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0001460329 Fluent, Inc. false --12-31 Q2 2021 326 368 0.0001 0.0001 10,000,000 10,000,000 0 0 0 0 0.0005 0.0005 200,000,000 200,000,000 82,440,259 80,295,141 78,371,427 76,349,274 4,068,832 3,945,867 0 2,386 1,067 0 0 24 1,480 833,333 3.75 6.00 5 3 6 4 2 530 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 March 31, 2021, there were 4,055,011 outstanding shares of treasury stock. Vested not delivered represents vested RSUs with delivery deferred to a future time. For the three months ended March 31, 2021, there was a net decrease of 565,255 shares included in the vested not delivered balance as a result of the delivery of 650,333 shares, partially offset by the vesting of 85,078 shares with deferred delivery election. 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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, 2021

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, 2021, the registrant had 78,386,466 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, 2021 and December 31, 2020

2

 

Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020

3

 

Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2021 and 2020

4

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020

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

23

Item 4.

Controls and Procedures

23

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

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, 2021

  

December 31, 2020

 

ASSETS:

        

Cash and cash equivalents

 $25,139  $21,087 

Accounts receivable, net of allowance for doubtful accounts of $326 and $368, respectively

  65,905   62,669 

Prepaid expenses and other current assets

  1,672   2,435 

Total current assets

  92,716   86,191 

Restricted cash

  1,480   1,480 

Property and equipment, net

  1,831   2,201 

Operating lease right-of-use assets

  7,460   8,284 

Intangible assets, net

  40,478   45,417 

Goodwill

  165,088   165,088 

Other non-current assets

  1,817   1,559 

Total assets

 $310,870  $310,220 

LIABILITIES AND SHAREHOLDERS' EQUITY:

        

Accounts payable

 $16,364  $7,692 

Accrued expenses and other current liabilities

  22,223   31,568 

Deferred revenue

  1,222   1,373 

Current portion of long-term debt

  6,250   7,293 

Current portion of operating lease liability

  2,261   2,291 

Total current liabilities

  48,320   50,217 

Long-term debt, net

  42,683   33,283 

Operating lease liability

  6,405   7,290 

Other non-current liabilities

  5,108   2,545 

Total liabilities

  102,516   93,335 

Contingencies (see 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 — 82,440,259 and 80,295,141, respectively; and Shares outstanding — 78,371,427 and 76,349,274, respectively

  41   40 

Treasury stock, at cost — 4,068,832 and 3,945,867 shares, respectively

  (10,666)  (9,999)

Additional paid-in capital

  415,325   411,753 

Accumulated deficit

  (196,346)  (184,909)

Total shareholders' equity

  208,354   216,885 

Total liabilities and shareholders' equity

 $310,870  $310,220 

 

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,

 
  

2021

  

2020

  

2021

  

2020

 

Revenue

 $73,378  $71,509  $143,548  $150,443 

Costs and expenses:

                

Cost of revenue (exclusive of depreciation and amortization)

  56,605   49,007   107,595   105,631 

Sales and marketing

  3,000   2,888   5,961   5,718 

Product development

  3,433   3,115   6,867   5,846 

General and administrative

  11,527   10,044   23,226   21,120 

Depreciation and amortization

  3,366   3,853   6,739   7,586 

Goodwill impairment and write-off of intangible assets

  199   817   199   817 

Total costs and expenses

  78,130   69,724   150,587   146,718 

(Loss) income from operations

  (4,752)  1,785   (7,039)  3,725 

Interest expense, net

  (427)  (1,333)  (1,435)  (2,865)

Loss on early extinguishment of debt

        (2,964)   

(Loss) income before income taxes

  (5,179)  452   (11,438)  860 

Income tax benefit

        1    

Net (loss) income

 $(5,179) $452  $(11,437) $860 
                 

Basic and diluted (loss) income per share:

                

Basic

 $(0.06) $0.01  $(0.14) $0.01 

Diluted

 $(0.06) $0.01  $(0.14) $0.01 
                 

Weighted average number of shares outstanding:

                

Basic

  79,962,275   78,510,383   79,560,643   78,557,331 

Diluted

  79,962,275   78,666,776   79,560,643   78,905,792 

 

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, 2021

  82,228,823  $41   4,055,011  $(10,623) $413,958  $(191,167) $212,209 

Vesting of restricted stock units and issuance of stock under incentive plans

  211,436            136      136 

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

        13,821   (43)        (43)

Exercise of stock options

                     

Share-based compensation

              1,231      1,231 

Net loss

                 (5,179)  (5,179)

Balance at June 30, 2021

  82,440,259  $41   4,068,832  $(10,666) $415,325  $(196,346) $208,354 
                             

Balance at December 31, 2020

  80,295,141  $40   3,945,867  $(9,999) $411,753  $(184,909) $216,885 

Vesting of restricted stock units and issuance of stock under incentive plans

  1,947,118   1         135      136 

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

        122,965   (667)        (667)

Exercise of stock options

  198,000            934      934 

Share-based compensation

              2,503      2,503 

Net loss

                 (11,437)  (11,437)

Balance at June 30, 2021

  82,440,259  $41   4,068,832  $(10,666) $415,325  $(196,346) $208,354 

 

 

  

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 

 

See notes to consolidated financial statements

 

 

 

 

FLUENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

  

Six Months Ended June 30,

 
  

2021

  

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net (loss) income

 $(11,437) $860 

Adjustments to reconcile net (loss) income to net cash provided by (used in) by operating activities:

        

Depreciation and amortization

  6,739   7,586 

Non-cash loan amortization expense

  287   694 

Share-based compensation expense

  2,432   3,678 

Non-cash loss on early extinguishment of debt

  2,198    

Non-cash accrued compensation expense for Put/Call Consideration

  2,627   530 

Goodwill impairment

     817 

Write-off of intangible assets

  199    

Provision for bad debt

  98   131 

Changes in assets and liabilities, net of business acquisition:

        

Accounts receivable

  (3,334)  5,513 

Prepaid expenses and other current assets

  763   (75)

Other non-current assets

  (258)  (599)

Operating lease assets and liabilities, net

  (91)  (81)

Accounts payable

  8,672   (9,973)

Accrued expenses and other current liabilities

  (9,345)  (515)

Deferred revenue

  (151)  1,328 

Other

  (64)  (62)

Net cash (used in) provided by operating activities

  (665)  9,832 

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Capitalized costs included in intangible assets

  (1,535)  (1,211)

Business acquisition, net of cash acquired

     (1,426)

Acquisition of property and equipment

  (23)  (37)

Net cash used in investing activities

  (1,558)  (2,674)

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from issuance of long-term debt, net of debt financing costs

  49,624    

Repayments of long-term debt

  (42,986)  (3,873)

Exercise of stock options

  934    

Prepayment penalty on debt extinguishment

  (766)   

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

  (667)  (446)

Proceeds from the issuance of stock

  136    

Repurchase of treasury stock

     (1,300)

Net cash provided by (used in) financing activities

  6,275   (5,619)

Net increase in cash, cash equivalents and restricted cash

  4,052   1,539 

Cash, cash equivalents and restricted cash at beginning of period

  22,567   20,159 

Cash, cash equivalents and restricted cash at end of period

 $26,619  $21,698 

SUPPLEMENTAL DISCLOSURE INFORMATION

        

Cash paid for interest

 $1,097  $2,100 

Cash paid for income taxes

 $340  $ 

Share-based compensation capitalized in intangible assets

 $71  $86 

 

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, 2021.

 

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 ("Winopoly") in its consolidated financial statements as a VIE (as further discussed in Note 11Business acquisition 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, 2020 ("2020 Form 10-K") filed with the SEC on March 16, 2021. The consolidated balance sheet as of  December 31, 2020 included herein was derived from the audited financial statements as of that date included in the 2020 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 amounts 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.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for the discontinuation of a reference rate such as LIBOR, formerly known as the London Interbank Offered Rate, because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

 

On January 1, 2021, FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions and improving the application of existing guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2020.The adoption of ASU 2019-12 on January 1, 2021 did not have a material effect on our 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, (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, (c) verify user interest or transfer calls to advertiser clients as a part of the contact center operation, or (d) deliver media spend as a part of the AdParlor business.

 

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, 2021 and December 31, 2020, the balance of deferred revenue was $1,222 and $1,373, respectively. The majority of the deferred revenue balance as of  December 31, 2020 was recognized into revenue during the first quarter of 2021.

 

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, 2021 and December 31, 2020, unbilled revenue included in accounts receivable was $25,581 and $28,337, 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 billed.

 

 

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, accruals for contingencies and allowance for deferred tax assets. 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.

 

 

2. (Loss) income per share

 

Basic (loss) income per share is computed by dividing net (loss) 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 (loss) 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 six months ended June 30, 2021 and 2020, basic and diluted (loss) income per share was as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Numerator:

                

Net (loss) income

 $(5,179) $452  $(11,437) $860 

Denominator:

                

Weighted average shares outstanding

  78,270,386   76,244,975   77,574,295   76,007,997 

Weighted average restricted shares vested not delivered

  1,691,889   2,265,408   1,986,348   2,549,334 

Total basic weighted average shares outstanding

  79,962,275   78,510,383   79,560,643   78,557,331 

Dilutive effect of assumed conversion of restricted stock units

     156,393      348,461 

Total diluted weighted average shares outstanding

  79,962,275   78,666,776   79,560,643   78,905,792 

Basic and diluted (loss) income per share:

                

Basic

 $(0.06) $0.01  $(0.14) $0.01 

Diluted

 $(0.06) $0.01  $(0.14) $0.01 

 

The following potentially dilutive securities were excluded from the calculation of diluted (loss) 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,

 
  

2021

  

2020

  

2021

  

2020

 

Restricted stock units

  2,843,570   3,412,390   2,843,570   2,288,573 

Stock options

  2,204,000   2,568,000   2,204,000   2,568,000 

Warrants

  833,333   2,183,333   833,333   2,183,333 

Total anti-dilutive securities

  5,880,903   8,163,723   5,880,903   7,039,906 

 

 

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, 2021

  

December 31, 2020

 

Gross amount:

            

Software developed for internal use

  3  $8,381  $7,376 

Acquired proprietary technology

  3-5   14,845   14,788 

Customer relationships

  5-10   37,886   37,886 

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

      111,020   109,958 

Accumulated amortization:

            

Software developed for internal use

      (4,249)  (3,551)

Acquired proprietary technology

      (12,936)  (12,474)

Customer relationships

      (27,303)  (24,657)

Trade names

      (4,699)  (4,252)

Domain names

      (53)  (48)

Databases

      (19,534)  (17,791)

Non-competition agreements

      (1,768)  (1,768)

Total accumulated amortization

      (70,542)  (64,541)

Net intangible assets:

            

Software developed for internal use

      4,132   3,825 

Acquired proprietary technology

      1,909   2,314 

Customer relationships

      10,583   13,229 

Trade names

      11,958   12,405 

Domain names

      138   143 

Databases

      11,758   13,501 

Total intangible assets, net

     $40,478  $45,417 

 

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 (the "Winopoly Acquisition"), effective April 1, 2020 (see Note 11Business acquisition).

 

During the three months ended  March 31, 2021, the Company determined that the reduction in operating results of the Fluent reporting unit, along with a decline in the market value of its publicly-traded stock, collectively constituted a triggering event. As such, 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  March 31, 2021, 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, were reasonable.  The Company completed its quarterly triggering event assessment for the three months ended June 30, 2021 and determined that no triggering event had occurred requiring further impairment assessments for its long lived assets.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

Amortization expense of $3,169 and $3,659 for the three months ended June 30, 2021 and 2020, respectively, and $6,346 and $7,206, for the six months ended  June 30, 2021 and 2020, respectively, is included in depreciation and amortization expenses in the consolidated statements of operations. As of June 30, 2021, intangible assets with a carrying amount of $790, 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, 2021, estimated amortization expense related to the Company's intangible assets for the remainder of 2021 and through 2026 and thereafter are as follows:

 

Year

 

June 30, 2021

 

Remainder of 2021

 $6,059 

2022

  11,852 

2023

  5,504 

2024

  4,602 

2025

  4,024 

2026 and thereafter

  8,437 

Total

 $40,478 

 

 

4. Goodwill

 

Goodwill represents the cost in excess of fair value of net assets acquired in a business combination. As of June 30, 2021, 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 acquisition).

 

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  March 31, 2021, the Company determined that the reduction in operating results of the Fluent reporting unit, along with a decline in the market value of its publicly-traded stock, collectively constituted a triggering event. As such, the Company conducted an interim test of the fair value of its goodwill for potential impairment. Based on the results as of March 31, 2021, which used a combination of the income and market approaches to determine the fair value of the Fluent reporting unit, the Company concluded its goodwill of $160,922 was not impaired since the results of the interim test indicated that the estimated fair value exceeded its carrying value by approximately 17%. The Company believes that the assumptions utilized in its interim impairment testing, including the determination of an appropriate discount rate of 14.5%, long-term profitability growth projections, and estimated future cash flows, are reasonable. The risk of future impairment of goodwill exists if actual results, such as lower than expected revenue, profitability, cash flows, market multiples, discount rates and control premiums, differ from the assumptions used in the Company's interim impairment test.

 

The Company completed its quarterly triggering event assessment for the three months ended June 30, 2021 and determined no triggering event had occurred requiring further interim impairment assessments for its remaining goodwill. However, if additional reduction in operating results or a decline in the market value of its publicly-traded stock occurs, this could result in future impairment charges.

 

 

5. Long-term debt, net

 

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

 

  

June 30, 2021

  

December 31, 2020

 

Refinanced Term Loan due 2023 (less unamortized discount and financing costs of $0 and $2,386, respectively)

 $  $39,350 

New Credit Facility Term Loan due 2026 (less unamortized discount and financing costs of $1,067 and $0, respectively)

  47,683    

Note Payable due 2021 (less unamortized discount of $0 and $24, respectively)

  1,250   1,226 

Long-term debt, net

  48,933   40,576 

Less: Current portion of long-term debt

  (6,250)  (7,293)

Long-term debt, net (non-current)

 $42,683  $33,283 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

Refinanced Term Loan

 

On March 31, 2021, Fluent, LLC redeemed $38,318 aggregate principal amount of our term loan entered into on December 8, 2015 and due March 26, 2023 (the "Refinanced Term Loan"), prior to maturity, resulting in a loss of $2,964 as a cost of early extinguishment of debt.

 

New Credit Facility

 

On March 31, 2021, Fluent, LLC entered into a credit agreement (the “Credit Agreement”) by and among, Fluent, LLC, certain subsidiaries of Fluent, LLC as guarantors, Citizens Bank, N.A. as administrative agent, lead arranger and bookrunner, BankUnited, N.A. and Silicon Valley Bank. The Credit Agreement provides for a term loan in the aggregate principal amount of $50.0 million funded on the Closing Date (the “Term Loan”), along with an undrawn revolving credit facility of up to $15.0 million (the "Revolving Loans," and together with the Term Loan, the "New Credit Facility").

 

The proceeds of the Term Loan were used to repay all outstanding amounts under the Refinanced Term Loan, including transaction fees and expenses, and for working capital and other general corporate purposes.

 

Borrowings under the Credit Agreement bear interest at a rate per annum equal to an applicable margin, plus, at the Company's option, either a base rate or a London Inter-bank Offered Rate (“LIBOR”) rate (subject to a floor of 0.25%). The applicable margin is between 0.75% and 1.75% for base rate borrowings and 1.75% and 2.75% for LIBOR rate borrowings, depending upon the Company's consolidated leverage ratio. The opening interest rate of the New Credit Facility is 2.50% (LIBOR + 2.25%). 

 

Borrowings under the Credit Agreement are secured by substantially all of the assets of Fluent, LLC and, subject to certain exclusions, each of its existing and future U.S. subsidiaries. Such assets include, subject to certain limitations, the equity interests of each of the existing and future direct and indirect U.S. subsidiaries of Fluent, LLC.

 

The Credit Agreement contains negative covenants that, among other things, limit Fluent, LLC's ability to: incur indebtedness; grant liens on its assets; enter into certain investments; consummate fundamental change transactions; engage in mergers or acquisitions or dispose of assets; enter into certain transactions with affiliates; make changes to its fiscal year; enter into certain restrictive agreements; and make certain restricted payments (including for dividends and stock repurchases, which are generally prohibited except in a few circumstances and/or up to specified amounts). Each of these limitations are subject to various conditions.

 

The Credit Agreement matures on March 31, 2026 and interest is payable monthly. Scheduled principal amortization of the Term Loan is $1,250 per quarter, which commenced with the fiscal quarter ended June 30, 2021. At June 30, 2021, 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, 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, does 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. The first installment payment of $1,250 was made on July 1, 2020, and the second installment payment of $1,250 was made on July 1, 2021, in each case using cash on hand.

 

Maturities

 

As of June 30, 2021, scheduled future maturities of the Credit Agreement and Note Payable are as follows:

 

Year

  June 30, 2021 

Remainder of 2021

 $3,750 

2022

  5,000 

2023

  5,000 

2024

  5,000 

2025

  31,250 

Total maturities

 $50,000 

 

Fair value

 

As of June 30, 2021, 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, 2021 and December 31, 2020, 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 a portion of these allowances. 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 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, 2021 and 2020, the Company's effective income tax benefit rate of 0% 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, 2021 and December 31, 2020, 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, 2021, 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.

 

 

7. Common stock, treasury stock and warrants

 

Common stock

 

As of  June 30, 2021 and December 31, 2020, the number of issued shares of common stock was 82,440,259 and 80,295,141, respectively, which included shares of treasury stock of 4,068,832 and 3,945,867, respectively.

 

For the six months ended June 30, 2021, the change in the number of issued shares of common stock was the result of an aggregate 1,947,118 shares of common stock issued upon vesting of RSUs, including 122,965 shares of common stock withheld to cover statutory taxes upon such vesting, which are reflected in treasury stock, as discussed below. The change also included the exercise of 198,000 stock options by a former key executive. 

 

Treasury stock

 

As of  June 30, 2021 and December 31, 2020, the Company held shares of treasury stock of 4,068,832 and 3,945,867, with a cost of $10,666 and $9,999, 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, 2021, 122,965 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. 

 

Warrants

 

As of  June 30, 2021 and December 31, 2020, warrants to purchase an aggregate of 833,333 of common stock were outstanding 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, requiring 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, 2021, the Company maintains two share-based incentive plans: the Cogint, Inc. 2015 Stock Incentive Plan and the Fluent, Inc. 2018 Stock Incentive Plan (the "2018 Plan") which, combined, authorize the issuance of 21,337,143 shares of common stock. As of June 30, 2021, there were 1,509,149 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 executives, which were issued on February 1, 2019, December 20, 2019,  March 1, 2020 and March 1, 2021 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%, 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%, 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 March 31, 2021, the first condition for the stock options issued on February 1, 2019, December 20, 2019 and March 1, 2020 have been met and the second condition for the stock options issued on December 20, 2019 and March 1, 2020 have been met. 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

   

March 1, 2021

 

Fair value lower range

  $ 2.81     $ 1.58     $ 1.46     $ 4.34  

Fair value higher range

  $ 2.86     $ 1.61     $ 1.49     $ 4.43  

Exercise price

  $ 4.72     $ 2.56     $ 2.33     $ 6.33  

Expected term (in years)

    1.0 - 1.3       1.0 - 1.6       1.0 - 1.5       1.0 - 1.3  

Expected volatility

    65 %     70 %     70 %     80 %

Dividend yield

    %     %     %     %

Risk-free rate

    2.61 %     1.85 %     1.05 %     1.18 %

 

For the six months ended June 30, 2021, 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, 2020

    2,294,000     $ 4.34       8.0     $ 2,256  

Granted

    108,000     $ 6.33       9.7        

Exercised

    (198,000 )                        

Outstanding as of June 30, 2021

    2,204,000     $ 4.41       7.6     $ 190  

Options exercisable as of June 30, 2021

    1,307,000     $ 4.06       7.5     $ 190  

 

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, 2021, 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, 2020

    1,225,000     $ 3.93       8.4  

Granted

    108,000     $ 6.33       9.7  

Vested

    (436,000 )              

Unvested as of June 30, 2021

    897,000     $ 4.91       7.8  

 

12

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

Compensation expense recognized for stock options of $123 and $152 for the three months ended June 30, 2021 and 2020, respectively, and $290 and $1,351 for the six months ended June 30, 2021 and 2020, respectively, was recorded in sales and marketing, product development and general and administrative expenses in the consolidated statements of operations. As of June 30, 2021, there was $334 of unrecognized share-based compensation with respect to outstanding stock options.

 

Restricted stock units and restricted stock

 

For the six months ended June 30, 2021, 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, 2020

    3,377,097     $ 7.09  

Granted

    1,043,660     $ 5.88  

Vested and delivered

    (1,824,153 )   $ 2.98  

Withheld as treasury stock (1)

    (122,965 )   $ 4.91  

Vested not delivered (2)

    570,335     $ 2.70  

Forfeited

    (200,404 )   $ 4.20  

Unvested as of June 30, 2021

    2,843,570     $ 8.69  

 

(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, 2021, there were 4,068,832 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, 2021, there was a net decrease of 570,335 shares included in the vested not delivered balance as a result of the delivery of 650,333 shares, partially offset by the vesting of 79,998 shares with deferred delivery election. As of June 30, 20211,691,666 outstanding RSUs were vested not delivered.

 

Compensation expense recognized for RSUs and restricted stock of $1,108 and $1,176 for the three months ended June 30, 2021 and 2020, respectively, and $2,213 and $2,413 for the six months ended June 30, 2021 and 2020, 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, 2021, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $9,998, which is expected to be recognized over a weighted average period of 2.3 years.

 

For the three and six months ended June 30, 2021 and 2020, 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,

 
   

2021

   

2020

   

2021

   

2020

 

Sales and marketing

  $ 209     $ 269     $ 372     $ 487  

Product development

    233       286       501       523  

General and administrative

    759       726       1,559       2,668  

Share-based compensation expense

    1,201       1,281       2,432       3,678  

Capitalized in intangible assets

    30       47       71       86  

Total share-based compensation

  $ 1,231     $ 1,328     $ 2,503     $ 3,764  

 

On May 13, 2021, the Company's then-CEO and then-President purchased a total of 50,000 shares from the Company for cash under the 2018 Stock Incentive Plan. The per share purchase price for each transaction was the closing price reported on Nasdaq on the date of purchase.

 

13

 

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 EBITDA. As of June 30, 2021, 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 of AdParlor, LLC, 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,

 
  

2021

  

2020

  

2021

  

2020

 

Fluent segment revenue:

                

United States

 $59,306  $57,462  $117,558  $125,613 

International

  10,693   12,935   19,983   22,346 

Fluent segment revenue

 $69,999  $70,397  $137,541  $147,959 

All Other segment revenue:

                

United States

 $3,338  $1,012  $5,935  $2,197 

International

  41   100   72   287 

All Other segment revenue

 $3,379  $1,112  $6,007  $2,484 

Segment EBITDA

                

Fluent segment EBITDA

 $(1,582) $6,809  $(172) $12,698 

All Other segment EBITDA

  196   (1,171)  (128)  (1,387)

Total EBITDA

  (1,386)  5,638   (300)  11,311 

Depreciation and amortization

  3,366   3,853   6,739   7,586 

Total (loss) income from operations

 $(4,752) $1,785  $(7,039) $3,725 

 

  

June 30,

  

December 31,

 
  2021  2020 

Total assets:

      

Fluent

 $290,717  $292,616 

All Other

  20,153   17,604 

Total assets

 $310,870  $310,220

 

 

 

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 May 6, 2021, the Company and the NY AG executed an Assurance of Discontinuance (the “AOD”) to resolve this matter. The AOD imposed injunctive provisions on the Company’s practices with regard to political advocacy campaigns, most of which the Company had already implemented, and imposed a $3.7 million penalty, which was in line with the Company's accrual in the prior quarter and paid in full as of June 30, 2021.

 

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 was responsive and fully cooperated with each of the DOJ and the DC AG.

 

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. On October 16, 2020, the Company filed challenges to the Notices of Determination. On June 21, 2021, the Company and the Tax Department participated in a conciliation conference, but the audits were not resolved. Based on the foregoing, the Company believes 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 responsive and is fully cooperating with the FTC. 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 acquisition

 

Winopoly acquisition

 

On April 1, 2020, the Company acquired, through a wholly owned subsidiary, a 50% membership interest in Winopoly (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. As of the first quarter of 2021, the initial contingent consideration of $1,000 had been paid based on specific revenue targets having been met. On May 17, 2021, additional contingent consideration that was not previously deemed to be probable of payment in the amount of $500 was paid based on a specific revenue target having been met. Winopoly is a contact center operation, which serves as a marketplace that matches consumers sourced by Fluent and other third parties with advertiser clients. In accordance with ASC 805, the Company determined that the Winopoly Acquisition constituted the purchase of a business. 

 

The 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 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. 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

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. 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 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 the month of the put/call closing extending through six months following the month of the put/call closing (the "Put/Call Consideration"). 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 respective shares of the Put/Call Consideration.

 

Although the sellers maintain an equity interest in Winopoly, the Company has 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 and the Put/Call Consideration, both of which are dependent on the sellers' 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; 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, the Company estimates the amount of the Put/Call Consideration, which is 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, 2021, compensation expense of $881 and $2,627, respectively, and 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.

 

 

12. Variable Interest Entity

 

The Company has determined that Winopoly (as discussed in Note 11, Business acquisition) 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 provide the Company with control over certain activities that most significantly impact its economic performance. These significant activities include the compliance practices of Winopoly and the Company's provisions of leads that Winopoly uses to generate its revenue, which ultimately give the Company its controlling interest. The Company therefore consolidates Winopoly in its consolidated financial statements, inclusive of deemed compensation expense to the sellers for services rendered.

 

 

13. Related party transactions

 

During the three and six months ended June 30, 2021, the Company recognized revenue from a client in which the then-CEO holds a significant ownership interest. Accounts receivable for this client were $119 and $137 as of June 30, 2021 and December 31, 2020, respectively. For the three and six months ended June 30, 2021, the Company recognized revenue from this client of $0 and $33, respectively, and for the three and six months ended June 30, 2020, the Company recognized revenue from this client of $95 and $145, respectively. In accordance with the Company's policies and procedures for determining allowances for doubtful accounts and write-offs, the Company wrote-off the outstanding accounts receivable from this client as of June 30, 2021.

 

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 and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 16, 2021 ("2020 Form 10-K"), and other filings we make with the Securities and Exchange Commission (the "SEC"). We do not undertake any obligation to update forward-looking statements, except as required by law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.

 

Overview

 

Fluent, Inc. ("we," "us," "our," "Fluent," or the "Company"), is an industry leader in data-driven digital marketing services. We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach. We deliver performance-based marketing executions and lead generation data records to our clients, which in 2020 included over 500 consumer brands, direct marketers and agencies across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer, and Staffing & Recruitment.

 

We attract consumers at scale to our owned digital media properties primarily through promotional offerings and employment opportunities. To register on our sites, consumers provide their names, contact information and opt-in permission to present them with offers on behalf of our clients. Approximately 90% of these users engage with our media on their mobile devices or tablets. Our always-on, real-time capabilities enable users to access our media whenever and wherever they choose.

 

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

 

Since our inception, we have amassed a large, proprietary database of first-party, self-declared user information and preferences. We have permission to contact the majority of users in our database through multiple channels, such as email, direct mail, telephone, push notifications and SMS text messaging. We leverage this data in our performance offerings primarily to serve advertisements that we believe will be relevant to users based on the information they provide, and in our lead generation offerings to provide our clients with users' contact information so that our clients may communicate with the users directly. We continue to leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising.

 

Second Quarter Financial Summary

 

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

 

Revenue increased 3% to $73.4 million, from $71.5 million.

  Net loss was $5.2 million, or $0.06 per share, compared to net income of $0.5 million or $0.01 per share.
  Media margin decreased 19% to $20.1 million, from $24.8 million, representing 27.4% of revenue.
  Adjusted EBITDA decreased 80% to $1.9 million, based on net loss of $5.2 million, from $9.4 million, based on net income of $0.5 million.
  Adjusted net loss was $1.9 million, or $0.02 per share, compared to adjusted net income of $4.2 million, or $0.05 per share.

 

Six months ended June 30, 2021 compared to six months ended June 30, 2020:

 

Revenue decreased 5% to $143.5 million, from $150.4 million.

  Net loss was $11.4 million, or $0.14 per share, compared to net income of $0.9 million or $0.01 per share.
  Media margin decreased 8% to $45.0 million, from $48.7 million, representing 31.4% of revenue.
  Adjusted EBITDA decreased 64% to $6.6 million, based on net loss of $11.4 million, from $18.4 million, based on net income of $0.9 million.
  Adjusted net loss was $1.6 million, or $0.02 per share, compared to adjusted net income of $8.0 million, or $0.10 per share.

 

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

 

Trends Affecting our Business

 

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

 

A key challenge for our business is identifying and accessing media sources that are of high quality and able to attract targeted users to our media properties. As our business has grown, we have attracted larger and more sophisticated clients to our platform. To further increase our value proposition to clients and to fortify our leadership position in relation to the evolving regulatory landscape of our industry, we commenced a traffic quality initiative (the "Traffic Quality Initiative") in 2020. We believe that significant value can be created by improving the quality of traffic we source to our media properties, through higher participation rates on our sites, leading to higher conversion rates, resulting in increased monetization and ultimately increasing revenue and media margin.

 

Through this initiative, we substantially curtailed the volume of lower quality affiliate traffic that we source, particularly during the fourth quarter of 2020 and the first quarter of 2021, and continue to make smaller adjustments as appropriate. See "Results of Operations" below for additional detail on the impact to our revenue during the first quarter of 2021. To replace this lower quality traffic, we are testing and scaling various media channels, strategies and partners to generate consumer traffic meeting our quality requirements. Some of these strategies tested in the second quarter of 2021 involved increased media spend with major digital media platforms and revised bidding strategies for affiliate traffic, each of which were expected to yield lower margins, with the intent to optimize spend for improved profitability in future periods. The mix and profitability of our media channels, strategies and partners is likely to be dynamic and reflect evolving market dynamics and the impact of our Traffic Quality Initiative. Consolidation of media sources, changes in search engine, email and text message blocking algorithms and increased competition for available media have made the process of sourcing new traffic challenging during 2021 and may continue to do so in the future. As we test and scale new media channels, strategies and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability. However, we believe the Traffic Quality Initiative will benefit the Company over time, providing the foundation to support sustainable long-term growth and positioning us as an industry leader.

 

Seasonality and Cyclicality

 

Our results are subject to fluctuation as a result of seasonality and cyclicality in our and our clients’ businesses. For example, our fourth fiscal quarter ending December 31 is typically characterized by higher advertiser budgets, which can be somewhat offset by seasonal challenges of lower availability and/or higher pricing for some forms of media during the holiday period. Further, as reflected in historical data from the Interactive Advertising Bureau (IAB), industry spending on internet advertising has generally declined sequentially in the first quarter of the calendar year from the fourth quarter. Similar to the industry overall, some of our clients have lower advertising budgets during our first fiscal quarter ending March 31; however, we believe that the breadth of industries in which our clients operate provides us with some insulation from these fluctuations.

 

In addition to variations in budgets from quarter to quarter, certain clients have budgets that start stronger at the beginning of quarterly or monthly periods, may reach limits during such periods and then may have needs to satisfy their performance objectives at the end of such periods. Beyond these budgetary constraints and buying patterns of clients, other factors affecting our business may include macroeconomic conditions affecting the digital media industry and the various client verticals we serve.

 

COVID-19 Update

 

On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. At this time, our operations have not been significantly impacted by the global economic impact of COVID-19, and we have taken appropriate measures to ensure that we are able to conduct our business remotely without significant disruptions. The economic uncertainty caused by COVID-19 has had varying degrees of impact on certain of our advertiser clients in certain industry verticals over the course of the pandemic. For example, industry verticals such as staffing and recruitment and financial products and services exhibited reduced pricing and/or demand following the onset of the pandemic and have subsequently recovered to varying degrees since that time. On the other hand, demand from certain advertisers in other verticals, such as streaming services and mobile gaming, increased during the pandemic and has since remained strong. With the proliferation of COVID-19 vaccinations in the U.S. during the second quarter of 2021, we have seen a substantial recovery in the staffing and recruitment vertical. There may continue to be additional shifts in pricing and/or demand among our clients, as the trajectory of the pandemic and future economic outlook remain uncertain.

 

 

We implemented company-wide work-from-home beginning on March 13, 2020. During the second quarter of 2021, we began to open our headquarters to employees that meet health protocols and voluntarily choose to work in the office. We expect to implement a more formal policy regarding working from home later in the third quarter. While we believe we have adapted well to a work-from-home environment, COVID-19 increases the likelihood of certain risks of disruption to our business, such as the incapacity of certain employees or system interruptions, which could lead to diminishment of our regular business operations, technological capacity and cybersecurity capabilities, as well as operational inefficiencies and reputational harm.

 

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

 

Definitions, Reconciliations and Uses of Non-GAAP Financial Measures

 

We report the following non-GAAP measures:

 

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

 

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

 

Adjusted net income is defined as net (loss) income excluding (1) Share-based compensation expense, (2) loss on early extinguishment of debt, (3) accrued compensation expense for Put/Call Consideration, (4) goodwill impairment,  (5) write-off of intangible assets, (6) acquisition-related costs, (7) restructuring and other severance costs, and (8) certain litigation and other related costs. Adjusted net income is also presented on a per share (basic and diluted) basis.

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2021

   

2020

   

2021

   

2020

 

Net (loss) income

  $ (5,179 )   $ 452     $ (11,437 )   $ 860  

Income tax benefit

                (1 )      

Interest expense, net

    427       1,333       1,435       2,865  

Depreciation and amortization

    3,366       3,853       6,739       7,586  

Loss on early extinguishment of debt

                2,964        

Goodwill impairment

          817             817  

Write-off of intangible assets

    199             199        

General and administrative

    11,527       10,044       23,226       21,120  

Product development

    3,433       3,115       6,867       5,846  

Sales and marketing

    3,000       2,888       5,961       5,718  

Non-media cost of revenue (1)

    3,363       2,312       9,053       3,915  

Media margin

  $ 20,136     $ 24,814     $ 45,006     $ 48,727  

Revenue

  $ 73,378     $ 71,509     $ 143,548     $ 150,443  

Media margin % of revenue

    27.4 %     34.7 %     31.4 %     32.4 %

 

(1)

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

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2021

   

2020

   

2021

   

2020

 

Net (loss) income

  $ (5,179 )   $ 452     $ (11,437 )   $ 860  

Income tax benefit

                (1 )      

Interest expense, net

    427