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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549 

 


 

FORM 10-Q

 


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                    

 

Commission file number 001-37893

 


 

FLUENT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware

77-0688094

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

300 Vesey Street, 9th Floor

New York, New York 10282

(Address of Principal Executive Offices) (Zip Code)

 

(646) 669-7272

(Registrant's Telephone Number, Including Area Code)

 

Not Applicable 

(Former name, former address and former fiscal year, if changed since last report)

 


 

Securities registered pursuant to Section 12(b) of the Act:

     

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0005 par value per share

 

FLNT

 

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

☐ 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes      No  ☒

As of August 5, 2020, the registrant had 76,313,556 shares of common stock outstanding.



 

 

 

 
 

FLUENT, INC.

 

TABLE OF CONTENTS FOR FORM 10-Q

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

2

 

Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019

3

 

Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2020 and 2019

4

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

5

 

Notes to Consolidated Financial Statements

6

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

25

Signatures

26

 

 

 

PART I - FINANCIAL INFORMATION

 

Unless otherwise indicated or required by the context, all references in this Quarterly Report on Form 10-Q to "we," "us," "our," "Fluent," or the "Company," refer to Fluent, Inc. and its consolidated subsidiaries.

 

ITEM 1. FINANCIAL STATEMENTS.

 

 

FLUENT, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

(unaudited)

 

  

June 30, 2020

  

December 31, 2019

 

ASSETS:

        

Cash and cash equivalents

 $20,218  $18,679 

Accounts receivable, net of allowance for doubtful accounts of $309 and $1,967, respectively

  55,304   60,915 

Prepaid expenses and other current assets

  1,996   1,921 

Total current assets

  77,518   81,515 

Restricted cash

  1,480   1,480 

Property and equipment, net

  2,566   2,863 

Operating lease right-of-use assets

  9,063   9,865 

Intangible assets, net

  51,094   55,603 

Goodwill

  165,088   164,774 

Other non-current assets

  1,592   993 

Total assets

 $308,401  $317,093 

LIABILITIES AND SHAREHOLDERS' EQUITY:

        

Accounts payable

 $11,601  $21,574 

Accrued expenses and other current liabilities

  21,027   20,358 

Deferred revenue

  2,468   1,140 

Current portion of long-term debt

  9,677   6,873 

Current portion of operating lease liability

  2,279   2,282 

Total current liabilities

  47,052   52,227 

Long-term debt, net

  38,115   44,098 

Operating lease liability

  8,176   9,056 

Other non-current liabilities

  1,243   775 

Total liabilities

  94,586   106,156 
Contingencies (Note 10)          

Shareholders' equity:

        

Preferred stock — $0.0001 par value, 10,000,000 Shares authorized; Shares outstanding — 0 shares for both periods

      

Common stock — $0.0005 par value, 200,000,000 Shares authorized; Shares issued — 79,908,985 and 78,642,078, respectively; and Shares outstanding — 76,292,587 and 75,873,679, respectively

  40   39 

Treasury stock, at cost — 3,616,398 and 2,768,399 shares, respectively

  (9,930)  (8,184)

Additional paid-in capital

  409,961   406,198 

Accumulated deficit

  (186,256)  (187,116)

Total shareholders' equity

  213,815   210,937 

Total liabilities and shareholders' equity

 $308,401  $317,093 

 

See notes to consolidated financial statements

 

 

 

 

FLUENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

(unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
Revenue   $ 71,509     $ 70,560     $ 150,443     $ 137,121  

Costs and expenses:

                               
Cost of revenue (exclusive of depreciation and amortization)     49,007       49,133       105,631       93,962  
Sales and marketing     2,888       3,058       5,718       6,492  
Product development     3,115       2,287       5,846       4,445  
General and administrative     10,044       10,294       21,120       20,329  
Depreciation and amortization     3,853       3,306       7,586       6,623  
Goodwill impairment     817             817        
Total costs and expenses     69,724       68,078       146,718       131,851  

Income from operations

    1,785       2,482       3,725       5,270  
Interest expense, net     (1,333 )     (1,767 )     (2,865 )     (3,545 )

Income before income taxes

    452       715       860       1,725  
Income tax benefit                       35  

Net income

    452       715       860       1,760  
                                 

Basic and diluted income per share:

                               
Basic   $ 0.01     $ 0.01     $ 0.01     $ 0.02  
Diluted   $ 0.01     $ 0.01     $ 0.01     $ 0.02  
                                 

Weighted average number of shares outstanding:

                               

Basic

    78,510,383       79,388,383       78,557,331       79,297,599  
Diluted     78,666,776       81,132,304       78,905,792       80,443,530  

 

See notes to consolidated financial statements

 

 

 

 

FLUENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Amounts in thousands, except share data)

(unaudited)

 

   

Common stock

   

Treasury stock

   

Additional paid-in

   

Accumulated

   

Total shareholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

capital

   

deficit

   

equity

 

Balance at March 31, 2020

    79,809,417     $ 40       3,601,804     $ (9,900 )   $ 408,633     $ (186,708 )   $ 212,065  

Vesting of restricted stock units and issuance of restricted stock

    99,568                                      

Increase in treasury stock resulting from shares withheld to cover statutory taxes

                14,594       (30 )                 (30 )

Share-based compensation

                            1,328             1,328  

Net income

                                  452       452  

Balance at June 30, 2020

    79,908,985     $ 40       3,616,398     $ (9,930 )   $ 409,961     $ (186,256 )   $ 213,815  
                                                         

Balance at December 31, 2019

    78,642,078     $ 39       2,768,399     $ (8,184 )   $ 406,198     $ (187,116 )   $ 210,937  

Vesting of restricted stock units and issuance of restricted stock

    1,566,907       1                   (1 )            

Increase in treasury stock resulting from shares withheld to cover statutory taxes

                190,326       (446 )                 (446 )

Repurchase of shares into treasury stock

                657,673       (1,300 )                 (1,300 )

Exercise of warrants by certain warrant holders (see note 7)

    (300,000 )                                    

Share-based compensation

                            3,764             3,764  

Net income

                                  860       860  

Balance at June 30, 2020

    79,908,985     $ 40       3,616,398     $ (9,930 )   $ 409,961     $ (186,256 )   $ 213,815  

 

 

   

Common stock

   

Treasury stock

   

Additional paid-in

   

Accumulated

   

Total shareholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

capital

   

deficit

   

equity

 
Balance at March 31, 2019     77,603,189     $ 39       1,554,829     $ (4,882 )   $ 399,208     $ (184,324 )   $ 210,041  
Vesting of restricted stock units and issuance of restricted stock     931,585                                      
Increase in treasury stock resulting from shares withheld to cover statutory taxes                 230,660       (1,469 )                 (1,469 )
Share-based compensation expense                                 2,984             2,984  
Net income                                       715       715  

Balance at June 30, 2019

    78,534,774     $ 39       1,785,489     $ (6,351 )   $ 402,192     $ (183,609 )   $ 212,271  
                                                         
Balance at December 31, 2018     76,525,581     $ 38       1,233,198     $ (3,272 )   $ 395,769     $ (185,369 )   $ 207,166  
Vesting of restricted stock units and issuance of restricted stock     2,009,193       1                   (1 )            
Increase in treasury stock resulting from shares withheld to cover statutory taxes                 552,291       (3,079 )                 (3,079 )
Reclassification of exercisable warrants from liability to equity                                 1,150             1,150  
Share-based compensation expense                                 5,274             5,274  
Net income                                       1,760       1,760  

Balance at June 30, 2019

    78,534,774     $ 39       1,785,489     $ (6,351 )   $ 402,192     $ (183,609 )   $ 212,271  

 

See notes to consolidated financial statements

 

 

 

 

FLUENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 860     $ 1,760  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    7,586       6,623  

Non-cash interest expense

    694       648  

Share-based compensation expense

    3,678       5,229  
Goodwill impairment     817        
Non-cash accrued compensation expenses for Put/Call Consideration     530        

Provision for bad debt

    131       189  

Changes in assets and liabilities, net of business acquisition:

               

Accounts receivable

    5,513       2,758  

Prepaid expenses and other current assets

    (75 )     (522 )

Other non-current assets

    (599 )     (21 )

Operating lease assets and liabilities, net

    (81 )     1,560  

Accounts payable

    (9,973 )     (1,551 )

Accrued expenses and other current liabilities

    (515 )     (3,762 )

Deferred revenue

    1,328       202  
Other     (62 )      

Net cash provided by operating activities

    9,832       13,113  

CASH FLOWS FROM INVESTING ACTIVITIES:

               
Business acquisition, net of cash acquired     (1,426 )      

Acquisition of property and equipment

    (37 )     (1,894 )

Capitalized costs included in intangible assets

    (1,211 )     (978 )

Net cash used in investing activities

    (2,674 )     (2,872 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Repayments of long-term debt

    (3,873 )     (3,095 )

Taxes paid related to net share settlement of vesting of restricted stock units

    (446 )     (3,079 )
Repurchase of treasury stock     (1,300 )      

Net cash used in financing activities

    (5,619 )     (6,174 )

Net increase in cash, cash equivalents and restricted cash

    1,539       4,067  

Cash, cash equivalents and restricted cash at beginning of period

    20,159       19,249  

Cash, cash equivalents and restricted cash at end of period

  $ 21,698     $ 23,316  

SUPPLEMENTAL DISCLOSURE INFORMATION

               

Cash paid for interest

  $ 2,100     $ 2,810  

Cash paid for income taxes

  $     $  

Share-based compensation capitalized in intangible assets

  $ 86     $ 45  

Non-cash additions to property and equipment

  $     $ 122  

Reclassification of exercisable warrants from liability to equity

  $     $ 1,150  

 

See notes to consolidated financial statements

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share data)

(unaudited)

 

 

 

1. Summary of significant accounting policies

 

(a) Basis of preparation 

 

The accompanying unaudited consolidated financial statements have been prepared by Fluent, Inc., a Delaware corporation (the "Company" or "Fluent"), in accordance with accounting principles generally accepted in the United States ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2020.

 

From time to time, the Company may enter into relationships or investments with other entities, and, in certain instances, the entity in which the Company has a relationship or investment may qualify as a variable interest entity (“VIE”). The Company consolidates a VIE in its financial statements if the Company is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has the power to direct activities that most significantly impact the operations of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE. As of April 1, 2020, the Company has included Winopoly, LLC in its consolidated financial statements as a VIE (as further discussed in Note 11, Business acquisitions and Note 12, Variable interest entity).

 

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended  December 31, 2019 ("2019 Form 10-K") filed with the SEC on March 13, 2020. The consolidated balance sheet as of  December 31, 2019 included herein was derived from the audited financial statements as of that date included in the 2019 Form 10-K.

 

Principles of consolidation

 

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation.

 

(b) Recently issued and adopted accounting standards

 

In January 2016, FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, and additional changes, modifications, clarifications or interpretations thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available-for-sale debt securities at the amount expected to be collected. The new guidance is effective for annual and interim periods beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

(c) Revenue recognition

 

Revenue is recognized when control of goods or services is transferred to customers, in amounts that reflect the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is typically to (a) deliver data records, based on predefined qualifying characteristics specified by the customer or (b) generate conversions, based on predefined user actions (for example, a click, a registration or the installation of an app) and subject to certain qualifying characteristics specified by the customer.

 

If a customer pays consideration before the Company's performance obligations are satisfied, such amounts are classified as deferred revenue on the consolidated balance sheets. As of  June 30, 2020 and December 31, 2019, the balance of deferred revenue was $2,468 and $1,140, respectively. The majority of the deferred revenue balance as of  December 31, 2019 was recognized into revenue during the first quarter of 2020.

 

When there is a delay between the period in which revenue is recognized and when a customer invoice is issued, revenue is recognized and the related amounts are recorded as unbilled revenue within accounts receivable on the consolidated balance sheets. As of  June 30, 2020 and December 31, 2019, unbilled revenue included in accounts receivable was $23,142 and $29,061, respectively. In line with industry practice, the unbilled revenue balance is recorded based on the Company's internally tracked conversions, net of estimated variances between this amount and the amount tracked and subsequently confirmed by customers. Substantially all amounts included within the unbilled revenue balance are invoiced to customers within the month directly following the period of service. Historical estimates related to unbilled revenue have not been materially different from actual revenue bille

d.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

(d) Use of estimates

 

The preparation of consolidated financial statements in accordance with US GAAP requires the Company’s management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, the portion of revenue subject to estimates for variances between internally-tracked conversions and those confirmed by the customer, purchase accounting, put/call considerations, consolidation of variable interest entity and income tax provision. These estimates are often based on complex judgments and assumptions that management believes to be reasonable, but are inherently uncertain and unpredictable. Actual results could differ from these estimates.

 

Except for the impairment of goodwill related to the Company’s All Other reporting unit as discussed in Note 4, Goodwill, results of operations for the three and six months ended June 30, 2020 did not include any adjustments to assets or liabilities due to the impact of COVID-19. While the Company has not incurred significant disruptions to its business thus far from the COVID-19 pandemic, management is unable to accurately predict the impact COVID-19 will have on its operations due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to customers' and suppliers' businesses and numerous other factors. Management will continue to evaluate the nature and extent that COVID-19 will impact its business, results of operations and financial condition.

 

 

2. Income per share

 

Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period, in addition to restricted stock units ("RSUs") and restricted common stock that are vested but not delivered. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock are exercised or converted into common stock and is calculated using the treasury stock method for stock options, restricted stock units, restricted stock, warrants and deferred common stock. Common equivalent shares are excluded from the calculation in loss periods, as their effects would be anti-dilutive.

 

For the three and six months ended June 30, 2020 and 2019, basic and diluted income per share was as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Numerator:

                

Net income

 $452  $715  $860  $1,760 

Denominator:

                
Weighted average shares outstanding  76,244,975   76,487,160   76,007,997   76,056,652 
Weighted average restricted shares vested not delivered  2,265,408   2,901,223   2,549,334   3,240,947 
Total basic weighted average shares outstanding  78,510,383   79,388,383   78,557,331   79,297,599 
Dilutive effect of assumed conversion of restricted stock units  156,393   1,408,277   348,461   882,263 
Dilutive effect of assumed conversion of warrants     329,808      262,567 
Dilutive effect of assumed conversion of stock options     5,836      1,101 
Total diluted weighted average shares outstanding  78,666,776   81,132,304   78,905,792   80,443,530 

Basic and diluted income per share:

                
Basic $0.01  $0.01  $0.01  $0.02 
Diluted $0.01  $0.01  $0.01  $0.02 

 

The following potentially dilutive securities were excluded from the calculation of diluted income per share, as their effects would have been anti-dilutive for the periods presented:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
Restricted stock units  3,412,390   110,000   2,288,573   1,740,502 
Stock options  2,568,000   2,060,000   2,568,000   2,060,000 
Warrants  2,183,333   1,350,000   2,183,333   1,350,000 

Total anti-dilutive securities

  8,163,723   3,520,000   7,039,906   5,150,502 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

 

3. Intangible assets, net

 

Intangible assets, net, other than goodwill, consist of the following: 

 

  

Amortization period (in years)

  

June 30, 2020

  

December 31, 2019

 

Gross amount:

            

Software developed for internal use

  3  $5,987  $4,866 

Acquired proprietary technology

  3-5   14,638   13,661 

Customer relationships

  5-10   37,886   37,286 

Trade names

  4-20   16,657   16,657 

Domain names

  20   191   191 

Databases

  5-10   31,292   31,292 

Non-competition agreements

  2-5   1,768   1,768 

Total gross amount

      108,419   105,721 

Accumulated amortization:

            

Software developed for internal use

      (2,752)  (1,995)

Acquired proprietary technology

      (11,021)  (9,516)

Customer relationships

      (22,011)  (19,396)

Trade names

      (3,806)  (3,359)

Domain names

      (44)  (39)

Databases

      (15,987)  (14,182)

Non-competition agreements

      (1,704)  (1,631)

Total accumulated amortization

      (57,325)  (50,118)

Net intangible assets:

            

Software developed for internal use

      3,235   2,871 

Acquired proprietary technology

      3,617   4,145 

Customer relationships

      15,875   17,890 

Trade names

      12,851   13,298 

Domain names

      147   152 

Databases

      15,305   17,110 

Non-competition agreements

      64   137 

Total intangible assets, net

     $51,094  $55,603 

 

The amounts relating to acquired proprietary technology, customer relationships, trade names, domain names, databases and non-competition agreements primarily represent the fair values of intangible assets acquired as a result of the acquisition of Fluent, LLC, effective December 8, 2015 (the "Fluent LLC Acquisition"), the acquisition of Q Interactive, LLC, effective June 8, 2016 (the "Q Interactive Acquisition"), the acquisition of substantially all the assets of AdParlor Holdings, Inc. and certain of its affiliates, effective July 1, 2019 (the "AdParlor Acquisition"), and the acquisition of a 50% interest in Winopoly, LLC (the "Winopoly Acquisition"), effective April 1, 2020 (see Note 11Business acquisitions).

 

During the three months ended June 30, 2020, the Company determined that the effects of the macroeconomic conditions arising from the global COVID-19 pandemic and the social unrest throughout the United States during June 2020, which changed the media-buying patterns of certain customers directly impacting the All Other reporting unit, constituted an impairment triggering event. As such, the Company conducted an interim test of the recoverability of its long-lived assets. Based on the results of this recoverability test, which measured the Company's projected undiscounted cash flows as compared to the carrying value of the asset group, the Company determined that, as of June 30, 2020, its long-lived assets were not impaired. Management believes that the assumptions utilized in this interim impairment testing, including the determination of estimated future cash flows, are reasonable. Future tests may indicate impairment if actual future cash flows or other factors differ from the assumptions used in the Company's interim impairment test at June 30, 2020.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

Amortization expense of $3,659 and $3,127 for the three months ended June 30, 2020 and 2019, respectively, and $7,206 and $6,252, for the six months ended June 30, 2020 and 2019, respectively, is included in depreciation and amortization expenses in the consolidated statements of operations. As of June 30, 2020, intangible assets with a carrying amount of $633, included in the gross amount of software developed for internal use, have not commenced amortization, as they are not ready for their intended use.

 

As of June 30, 2020, estimated amortization expense related to the Company's intangible assets for the remainder of 2020 and through 2025 and thereafter are as follows:

 

Year

 

June 30, 2020

 
Remainder of 2020 $7,266 
2021  11,674 
2022  10,341 
2023  4,912 

2024

  4,470 

2025 and thereafter

  12,431 
Total $51,094 

 

 

4. Goodwill

 

Goodwill represents the cost in excess of fair value of net assets acquired in a business combination. As of June 30, 2020, the total balance of goodwill was $165,088, and relates to the acquisition of Interactive Data, LLC, the Fluent LLC Acquisition, the Q Interactive Acquisition, the AdParlor Acquisition, and the Winopoly Acquisition (see Note 11Business acquisitions).

 

In accordance with ASC 350, Intangibles - Goodwill and Other, goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. The measurement date of the Company's annual goodwill impairment test is October 1.

 

During the three months ended June 30, 2020, the Company determined that the effects of the macroeconomic conditions arising from the global COVID-19 pandemic and the social unrest throughout the United States during June 2020, which changed the media-buying patterns of certain customers directly impacting the All Other reporting unit, constituted an impairment triggering event. As such, the Company conducted an interim test of the fair value of its goodwill for potential impairment as of June 30, 2020. The results of this interim impairment test, which used a combination of income and market approaches to determine the fair value of the All Other reporting unit, indicated that its carrying value exceeded its estimated fair value by 8.9%, the Company concluded that All Other's goodwill of $4,983 was impaired by $817. The Company believes that the assumptions utilized in its interim impairment testing, including the determination of an appropriate discount rate of 16%, long-term profitability growth projections, and estimated future cash flows, are reasonable. The interim goodwill impairment test reflected management's best estimate of the economic impact to its business, end-market conditions and recovery timelines. While no further triggering events were identified by management as of June 30, 2020, if the ongoing economic uncertainty proves to be more severe than estimated, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in future impairment charges. 

 

As of June 30, 2020 and December 31, 2019, the change in the carrying value of goodwill for the Company's operating segments are listed below: 

 

  

Fluent

  

All Other

  

Total

 

Balance as of December 31, 2019

 $159,791  $4,983  $164,774 

Winopoly Acquisition

  1,131      1,131 

Goodwill impairment

     (817)  (817)

Balance as of June 30, 2020

 $160,922  $4,166  $165,088 

 

 

5. Long-term debt, net

 

Long-term debt, net, related to the Refinanced Term Loan and Note Payable (as defined below) consisted of the following:

 

  

June 30, 2020

  

December 31, 2019

 

Refinanced Term Loan due 2023 (less unamortized discount of $3,072 and $3,715, respectively)

 $45,341  $48,571 

Note Payable due 2021 (less unamortized discount of $49 and $100, respectively)

  2,451   2,400 

Long-term debt, net

  47,792   50,971 

Less: Current portion of long-term debt

  (9,677)  (6,873)

Long-term debt, net (non-current)

 $38,115  $44,098 

 

Refinanced Term Loan


On March 26, 2018, Fluent, LLC refinanced and fully repaid its existing term loans and certain promissory notes, which had been entered into on December 8, 2015, with a new term loan in the amount of $70.0 million ("Refinanced Term Loan"), pursuant to a Limited Consent and Amendment No. 6 ("Amendment No. 6") to its Credit Agreement (the "Credit Agreement"). The Refinanced Term Loan is guaranteed by the Company and its direct and indirect subsidiaries, and is secured by substantially all of the assets of the Company and its direct and indirect subsidiaries, including Fluent, LLC, in each case, on an equal and ratable basis. The Refinanced Term Loan accrues interest at the rate of either, at Fluent's option, (a) LIBOR (subject to a floor of 0.50%) plus 7.00% per annum, or (b) the base rate (generally equivalent to the U.S. prime rate) plus 6.0% per annum, payable in cash.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

The Refinanced Term Loan matures on March 26, 2023 and interest is payable monthly. Scheduled principal amortization of the Refinanced Term Loan is $875 per quarter, which commenced with the fiscal quarter ended June 30, 2018. The Credit Agreement, as amended, requires the Company to maintain and comply with certain financial and other covenants and includes certain prepayment provisions, including mandatory quarterly principal prepayments with a portion of the Company's excess cash flow. For the three months ended June 30, 2020, the quarterly prepayment resulting from excess cash flow was $4,927. At June 30, 2020, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.

 

Note Payable

 

On July 1, 2019, in connection with the AdParlor Acquisition (as defined in Note 11Business acquisitions), the Company issued a promissory note (the "Note Payable") in the principal amount of $2,350, net of discount of $150 from imputing interest on the non-interest bearing note using a 4.28% rate. The promissory note is guaranteed by the Company's subsidiary, Fluent, LLC, will not accrue interest except in the case of default, is payable in two equal installments on the first and second anniversaries of the date of closing of the acquisition and is subject to setoff in respect of certain indemnity and other matters.

 

Maturities

 

As of June 30, 2020, scheduled future maturities of the Refinanced Term Loan and Note Payable are as follows:

 

Year  June 30, 2020 

Remainder of 2020

 $7,927 

2021

  4,750 

2022

  3,500 

2023

  34,736 

2024

   

Total maturities

 $50,913 

 

Fair value

 

As of June 30, 2020, the fair value of long-term debt is considered to approximate its carrying value. The fair value assessment represents a Level 2 measurement.

 

 

6. Income taxes

 

The Company is subject to federal and state income taxes in the United States. The tax provision for interim periods is determined using an estimate of the Company's annual effective tax rate. The Company updates its estimated annual effective tax rate on a quarterly basis and, if the estimate changes, makes a cumulative adjustment. 

 

As of  June 30, 2020 and December 31, 2019, the Company has recorded a full valuation allowance against net deferred tax assets, and intends to continue maintaining a full valuation allowance on these net deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. Based on current income and anticipated future earnings, the Company believes there is a reasonable possibility that within the next twelve months sufficient positive evidence may become available to allow a conclusion to be reached that a significant portion, if not all, of the valuation allowance will 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 upon the level of profitability that the Company is able to achieve and the net deferred tax assets available.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

For the six months ended June 30, 2020 and 2019, the Company's effective income tax rate of 0% and 2%, respectively, differed from the statutory federal income tax rate of 21%, with such differences resulting primarily from the application of the full valuation allowance against the Company's deferred tax assets.

 

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available as of the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the Company's financial statements.

 

As of  June 30, 2020 and December 31, 2019, the balance of unrecognized tax benefits was $1,480. The unrecognized tax benefits, if recognized, would result in an increase to net operating losses that would be subject to a valuation allowance and, accordingly, result in no impact to the Company’s annual effective tax rate. As of June 30, 2020, the Company has not accrued any interest or penalties with respect to its uncertain tax positions.

 

The Company does not anticipate a significant increase or reduction in unrecognized tax benefits within the next twelve months.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act includes several provisions for corporations, including increasing the amount of deductible interest, allowing companies to carryback certain Net Operating Losses (“NOLs”) and increasing the amount of NOLs that corporations can use to offset income. Management is currently assessing the future implications of these provisions within the CARES Act but does not anticipate the impact to be material to the Company's consolidated financial statements.

 

 

7. Common stock, treasury stock and warrants

 

Common stock

 

As of  June 30, 2020 and December 31, 2019, the number of issued shares of common stock was 79,908,985 and 78,642,078, respectively, which included shares of treasury stock of 3,616,398 and 2,768,399, respectively.

 

For the six months ended June 30, 2020, the change in the number of issued shares of common stock was a result of an aggregate 1,566,907 shares of common stock issued upon vesting of RSUs, including 190,326 shares of common stock withheld to cover statutory taxes upon such vesting, which are reflected in treasury stock, discussed below. Additionally, as discussed and defined below, the holders of the Amended Whitehorse Warrants exercised the Put Right to require the Company to purchase from the warrant holders the 300,000 Warrant Shares for an aggregate of $1,150. The Company funded such purchase with cash on hand.

 

Treasury stock

 

As of  June 30, 2020 and December 31, 2019, the Company held shares of treasury stock of 3,616,398 and 2,768,399, with a cost of $9,930 and $8,184, respectively.

 

The Company's share-based incentive plans allow employees the option to either make cash payment or forfeit shares of common stock upon vesting to satisfy federal and state statutory tax withholding obligations associated with equity awards. The forfeited shares of common stock may be taken into treasury stock by the Company or sold on the open market. For the six months ended June 30, 2020, 190,326 shares of common stock were withheld to cover statutory taxes owed by certain employees for this purpose, all of which were taken into treasury stock. See Note 8, Share-based compensation. During the six months ended June 30, 2020, the Company repurchased 657,673 of its own shares as part of a stock repurchase program authorized by the Company's Board of Directors on November 19, 2019. 

 

Warrants

 

As of  June 30, 2020 and December 31, 2019, warrants to purchase an aggregate of 2,183,333 and 2,398,776 shares, respectively, of common stock were outstanding, respectively, with exercise prices ranging from $3.75 to $6.00 per share.

 

On July 9, 2018 the Company entered into First Amendments (the "First Amendments") to the Amendments to Warrants and Agreements to Exercise ("Amended Whitehorse Warrants") with (i) H.I.G. Whitehorse SMA ABF, L.P. regarding 46,667 warrants to purchase common stock of the Company, par value $0.0005 per share, at an exercise price of $3.00 per share; (ii) H.I.G. Whitehorse SMA Holdings I, LLC regarding 66,666 warrants to purchase common stock of the Company at an exercise price of $3.00 per share; and (iii) Whitehorse Finance, Inc. regarding 186,667 warrants to purchase common stock of the Company at an exercise price of $3.00 per share. In November 2017, the Amended Whitehorse Warrants were exercised and the Company issued an aggregate of 300,000 shares of common stock of the Company (the "Warrant Shares") to the warrant holders. Pursuant to the First Amendments, the warrant holders had the right, but not the obligation, to require the Company to purchase from these warrant holders the 300,000 Warrant Shares at $3.8334 per share (the "Put Right"), which could be exercised during the period commencing January 1, 2019 and ending December 15, 2019. On December 6, 2019, the Company entered into the Second Amendments to the Amended Whitehorse Warrants, pursuant to which the expiration of the Put Right was extended from December 15, 2019 to January 31, 2020. On January 31, 2020, the holders of the Amended Whitehorse Warrants exercised the Put Right to require the Company to purchase from the warrant holders the 300,000 Warrant Shares for an aggregate of $1,150. The Company funded such purchase with cash on hand.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

 

8. Share-based compensation

 

As of June 30, 2020, the Company maintains two share-based incentive plans: the Cogint, Inc. 2015 Stock Incentive Plan (the "2015 Plan") and the Fluent, Inc. 2018 Stock Incentive Plan (the "2018 Plan") which, combined, authorize the issuance of 21,129,259 shares of common stock. As of June 30, 2020, there were 1,755,868 shares of common stock reserved for issuance under the 2018 Plan. The primary purpose of the plans is to attract, retain, reward and motivate certain individuals by providing them with opportunities to acquire or increase their ownership interests in the Company.

 

Stock options

 

The Compensation Committee of the Company's Board of Directors approved the grant of stock options to certain Company officers, which were issued on February 1, 2019, December 20, 2019 and March 1, 2020, respectively, under the 2018 Plan. Subject to continuing service, 50% of the shares subject to these stock options will vest if the Company's stock price remains above 125.00%, 133.33% and 133.33%, respectively, of the exercise price for twenty consecutive trading days, and the remaining 50% of the shares subject to these stock options will vest if the Company's stock price remains above 156.25%, 177.78% and 177.78%, respectively, of the exercise price for twenty consecutive trading days; provided, that no shares will vest prior to the first anniversary of the grant date. As of June 30, 2020, the first condition for the stock options issued on February 1, 2019 has been met; therefore, 50% of the shares subject to these stock options vested on February 1, 2020. Any shares that remain unvested as of the fifth anniversary of the grant date will vest in full on such date. The fair value of the stock options granted was estimated at the trading day before the date of grant using a Monte Carlo simulation model. The key assumptions utilized to calculate the grant-date fair values for these awards are summarized below:

 

Issuance Date

 

February 1, 2019

  

December 20, 2019

  

March 1, 2020

 

Fair value lower range

 $2.81  $1.58  $1.46 

Fair value higher range

 $2.86  $1.61  $1.49 

Exercise price

 $4.72  $2.56  $2.33 

Expected term (in years)

  1.0 - 1.3   1.0 - 1.6   1.0 - 1.5 

Expected volatility

  65%  70%  70%

Dividend yield

  %  %  %

Risk-free rate

  2.61%  1.85%  1.05%

 

For the six months ended June 30, 2020, details of stock option activity were as follows:

 

  

Number of options

  

Weighted average exercise price per share

  

Weighted average remaining contractual term (in years)

  

Aggregate intrinsic value

 

Outstanding as of December 31, 2019

  2,120,000  $5.21   8.7  $ 

Granted

  478,000  $2.48   9.5     
Expired  (30,000) $7.14        

Outstanding as of June 30, 2020

  2,568,000  $4.34   8.6  $ 

Options exercisable as of June 30, 2020

  1,086,000  $4.82   8.1  $ 

 

The aggregate intrinsic value amounts in the table above represent the difference between the closing price of the Company's common stock at the end of the reporting period and the corresponding exercise prices, multiplied by the number of in-the-money stock options as of the same date.

 

For the six months ended June 30, 2020, the unvested balance of options was as follows:

 

  

Number of options

  

Weighted average exercise price per share

  

Weighted average remaining contractual term (in years)

 

Unvested as of December 31, 2019

  2,008,000  $4.72   9.1 

Granted

  478,000  $2.48   9.5 

Vested

  (1,004,000) $4.72   8.6 

Unvested as of June 30, 2020

  1,482,000  $4.00   8.9 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

Compensation expense recognized for stock options of $152 and $1,252 for the three months ended June 30, 2020 and 2019, respectively, and $1,351 and $2,103 for the six months ended June 30, 2020 and 2019, respectively, was recorded in sales and marketing, product development and general and administrative expenses in the consolidated statements of operations. As of June 30, 2020, there was $473 of unrecognized share-based compensation with respect to outstanding stock options.

 

Restricted stock units and restricted stock

 

For the six months ended June 30, 2020, details of unvested RSU and restricted stock activity were as follows:

 

  

Number of units

  

Weighted average grant-date fair value

 

Unvested as of December 31, 2019

  3,394,370  $8.03 

Granted

  1,545,032  $2.03 

Vested and delivered

  (1,376,581) $3.58 

Withheld as treasury stock (1)

  (190,326) $4.04 

Vested not delivered (2)

  525,334  $2.84 

Forfeited

  (161,506) $2.77 

Unvested as of June 30, 2020

  3,736,323  $6.83 

 

(1)

As discussed in Note 7, Common stock, treasury stock and warrants, the increase in treasury stock was due to shares withheld to cover statutory withholding taxes upon the delivery of shares following vesting of RSUs. As of June 30, 2020, there were 3,616,398 outstanding shares of treasury stock.

(2)

Vested not delivered represents vested RSUs with delivery deferred to a future time. For the six months ended June 30, 2020, there was a net decrease of 525,334 shares included in the vested not delivered balance as a result of the delivery of 655,333 shares, partially offset by the vesting of 129,999 shares with deferred delivery election. As of June 30, 20202,262,001 outstanding RSUs were vested not delivered.

 

Compensation expense recognized for RSUs and restricted stock of $1,176 and $1,732 for the three months ended June 30, 2020 and 2019, respectively, and $2,413 and $3,171 for the six months ended June 30, 2020 and 2019, respectively, was recorded in sales and marketing, product development and general and administrative in the consolidated statements of operations, and intangible assets in the consolidated balance sheets. The fair value of the RSUs and restricted stock was estimated using the closing prices of the Company's common stock on the dates of grant.

 

As of June 30, 2020, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $10,434, which is expected to be recognized over a weighted average period of 2.6 years.

 

For the three and six months ended June 30, 2020 and 2019, share-based compensation for the Company's stock option, RSU, common stock and restricted stock awards were allocated to the following accounts in the consolidated financial statements:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Sales and marketing

 $269  $160  $487  $529 

Product development

  286   277   523   522 

General and administrative

  726   2,517   2,668   4,178 

Share-based compensation expense

  1,281   2,954   3,678   5,229 

Capitalized in intangible assets

  47   30   86   45 

Total share-based compensation

 $1,328  $2,984  $3,764  $5,274 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

 

9. Segment information

 

The Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The profitability measure employed by CODM is segment income (loss) from operations. As of June 30, 2020, the Company has two operating segments and two corresponding reporting units, “Fluent” and “All Other,” and one reportable segment. “All Other” represents the operating results for the three and six months ended June 30, 2020 of AdParlor, LLC (see Note 11Business acquisitions), and is included for purposes of reconciliation of the respective balances below to the consolidated financial statements. “Fluent,” for the purposes of segment reporting, represents the consolidated operating results of the Company excluding “All Other.”

Summarized financial information concerning the Company's segments is shown in the following tables below:

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Fluent segment revenue:

                

United States

 $57,462  $62,644  $125,613  $122,121 

International

  12,935   7,916   22,346   15,000 

Fluent segment revenue

 $70,397  $70,560  $147,959  $137,121 

All Other segment revenue:

                

United States

 $1,012  $  $2,197  $ 

International

  100      287    

All Other segment revenue

 $1,112  $  $2,484  $ 

Segment income (loss) from operations:

                

Fluent

 $2,420  $2,482  $4,848  $5,270 

All Other

  (635)     (1,123)   

Total income from operations

  1,785   2,482   3,725   5,270 

Interest expense, net

  (1,333)  (1,767)  (2,865)  (3,545)

Income before income taxes

 $452  $715  $860  $1,725 

 

  

June 30

  

December 31

 
  2020  2019 

Total assets:

      

Fluent

 $293,917  $296,714 

All Other

  14,484   20,379 

Total assets

 $308,401  $317,093

 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

 

10. Contingencies

 

In the ordinary course of business, the Company is subject to loss contingencies that cover a range of matters. An estimated loss from a loss contingency, such as a legal proceeding or claim, is accrued if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, the Company evaluates, among other factors, the degree of probability and the ability to reasonably estimate the amount of any such loss.

 

On October 26, 2018, the Company received a subpoena from the New York Attorney General’s Office (“NY AG”) regarding compliance with New York Executive Law § 63(12) and New York General Business Law § 349, as they relate to the collection, use, or disclosure of information from or about consumers or individuals, as such information was submitted to the Federal Communication Commission (“FCC”) in connection with the FCC’s rulemaking proceeding captioned “Restoring Internet Freedom,” WC Docket No. 17-108. On December 13, 2018, the Company received a subpoena from the United States Department of Justice (“DOJ”) regarding the same issue. On March 12, 2020, the Company received a subpoena from the Office of the Attorney General of the District of Columbia ("DC AG") regarding the same issue. The Company has been fully cooperating with the NY AG, the DOJ, and the DC AG. Based on recent communications with the NY AG, the Company believes that a loss from these matters is probable, but it is not yet possible to reasonably estimate the magnitude of such loss. However, an unfavorable outcome could have a material adverse effect on the Company’s business, results of operations or financial position.

 

On June 27, 2019, as a part of two sales and use tax audits covering the period from December 1, 2010 to November 30, 2019, the New York State Department of Taxation and Finance (the “Tax Department”) issued a letter stating its position that revenue derived from certain of the Company’s customer acquisition and list management services are subject to sales tax, as a result of being deemed information services. The Company disputed the Tax Department's position on several grounds, but on January 14 and 15, 2020, the Tax Department issued Statements of Proposed Audit Adjustment totaling $8.2 million, including $2.0 million of interest. The Company formally disagreed with the amount of the Proposed Audit Adjustments and met with the Tax Department on March 4, 2020. During that meeting, the Company informed the Tax Department that a majority of the Proposed Audit Adjustments was attributable to revenue derived from transfers which were either excluded resales or sourced outside of New York and renewed its challenge as to the taxability of its customer acquisition revenue. On July 22 and 31, 2020, the Company received notices of determination from the Tax Department totaling $3.0 million, including $0.7 million of interest. Based on the foregoing, the Company believes that it is probable that a sales tax liability may result from this matter, and has estimated the range of any such liability to be between $0.7 million and $3.0 million. The Company has accrued a liability associated with these sales and use tax audits at the low end of this range.

 

On January 28, 2020, the Company received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) regarding compliance with the Federal Trade Commission Act, 15 U.S.C. §45 or the Telemarketing Sales Rule, 16 C.F.R. Part 310, as they relate to the advertising, marketing, promotion, offering for sale, or sale of rewards and other products, the transmission of commercial text messages, and/or consumer privacy or data security. The Company has been fully cooperating with the FTC and is responding to the CID. At this time, it is not possible to predict the ultimate outcome of this matter or the significance, if any, to the Company’s business, results of operations or financial position. 

 

 

11. Business acquisitions

 

Winopoly acquisition

 

On April 1, 2020, the Company acquired, through a wholly owned subsidiary, a 50% membership interest in Winopoly, LLC (the "Winopoly Acquisition") for a deemed purchase price of $2,553, which consisted of $1,553 in cash and contingent consideration with a fair value of $1,000 payable based upon the achievement of specified revenue targets over the eighteen-month period following the completion of the acquisition. Winopoly, LLC is a contact center operation, which serves as a marketplace that matches consumers sourced by Fluent with advertiser clients. In accordance with ASC 805, the Company determined that the Winopoly Acquisition constituted the purchase of a business. For the six months ended June 30, 2020, the Company incurred transaction-related expenses of $60 in connection with the acquisition, which are recorded in general and administrative expenses in the consolidated statements of operations. Assets and revenues of Winopoly, LLC totaled 0.9% and 0.7%, respectively, of the Company's consolidated financial statements at and for the six months ended June 30, 2020, and are included in the Fluent operating segment. 

 

The preliminary fair value of the acquired customer relationships of $600, to be amortized over a period of five years, was determined using the excess earnings method, a variation of the income approach, while the preliminary fair value of the acquired developed technology of $800, to be amortized over a period of three years, was determined using the cost approach. The amount of the purchase price in excess of the fair value of the net assets acquired was recorded as goodwill in the amount of $1,131 and primarily relates to intangible assets that do not qualify for separate recognition, including assembled workforce and synergies. The purchase accounting process has not yet been completed, primarily because the valuation of acquired assets and liabilities assumed has not been finalized. The Company expects to complete the purchase accounting as soon as practicable but no later than one year from the acquisition date. The Company does not believe there will be material adjustments.

 

At any time between the fourth and sixth anniversary of the Winopoly Acquisition, the sellers  may exercise a put option whereby the Company is required to acquire the remaining 50% membership interests in Winopoly, LLC. During this period, the Company also has the ability to exercise a call option whereby the sellers must sell the remaining 50% membership interests in Winopoly, LLC to the Company. The purchase price paid for the remaining 50% membership interests would be calculated based on a multiple of 4.0 x EBITDA (as such term is defined in the agreement between the parties), applied to a twelve-month period spanning the five months prior to month of put/call closing extending through six months following the month of put/call closing. In connection with the exercise of the put/call option, certain of the seller parties must enter into employment agreements with the Company in order to receive their share of the consideration for the remaining 50% of the membership interests (the "Put/Call Consideration").

 

Although the sellers maintain an equity interest in Winopoly, LLC, we have deemed this equity interest to be non-substantive in nature, as the sellers will primarily benefit from the Winopoly Acquisition based on periodic distributions of the earnings of Winopoly, LLC and the Put/Call Consideration, both of which are dependent on their continued service. Without providing service, the sellers could benefit from their pro rata share of the proceeds upon a third-party sale or liquidation of Winopoly, LLC; however, such a liquidity event is considered unlikely. Therefore, no non-controlling interest has been recognized. Periodic distributions for services rendered will be recorded as compensation expense. In addition, we will estimate the amount of the Put/Call Consideration, which will be accreted over the six year estimated service period, consisting of the estimated four years until the put/call can be exercised and the additional two-year service requirement. For the three and six months ended June 30, 2020, compensation expense of $530 related to the Put/Call Consideration was recorded in general and administrative on the consolidated statement of operations, with a corresponding liability in other non-current liabilities on the consolidated balance sheet.

 

AdParlor acquisition

 

On July 1, 2019, two wholly owned subsidiaries of the Company, AdParlor, LLC (formerly known as AdParlor Acquisition, LLC), a Delaware limited liability company, and Fluent Media Canada, Inc., a British Columbia company (together with AdParlor, LLC, each a "Buyer" and collectively "Buyers"), completed the acquisition of substantially all of the assets of AdParlor Holdings, Inc., a Delaware corporation ("AdParlor Holdings"), AdParlor International, Inc., a Delaware corporation ("AdParlor International"), AdParlor Media, Inc., a Delaware corporation ("AdParlor Media US"), and AdParlor Media ULC, a British Columbia unlimited liability company (together with AdParlor Holdings, AdParlor International and AdParlor Media US, each a "Seller" and collectively "Sellers") pursuant to an Asset Purchase Agreement (the "Purchase Agreement") dated June 17, 2019, by and among Buyers, Sellers and the parent of the Sellers, v2 Ventures Group LLC, a Delaware limited liability company (the "AdParlor Acquisition"). The purpose of the acquisition was to expand the Company's performance-based marketing capabilities. In accordance with ASC 805, the Company determined that the AdParlor Acquisition constituted the purchase of a business. 

 

At closing, the Buyers paid to Sellers cash consideration of $7,302, net of adjustments for working capital and indebtedness, and issued a promissory note to Sellers with a present value of $2,350 in exchange for substantially all of the assets of Sellers. This promissory note is guaranteed by Fluent, LLC, and will not accrue interest except in the case of default, is payable in two equal installments on the first and second anniversaries of the date of closing and is subject to setoff in respect of certain indemnity and other matters. See Note 5, Long-term debt, net for further detail. For the year ended December 31, 2019, the Company incurred transaction-related expenses of $483 in connection with the AdParlor Acquisition, which it recorded in general and administrative expenses in the consolidated statements of operations.

 

15

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

The following table summarizes the fair values of the assets acquired and the liabilities assumed at the closing date:

 

  

July 1, 2019

 
     

Cash and cash equivalents

 $56 
Accounts receivable  7,835 
Prepaid expenses and other current assets  54 

Property and equipment

  138 

Intangible assets

  4,700 

Goodwill

  4,983 

Other non-current assets

  28 
Accounts payable  (7,691)
Accrued expenses and other current liabilities  (418)
Deferred revenue  (33)

Total net assets acquired

 $9,652 

 

The fair values of the identifiable intangible assets and goodwill acquired at the closing date are as follows:

 

  

Fair Value

  Weighted Average Amortization Period (Years) 
Trade name & trademarks $300  4 

Developed technology

  2,100  4 

Customer relationships

  2,300  6 
Goodwill  4,983    

Total intangible assets, net

 $9,683    

 

With the assistance of a third-party valuation firm, the fair value of the acquired customer relationships was determined using the excess earnings method, a variation of the income approach, while the fair value of the acquired developed technology, trade names and trademarks were determined using the relief from royalty method of the income approach. The amount of the purchase price in excess of the fair value of the net assets acquired was recorded as goodwill and primarily relates to intangible assets that do not qualify for separate recognition, including assembled workforce and synergies. For tax purposes, the goodwill is deductible over fifteen years. 

 

 

12. Variable Interest Entity

 

The Company has determined that Winopoly, LLC (as discussed in Note 11, Business acquisitions) qualifies as a VIE, for which the Company is the primary beneficiary. A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary is the party that has the power to direct activities that most significantly impact the operations of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE. We assess whether we are the primary beneficiary of a VIE at the inception of the arrangement and at each reporting date.

 

Winopoly is a VIE, and the Company is its primary beneficiary, as contractual arrangements provides the Company with the control over certain activities that most significantly impact its economic performance. These significant activities include the compliance practices of Winopoly, LLC and the Company's provisions of leads that Winopoly, LLC uses to generate its revenue, which ultimately give the Company controlling interest. The Company therefore consolidates Winopoly, LLC in its consolidated financial statements, inclusive of deemed compensation expense to the sellers for services rendered.

 

 

13. Related party transactions

 

The Company earns revenue and incurs expenses from a client in which the Company's Chief Executive Officer holds a significant ownership interest. For the three and six months ended June 30, 2020, the Company recognized revenue from this client of $95 and $145, respectively. For both the three and six months ended June 30, 2020, the Company incurred expenses from this client of $1.

 

16

 
 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion in conjunction with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, the outcome of litigation, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in this Quarterly Report on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 13, 2020 ("2019 Form 10-K"), and other filings we make with the Securities and Exchange Commission (the "SEC"). 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 data and performance-based marketing executions to our clients, which in 2019 included over 500 consumer brands, direct marketers and agencies across a wide range of industries, including Financial Products & Services, Retail & Consumer, Media & Entertainment, Staffing & Recruitment and Marketing Services.

 

We attract consumers at scale to our owned digital media properties primarily through promotional offerings and employment opportunities. On average, our websites receive over 900,000 first-party user registrations daily, which include users’ names, contact information and opt-in permission to present them with offers on behalf of our clients. According to comScore, we reach 13% of the U.S. digital population on a monthly basis through our owned media properties. Nearly 90% of these users engage with our media on their mobile devices or tablets. Our always-on, real-time capabilities enable users to access our media whenever and wherever they choose.

 

Once users have registered with our sites, we integrate proprietary direct marketing technologies to engage them with surveys, polls and other experiences, through which we learn about their lifestyles, preferences and purchasing histories. Based on these insights, we serve targeted, relevant offers to them on behalf of our clients. As new users register and engage with our sites and existing registrants re-engage, we believe the enrichment of our database expands our addressable client base and improves the effectiveness of our performance-based campaigns.

 

Since our inception, we have amassed a large, proprietary database of first-party, self-declared user information and preferences. We have permission to contact the majority of users in our database through multiple channels, such as email, home address, telephone, push notifications and SMS text messaging. We leverage our data primarily to serve advertisements that we believe will be relevant to users based on the information they have provided. We have also begun to leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising, as well as services-based models, such as marketing research and insights.

 

Second Quarter Financial Summary

 

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

 

Revenue increased 1% to $71.5 million, from $70.6 million.

 

Net income was $0.5 million, or $0.01 per share, compared to $0.7 million or $0.01 per share.

 

Media margin increased 8% to $24.8 million, from $22.9 million, representing 34.7% of revenue.

 

Adjusted EBITDA decreased 3% to $9.4 million, based on net income of $0.5 million, from $9.7 million, based on a net income of $0.7 million.

 

Adjusted net income was $4.2 million, or $0.05 per share, compared to $4.6 million, or $0.06 per share.

 

Six months ended June 30, 2020 compared to six months ended June 30, 2019:

 

Revenue increased 10% to $150.4 million, from $137.1 million.

  Net income was $0.9 million, or $0.01 per share, compared to $1.8 million or $0.02 per share.
  Media margin increased 6% to $48.7 million, from $46.0 million, representing 32.4% of revenue.
  Adjusted EBITDA decreased $0.4 to $18.4 million, based on net income of $0.9 million, from $18.8 million, based on a net income of $1.8 million.
  Adjusted net income was $8.0 million, or $0.10 per share, compared to $8.7 million, or $0.11 per share.

 

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

 

COVID-19 Update

 

On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. At this time, our operations have not been significantly impacted by the global economic impact of COVID-19, and we have taken appropriate measures to ensure that we are able to conduct our business remotely without significant disruptions. The economic uncertainty caused by COVID-19 has had an impact on certain of our advertiser clients in certain industry verticals, such as staffing and recruitment and financial products and services, who have reduced their pricing and/or demand during the quarter. We took steps to reduce our costs of acquiring traffic and to match available consumers with other advertiser clients in the various industries we serve, thereby enabling us to more effectively manage our margins during the quarter. We anticipate additional shifts in pricing and/or demand among affected clients, as the trajectory of the pandemic and future economic outlook remain uncertain.

 

We implemented company-wide work-from-home beginning on March 13, 2020. While we believe we are well-positioned to adapt to a work-from-home environment, COVID-19 increases the likelihood of certain risks of disruption to our business, such as the incapacity of certain employees or system interruptions, which could lead to diminishment of our regular business operations, technological capacity and cybersecurity capabilities, as well as operational inefficiencies and reputational harm.

 

Please see "Results of Operations" and Item 1A. Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

 

 

Definitions, Reconciliations and Uses of Non-GAAP Financial Measures

 

We report the following non-GAAP measures:

 

Media margin is defined as revenue minus cost of revenue (exclusive of depreciation and amortization) attributable to variable costs paid for media and related expenses. Media margin is also presented as percentage of revenue.

 

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

 

Adjusted net income is defined as net income excluding (1) goodwill impairment, (2) accrued compensation expense for Put/Call Consideration, (3) share-based compensation expense, (4) acquisition-related costs, (5) restructuring and certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted net income is also presented on a per share (basic and diluted) basis.

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income

  $ 452     $ 715     $ 860     $ 1,760  

Income tax benefit

                      (35 )

Interest expense, net

    1,333       1,767       2,865       3,545  
Goodwill impairment     817             817        

Depreciation and amortization

    3,853       3,306       7,586       6,623  

General and administrative

    10,044       10,294       21,120       20,329  

Product development

    3,115       2,287       5,846       4,445  

Sales and marketing

    2,888       3,058       5,718       6,492  

Non-media cost of revenue (1)

    2,312       1,475       3,915       2,836  

Media margin

  $ 24,814     $ 22,902     $ 48,727     $ 45,995  

Revenue

  $ 71,509     $ 70,560     $ 150,443     $