0 million and $2.6 milli on (see Note 11,  Business acquisition, in the Notes to Consolidated Financial Statements), respectively. The decrease was mainly the result of the Put/Call Consideration related to the Initial Winopoly Acquisition (as defined below) and software license fees, offset by increased employee salaries and benefits, litigation and related costs due to the New York State Tax Department settlement and the acquisition-related costs in connection with the True North Acquisition and the Full Winopoly Acquisition (as defined below).   Depreciation and amortization.   Depreciation and amortization expenses decreased $0.1 million, or 1%, to $6.6 million for the six months ended June 30, 2022, compared to $6.7 million for the six months ended June 30, 2021.    Write-off of intangible assets. During the six months ended June 30, 2022, the Company recognized an impairment loss related to goodwill of $55.4 million, compared to $0.2 million recognized for the six months ended June 30, 2021 for the write off of intangible assets related to software developed for internal use.   Interest expense, net. Interest expense, net, decreased $0.6 million, or 43%, to $0.8 million for the six months ended June 30, 2022, from $1.4 million for the six months ended June 30, 2021. The decrease was attributable to a lower interest rate on the New Credit Facility, described below under "Liquidity and Capital Resources," compared to to the prior loan in place during the first quarter of 2021.   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 six months ended June 30, 2022.   28 Table of Contents   Net loss before income taxes . For the six months ended June 30, 2022, net loss before income taxes was $53.8 million, compared to net loss before income taxes of $11.4 million for the six months ended June 30, 2021. The increase in net loss of $42.4 million was primarily due to the non-cash impairment charge of $55.4 million,   an increase in the cost of revenue of $30.0 million, an increase in product development of $2.5 million, and an increase in sales and marketing of $2.4 million, partially offset by an increase in revenue of $43.9 million, as discussed above.    Income tax (expense) benefit. For the six months ended June 30, 2022, the Company had income tax expense of $5.1 million, compared to $0.01 million income tax benefit for the six months ended June 30, 2021 .   Net loss . Net loss of $59.0 million and net loss of $11.4 million were recognized for the six months ended June 30, 2022 and 2021, respectively, as a result of the foregoing.   Liquidity and Capital Resources   Cash (used in) operating activities . For the six months ended June 30, 2022, net cash used in operating activities was $1.9 million, compared to $0.7 million for the six months ended June 30, 2021. Net loss in the current period of $59.0 million represents an increase of $47.5 million, as compared with net loss of $11.4 million in the prior period. Adjustments to reconcile net loss to net cash used in operating activities of $69.5 million in the current period increased by $54.9 million, as compared with $14.6 million in the prior period, primarily due to a non-cash impairment loss related to goodwill of $55.4 million in the current period. Changes in assets and liabilities consumed cash of $12.4 million in the current period, as compared with $3.8 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 (used in) investing activities . For the six months ended June 30, 2022 and 2021, net cash used in investing activities was $3.2 million and $1.6 million, respectively. The increase was mainly due to the True North Acquisition that occurred in the current year.    Cash (used in) provided by financing activities. Net cash used by financing activities for the six months ended June 30, 2022 was $2.9 million and net cash provided by financing activities was $6.3 million for the six months ended June 30, 2021. The change of  $9.2  million in cash used in financing activities in the current period was mainly due to the decrease in the repayment of long term debt of $40.5 million, mainly offset by the net proceeds from issuance of long-term debt, net of financing costs of $49.6 million, the exercise of stock options by a former key executive of $0.9 million, and the prepayment penalty on early debt extinguishment of $0.8 million in the six months ended June 30, 2021.   As of June 30, 2022, we had noncancelable operating lease commitments of $7.6 million and long-term debt with a $43.8 million principal balance. For the six months ended June 30, 2022, we funded our operations using available cash.   As of June 30, 2022, we had cash and cash equivalents of approximately $26.4 million, a decrease of $8.1 million from $34.5 million as of December 31, 2021. We believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months and beyond.   29 Table of Contents   We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business. We continue to identify and prioritize additional technologies, which we may wish to develop internally or through licensing or acquisition from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurance that any such acquisitions will be made or that we will be able to successfully integrate any acquired business with our then current business or realize anticipated cost synergies. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to shareholders.     On 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 (the "2018 Plan") to certain Winopoly personnel valued at $1.4 million. (See Note 11,  Business acquisition, in the Notes to Consolidated Financial Statements.) On January 1, 2022, we acquired a 100% membership interest in True North Loyalty, LLC. (“True North Acquisition”) for a deemed purchase price of $2.3 million, which consisted of $1.0 million of cash at closing, $0.5 million of deferred payments due at both the first and second anniversary of the closing and contingent consideration with a fair value of $0.3 million, payable based upon the achievement of specified revenue targets over the five-year period following the completion of the acquisition. We also issued 100,000 shares of fully vested stock under the 2018 Plan to the sellers valued at $0.2 million. (See Note 11  Business acquisition, in the Notes to Consolidated Financial Statements.)   On March 31, 2021, Fluent, LLC, our wholly-owned subsidiary, entered into a credit agreement (the “Credit Agreement”) with certain subsidiaries of Fluent, LLC as guarantors and Citizens Bank, N.A., as administrative agent, lead arranger and bookrunner. 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, 2022, the Credit Agreement has an outstanding principal balance of $43.8 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 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's consolidated leverage ratio. The opening interest rate of the New Credit Facility was 2.50% (LIBOR + 2.25%), which increased to 3.92% (LIBOR + 2.25%) as of June 30, 2022.   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 stockholders 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 as of June 30, 2022, 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 condition 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.    30 Table of Contents   Critical Accounting Policies and Estimates   Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We periodically evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation 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.   As disclosed in Note 4, Goodwill, included in this Quarterly Report on Form 10-Q , the Company engaged a third party to assist in conducting an interim test of the fair value of its goodwill for potential impairment. The Company considered a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The Company determined that a market-based approach, which considered the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium, provided the best indication of fair value of the Fluent reporting unit. Based on the results of this market-based approach as of June 30, 2022, the Company concluded that its carrying value exceeded its estimated fair value by 27%. As such the Company concluded that its goodwill of $162.0 million for the Fluent reporting unit was impaired and recorded a non-cash impairment charge of $55.4 million. The impairment test involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates or assumptions. The critical assumptions used in determining the fair value of the reporting unit are forecasted cash flows, market multiples, and control premiums. Management exercises judgment in developing these assumptions. Certain of these assumptions are based on facts specific to the reporting unit, market participant assumptions and management’s projected cash flows. If actual cash flows were to decline from forecast, or market factors such as valuation multiples or interest rates were to trend in an unfavorable direction, there would be an increased risk of goodwill impairment for the Fluent reporting unit.   For additional information, please refer to our 2021 Form 10-K. Except as set forth herein, there have been no additional material changes to Critical Accounting Policies and Estimates disclosed in the 2021 Form 10-K.   Recently issued accounting and adopted standards   See Note 1(b), " Recently issued and adopted accounting standards," in the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.   Item 3. Quantitative and Qualitative Disclosures About Market Risk.   As a smaller reporting company, we are not required to provide the information required by this Item.