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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2022

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 4, 2022, the registrant had 79,891,976 shares of common stock, $0.0005 par value per share 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, 2022 and December 31, 2021

2

 

Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021

3

 

Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2022 and 2021

4

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021

5

 

Notes to Consolidated Financial Statements

6

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

Signatures

35

 

 

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, 2022

  

December 31, 2021

 

ASSETS:

        

Cash and cash equivalents

 $26,396  $34,467 

Accounts receivable, net of allowance for doubtful accounts of $373 and $313, respectively

  77,986   70,228 

Prepaid expenses and other current assets

  2,101   2,505 

Total current assets

  106,483   107,200 

Property and equipment, net

  1,162   1,457 

Operating lease right-of-use assets

  5,926   6,805 

Intangible assets, net

  32,872   35,747 

Goodwill

  110,780   165,088 

Other non-current assets

  1,917   1,885 

Total assets

 $259,140  $318,182 

LIABILITIES AND SHAREHOLDERS' EQUITY:

        

Accounts payable

 $17,043  $16,130 

Accrued expenses and other current liabilities

  34,623   33,932 

Deferred revenue

  698   651 

Current portion of long-term debt

  5,000   5,000 

Current portion of operating lease liability

  2,227   2,227 

Total current liabilities

  59,591   57,940 

Long-term debt, net

  37,964   40,329 

Operating lease liability

  4,728   5,692 

Other non-current liabilities

  739   811 

Total liabilities

  103,022   104,772 

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 — 84,146,082 and 83,057,083, respectively; and Shares outstanding — 79,845,930 and 78,965,260, respectively (Note 7)

  42   42 

Treasury stock, at cost — 4,300,152 and 4,091,823 Shares, respectively (Note 7)

  (11,171)  (10,723)

Additional paid-in capital

  421,172   419,059 

Accumulated deficit

  (253,925)  (194,968)

Total shareholders' equity

  156,118   213,410 

Total liabilities and shareholders' equity

 $259,140  $318,182 

 

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,

 
  

2022

   

2021

  

2022

  

2021

 

Revenue

 $98,361   $73,378  $187,424  $143,548 

Costs and expenses:

                 

Cost of revenue (exclusive of depreciation and amortization)

  70,026    56,605   137,589   107,595 

Sales and marketing

  4,484    3,000   8,336   5,961 

Product development

  4,802    3,433   9,357   6,867 

General and administrative

  11,688    11,527   22,975   23,226 

Depreciation and amortization

  3,332    3,366   6,639   6,739 
Goodwill impairment and write-off of intangible assets  55,400    199   55,528   199 

Loss on disposal of property and equipment

  21       21    

Total costs and expenses

  149,753    78,130   240,445   150,587 

Loss from operations

  (51,392)   (4,752)  (53,021)  (7,039)

Interest expense, net

  (430)   (427)  (814)  (1,435)

Loss on early extinguishment of debt

            (2,964)

Loss before income taxes

  (51,822)   (5,179)  (53,835)  (11,438)

Income tax (expense) benefit

  

(5,122

)      (5,122)  1 

Net loss

 $(56,944)  $(5,179) $(58,957) $(11,437)
                  

Basic and diluted loss per share:

                 

Basic

 $(0.70)  $(0.06) $(0.73) $(0.14)

Diluted

 $(0.70)  $(0.06) $(0.73) $(0.14)
                  

Weighted average number of shares outstanding:

                 

Basic

  81,493,821    79,962,275   81,193,107   79,560,643 

Diluted

  81,493,821    79,962,275   81,193,107   79,560,643 

 

See notes to consolidated financial statements

 

 

 

 

FLUENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

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

(unaudited)

 

  

Common stock

  

Treasury stock

  

Additional paid-in

  

Accumulated

  

Total shareholders'

 
  

Shares

  

Amount

  

Shares

  

Amount

  

capital

  

deficit

  

equity

 

Balance at March 31, 2022

  83,983,587  $42   4,300,152  $(11,171) $420,285  $(196,981) $212,175 

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

  162,495                   

Share-based compensation

              887      887 

Net loss

                 (56,944)  (56,944)

Balance at June 30, 2022

  84,146,082  $42   4,300,152  $(11,171) $421,172  $(253,925) $156,118 
                             

Balance at December 31, 2021

  83,057,083  $42   4,091,823  $(10,723) $419,059  $(194,968) $213,410 

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

  1,088,999            211      211 

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

        208,329   (448)        (448)

Share-based compensation

              1,902      1,902 

Net loss

                 (58,957)  (58,957)

Balance at June 30, 2022

  84,146,082  $42   4,300,152  $(11,171) $421,172  $(253,925) $156,118 

 

 

  

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)

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 restricted stock

  1,947,118   1         135      136 

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

        122,965   (667)        (667)

Exercise of warrants by certain warrant holders (Note 7)

  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 

 

See notes to consolidated financial statements

 

 

 

 

FLUENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net loss

 $(58,957) $(11,437)

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

        

Depreciation and amortization

  6,639   6,739 

Non-cash loan amortization expense

  135   287 

Share-based compensation expense

  1,851   2,432 

Non-cash loss on early extinguishment of debt

     2,198 

Non-cash accrued compensation expense for Put/Call Consideration

     2,627 

Goodwill impairment

  55,400    

Write-off of intangible assets

  128   199 

Loss on disposal of property and equipment

  21    

Provision for bad debt

  158   98 

Provision for income taxes

  5,122    

Changes in assets and liabilities, net of business acquisitions:

        

Accounts receivable

  (7,913)  (3,334)

Prepaid expenses and other current assets

  488   763 

Other non-current assets

  (25)  (258)

Operating lease assets and liabilities, net

  (85)  (91)

Accounts payable

  913   8,672 

Accrued expenses and other current liabilities

  (5,573)  (9,345)

Deferred revenue

  (177)  (151)

Other

  (72)  (64)

Net cash used in operating activities

  (1,947)  (665)

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Capitalized costs included in intangible assets

  (2,199)  (1,535)

Business acquisitions, net of cash acquired

  (971)   

Acquisition of property and equipment

  

(6

)  (23)

Net cash used in investing activities

  (3,176)  (1,558)

CASH FLOWS FROM FINANCING ACTIVITIES:

        

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

     49,624 

Repayments of long-term debt

  (2,500)  (42,986)

Exercise of stock options

     934 

Prepayment penalty on debt extinguishment

     (766)

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

  (448)  (667)

Proceeds from the issuance of stock

     136 

Net cash (used in) provided by financing activities

  (2,948)  6,275 

Net (decrease) increase in cash, cash equivalents and restricted cash

  (8,071)  4,052 

Cash, cash equivalents and restricted cash at beginning of period

  34,467   22,567 

Cash, cash equivalents and restricted cash at end of period

 $26,396  $26,619 

SUPPLEMENTAL DISCLOSURE INFORMATION

        

Cash paid for interest

 $687  $1,097 

Cash paid for income taxes

 $35  $340 

Share-based compensation capitalized in intangible assets

 $51  $71 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

        

Liability incurred for deferred payment in connection with True North acquisition:

 $860  $ 

Contingent consideration in connection with True North acquisition:

 $250  $ 

Equity issued in connection with True North acquisition:

 $211  $ 

 

See notes to consolidated financial statements

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per 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 ("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 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 ended June 30, 2022 and 2021, respectively, 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, 2022.

 

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. From April 1, 2020 through August 31, 2021, the Company had 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). Winopoly has been a wholly-owned subsidiary of the Company since September 1, 2021.

 

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, 2021 ("2021 Form 10-K") filed with the SEC on March 9, 2022. The consolidated balance sheet as of  December 31, 2021 included herein was derived from the audited financial statements as of that date included in the 2021 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, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2016-13, Financial Instruments—Credit Losses ("Topic 326"), 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 guidance on its consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Topic 848"), 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, and it does not anticipate that such adoption will have a material impact on its consolidated financial statements.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

(c) Revenue recognition

 

On January 1, 2018, we adopted and started applying the practical expedient offered under FASB Accounting Standards Codification ("ASC"), Revenue from Contracts with Customers, ("Topic 606"), which permits, under ASC 606-10-55-18 revenue to be 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 business of AdParlor, LLC, a wholly-owned subsidiary of the Company.

 

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, 2022 and December 31, 2021, the balance of deferred revenue was  $698 and $651, respectively. The majority of the deferred revenue balance as of  December 31, 2021 was recognized into revenue during the first quarter of 2022.

 

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, 2022 and December 31, 2021, unbilled revenue included in accounts receivable was $31,804 and $31,842, 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.

 

(d) Use of estimates

 

The preparation of consolidated financial statements in accordance with 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, the put/call consideration, 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.

 

(e) Fair value

 

The fair value of the Company’s cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values because of the short-term nature of these instruments.

 

As of June 30, 2022, the fair value of long-term debt is considered to approximate its carrying value. The fair value assessment represents a Level 2 measurement.

 

The fair value of certain long-lived non-financial assets and liabilities may be required to be measured on a nonrecurring basis in certain circumstances, including when there is evidence of impairment. As of June 30, 2022, certain non-financial assets have been measured at fair value subsequent to their initial recognition. The Company determined the estimated fair value to be Level 3, as certain inputs used to determine fair value are unobservable, see Note 4, Goodwill, for further discussion of the impairment charge.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

 

2. Loss per share

 

Basic loss per share is computed by dividing net loss 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 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, 2022 and 2021, basic and diluted loss per share was as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Numerator:

                

Net loss

 $(56,944) $(5,179) $(58,957) $(11,437)

Denominator:

                

Weighted average shares outstanding

  79,793,240   78,270,386   79,479,049   77,574,295 

Weighted average restricted shares vested not delivered

  1,700,581   1,691,889   1,714,058   1,986,348 

Total basic weighted average shares outstanding

  81,493,821   79,962,275   81,193,107   79,560,643 

Dilutive effect of assumed conversion of restricted stock units

            

Total diluted weighted average shares outstanding

  81,493,821   79,962,275   81,193,107   79,560,643 

Basic and diluted loss per share:

                

Basic

 $(0.70) $(0.06) $(0.73) $(0.14)

Diluted

 $(0.70) $(0.06) $(0.73) $(0.14)

 

Based upon the exercise price and the average stock price for the three and six months ended June 30, 2022 and 2021, respectively, certain stock equivalents, including stock options and warrants, have been excluded from diluted weighted average share calculations due to their anti-dilutive nature.

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Restricted stock units

  1,875,000   2,843,570   1,875,000   2,843,570 

Stock options

  2,139,000   2,204,000   2,139,000   2,204,000 

Warrants

     833,333      833,333 

Total anti-dilutive securities

  4,014,000   5,880,903   4,014,000   5,880,903 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

 

3. Intangible assets, net

 

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

 

  

Amortization period (in years)

  

June 30, 2022

  

December 31, 2021

 

Gross amount:

            

Software developed for internal use

  3  $11,757   9,552 

Acquired proprietary technology

  3-5   15,824   14,844 

Customer relationships

  5-10   38,068   37,886 

Trade names

  4-20   16,657   16,657 

Domain names

  20   195   191 

Databases

  5-10   31,292   31,292 

Non-competition agreements

  2-5   1,768   1,768 

Total gross amount

      115,561   112,190 

Accumulated amortization:

            

Software developed for internal use

      (6,546)  (5,263)

Acquired proprietary technology

      (13,851)  (13,402)

Customer relationships

      (32,685)  (29,948)

Trade names

      (5,592)  (5,145)

Domain names

      (63)  (58)

Databases

      (22,184)  (20,859)

Non-competition agreements

      (1,768)  (1,768)

Total accumulated amortization

      (82,689)  (76,443)

Net intangible assets:

            

Software developed for internal use

      5,211   4,289 

Acquired proprietary technology

      1,973   1,442 

Customer relationships

      5,383   7,938 

Trade names

      11,065   11,512 

Domain names

      132   133 

Databases

      9,108   10,433 

Total intangible assets, net

     $32,872  $35,747 

 

The gross amounts associated with software developed for internal use primarily represents the capitalized costs of internally developed software. 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, LLC. and certain of its affiliates, effective July 1, 2019 (the "AdParlor Acquisition"), the acquisition of a 50% interest in Winopoly (the "Initial Winopoly Acquisition"), effective April 1, 2020 (Note 11Business acquisition), and the acquisition of 100% interest in True North Loyalty, LLC. (the "True North Acquisition"), effective January 1, 2022 (Note 11, Business acquisition). In connection with the Initial Winopoly Acquisition, the Company recorded 100% equity ownership for GAAP purposes due to Winopoly's status as a VIE for which the Company is a primary beneficiary, so no further intangible assets were acquired in connection with the Full Winopoly Acquisition described in Note 11, Business acquisition.

 

During the second quarter of 2022, the Company determined that the decline in its publicly traded stock price which resulted in a corresponding decline in its market capitalization 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 June 30, 2022, its long-lived assets were not impaired. The Company believes that the assumptions utilized in this interim impairment testing, including the estimation of future cash flows, were 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, 2022. 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

Amortization expense of $3,218 and $3,169 for the three months ended June 30, 2022 and 2021, respectively, and $6,359 and $6,346, for the six months ended June 30, 2022 and 2021, respectively, is included in depreciation and amortization expenses in the consolidated statements of operations. As of June 30, 2022, intangible assets with a carrying amount of $1,116, 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, 2022, estimated amortization expense related to the Company's intangible assets for the remainder of 2022 and through 2027 and thereafter are as follows:

 

Year

 

June 30, 2022

 

Remainder of 2022

 $5,453 

2023

  6,719 

2024

  6,615 

2025

  5,301 

2026

  1,385 

2027 and thereafter

  7,399 

Total

 $32,872 

 

 

4. Goodwill

 

Goodwill represents the consideration paid in excess of the fair value of net assets acquired in a business combination. As of June 30, 2022, the total balance of goodwill was $110,780, a decrease of $54,308 from December 31, 2021, as a result of a non-cash impairment charge of $55,400 partially offset by $1,092 attributable to the True North Acquisition (Note 11Business acquisition). The balance also includes goodwill from the acquisition of Interactive Data, LLC, the Fluent LLC Acquisition, the Q Interactive Acquisition, the AdParlor Acquisition, and the Initial Winopoly Acquisition (Note 11Business acquisition). In connection with the Initial Winopoly Acquisition, the Company recorded 100% equity ownership for GAAP purposes due to Winopoly's status as a VIE for which the Company is a primary beneficiary, so no further goodwill was acquired in connection with the Full Winopoly Acquisition described in Note 11, Business acquisition.

 

In accordance with ASC 350, Intangibles - Goodwill and Other, goodwill is assessed 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 second quarter of 2022, the Company determined that the decline in the market value of its publicly-traded stock, which resulted in a corresponding decline in its market capitalization, constituted a triggering event. The Company conducted an interim test of the fair value of the Fluent reporting unit's goodwill for potential impairment as of June 30, 2022. The Company considered a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The Company determined that a market-based approach, which considered the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium, provided the best indication of fair value of the Fluent reporting unit. The results of this market-based approach indicated that its carrying value exceeded its fair value by 27%. The Company therefore concluded that the Fluent reporting unit’s goodwill of $162.0 million was impaired and recorded a non-cash impairment charge of $55.4 million.

 

The Company believes that the assumptions utilized in its interim impairment testing, including forecasted cash flows, market multiples and control premiums, are reasonable.

 

  

Fluent

  

All Other

  

Total

 

Balance as of December 31, 2021

 $160,922  $4,166  $165,088 
True North Acquisition   1,092      1,092 

Fluent goodwill impairment

  (55,400)     (55,400)

Balance as of June 30, 2022

 $106,614  $4,166  $110,780 

 

 

 

5. Debt, net

 

Long-term debt, net of unamortized discount and financing costs, related to the Refinanced Term Loan and the New Credit Facility Term Loan consisted of the following:

 

  

June 30, 2022

  

December 31, 2021

 

New Credit Facility Term Loan due 2026 (less unamortized discount and financing costs of $786 and $921, respectively)

 $42,964  $45,329 

Less: Current portion of long-term debt

  (5,000)  (5,000)

Long-term debt, net (non-current)

 $37,964  $40,329 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

Refinanced Term Loan

 

On March 31, 2021, Fluent, LLC, a wholly-owned subsidiary of the Company redeemed in full $38,318 in the aggregate principal amount of a 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 the cost of early extinguishment of the debt, $766 of which was a cash payment.

 

New Credit Facility

 

On March 31, 2021, Fluent, LLC entered into a credit agreement (the “Credit Agreement”) with certain subsidiaries of Fluent, LLC as guarantors, and Citizens Bank, N.A. as administrative agent, lead arranger and bookrunner. The Credit Agreement provides for a term loan in the aggregate principal amount of $50,000 funded on the closing date (the “Term Loan”), along with an undrawn revolving credit facility of up to $15,000 (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 due 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 LIBOR rate (subject to a floor of 0.25%). The applicable margin is between 0.75% and 1.75% for base rate borrowings and 1.75% and 2.75% for LIBOR rate borrowings, depending upon the Company's consolidated leverage ratio. The opening interest rate of the New Credit Facility was 2.50% (LIBOR + 2.25%), which increased to 3.92% (LIBOR + 2.25%) as of June 30, 2022.

 

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, 2022, the Company was in compliance with all of the financial and other covenants under the Credit Agreement. Effective September 1, 2021, the Credit Agreement was amended to add Winopoly as a party to that agreement following the consummation of the Full Winopoly Acquisition which transaction is more fully described in Note 11, Business acquisition, of this Quarterly Report on Form 10-Q. Effective April 29, 2022, the Credit Agreement was amended to add certain additional subsidiaries of Fluent, LLC as parties. 

 

Maturities

 

As of June 30, 2022, scheduled future maturities of the Credit Agreement are as follows:

 

Year

  June 30, 2022 

Remainder of 2022

 $2,500 

2023

  5,000 

2024

  5,000 

2025

  5,000 

2026

  26,250 

Total maturities

 $43,750 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

 

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, a cumulative adjustment is made. 

 

As of  June 30, 2022 and December 31, 2021, 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 that the Company is able to achieve and the net deferred tax assets available.

 

For the six months ended June 30, 2022, the Company's effective income tax expense rate of 9.5% primarily represents the projected federal and state cash tax expense expected to result in taxable income for full-year 2022 after consideration of the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses. For the six months ended June 30, 2021, 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, 2022 and December 31, 2021, 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, 2022, 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, 2022 and December 31, 2021, the number of issued shares of common stock was 84,146,082 and 83,057,083, respectively, which included shares of treasury stock of 4,300,152 and 4,091,823, respectively.

 

For the six months ended June 30, 2022, the change in the number of issued shares of common stock was the result of an aggregate 1,088,999 shares of common stock issued upon vesting of RSUs, including 208,329 shares of common stock withheld to cover statutory taxes upon such vesting, which are reflected in treasury stock, as discussed below.  

 

Treasury stock

 

As of  June 30, 2022 and December 31, 2021, the Company held shares of treasury stock of 4,300,152 and 4,091,823, respectively with a cost of $11,171 and $10,723, respectively.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

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, 2022, 208,329 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 March 31, 2022, there were outstanding warrants to purchase an aggregate of 833,333 shares of common stock at prices ranging from $3.75 to $6.00 per share. On May 22, 2022, the warrants expired, unexercised. 

 

 

 

8. Share-based compensation

 

As of June 30, 2022, the Company maintained 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 21,484,593 shares of common stock. On June 8, 2022 (the "Effective Date"), the stockholders of the Company approved the Fluent, Inc. 2022 Omnibus Equity Incentive Plan (the "2022 Plan"). The 2022 Plan has 10,909,251 shares of common stock reserved for issuance including 909,251 shares of common stock that were carried over from the 2018 Plan. No further awards may be issued under the 2015 Plan or the 2018 Plan (together, the "Prior Plans"). All awards under the Prior Plans that were outstanding as of the Effective Date will continue to be governed by the terms, conditions and procedures set forth in the Prior Plans and any applicable award agreement. 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. 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

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, 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 June 30, 2022, the first condition for the stock options issued on February 1, 2019, December 20, 2019 and March 1, 2020 had been met and the second condition for the stock options issued on December 20, 2019 and March 1, 2020 had 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, 2022, 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, 2021

  2,204,000  $4.41   7.1  $ 

Granted

            

Exercised

            

Expired

  (65,000)  1.10       

Outstanding as of June 30, 2022

  2,139,000  $4.37   6.8

 

 $ 

Options exercisable as of June 30, 2022

  1,242,000  $3.98   

6.8

  $ 

 

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.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

For the six months ended June 30, 2022, 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, 2021

  897,000  $4.91   7.3 

Granted

         

Vested

         

Unvested as of June 30, 2022

  897,000  $4.91   6.8 

 

Compensation expense recognized for stock options of $20 and $123 for the three months ended June 30, 2022 and 2021, respectively, and $125 and $290 for the six months ended  June 30, 2022 and 2021, respectively, was recorded in sales and marketing, product development and general and administrative expenses in the consolidated statements of operations. As of June 30, 2022, there was $20 of unrecognized share-based compensation with respect to outstanding stock options.

 

Restricted stock units and restricted stock

 

For the six months ended June 30, 2022, 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, 2021

  3,111,321  $8.03 

Granted

  200,000  $1.89 

Vested and delivered

  (880,670) $3.85 

Withheld as treasury stock (1)

  (208,329) $4.56 

Vested not delivered (2)

  (17,206) $3.35 

Forfeited

  (330,116) $3.72 

Unvested as of June 30, 2022

  1,875,000  $10.53 

 

(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, 2022, there were 4,300,152 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, 2022, there was a net increase of 17,206 shares included in the vested not delivered balance as a result of the timing of delivery of certain shares. As of June 30, 20221,708,872 outstanding RSUs were vested not delivered.

 

Compensation expense recognized for RSUs and restricted stock of $867 and $1,108 for the three months ended June 30, 2022 and 2021, respectively, and $1,777 and $2,213 for the six months ended  June 30, 2022 and 2021, respectively, was recorded in sales and marketing, product development and general and administrative in the consolidated statements of operations, and intangible assets, net 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, 2022, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $5,109, which is expected to be recognized over a weighted average period of 1.6 years.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

For the three and six months ended June 30, 2022 and 2021, share-based compensation for the Company's stock options, RSUs, 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,

 
  

2022

  

2021

  

2022

  

2021

 

Sales and marketing

 $143  $209  $313  $372 

Product development

  98   233   258   501 

General and administrative

  622   759   1,280   1,559 

Share-based compensation expense

  863   1,201   1,851   2,432 

Capitalized in intangible assets

  24   30   51   71 

Total share-based compensation

 $887  $1,231  $1,902  $2,503 

 

 

 

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 earnings before interest, taxes, depreciation and amortization ("EBITDA"). As of June 30, 2022, 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 for the three and six months ended June 30, 2022 and 2021 are shown in the following tables below:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Fluent segment revenue:

                

United States

 $54,684  $59,306  $115,343  $117,558 

International

  41,258  $10,693   66,633   19,983 

Fluent segment revenue

 $95,942  $69,999  $181,976  $137,541 

All Other segment revenue:

                

United States

 $2,387  $3,338  $5,376  $5,935 

International

  32   41   72   72 

All Other segment revenue

 $2,419  $3,379  $5,448  $6,007 

Segment EBITDA

                

Fluent segment EBITDA

 $(48,168) $(1,582) $(46,247) $(172)

All Other segment EBITDA

  108   196   (135)  (128)

Total EBITDA

  (48,060)  (1,386)  (46,382)  (300)

Depreciation and amortization

  3,332   3,366   6,639   6,739 

Total loss from operations

 $(51,392) $(4,752) $(53,021) $(7,039)

 

  

June 30,

  

December 31,

 
  2022  2021 

Total assets:

      

Fluent

 $241,703  $297,768 

All Other

  17,437   20,414 

Total assets

 $259,140  $318,182

 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

As of June 30, 2022, long-lived assets are all located in the United States.

 

For the six months ended  June 30, 2022, the Company identified an international customer within the Fluent segment with revenue in the amount of $40,635 which represents 22% of consolidated revenue.

 

 

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 $3,700 penalty, which was in line with the Company's accrual as of March 31, 2021 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 has not received any communications from either the DOJ or the DC AG since the second quarter of 2020. 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.

 

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 March 31, 2022, after a Conciliation Conference, the Company reached a settlement with the Tax Department for $1.7 million which was paid on April 1, 2022.

 

On January 28, 2020, the Company received a Civil Investigative Demand 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.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

On October 6, 2020, the Company received notice from the Pennsylvania Office of the Attorney General (“PA OAG”) that it was reviewing the Company’s business practices for compliance under the Unfair Trade Practices and Consumer Protection Law, 73 P.S. § 201-1 et seq. ("PA UTP"); the Telemarketer Registration Act, 73 P.S. § 2241 et. seq.("PA TSR"), and the Telemarketing Sales Rule, 16 C.F.R. 310 et seq ("TSR"). The Company has been responsive and is fully cooperating with the PA OAG. On February 14, 2022, the PA OAG sent a letter in which it asserted that the Company's lead generation practices violate the PA TSR, the PA UTP and the TSR. While, the Company continues to believe that its lead generation practices are compliant with applicable laws, the Company and the PA OAG are negotiating the terms of an Assurance of Voluntary Compliance ("AVC") to resolve the matter. It is uncertain whether a mutually acceptable AVC can be reached and the terms thereof. Consequently, 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

 

True North Acquisition

 

On  January 1, 2022, the Company acquired a 100% membership interest in True North Loyalty, LLC for a deemed purchase price of $2,321, which consisted of $1,000 in cash at closing, $860 of deferred payments due at both the first and second anniversary of the closing date adjusted for net-working capital, and contingent consideration with a fair value at the closing date of $250, payable in common stock based upon the achievement of specified revenue targets over the five-year period following the completion of the acquisition. The Company also issued 100,000 shares of fully vested stock under the 2018 Plan to the sellers valued at $211. Certain seller parties entered into employment and non-competition agreements with Company in connection with the True North Acquisition. True North Loyalty, LLC is a subscription-based business that utilizes call center operations and other media channels to market recurring revenue services to consumers. In accordance with ASC 805, the Company determined that the True North Acquisition constituted the purchase of a business. For the three and six months ended June 30, 2022, the Company incurred transaction-related expenses of $39 and $59, respectively, and compensation expense related to non-compete agreements in connection with the acquisition of $125 and $250, respectively, which are recorded as part of general and administrative expenses in the consolidated statements of operations. Assets and revenues of True North Loyalty, LLC totaled 1% and 2%, respectively, of the Company's consolidated assets and revenues as of and for the six months ended  June 30, 2022 and are included in the Fluent operating segment.

 

On  January 1, 2022, it was determined to use the excess earnings method, a variation of the income approach, to amortize: (i) the fair value of the acquired customer relationships related to subscribers of $170 over a period of one year and (ii) the fair value of the acquired customer relationships related to call centers of $1,180, over a period of five years. 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 $1,092 and primarily relates to intangible assets that do not qualify for separate recognition, including assembled workforce and synergies. For tax purposes, the goodwill is not deductible.

 

Below is a summary of the purchase price allocation of the True North Acquisition:    
Cash $29 
Accounts receivable, net  3 
Prepaid expenses and other current assets  84 
Intangible assets:    
Customer list  182 
Developed technology  1,180 
Goodwill  1,092 
Other non-current assets  7 
Liabilities assumed  (256)
Consideration transferred $2,321 
 

Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

Winopoly acquisition

 

On April 1, 2020, the Company acquired, through a wholly-owned subsidiary, a 50% membership interest in Winopoly 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. The initial contingent consideration of $1,000 had been paid based on specific revenue targets having been met in the first quarter of 2021. 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 Initial Winopoly Acquisition constituted the purchase of a business

 

On April 1, 2020, 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. In connection with the Initial Winopoly Acquisition, the Company had recorded 100% equity ownership for GAAP purposes due to Winopoly's status as VIE for which the Company is a primary beneficiary.

 

In connection with the Initial Winopoly Acquisition, at any time between the fourth and sixth anniversary of the Initial Winopoly Acquisition, the sellers had the ability to exercise a put option to require the Company to acquire the remaining 50% membership interests in Winopoly. During this period, the Company also had the ability to exercise a call option to require the sellers to sell the remaining 50% membership interests in Winopoly to the Company. The purchase price to be paid upon exercise of the put or call option for the remaining 50% membership interests was 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 would have been required to enter into employment agreements with the Company in order to receive their respective shares of the Put/Call Consideration.

 

Although the sellers maintained an equity interest in Winopoly through August 31, 2021, the Company had deemed this equity interest to be non-substantive in nature, as the sellers would primarily benefit from the Initial Winopoly Acquisition based on periodic distributions of the earnings of Winopoly and the Put/Call Consideration, both of which were 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 was considered unlikely. Therefore, no non-controlling interest had been previously recognized. Periodic distributions for services rendered were recorded as compensation expense. In addition, the Company had estimated the amount of the Put/Call Consideration, which was accreted over the six-year estimated service period, consisted of the estimated four years until the put/call could be exercised and the additional two-year service requirement.

 

On September 1, 2021, the Company acquired the remaining 50% membership interest in Winopoly (the “Full Winopoly Acquisition”) in a negotiated transaction. The consideration was $7,785, which consisted of $3,425 of cash at closing, $2,000 of cash due on January 31, 2022, and $500 of deferred payments due at both the first and second anniversary of the closing. The Company also issued 500,000 shares of fully-vested stock under the 2018 Plan to certain Winopoly personnel valued at $1,360. Certain seller parties entered into employment and non-competition agreements with the Company in connection with the Full Winopoly Acquisition. As a result, the Put/Call Consideration was terminated, partially offsetting the consideration paid in the Full Winopoly Acquisition, resulting in a net expense of $3,201 on the date of the Full Winopoly Acquisition which was recorded as general and administrative and product development expenses.

 

For the year ended December 31, 2021, the Company incurred transaction-related costs of $28 in connection with the Full Winopoly Acquisition which are also recorded as general and administrative expenses. For the three and six months ended June 30, 2021, compensation expense of $881 and $2,627 respectively, related to the Put/Call Consideration were recorded in general and administrative on the consolidated statement of operations, which had a corresponding liability in other non-current liabilities on the consolidated balance sheet. There was no corresponding charge for the three and six months ended June 30, 2022.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(unaudited)

 

 

12. Variable Interest Entity

 

The Company determined that, following the Initial Winopoly Acquisition, Winopoly qualified as a VIE for which the Company was the primary beneficiary (Note 11, Business acquisition). 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.

 

The Company's conclusion that Winopoly was a VIE, and the Company was its primary beneficiary, derived from contractual arrangements that provided the Company with control over certain activities that most significantly impacted its economic performance. These significant activities include the compliance practices of Winopoly and the Company's provisions of leads that Winopoly used to generate its revenue, which ultimately gave the Company its controlling interest. The Company therefore consolidated Winopoly in its consolidated financial statements from the inception of the Initial Winopoly Acquisition, inclusive of deemed compensation expense to the sellers for services rendered. On September 1, 2021, the Company completed the Full Winopoly Acquisition and Winopoly's status as a VIE terminated (Note 3, Intangible assets, net, Note 4, Goodwill and Note 11, Business acquisition).

 

 

 

 

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

 

 

You should read the following discussion in conjunction with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. In addition to historical information, this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, the outcome of litigation, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. These forward-looking statements can be identified by the use of terminology such as “anticipate,“believe," "estimate," "expect," "intend," "project," "will,"  or the negative thereof or other variations thereon or comparable terminology. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed on March 9, 2022 ("2021 Form 10-K") including without limitation, those discussed in Item 1A. "Risk Factors." in Part I. of the 2021 Form 10-K, and other filings we make with the Securities and Exchange Commission (the "SEC"). We do not undertake any obligation to update forward-looking statements, except as required by law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
 

Overview

 

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

 

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

 

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

 

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

 

 

Second Quarter Financial Summary

 

Three months ended June 30, 2022, compared to three months ended June 30, 2021:

Revenue increased 34% to $98.4 million, compared to $73.4 million.

Net loss was $56.9 million, or $0.70 per share, compared to net loss of $5.2 million or $0.06 per share.

Gross profit (exclusive of depreciation and amortization) was $28.3 million, an increase of 69% as compared to the three months ended June 30, 2021, and representing 29% of revenue for the three months ended June 30, 2022

Media margin increased 60% to $32.3 million, compared to $20.1 million, representing 32.8% of revenue for the three months ended June 30, 2022

Adjusted EBITDA increased to $9.4 million representing 9.6% of revenue, based on net loss of $56.9 million, compared to $1.9 million, based on net loss of $5.2 million.

Adjusted net income was $0.6 million, or $0.01 per share, compared to adjusted net loss of $1.9 million, or $0.02 per share.

 

Six months ended June 30, 2022, compared to six months ended June 30, 2021:

Revenue increased 31% to $187.4 million, compared to $143.5 million.

Net loss was $59.0 million, or $0.73 per share, compared to net loss of $11.4 million or $0.14 per share.

Gross profit (exclusive of depreciation and amortization) was $49.8 million, an increase of 39% as compared to the six months ended June 30, 2021, and representing 27% of revenue for the six months ended June 30, 2022

Media margin increased 29% to $58.3 million, compared to $45.0 million, representing 31.1% of revenue for the six months ended June 30, 2022

Adjusted EBITDA increased to $14.2 million, representing 7.6% of revenue, based on net loss of $59.0 million, compared to $6.6 million, based on net loss of $11.4 million.

Adjusted net income was $1.6 million, or $0.02 per share, compared to adjusted net loss of $1.6 million, or $0.02 per share.

 

Media margin, adjusted EBITDA and adjusted net income (loss) are non-GAAP financial measures.  See "Definitions, Reconciliations and Uses of Non-GAAP Financial Measures" below.

 

Trends Affecting our Business

 

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

 

Our business depends on identifying and accessing media sources that are of high quality and on our ability to attract targeted users to our media properties. As our business has grown, we have attracted larger and more sophisticated clients to our platform. To further increase our value proposition to clients and to fortify our leadership position in relation to the evolving regulatory landscape of our industry, we commenced a traffic quality initiative (the "Traffic Quality Initiative") in 2020. Our Traffic Quality Initiative curtailed the volume of lower quality affiliate traffic that we source, beginning in the fourth quarter of 2020 as we took a strategic course in building high quality traffic. Our strategy of focusing on high quality targeted media traffic continued into the second quarter of 2022.

 

We believe that significant value can be created by improving the quality of traffic we source to our media properties, through increased user participation rates on our sites, leading to higher conversion rates, resulting in increased monetization, and ultimately increasing revenue and media margin. Media margin, a non-GAAP measure, is the portion of gross profit (exclusive of depreciation and amortization) reflecting variable costs paid for media and related expenses and excluding non-media cost of revenue. We have also been pursuing strategic initiatives that enable us to grow revenue with existing user traffic volume, while attracting new users to our media properties. During the second quarter of 2022, we continued to see improved monetization of consumer traffic through improved customer relationship management, new streams of traffic and internal capabilities that allow us to re-engage consumers who have registered on our owned media properties. Through these initiatives, our business has become less dependent on traditional, low-quality sources of traffic volume to generate revenue growth.

 

In the first six months of 2022, we increased our spend with major digital media platforms and revised our bidding strategies for affiliate traffic. While these strategies yielded lower margins initially and below our historical levels achieved through affiliate marketing, we better optimized our spend for improved profitability in the second quarter 2022 and intend to continue to do so in future periods. The mix and profitability of our media channels, strategies and partners is likely to continue to be dynamic and reflect evolving market dynamics as well as the impact of our Traffic Quality Initiative. Volatility of affiliate supply sources, consolidation of media sources, changes in search engine, email and text message blocking algorithms, and increased competition for available media made the process of growing our traffic under our evolving quality standards challenging during 2021. As we evaluate and scale new media channels, strategies, and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability.

 

Seasonality and Cyclicality

 

Our results are subject to fluctuations as a result of seasonality and cyclicality in our and our clients’ businesses. Other factors affecting our business may include macroeconomic conditions that impact the digital advertising industry, the various client verticals we serve, and general market conditions.

 

 

COVID-19 

 

On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. At this time, our operations have not been significantly impacted by the global economic impact of COVID-19, and we have taken appropriate measures to ensure that we are able to conduct our business remotely without significant disruptions.

 

On March 13, 2020, we implemented a company-wide work-from-home policy. On April 1, 2022, we implemented a hybrid approach to have our employees in the office two days a week, but only if employees are comfortable to do so. While we believe we have adapted well to a work-from-home environment, COVID-19 increases the likelihood of certain risks of disruption to our business, such as the incapacity of certain employees or system interruptions, which could lead to diminishment of our regular business operations, technological capacity and cybersecurity capabilities, as well as operational inefficiencies and reputational harm. The same hybrid approach continued into the second quarter of 2022.

 

Please see Item 1A. Risk Factors in the Form 10-K for the year ended December 31, 2021, for more information or further discussion of the possible impact of the COVID-19 pandemic on our business.

 

Definitions, Reconciliations and Uses of Non-GAAP Financial Measures

 

We report the following non-GAAP measures:

 

Media margin is defined as that portion of gross profit (exclusive of depreciation and amortization) reflecting the variable costs paid for media and related expenses and excluding non-media cost of revenue. Gross profit (exclusive of depreciation and amortization) represents revenue minus cost of revenue (exclusive of depreciation and amortization). Media margin is also presented as percentage of revenue.

 

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

 

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

 

Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization) for the three and six months ended June 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure.

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenue

  $ 98,361     $ 73,378     $ 187,424     $ 143,548  

Less: Cost of revenue (exclusive of depreciation and amortization)

    70,026       56,605       137,589       107,595  

Gross profit (exclusive of depreciation and amortization)

  $ 28,335     $ 16,773     $ 49,835     $ 35,953  

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

    29 %     23 %     27 %     25 %

Non-media cost of revenue (1)

    3,974       3,363       8,423       9,053  

Media margin

  $ 32,309     $ 20,136     $ 58,258     $ 45,006  

Media margin % of revenue

    32.8 %     27.4 %     31.1 %     31.4 %

 

(1)

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

 

 

Below is a reconciliation of adjusted EBITDA from net loss for the three and six months ended June 30, 2022 and 2021, respectively, which we believe is the most directly comparable GAAP measure:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022