UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
FLUENT, INC.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
(
(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 |
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| The |
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. ☒
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). ☒
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 | ☐ |
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| ☒ | Smaller reporting company | |
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| 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
As of August 17, 2023, the registrant had
TABLE OF CONTENTS FOR FORM 10-Q
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| Item 1. |
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Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 |
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Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 |
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Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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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.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(unaudited)
| June 30, 2023 | December 31, 2022 | |||||||
| ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ and $, respectively | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | | |||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenue | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of operating lease liability | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net | ||||||||
| Operating lease liability | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Contingencies (Note 10) | ||||||||
| Shareholders' equity: | ||||||||
| Preferred stock — $ par value, Shares authorized; Shares outstanding — shares for both periods | ||||||||
| Common stock — $ par value, Shares authorized; Shares issued — and , respectively; and Shares outstanding — and , respectively (Note 7) | ||||||||
| Treasury stock, at cost — and Shares, respectively (Note 7) | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Revenue |
$ | $ | $ | $ | ||||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) |
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| Sales and marketing |
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| Product development |
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| General and administrative |
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| Depreciation and amortization |
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| Goodwill impairment and write-off of intangible assets |
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| Loss on disposal of property and equipment |
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| Total costs and expenses |
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| Income (loss) from operations |
( |
) | ( |
) | ( |
) | ||||||||||
| Interest expense, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income (loss) before income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
| Income tax expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
| Basic and diluted income (loss) per share: |
||||||||||||||||
| Basic |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Diluted |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Weighted average number of shares outstanding: |
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| Basic |
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| Diluted |
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See notes to consolidated financial statements
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 |
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| Balance at March 31, 2023 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Vesting of restricted stock units and issuance of stock under incentive plans |
— | — | — | |||||||||||||||||||||||||
| Share-based compensation |
— | — | ||||||||||||||||||||||||||
| Net income |
— | — |
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| Balance at June 30, 2023 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Balance at December 31, 2022 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Vesting of restricted stock units and issuance of stock under incentive plans |
( |
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| Increase in treasury stock resulting from shares withheld to cover statutory taxes |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||
| Share-based compensation |
— | — | ||||||||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Common stock |
Treasury stock |
Additional paid-in |
Accumulated |
Total shareholders' |
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| Shares |
Amount |
Shares |
Amount |
capital |
deficit |
equity |
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| Balance at March 31, 2022 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Vesting of restricted stock units and issuance of stock under incentive plans |
— | — | — | |||||||||||||||||||||||||
| Share-based compensation |
— | — | ||||||||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at June 30, 2022 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Balance at December 31, 2021 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Vesting of restricted stock units and issuance of restricted stock |
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| Increase in treasury stock resulting from shares withheld to cover statutory taxes |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||
| Share-based compensation |
— | — | ||||||||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at June 30, 2022 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
| Six Months Ended June 30, |
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| 2023 |
2022 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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| Depreciation and amortization |
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| Non-cash loan amortization expense |
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| Share-based compensation expense |
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| Goodwill impairment |
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| Write-off of intangible assets |
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| Loss on disposal of property and equipment |
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| Provision for bad debt |
( |
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| Deferred income taxes |
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| Changes in assets and liabilities, net of business acquisitions: |
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| Accounts receivable |
( |
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| Prepaid expenses and other current assets |
( |
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| Other non-current assets |
( |
) | ||||||
| Operating lease assets and liabilities, net |
( |
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) | ||||
| Accounts payable |
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| Accrued expenses and other current liabilities |
( |
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| Deferred revenue |
( |
) | ( |
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| Other |
( |
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| Net cash provided by (used in) operating activities |
( |
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| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Capitalized costs included in intangible assets |
( |
) | ( |
) | ||||
| Business acquisitions, net of cash acquired |
( |
) | ( |
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| Acquisition of property and equipment |
( |
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| Net cash used in investing activities |
( |
) | ( |
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| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Repayments of long-term debt |
( |
) | ( |
) | ||||
| Debt financing costs |
( |
) | ||||||
| Taxes paid related to net share settlement of vesting of restricted stock units |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE INFORMATION |
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| Cash paid for interest |
$ | |||||||
| Cash paid for income taxes |
$ | |||||||
| Share-based compensation capitalized in intangible assets |
$ | |||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
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| Contingent payments in connection with TAPP consolidation |
$ | $ | ||||||
| Deferred payment in connection with True North acquisition |
$ | $ | ||||||
| Contingent consideration in connection with True North acquisition |
$ | $ | ||||||
| Equity issued in connection with True North acquisition |
$ | $ | ||||||
See notes to consolidated financial statements
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, 2023 and 2022, 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, 2023.
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.
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, 2022 ("2022 Form 10-K") filed with the SEC on March 15, 2023. The consolidated balance sheet as of December 31, 2022 included herein was derived from the audited financial statements as of that date and included in the 2022 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
Accounting pronouncements not listed below were assessed and determined to be not applicable or are expected to have minimal impact on the Company's consolidated financial statements.
In January 2016, the Financial Accounting Standards Board issued Accounting Standards Updates 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 was effective for annual and interim periods beginning after December 15, 2022, and early adoption was permitted. The Company completed its assessment of the new guidance and determined it had no 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
Revenue is generated when control of goods or services is transferred to customers, in the 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.
Revenue is recognized upon satisfaction of the associated performance obligation. The Company elected the "right to invoice" practical expedient under Accounting Standards Codification ("ASC") 606-10-55-18 as a measure for revenue to be recognized, as it corresponds directly with the amounts that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
When there is a delay between the period in which revenue is recognized and when a customer invoice is issued, revenue is earned, and the related amounts are recorded as unbilled revenue within accounts receivable on the consolidated balance sheets. As of June 30, 2023 and December 31, 2022, unbilled revenue included in accounts receivable was $
(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, consolidation of variable interest entity, accruals for contingencies, and income tax provisions. 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
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Accounting standards describe a fair value hierarchy based on the following three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
| ● | Level 1 — Quoted prices in active markets for identical assets, liabilities, or funds. |
| ● | Level 2— Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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, 2023, the Company regards the fair value of its long-term debt to approximate its carrying value. The fair value assessment represents a Level 2 measurement. See Note 5, Long-term debt, net.
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, 2023, certain non-financial assets have been measured at fair value subsequent to their initial recognition. The Company determined the estimated fair value to be a Level 3, as certain inputs used to determine fair value are unobservable. See Note 4, Goodwill, for further discussion of impairment charges.
2. Income (loss) per share
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, in addition to restricted stock units ("RSUs") that are vested but not delivered. Diluted income (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. Stock 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, 2023 and 2022, basic and diluted income (loss) per share were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Weighted average restricted shares vested not delivered | ||||||||||||||||
| Total basic weighted average shares outstanding | ||||||||||||||||
| Dilutive effect of assumed conversion of restricted stock units | ||||||||||||||||
| Total diluted weighted average shares outstanding | ||||||||||||||||
| Basic and diluted income (loss) per share: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Based on exercise prices compared to the average stock prices for the three and six months ended June 30, 2023 and 2022, certain stock equivalents, including stock options and warrants, have been excluded from the diluted weighted average share calculations due to their anti-dilutive nature.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Restricted stock units | ||||||||||||||||
| Stock options | ||||||||||||||||
| Total anti-dilutive securities | ||||||||||||||||
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, 2023 | December 31, 2022 | ||||||||||
| Gross amount: | ||||||||||||
| Software developed for internal use | $ | |||||||||||
| Acquired proprietary technology | ||||||||||||
| Customer relationships | ||||||||||||
| Trade names | ||||||||||||
| Domain names | ||||||||||||
| Databases | ||||||||||||
| Non-competition agreements | ||||||||||||
| Total gross amount | ||||||||||||
| Accumulated amortization: | ||||||||||||
| Software developed for internal use | ( | ) | ( | ) | ||||||||
| Acquired proprietary technology | ( | ) | ( | ) | ||||||||
| Customer relationships | ( | ) | ( | ) | ||||||||
| Trade names | ( | ) | ( | ) | ||||||||
| Domain names | ( | ) | ( | ) | ||||||||
| Databases | ( | ) | ( | ) | ||||||||
| Non-competition agreements | ( | ) | ( | ) | ||||||||
| Total accumulated amortization | ( | ) | ( | ) | ||||||||
| Net intangible assets: | ||||||||||||
| Software developed for internal use | ||||||||||||
| Acquired proprietary technology | ||||||||||||
| Customer relationships | ||||||||||||
| Trade names | ||||||||||||
| Domain names | ||||||||||||
| Databases | ||||||||||||
| Total intangible assets, net | $ | $ | ||||||||||
The gross amounts associated with software developed for internal use primarily represent 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 Holdings, Inc. and certain of its affiliates, effective July 1, 2019 (the "AdParlor Acquisition"); the acquisition of a
The Company completed its quarterly triggering event assessments for the three months ended June 30, 2023 and has determined that the effect of the recently imposed regulatory requirements on the Company constituted a triggering event. The Company conducted an interim test of the recoverability of its long-lived assets, which compared projected undiscounted cash flows to the carrying value of the asset group. The results of this approach indicated that its long-lived assets were not impaired.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
Amortization expense of $
As of June 30, 2023, estimated amortization expenses related to the Company's intangible assets for the remainder of 2023 and through 2028 and thereafter are as follows:
| Year | June 30, 2023 | |||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 and thereafter | ||||
| Total | $ | |||
4. Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of net assets acquired, when accounted for under business combination accounting. As of June 30, 2023, the total balance of goodwill was $
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 set to October 1.
The Company completed its quarterly triggering event assessments for the three months ended March 31, 2023 and 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 March 31, 2023. 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
The Company completed its quarterly triggering event assessments for the three months ended June 30, 2023 and determined that the effect of the recently imposed regulatory requirements and the effect of the continued economic slowdown on the Company’s expected operating results had both constituted a triggering event. The Company conducted an interim test of the fair value of the Fluent reporting unit's goodwill for potential impairment related to both triggering events as of June 30, 2023. The Company applied a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The results of this approach indicated that its fair value exceeded its carrying value by
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
5. Long-term debt, net
Long-term debt, net of unamortized discount and financing costs, related to the Credit Facility consisted of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| Credit Facility due 2026 (less unamortized discount and financing costs of $761 and $656, respectively) | $ | $ | ||||||
| Less: Current portion of long-term debt | ( | ) | ( | ) | ||||
| Long-term debt, net (non-current) | $ | $ | ||||||
Credit Facility
On March 31, 2021, Fluent, LLC ("Borrower") entered into a credit agreement (as amended, modified, extended, restated, replaced, or supplemented from time to time, the "Credit Agreement") with certain subsidiaries of Fluent, LLC as guarantors, and Citizens Bank, N.A. ("Citizens Bank") as administrative agent, lead arranger and bookrunner. The Credit Agreement provides for a term loan in the aggregate principal amount of $
The Credit Agreement matures on March 31, 2026, and interest is payable monthly. Scheduled principal amortization of the Term Loan is $
Borrowings under the Credit Agreement bear interest at a rate per annum equal to the benchmark selected by the Borrower, which may be based on the Alternative Base Rate, (as defined in the Credit Agreement), LIBOR (as defined in the Credit Agreement) rate (subject to a floor of
The Credit Agreement also contains certain customary conditions applicable to extensions of credit, including that representations and warranties made in the Credit Agreement be materially true and correct at the time of such extension. The third amendment added an additional condition consisting of two financial covenants with which the Company must comply in order to draw on the Revolving Loans during the balance of 2023. As of June 30, 2023, the Company was not in compliance with this additional condition and was therefore unable to draw on the Revolving Loans. These matters do not represent Events of Default (as defined in the Credit Agreement) and therefore do not affect the Term Loan.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
Maturities
As of June 30, 2023, scheduled future maturities of the Credit Agreement are as follows:
| Year | June 30, 2023 | |||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total maturities | $ |
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 ("AETR"). The Company updates its estimated AETR on a quarterly basis and, if the estimate changes, a cumulative adjustment is made.
As of June 30, 2023 and December 31, 2022, the Company 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, 2023, the Company's effective income tax expense rate of
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, 2023 and December 31, 2022, the balance of unrecognized tax benefits was $
The Company does anticipate a significant increase or reduction in unrecognized tax benefits within the next twelve months.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
7. Common stock, treasury stock and warrants
Common stock
As of June 30, 2023 and December 31, 2022, the number of issued shares of common stock was
For the six months ended June 30, 2023, the change in the number of issued shares of common stock was the result of an aggregate
Treasury stock
As of June 30, 2023 and December 31, 2022, the Company held shares of treasury stock of
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, 2023,
8. Share-based compensation
On June 8, 2022 (the "Effective Date"), the stockholders of the Company approved the Fluent, Inc. 2022 Omnibus Equity Incentive Plan (the "2022 Plan") that authorized for issuance
The primary purpose of the 2022 Plan and prior 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. In October 2022, the Company issued to certain of its senior officers and employees, restricted stock units ("RSUs") (time-based vesting), long-term incentive grants (performance and time-based vesting RSUs), or performance share units ("PSUs") (achievement of performance targets settled in cash) under the 2022 Plan.
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. Subject to continuing service,
| Issuance Date | February 1, 2019 | December 20, 2019 | March 1, 2020 | March 1, 2021 | ||||||||||||
| Fair value lower range | $ | $ | $ | $ | ||||||||||||
| Fair value higher range | $ | $ | $ | $ | ||||||||||||
| Exercise price | $ | $ | $ | $ | ||||||||||||
| Expected term (in years) | ||||||||||||||||
| Expected volatility | % | % | % | % | ||||||||||||
| Dividend yield | — | % | — | % | — | % | — | % | ||||||||
| Risk-free rate | % | % | % | % | ||||||||||||
For the six months ended June 30, 2023, 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, 2022 | $ | $ | — | |||||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Expired | — | — | — | |||||||||||||
| Outstanding as of June 30, 2023 | $ |
| $ | — | ||||||||||||
| Options exercisable as of June 30, 2023 | $ | | $ | — | ||||||||||||
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, 2023, the unvested balance of stock options was as follows:
| Number of stock options | Weighted average exercise price per share | Weighted average remaining contractual term (in years) | ||||||||||
| Unvested as of December 31, 2022 | $ | |||||||||||
| Granted | — | |||||||||||
| Vested | — | — | ||||||||||
| Unvested as of June 30, 2023 | $ | |||||||||||
Compensation expense recognized for stock options of $
Restricted stock units and restricted stock
For the six months ended June 30, 2023, details of unvested RSU activity were as follows:
| Number of units | Weighted average grant-date fair value | |||||||
| Unvested as of December 31, 2022 | $ | |||||||
| Granted | $ | |||||||
| Vested and delivered | ( | ) | $ | |||||
| Withheld as treasury stock (1) | ( | ) | $ | |||||
| Vested not delivered (2) | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Unvested as of June 30, 2023 | $ | |||||||
| (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, 2023, there were |
| (2) | Vested not delivered represents vested RSUs with delivery deferred to a future time. For the six months ended June 30, 2023, there was a net increase in the vested not delivered balance as a result of the vesting of the |
Compensation expense recognized for RSUs of $
As of June 30, 2023, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $
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, 2023 and 2022, share-based compensation for the Company's stock options, RSUs, and common stock awards were allocated to the following accounts in the consolidated financial statements:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Sales and marketing | $ | $ | $ | $ | ||||||||||||
| Product development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Share-based compensation expense | ||||||||||||||||
| Capitalized in intangible assets | ||||||||||||||||
| Total share-based compensation | $ | $ | $ | $ | ||||||||||||
As of June 30, 2023, the Company recorded a liability of $
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, 2023, the Company had operating segments with corresponding reporting units, "Fluent" and "All Other," and reportable segment. "Fluent," for the purposes of segment reporting, represents the consolidated operating results of the Company excluding "All Other." "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.
Summarized financial information concerning the Company's segments for the three and six months ended June 30, 2023 and 2022 are shown in the following tables below:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Fluent segment revenue(1): | ||||||||||||||||
| United States | $ | $ | $ | |||||||||||||
| International | $ | |||||||||||||||
| Fluent segment revenue | ||||||||||||||||
| All Other segment revenue(1): | ||||||||||||||||
| United States | $ | $ | $ | |||||||||||||
| International | ||||||||||||||||
| All Other segment revenue | $ | $ | $ | |||||||||||||
| Segment EBITDA | ||||||||||||||||
| Fluent segment EBITDA | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| All Other segment EBITDA | ( | ) | ( | ) | ||||||||||||
| Total EBITDA | ( | ) | ( | ) | ( | ) | ||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total income (loss) from operations | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
(1) Revenue aggregation is based upon location of the customer.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Total assets: | ||||||||
| Fluent | $ | $ | ||||||
| All Other | ||||||||
| Total assets | $ | $ |
| |||||
As of June 30, 2023, long-lived assets are all located in the United States.
For the six months ended June 30, 2023, the Company identified an international customer within the Fluent segment with revenue in the amount of $
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. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.
On March 31, 2022, the Company reached a settlement for $
On January 28, 2020, Fluent received a Civil Investigative Demand from the Federal Trade Commission ("FTC") regarding compliance with the FTC Act and the Telemarketing Sales Rule. On October 18, 2022, the FTC staff sent the Company a draft complaint and proposed consent order seeking injunctive relief and a civil monetary penalty. On January 12, 2023, the Company made an initial proposal of $
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 ("PAAG") that it was reviewing the Company’s business practices relating to telemarketing. After the Company and the PAAG were unable to reach agreement on a proposed Assurance of Voluntary Compliance, the Commonwealth of Pennsylvania filed a complaint for permanent injunction, civil penalties, and other relief in the United States District Court for the Western District of Pennsylvania on November 2, 2022. On May 19, 2023, the parties entered into a settlement, wherein the Company agreed to injunctive relief and to pay the PAAG $
The Company has been involved in a Telephone Consumer Protection Act class action, Daniel Berman v. Freedom Financial Network, which was originally filed in 2018. On May 31, 2023, the parties entered into an Amended Class Action Settlement Agreement (the "Berman Settlement Agreement"), which includes injunctive provisions and payment to plaintiffs of $
11. Business acquisition
True North Acquisition
On January 1, 2022, the Company acquired a
Since January 1, 2022, the Company has used 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 $
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
12. Variable Interest Entity
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. The Company assesses whether we are the primary beneficiary of a VIE at the inception of the arrangement and as of the reporting date.
On January 9, 2023, the Company entered into employment agreements with certain key employees of TAPP, an influencer-based business, which uses as an application to utilize its relationship with influencer to bring consumers to advertising clients. The Company is also a customer of TAPP and accounts for the majority of TAPP’s revenues. By virtue of TAPP’s key employees being employed by the Company and the significance of the Company to TAPP’s financial performance, the Company determined that TAPP qualified as a VIE in which the Company had a variable interest and that the Company is the primary beneficiary as a result of its significant influence and control over certain activities that most significantly impact its economic performance. As a result, the Company consolidates the TAPP operations. As the Company does not have an equity interest,
As the Company gained control of TAPP, in accordance with ASC 805, Business Combinations, it was then determined that TAPP constituted a business. The deemed fair value of the consideration was $
13. Subsequent Events
On July 31, 2023, the Company was informed that it would be receiving $
On August 21, 2023, in order to avoid a projected violation of certain financial covenants for the third and fourth quarters of 2023, Fluent, LLC entered into a fourth amendment to the Credit Agreement with certain subsidiaries of Fluent, LLC as guarantors, and Citizens Bank as administrative agent, lead arranger and bookrunner, which (i) adjusted certain financial covenants for the remaining fiscal quarters of 2023, (ii) temporarily adjusted interest rates, (iii) permitted Citizens Bank to retain a business consultant at Fluent, LLC’s expense to advise on the credit parties’ financial and operating performance; (iv) required weekly liquidity reports to Citizens Bank, (iv) required a $
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Fluent, Inc. ("we," "us," "our," "Fluent," or the "Company"), is an industry leader in data-driven digital marketing services. We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach. We deliver data and performance-based marketing executions to our clients, which include 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 where they are rewarded for completing activities within our platforms. To register on our sites, consumers provide their names, contact information and opt-in permission to present them with relevant 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 on our sites, we integrate our proprietary direct marketing technologies to engage them with surveys, polls, and other experiences, through which we gather information about their lifestyles, preferences, purchasing histories and other matters. Based on these insights, 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, 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 when they engage with our sites, and in our data offerings to provide our clients with users' contact information so that our clients may communicate with them directly. We may also leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising.
We generate revenue by delivering measurable online marketing results to our clients. We differentiate ourselves from other marketing alternatives by our abilities to provide clients with a cost-effective and measurable return on advertising spend ("ROAS"), a measure of profitability of sales compared to the money spent on ads, to manage highly targeted and highly fragmented online media sources and to provide access to our owned digital media properties and technology platforms. We are predominantly paid on a negotiated or market-driven "per click," "per lead," or other "per action" basis that aligns with the customer acquisition cost targets of our clients. We bear the costs of sourcing traffic from publishers for our owned digital media properties that ultimately generate qualified clicks, leads, calls, app downloads or customers for our clients.
Through AdParlor, LLC, we conduct our non-core business which offers clients various social media strategies through the planning and buying of media on different platforms.
Second Quarter Financial Summary
Three months ended June 30, 2023, compared to three months ended June 30, 2022:
| • |
Revenue decreased 16% to $82.1 million, compared to $98.4 million |
| • | Net income was $4.3 million, or $0.05 per share, compared to net loss of $56.9 million or $0.70 per share |
| • | Gross profit (exclusive of depreciation and amortization) was $22.6 million, a decrease of 20% as compared to the three months ended June 30, 2022, and representing 28% of revenue for the three months ended June 30, 2023 |
| • | Media margin decreased 20% to $25.9 million, compared to $32.3 million, representing 31.5% of revenue for the three months ended June 30, 2023 |
| • | Adjusted EBITDA decreased to $5.6 million, representing 6.8% of revenue, based on net income of $4.3 million, compared to $9.4 million, based on net loss of $56.9 million |
| • | Adjusted net income was $0.0 million, or $0.00 per share, compared to adjusted net income of $0.6 million, or $0.01 per share |
Six months ended June 30, 2023, compared to six months ended June 30, 2022:
| • |
Revenue decreased 15% to $159.4 million, compared to $187.4 million |
| • | Net loss was $27.7 million, or $0.34 per share, compared to net loss of $59.0 million or $0.73 per share |
| • | Gross profit (exclusive of depreciation and amortization) was $41.6 million, a decrease of 17% as compared to six months ended June 30, 2022, and representing 26% of revenue for the six months ended June 30, 2023 |
| • | Media margin decreased 18% to $47.9 million, compared to $58.3 million, representing 30.0% of revenue for the six months ended June 30, 2023 |
| • | Adjusted EBITDA decreased to $6.0 million, representing 3.8% of revenue, based on net loss of $27.7 million, compared to $14.2 million, based on net loss of $59.0 million |
| • | Adjusted net loss was $2.7 million, or $0.03 per share, compared to adjusted net income 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 the evolving regulatory landscape of our industry, we implemented a Traffic Quality Initiative in 2020. Generating high quality traffic will remain a focus moving forward, and it is now part of a broader initiative to improve the consumer experience.
Starting in 2022, we increased our spend with major digital media platforms, revised our bidding strategies for affiliate traffic, and developed partnerships to expand traffic from social media platforms, including the growing influencer segment. We also pursued strategic initiatives that enable us to grow revenue with existing user traffic volume, while attracting new users to our media properties via email and SMS messages. These efforts have continued into the first half of 2023, as we continue to focus on improved monetization of consumer traffic through improved customer relationship management 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 the volume of users to generate revenue growth.
We believe that significant value has been, and will continue to be, created by improving the quality of traffic sourced 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.
Volatility of affiliate supply sources, changes in search engine algorithms, email and text message blocking algorithms, and increased competition for available media made the process of growing our traffic volume under our evolving quality standards challenging, which we saw in 2022, and have continued to be a factor into the first half of 2023. In an effort to offset these challenges, we invested in strategic internal efforts to secure additional traffic from the influencer and social media segments and continue to grow our e-commerce post-sales solution. In light of the challenging macro-economic environment, we have reviewed our strategic investments for 2023 and paused or eliminated lower priority projects while also streamlining our organization through targeted workforce reductions. The mix and profitability of our media channels, strategies, and partners is likely to continue to be dynamic and reflect evolving market trends and the regulatory environment.
Advertiser Trends & Seasonality
We deliver data and performance-based marketing executions to our clients across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer, and Staffing & Recruitment. Both data and performance-based spend continued to be challenged in 2023 by general economic uncertainty. We experienced slowdowns in the first half of 2023 in certain segments of the Media & Entertainment, Staffing & Recruitment, and Financial Products & Services sectors. Additionally, in the third quarter we experienced pricing pressure from clients in certain segments of the Media & Entertainment sector that will add pressure to the marketplace in the short term.
In an effort to offset these challenges, we continue to work with a select group of advertisers to define high performing consumer segments and strategically price paid conversions to help clients drive higher return on ad spend. This initiative has driven increased budgets from clients in the gaming, streaming, and subscription segments, which, collectively, represents a large component of our revenue mix.
Additionally, our results are subject to fluctuations as a result of seasonality and cyclicality in 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.
Business Practices & Compliance
During the first half of 2023, we continued to be impacted by slowing economic conditions and uncertainty. Additionally, as a result of the FTC Consent Order described in Part II, Item 1 – Legal Proceedings, below, we have made additional changes to our employment opportunities marketplace and programmatic advertising businesses and have implemented industry-leading compliance measures across the entire business, which will have a negative impact on our revenues and media margin in the third quarter and beyond. In the medium term, we expect that the increased industry-wide regulatory scrutiny will eliminate the competitive advantage that less compliance-focused platforms currently enjoy as a result of the changes we have implemented, and that our industry-leading compliance will be a competitive advantage enabling us to recapture market share from our competitors, but we cannot assure you that the adverse impact on our revenues and media margin will not continue longer than expected. Additionally, we anticipate decreased legal fees related to the inquiry on an ongoing basis. In response to the regulatory requirements, we will refocus investment into businesses unaffected by the FTC Consent Order, such as the Rewards business and Adflow, and our e-commerce post sales solution.
Current Economic Conditions
We are subject to risks and uncertainties caused by events with significant macroeconomic impacts. Inflation, rising interest rates and reduced consumer confidence have caused our clients and their customers to be cautious in their spending. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain.
Please see Item 1A. Risk Factors in the 2022 Form 10-K, for more information or further discussion of the possible impact of unfavorable conditions 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) goodwill impairment, (6) write-off of intangible assets, (7) acquisition-related costs, (8) restructuring and other severance costs, and (9) certain litigation and other related costs.
Adjusted net income (loss) is defined as net income (loss) excluding (1) share-based compensation expense, (2) goodwill impairment, (3) write-off of intangible assets, (4) acquisition-related costs, (5) restructuring and other severance costs, and (6) 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, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Revenue |
$ | 82,145 | $ | 98,361 | $ | 159,399 | $ | 187,424 | ||||||||
| Less: Cost of revenue (exclusive of depreciation and amortization) |
59,540 | 70,026 | 117,812 | 137,589 | ||||||||||||
| Gross profit (exclusive of depreciation and amortization) |
$ | 22,605 | $ | 28,335 | $ | 41,587 | $ | 49,835 | ||||||||
| Gross profit (exclusive of depreciation and amortization) % of revenue |
28 | % | 29 | % | 26 | % | 27 | % | ||||||||
| Non-media cost of revenue (1) |
3,300 | 3,974 | 6,281 | 8,423 | ||||||||||||
| Media margin |
$ | 25,905 | $ | 32,309 | $ | 47,868 | $ | 58,258 | ||||||||
| Media margin % of revenue |
31.5 | % | 32.8 | % | 30.0 | % | 31.1 | % | ||||||||
| (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, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net income (loss) |
$ | 4,251 | $ | (56,944 | ) | $ | (27,692 | ) | $ | (58,957 | ) | |||||
| Income tax expense |
1,693 | 5,122 | 1,794 | 5,122 | ||||||||||||
| Interest expense, net |
795 | 430 | 1,484 | 814 | ||||||||||||
| Depreciation and amortization |
3,095 | 3,332 | 5,454 | 6,639 | ||||||||||||
| Share-based compensation expense |
936 | 863 | 1,997 | 1,851 | ||||||||||||
| Goodwill impairment |
— | 55,400 | 25,700 | 55,400 | ||||||||||||
| Write-off of intangible assets |
— | — | — | 128 | ||||||||||||
| Loss on disposal of property and equipment |
— | 21 | — | 21 | ||||||||||||
| Acquisition-related costs(1)(2) |
562 | 579 | 1,185 | 1,137 | ||||||||||||
| Restructuring and other severance costs |
— | 38 | 480 | 38 | ||||||||||||
| Certain litigation and other related costs |
(5,736 | ) | 596 | (4,358 | ) | 1,998 | ||||||||||
| Adjusted EBITDA |
$ | 5,596 | $ | 9,437 | $ | 6,044 | $ | 14,191 | ||||||||
| (1) |
Balance includes compensation expense related to non-competition agreements entered into as a result of certain acquisitions. |
| (2) | Balance includes earn-out expense of $24 and $110 for the three and six months ended June 30, 2023, respectively, as a result of certain acquisitions. |
Below is a reconciliation of adjusted net income (loss) and adjusted net income (loss) per share from net loss for the three and six months ended June 30, 2023 and 2022, respectively, which we believe is the most directly comparable GAAP measure.
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| (In thousands, except share and per share data) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
| Net income (loss) |
$ | 4,251 | $ | (56,944 | ) | $ | (27,692 | ) | $ | (58,957 | ) | |||||
| Share-based compensation expense |
936 | 863 | 1,997 | 1,851 | ||||||||||||
| Goodwill impairment |
— | 55,400 | 25,700 | 55,400 | ||||||||||||
| Write-off of intangible assets |
— | — | — | 128 | ||||||||||||
| Loss on disposal of property and equipment |
— | 21 | — | 21 | ||||||||||||
| Acquisition-related costs(1)(2) |
562 | 579 | 1,185 | 1,137 | ||||||||||||
| Restructuring and other severance costs |
— | 38 | 480 | 38 | ||||||||||||
| Certain litigation and other related costs |
(5,736 | ) | 596 | (4,358 | ) | 1,998 | ||||||||||
| Adjusted net income (loss) |
$ | 13 | $ | 553 | $ | (2,688 | ) | $ | 1,616 | |||||||
| Adjusted net income (loss) per share: |
||||||||||||||||
| Basic |
$ | 0.00 | $ | 0.01 | $ | (0.03 | ) | $ | 0.02 | |||||||
| Diluted |
$ | 0.00 | $ | 0.01 | $ | (0.03 | ) | $ | 0.02 | |||||||
| Weighted average number of shares outstanding: |
||||||||||||||||
| Basic |
82,727,971 | 81,493,821 | 82,323,854 | 81,193,107 | ||||||||||||
| Diluted |
82,752,646 | 81,575,329 | 82,323,854 | 81,233,586 | ||||||||||||
| (1) |
Balance includes compensation expense related to non-competition agreements entered into as a result of certain acquisitions. |
| (2) |
Balance includes earn-out expense of $24 and $110 for the three and
six months ended June 30, 2023, respectively, as a result of certain acquisitions.
|
We present media margin, media margin as a percentage of revenue, adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors. More specifically:
Media margin, as defined above, is a measure of the efficiency of the Company’s operating model. We use media margin and the related measure of media margin as a percentage of revenue as primary metrics to measure the financial return on our media and related costs, specifically to measure the degree by which the revenue generated from our digital marketing services exceeds the cost to attract the consumers to whom offers are made through our services. Media margin is used extensively to manage our operating performance, including evaluating operational performance against budgeted media margin and understanding the efficiency of our media and related expenditures. We also use media margin for performance evaluations and compensation decisions regarding certain personnel.
Adjusted EBITDA, as defined above, is another primary metric by which we evaluate the operating performance of our business, on which certain operating expenditures and internal budgets are based and by which, in addition to media margin and other factors, our senior management is compensated. The first three adjustments represent the conventional definition of EBITDA, and the remaining adjustments are items recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. These adjustments include certain litigation and other related costs associated with legal matters outside the ordinary course of business, including costs and accruals related to matters as described below (See Part II, Item 1 — Legal Proceedings). We consider items one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. There were no adjustments for one-time items in the periods presented by this Quarterly Report on Form 10-Q.
Adjusted net income (loss), as defined above, and the related measure of adjusted net income (loss) per share exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income (loss) affords investors a different view of the overall financial performance as compared to adjusted EBITDA and the GAAP measure of net income (loss).
Media margin, adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share are non-GAAP financial measures with certain limitations regarding their usefulness. They do not reflect our financial results in accordance with GAAP, as they do not include the impact of certain expenses that are reflected in our consolidated statements of operations. Accordingly, these metrics are not indicative of our overall results or indicators of past or future financial performance. Further, they are not financial measures of profitability and are neither intended to be used as a proxy for the profitability of our business nor to imply profitability. The way we measure media margin, adjusted EBITDA, and adjusted net income (loss) may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements.
Comparison of Our Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022
Revenue
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Revenue |
$82,145 |
$98,361 |
(16%) |
$159,399 |
$187,424 |
(15%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Revenue for the three months ended June 30, 2023 decreased $16.2 million, or 16%, to $82.1 million, compared to $98.4 million for the three months ended June 30, 2022. The decrease was largely attributable to declines in the US Rewards business due to a reduction in client spend. In addition, revenue from the employment opportunities marketplace declined due to the challenging labor market and changes in business practices to reflect recently imposed regulatory requirements in connection with the FTC Consent Order described in Part II, Item 1 – Legal Proceedings, below. The revenue decline was partially offset by growth in our call solutions business and our influencer based business.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Revenue for the six months ended June 30, 2023 decreased $28.0 million, or 15%, to $159.4 million, compared to $187.4 million for the six months ended June 30, 2022. The decrease was largely attributable to declines in the US Rewards business due to a reduction in client spend. In addition, revenue from the employment opportunities marketplace declined due to the challenging labor market and changes in business practices to reflect increased regulatory scrutiny and recently imposed regulatory requirements in connection with the FTC Consent Order described in Part II, Item 1 – Legal Proceedings, below. The revenue decline was partially offset by continued growth in our call solutions business and our Influencer based business. We also saw an increase in the international Rewards business which was driven by new affiliates, new advertisers, new campaigns, higher traffic, and accelerated creative testing.
Cost of revenue (exclusive of depreciation and amortization)
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Cost of revenue (exclusive of depreciation and amortization) |
$59,540 |
$70,026 |
(15%) |
$117,812 |
$137,589 |
(14%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Cost of revenue for the three months ended June 30, 2023 (exclusive of depreciation and amortization) decreased $10.5 million, or 15%, to $59.5 million, compared to $70.0 million for the three months ended June 30, 2022. The decrease was attributable to the same factors causing the decline in revenue for the quarter over quarter period. Our cost of revenue primarily consists of media and related costs associated with acquiring traffic from third-party publishers and digital media platforms for our owned and operated websites. The costs also include enablement costs associated with our call centers and tracking costs related to our consumer data. In addition, there are indirect costs which include fulfillment costs related to rewards earned by consumers who complete the requisite number of advertisers' offers, along with call center software and hosting costs.
The total cost of revenue for the three months ended June 30, 2023 (exclusive of depreciation and amortization) as a percentage of revenue increased to 72% compared to 71% for the three months ended June 30, 2022. The increase was largely attributable to the increase in the cost of media as a percentage of revenue.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Cost of revenue for the six months ended June 30, 2023 (exclusive of depreciation and amortization) decreased $19.8 million, or 14% to $117.8 million, compared to $137.6 million for the six months ended June 30, 2022. The decrease was primarily attributable to the same factors causing the decline in revenue for the year over year period. The total cost of revenue for the six months ended June 30, 2023 (exclusive of depreciation and amortization) as a percentage of revenue increased to 74% compared to 73% for the six months ended June 30, 2022. The increase was largely attributable to the increase in the cost of media as a percentage of revenue.
In the normal course of executing paid media campaigns to source consumer traffic, we regularly evaluate new channels, strategies, and partners, in an effort to identify actionable opportunities which can then be optimized over time. Traffic acquisition costs incurred with the major digital media platforms have historically been higher than affiliate traffic sources. For the six months ended June 30, 2023 digital media spend continued to be driven by strategic test and learn initiatives that began in the second quarter of 2022. The mix and profitability of our media channels, strategies, and partners will likely reflect evolving market dynamics and the impact of our Traffic Quality Initiative. As we evaluate and scale new media channels, strategies, and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability. The improved traffic quality being sourced is the foundation to support sustainable long-term growth and positioning us as an industry leader. Past levels of cost of revenue (exclusive of depreciation and amortization) may therefore not be indicative of future costs, which may increase or decrease as these uncertainties in our business play out.
Sales and marketing
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Sales and marketing |
$4,215 |
$4,484 |
(6%) |
$9,028 |
$8,336 |
8% |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Sales and marketing expenses for the three months ended June 30, 2023 decreased $0.3 million, or 6%, to $4.2 million, compared to $4.5 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, sales and marketing expense consisted mainly of employee salaries and benefits of $3.6 million and $3.8 million, advertising costs of $0.3 and $0.3 million, and non-cash share-based compensation expenses of $0.1 and $0.1 million, respectively. The decrease was primarily due to the decline in headcount from restructurings in the first quarter of 2023 and fourth quarter of 2022.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Sales and marketing expenses for the six months ended June 30, 2023 increased $0.7 million, or 8%, to $9.0 million, compared to $8.3 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, sales and marketing expense consisted mainly of employee salaries and benefits of $7.4 million and $7.1 million, advertising costs of $0.6 and $0.6 million, and non-cash share-based compensation expenses of $0.3 and $0.3 million, respectively. The increase was primarily due to annual salary increases partially offset by reductions in headcount from restructuring during the prior periods.
Product development
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Product development |
$4,615 |
$4,802 |
(4%) |
$9,553 |
$9,357 |
2% |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Product development expense for the three months ended June 30, 2023 decreased $0.2 million, or 4%, to $4.6 million, compared to $4.8 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, product and development expense consisted mainly of salaries and benefits of $3.4 million and $3.5 million, software license and maintenance costs of $0.5 million and $0.4 million, professional fees of $0.4 million and $0.7 million, and non-cash share-based compensation expense of $0.1 million and $0.1 million, respectively. The decrease in product development expense is primarily due to lower consulting fees, along with a decrease in headcount from restructuring.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Product development expense for the six months ended June 30, 2023 increased $0.2 million, or 2%, to $9.6 million, compared to $9.4 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, product and development expense consisted mainly of salaries and benefits of $6.9 million and $6.8 million, professional fees of $1.0 million and $1.4 million, software license and maintenance costs of $0.9 million and $0.7 million, and non-cash share-based compensation expense of $0.3 million and $0.3 million, respectively. The increase in product development expenses reflects an increase in software license and maintenance costs and other operating costs.
General and administrative
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| General and administrative |
$3,941 |
$11,688 |
(66%) |
$16,266 |
$22,975 |
(29%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
General and administrative expenses for the three months ended June 30, 2023 decreased by $7.7 million, or 66%, to $3.9 million, compared to $11.7 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, general and administrative expense consisted mainly of employee salaries and benefits of $4.6 million and $6.0 million, professional fees of $1.3 million and $1.3 million, office overhead of $1.0 million and $1.2 million, non-cash share-based compensation expense of $0.7 million and $0.6 million, software license and maintenance costs of $0.7 million and $0.6 million, acquisition-related costs of $0.6 million and $0.6 million, and certain litigation and related costs of ($5.7) million and $0.6 million, respectively. The decrease was mainly the result of headcount and certain employee salary reductions along with a decrease in litigation related costs due to the lower than previously accrued regulatory settlement amount and insurance reimbursement related to previously incurred legal fees, even as legal fees had increased in the second quarter of 2023.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
General and administrative expenses for the six months ended June 30, 2023 decreased by $6.7 million, or 29%, to $16.3 million, compared to $23.0 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, general and administrative expense consisted mainly of employee salaries and benefits of $9.5 million and $10.9 million, professional fees of $2.9 million and $2.7 million, office overhead of $2.2 million and $2.3 million, non-cash share-based compensation expense of $1.4 million and $1.3 million, software license and maintenance costs of $1.2 million and $1.2 million, acquisition-related costs of $1.2 million and $1.1 million, and certain litigation and related costs of ($4.4) million and $2.0 million, respectively. The decrease was mainly the result of both lower salary costs due to restructuring in the first quarter of 2023 and fourth quarter of 2022, along with a decline in litigation related costs due to the lower than expected regulatory settlement amount in the second quarter of 2023, although legal fees to reach the settlement increased, as well as insurance reimbursement related to previously incurred legal fees. These increases were partly offset by professional fees and strategic company training expenses.
During the first quarter of 2023, the Company implemented reductions in the workforce that resulted in the termination of approximately 20 employees. These reductions in workforce were implemented following management’s determination to reduce headcount and decrease the Company's overhead to more effectively align resources to the Company's core business operations. In connection with these reductions in workforce, the Company incurred $0.5 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, to be fully settled in cash by March 31, 2024.
Depreciation and amortization
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Depreciation and amortization |
$3,095 |
$3,332 |
(7%) |
$5,454 |
$6,639 |
(18%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Depreciation and amortization expenses for the three months ended June 30, 2023 decreased $0.2 million, or 7%, to $3.1 million, compared to $3.3 million for the three months ended June 30, 2022. This decrease was mainly due to certain intangible assets that fully amortized as compared to the three months ended June 30, 2022, partly offset by the amortization of the acquired intangibles related to TAPP, LLC.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Depreciation and amortization expenses for the six months ended June 30, 2023 decreased $1.2 million, or 18%, to $5.5 million, compared to $6.6 million for the six months ended June 30, 2022. This decrease was mainly due to certain intangible assets that had fully amortized as compared to the six months ended June 30, 2022, partly offset by the amortization of the acquired intangibles related to TAPP, LLC.
Goodwill impairment
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Goodwill impairment |
— |
$55,400 |
(100%) |
$25,700 |
$55,400 |
(54%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
For the three months ended June 30, 2023, the Company did not recognize an impairment loss related to goodwill, compared to $55.4 million for the three months ended June 30, 2022.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
For the six months ended June 30, 2023, the Company recognized a $25.7 million impairment loss related to goodwill, compared to $55.4 million for the six months ended June 30, 2022.
Write-off of intangible assets
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Write-off of intangible assets |
— |
— |
— |
— |
$128 |
(100%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
For the three months ended June 30, 2023 and 2022, the Company did not recognize write-offs of intangible assets.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
For the six months ended June 30, 2023, the Company did not recognize write-offs of intangible assets, compared to $0.1 million for the write-offs of intangible assets related to software developed for internal use for the six months ended June 30, 2022.
Loss on disposal of property and equipment
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Loss on disposal of property and equipment |
— |
$21 |
(100%) |
— |
$21 |
(100%) |
|||||||
The Company recognized no loss on disposal of property and equipment for the three months ended June 30, 2023, compared to $0.02 million for the three months ended June 30, 2022.
Interest expense, net
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Interest expense, net |
$795 |
$430 |
85% |
$1,484 |
$814 |
82% |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Interest expense, net, for the three months ended June 30, 2023 increased $0.4 million, compared to the three months ended June 30, 2022, which was driven by a higher average interest rate on the Term Loan described below under "Liquidity and Capital Resources" below.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Interest expense, net, for the six months ended June 30, 2023 increased $0.7 million, compared to the six months ended June 30, 2022, which was driven by a higher average interest rate on the Term Loan described below under "Liquidity and Capital Resources".
Income (loss) before income taxes
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Income (loss) before income taxes |
$5,944 |
($51,822) |
(111%) |
($25,898) |
($53,835) |
(52%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Income before income taxes for the three months ended June 30, 2023 was $5.9 million, compared to loss before income taxes of $51.8 million for the three months ended June 30, 2022. The change in income (loss) before income taxes of $57.8 million was primarily due to a goodwill impairment of $55.4 million that occurred in the prior period, a decline in cost of revenue of $10.5 million, and an overall decrease in operating expenses of $8.2 million driven in part by the contra-expense related to the insurance reimbursement or prior legal fees, offset by the decline in revenues of $16.2 million.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Loss before income taxes for the six months ended June 30, 2023 was $25.9 million, compared to loss before income taxes of $53.8 million for the six months ended June 30, 2022. The decrease in loss before income taxes of $27.9 million was primarily due to a decrease in goodwill impairment and write-off of intangibles of $29.8 million, a decline in cost of revenue of $19.8 million, and a slight decrease in operating expenses of $5.8 million driven in part by the contra-expense related to the insurance reimbursement or prior legal fees, offset by the decline in revenues of $28.0 million.
Income tax expense
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Income tax expense |
(1,693) |
(5,122) |
(67%) |
($1,794) |
($5,122) |
(65%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Income tax expense for the three months ended June 30, 2023, was $1.7 compared to $5.1 for the three months ended June 30, 2022, primarily driven by the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses offset by the benefit of federal research and development credits.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Income tax expense for the six months ended June 30, 2023 was $1.8 million, compared to $5.1 for the six months ended June 30, 2022, primarily driven by the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses offset by the benefit of federal research and development credits.
As of June 30, 2023 and 2022, we recorded a full valuation allowance against our net deferred tax assets. We intend to maintain a full valuation allowance against the net deferred tax assets until there is sufficient evidence to support the release of all or some portion of such 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 we are able to achieve and the net deferred tax assets available.
Net income (loss)
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
| (In thousands) |
2023 |
2022 |
% Change |
2023 |
2022 |
% Change |
|||||||
| Net income (loss) |
$4,251 |
($56,944) |
(107%) |
($27,692) |
($58,957) |
(53%) |
|||||||
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Net income for the three months ended June 30, 2023 was $4.3 million compared to net loss of $56.9 million for the three months ended June 30, 2022 due to a goodwill impairment and write-off of intangibles that occurred in the prior period and declines in cost of revenue, operating expenses, and income tax, partly offset by the decline in revenues as discussed above.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Net loss for the six months ended June 30, 2023 was $27.7 million compared to net loss of $59.0 million for the six months ended June 30, 2022 due to a decrease in goodwill impairment and write-off of intangibles, a decline in cost of revenue, a decrease in operating expenses, and lower income tax expense, offset by the decline in revenues, as discussed above.
Liquidity and Capital Resources
Cash provided by (used in) operating activities. For the six months ended June 30, 2023, net cash provided by operating activities was $2.1 million, compared to net cash used by operating activities of $1.9 million for the six months ended June 30, 2022. Net loss in the current period of $27.7 million represents a decrease of $31.3 million, as compared with net loss of $59.0 million in the prior period. Adjustments to reconcile net loss to net cash provided by operating activities of $33.2 million in the current period decreased by $31.1 million, as compared with $64.3 million in the prior period, primarily due to a lower goodwill impairment and depreciation and amortization in the current period as compared to the prior period. Changes in assets and liabilities sourcing cash of $3.4 million in the current period, as compared with consuming cash of $7.3 million in the prior period, primarily due to ordinary-course changes in working capital, largely involving the timing of receipt of amounts owing from clients and disbursements of amounts payable to vendors.
Cash used in investing activities. For the six months ended June 30, 2023 and 2022, net cash used in investing activities was $3.6 million and $3.2 million, respectively. The increase was mainly due to the impact of the TAPP, LLC consolidation that occurred in the current period ended June 30, 2023, compared to the True North Loyalty, LLC acquisition that occurred in the prior period ended June 30, 2022.
Cash used in financing activities. Net cash used in financing activities for the six months ended June 30, 2023 and 2022 was $3.0 million and $2.9 million, respectively. The slight change was due to the cash paid related to the debt modification, mainly offset by the decline in taxes paid related to share settlements of vesting of restricted stock units.
As of June 30, 2023, we had noncancelable operating lease commitments of $5.4 million and long-term debt with a $38.8 million principal balance. For the six months ended June 30, 2023, we funded our operations using available cash.
As of June 30, 2023, we had cash and cash equivalents of $21.0 million, a decrease of $4.5 million from $25.5 million as of December 31, 2022. We believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months and beyond regardless of our inability to access the Revolving Loans described below.
As of June 30, 2023, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.
We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business. We continue to identify and prioritize additional technologies, which we may wish to develop internally or through licensing or acquisition from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurance that any such acquisitions will be made or that we will be able to successfully integrate any acquired business with our then current business or realize anticipated cost synergies. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to shareholders.
On March 31, 2021, Fluent, LLC ("Borrower"), entered into a credit agreement (as amended, modified, extended, restated, replaced, or supplemented from time to time, the "Credit Agreement") with certain subsidiaries of Fluent, LLC as guarantors, and Citizens Bank, N.A. ("Citizens Bank") 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 "Credit Facility"). On May 15, 2023, the parties entered into a third amendment to the Credit Agreement, which amended certain provisions by adding an additional tier of applicable margin to the selected rates and providing for additional notice of certain material events and, for the remaining fiscal quarters of 2023: (i) established the applicable pricing floor; (ii) modified and adjusted certain EBITDA add-backs; (iii) added monthly financial reporting; (iv) provided additional financial covenant testing conditions on Fluent’s ability to draw on the Revolving Loans; (v) added tiers to certain financial covenants and added a minimum cash liquidity financial covenant; (vi) provided additional restrictions on the ability to make loans and advances to officers, directors and employees; (vii) provided additional restrictions on the ability to invest in certain subsidiaries and joint ventures; (viii) provided additional restrictions on the ability to make additional loans, investments or permitted acquisitions; and (ix) added unrestricted cash requirements before the Company is permitted to pay dividends, make distributions or redeem or repurchase equity interests, in each case pursuant to the terms and conditions under the Credit Agreement. Additionally, on August 21, 2023, in order to avoid a projected violation of certain financial covenants for the third and fourth quarters of 2023, Fluent, LLC entered into a fourth amendment to the Credit Agreement which (i) adjusted certain financial covenants for the remaining fiscal quarters of 2023, (ii) temporarily adjusted interest rates, (iii) permitted the Citizens Bank to retain a business consultant at Fluent, LLC’s expense to advise on the credit parties’ financial and operating performance; (iv) required weekly liquidity reports to Citizens Bank, (iv) required a $5 million prepayment of the Term Loan, and (v) adjusted the Revolving Loans by the same amount to $10 million. The $5 million prepayment amount is reflected as current portion of long-term debt at June 30, 2023 in the consolidated balance sheet included in this report.
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. As of June 30, 2023, the Company was in compliance with all of the financial and other covenants applicable to the Term Loan under the Credit Agreement.
The Credit Agreement also contains certain customary conditions applicable to extensions of credit, including that representations and warranties made in the Credit Agreement be materially true and correct at the time of such extension. The third amendment added an additional condition consisting of two financial covenants with which the Company must comply in order to draw on the Revolving Loans during the balance of 2023. As of June 30, 2023, the Company was not in compliance with this additional condition and was therefore unable to draw on the Revolving Loans. These matters do not represent Events of Default (as defined in the Credit Agreement) and therefore do not affect the Term Loan.
With the fourth amendment management now expects to be in compliance with the covenant requirements of the Credit Agreement; however, the continuing impact from the FTC Consent Order on the Company’s business as well as other macro-economic factors could impact this compliance. These items, as well others, could require the Company further amend its Credit Agreement, which may or may not be available on acceptable terms.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We periodically evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. All amounts below are presented in thousands.
As disclosed in Note 4, Goodwill, the Company engaged a third party to assist in conducting an interim test of the fair value of its goodwill for potential impairment for the three months ended March 31, 2023. 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, due to the decline in value of its publicly traded stock, provided the best indication of fair value of the Fluent reporting unit. Under the market approach, it considers the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium. If we were to experience an additional decline in market capitalization or assumptions in management's forecast, there would be an increased risk of impairment of goodwill. Based on the results of this market-based approach as of March 31, 2023, the Company concluded that its carrying value exceeded its estimated fair value by 20%. As such, the Company concluded that its goodwill of $51,614 for the Fluent reporting unit was impaired and recorded a non-cash impairment charge of $25,700 for the first quarter of 2023.
Additionally, the Company engaged a third party to assist in conducting an interim test of the fair value of its goodwill for potential impairment for the three months ended June 30, 2023. The Company determined that a combination of income approach and the market approach provided the best indication of fair value of the Fluent reporting unit. The income approach and market approach utilize accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. The critical assumptions in the income approach include forecasted revenues and profitability, long-term growth rates, and discount rates. The market approach considers the Company’s implied market multiple applied to management's forecasted profitability and is further adjusted for control premium. Management exercises judgment in developing these assumptions. If we were to experience sales declines, a significant change in operating margins which may impact our cash flows, an increase in our discount rates, a decline in the Company’s market capitalization, and/or a decrease in our projected long-term growth rates, there would be an increased risk of impairment of goodwill and/or other assets. Based on the results of this approach as of June 30, 2023, the Company concluded that its fair value exceeded its estimated carrying value by 5%. As such the Company concluded that its goodwill of $27,469 for the Fluent reporting unit was not impaired. If there is a reduction in operating results or a decline in the market value of the Company's publicly-traded stock, this could result in future impairment charges, which could affect the financial results.
For additional information, please refer to our 2022 Form 10-K. There have been no additional material changes to Critical Accounting Policies and Estimates disclosed in the 2022 Form 10-K.
Recently issued accounting and adopted standards
See Note 1(b), "Recently issued and adopted accounting standards," in the Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Company's Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of June 30, 2023. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including the Company's Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), the Company's Chief Executive Officer and Interim Chief Financial Officer carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures as of June 30, 2023 and concluded they were not effective as of that date. Based on this evaluation, they concluded our procedures were not effective due to the identification of a material weakness in internal control over financial reporting relating to our ability to timely account for non-routine, non-recurring, unusual or complex financial transactions. As a result, the Company performed additional analysis deemed necessary to ensure that our financial statements included in this Quarterly Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with GAAP.
Remediation Efforts to Address Material Weakness
With the oversight of the Audit Committee of the Board of Directors, we are in the process of developing a remediation plan that will enhance our processes for timely identifying and determining the proper accounting for non-routine, non-recurring, unusual or complex transactions.
Changes in Internal Control Over Financial Reporting
Except as noted above, there were no changes to our internal control over financial reporting during this quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Other than as disclosed below under "Certain Legal Matters," the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the Company's management, is likely to have a material adverse effect on the business, financial condition, results of operations or cash flows of the Company. Legal fees associated with such legal proceedings are expensed as incurred. We review legal proceedings and claims on an ongoing basis and follow appropriate accounting guidance, including Financial Accounting Standards Board Accounting Standards Codification 450, Contingencies, when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, we evaluate, among other factors, the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. We do not accrue liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.
In addition, we may be involved in litigation from time to time in the ordinary course of business. We do not believe that the ultimate resolution of any such matters will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty, and we cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on our business, financial condition, results of operations and cash flows.
Certain Legal Matters
On March 31, 2022, the Company reached a settlement for $1.7 million with the New York State Department of Taxation and Finance (the "Tax Department") following a sales and use tax audit covering the period from December 1, 2010 to November 30, 2019. The Tax Department had asserted that revenue derived from certain of the Company’s customer acquisition and list management services were subject to sales tax, as a result of being deemed taxable information services. The settlement amount was paid on April 1, 2022. Since March 1, 2022, the Company has been collecting and remitting New York sales tax on certain types of revenues from New York based clients.
On January 28, 2020, Fluent received a Civil Investigative Demand from the Federal Trade Commission ("FTC") regarding compliance with the FTC Act and the Telemarketing Sales Rule. On October 18, 2022, the FTC staff sent the Company a draft complaint and proposed consent order seeking injunctive relief and a civil monetary penalty. On January 12, 2023, the Company made an initial proposal of $5.0 million for the civil monetary penalty contingent on successful negotiation of the remaining outstanding injunctions and other provisions. The Company accrued the same amount for the year ending December 31, 2022. On May 26, 2023, Fluent agreed to the terms of a Stipulated Order for Permanent Injunction, Monetary Judgment, Civil Penalty Judgment, and Other Relief (the "FTC Consent Order"). The FTC Consent Order imposed a civil penalty of $2.5 million, required additional changes to the Company’s employment opportunities marketplace and programmatic advertising business, and resulted in the implementation of compliance measures across the business. The same day, Fluent transferred the amount of the civil penalty to a third-party escrow account. On July 17, 2023, the FTC filed its Complaint for Civil Penalties, Permanent Injunction, Monetary Relief, and Other Relief and, together with Fluent, filed a Joint Motion for Entry of Proposed Stipulated Order in the United States District Court for the Southern District of Florida. The FTC Consent Order was entered by the Court on August 11, 2023, and the escrow funds were released on August 15, 2023.
On October 6, 2020, the Company received notice from the Pennsylvania Office of the Attorney General ("PAAG") that it was reviewing the Company’s business practices relating to telemarketing. After the Company and the PAAG were unable to reach agreement on a proposed Assurance of Voluntary Compliance, the Commonwealth of Pennsylvania filed a complaint for permanent injunction, civil penalties, and other relief in the United States District Court for the Western District of Pennsylvania on November 2, 2022. On May 19, 2023, the parties entered into a settlement, wherein the Company agreed to injunctive relief and to pay the PAAG $0.25 million for investigatory costs, all of which was paid as of June 30, 2023.
The Company has been involved in a Telephone Consumer Protection Act class action, Daniel Berman v. Freedom Financial Network, which was originally filed in 2018. On May 31, 2023, the parties entered into an Amended Class Action Settlement Agreement (the "Berman Settlement Agreement"), which includes injunctive provisions and payment to plaintiffs of $9.75 million for legal fees and a consumer redress fund. On July 28, 2023, the Court preliminarily approved the Berman Settlement Agreement, and the Company contributed $3.1 million, payable following the final approval of the settlement. The final approval of the settlement is expected in mid-2024. The Company's contribution amounts were accrued as of December 31, 2022. This amount is payable $1.1 million in cash and $2.0 million pursuant to an interest-bearing note with a two-year term provided by a co-defendant, Freedom Financial Network.
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our 2022 Form 10-K, the occurrence of any one of which could have a material adverse effect on our actual results.
Except as set forth below, there have been no material changes to the risk factors previously disclosed in our 2022 Form 10-K. The risk factors below update all risk factors in our 2022 Form 10-K related to the matters discussed in the risk factors below.
The FTC and the PAAG have concluded their investigations involving the Company. The terms of resolution of these actions, or similar actions by other regulators, will affect our business and results of operations.
As a result of the FTC Consent Order and the PAAG settlement, we have made additional changes to our employment opportunities marketplace and programmatic advertising businesses and have implemented industry-leading compliance measures across the entire business which will have at least a short-term negative impact on our revenues and media margin. While in the medium term, we expect that the increased industry-wide scrutiny and compliance demands of partners will eliminate the competitive advantage that less compliance-focused platforms currently enjoy as a result of the changes we have implemented, and that our industry-leading compliance protocols will be a competitive advantage enabling us to recapture market share from our competitors, we cannot assure you that the adverse impact on our revenues and media margin will not continue longer than expected.
Despite resolving the FTC and PAAG matters, we could be subject to additional regulatory actions from other state attorneys general. Moreover, the TCPA plaintiffs’ bar and individual claimants may file claims and lawsuits against us. Such actions could have a substantial adverse impact on our reputation and ability to continue to buy media cost effectively and the willingness of our advertiser clients to continue to do business with us, which could in turn materially and adversely affect our results of operations and financial position. Such claims may also require significant expenditures for legal fees.
Increasing regulatory scrutiny of the digital marketing industry could adversely impact our business and results of operations.
Increasing awareness and concern among the general public, privacy advocates, mainstream media and governmental bodies has led to increasing regulatory scrutiny of the digital marketing industry. Fluent, LLC recently agreed to the FTC Consent Order and PAAG settlement and implemented industry-leading compliance measures across the entire business, and particularly in the employment opportunities and programmatic advertising businesses. These changes will have a negative impact on our revenues and media margin in the short term and potentially longer. We may become subject to additional regulatory actions and/or requirements, which could in turn materially and adversely affect our results of operations and financial position. See risk factor entitled "The FTC and the PAAG have concluded their investigations involving the Company . . ." above. In addition, additional regulatory actions may require significant expenditures for legal fees.
There can be no assurance that our common stock will continue to be listed on The Nasdaq Global Market ("Nasdaq"), which could limit investors’ ability to make transactions in our common stock and the price of our common stock and our ability to access the capital markets could be negatively impacted.
Our common stock is traded on Nasdaq under the symbol "FLNT." To maintain our listing we are required to satisfy continued listing requirements, including the requirement commonly referred to as the minimum bid price rule. The minimum bid price rule requires that the closing bid price of our common stock be at least $1.00 per share. On May 1, 2023, we received a letter from the Staff of the Listing Qualifications Department of The Nasdaq Stock Market LLC indicating that based upon the Company's closing bid price during the previous 31 consecutive business days, we no longer met the minimum bid price rule. The notice had no immediate effect on the listing of our common stock on Nasdaq, and we have until October 30, 2023 to regain compliance. If at any time during such 180-calendar day period the closing bid price of our common stock is at least $1.00 for a minimum of 10 consecutive business days, Nasdaq will provide us written confirmation of compliance and the matter will be closed. If we do not regain compliance by October 30, 2023, and we request to transfer the listing of our common stock from The Nasdaq Global Market to The Nasdaq Capital Market, we may be eligible for an additional 180-calendar day compliance period, subject to satisfying the conditions in the applicable Nasdaq Listing Rules. However, there can be no assurance that we will be able to regain compliance with the minimum bid price rule or continue to satisfy other continued listing standards and maintain the listing of our common stock on Nasdaq. The suspension or delisting of our common stock, or the commencement of delisting proceedings, could, among other things, materially impair our stockholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. Although we may effect a reverse stock split of our issued and outstanding common stock in the future, there can be no assurance that such reverse stock split will enable us to regain compliance with the Nasdaq minimum bid price requirement.
Covenants in our Credit Agreement impose restrictions that may limit our operating and financial flexibility.
The Credit Agreement contains negative covenants that, among other things, limit our 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). The Credit Agreement contains certain affirmative covenants and customary events of default provisions, including, subject to thresholds and grace periods, among others, payment default, covenant default, cross default to other material indebtedness, and judgment default. Each of these limitations are subject to various conditions.
In addition, the Credit Agreement contains financial covenants that require us to maintain minimum total leverage ratios and fixed charge coverage ratios. The applicable interest rate on the facility may increase if our total leverage ratio increases to specified amounts that would result in our interest expenses going up. Subject to the terms and conditions set forth in the Credit Agreement, we are required to make annual mandatory prepayments of 10% of the original principal amount of the facility and make other prepayments in certain circumstances prior to March 31, 2026, the Maturity Date of the facility.
These covenants could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand and pursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot provide any assurance that we will be able to comply with such covenants. The restrictions also limit our ability to obtain future financings or to withstand a future downturn in our business or the economy in general. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
A breach of any covenant in the Credit Agreement would result in a default under the Credit Agreement after the expiration of any applicable grace periods a default, if not cured or waived, could result in the acceleration of the debt outstanding under the Credit Agreement. In the second and third quarters of 2023, we entered into amendments to the Credit Agreement to prevent breaches of certain covenants. There is no assurance we will be able to obtain an amendment or waiver to the Credit Agreement to prevent future defaults. Any amendment or waiver will likely require concessions from the Company, such as prepayments, the imposition of other covenants or restrictions, limitations on future borrowing, or the payment of lender expenses. If the debt is accelerated, we may not be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at such time, it may not be on terms that are acceptable to us or as favorable to us as our current agreements. If our debt is in default for any reason, our business, financial condition, and results of operations could be materially and adversely affected.
Our management has identified a material weakness in our internal controls over financial reporting, and we may be unable to develop, implement and maintain appropriate controls in future periods, which may lead to errors or omissions in our financial statements.
The Sarbanes-Oxley Act and related rules and regulations require that management report annually on the effectiveness of our internal control over financial reporting and assess the effectiveness of our disclosure controls and procedures on a quarterly basis. Maintaining and adapting our internal controls is expensive and requires significant management attention. Moreover, as we continue to grow, our internal controls may become more complex and require additional resources to ensure they remain effective amid dynamic regulatory and other guidance.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis. As of June 30, 2023, our management concluded that our disclosure controls and procedures were not effective and that we had, as of such date, a material weakness relating to our ability to timely account for non-routine, non-recurring, unusual or complex financial transactions. As a result, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles.
With the oversight of the Audit Committee of the Board of Directors, we are developing a remediation plan that will enhance our processes for timely identifying and determining the proper accounting for non-routine, non-recurring, unusual or complex transactions . We cannot currently provide an estimate of how long such plan will take to remediate the material weakness or assure you that the remediation plan will remediate the material weakness.
Although we review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, there can be no assurance that we will not discover additional weaknesses in our internal control over financial reporting in the future. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements, which could result in violations of applicable securities laws and NASDAQ listing requirements, subject us to litigation and investigations, negatively affect investor confidence in our financial statements, and adversely impact our stock price and ability to access capital markets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Because this Quarterly Report on Form 10-Q is being filed within four business days after the applicable triggering events, the information below is being disclosed under this Item 5 instead of under Item 1.01 (Entry into a Material Definitive Agreement), Item 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of Registrant) and Item 3.03 (Material Modification to Rights of Security Holders) of Form 8-K.
On August 21, 2023, Fluent, LLC entered into a fourth amendment to the Credit Agreement with certain subsidiaries of Fluent, LLC as guarantors, and Citizens Bank, N.A. (“Citizens Bank”) as administrative agent, lead arranger and bookrunner, which (i) adjusted certain financial covenants for the remaining fiscal quarters of 2023, (ii) temporarily adjusted interest rates, (iii) permitted Citizens Bank to retain a business consultant at Fluent, LLC’s expense to advise on the credit parties’ financial and operating performance; (iv) required weekly liquidity reports to Citizens Bank, (iv) required a $5 million prepayment of the Term Loan, and (v) adjusted the Revolving Loans by the same amount to $10 million.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
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Incorporated by Reference |
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Exhibit Description |
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Filing Date |
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Herewith |
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| 3.1 | Certificate of Domestication | 8-K | 001-37893 | 3.1 | 3/26/2015 | ||||||||
| 3.2 | Certificate of Incorporation | 8-K | 001-37893 | 3.2 | 3/26/2015 | ||||||||
| 3.3 | Certificate of Amendment to the Certificate of Incorporation | 8-K | 001-37893 | 3.1 | 9/26/2016 | ||||||||
| 3.4 | Certificate of Amendment to the Certificate of Incorporation | 8-K | 001-37893 | 3.1 | 4/16/2018 | ||||||||
| 3.5 | Amended and Restated Bylaws | 8-K | 001-37893 | 3.2 | 2/19/2019 | ||||||||
| 10.1 | Third Amendment to Credit Agreement | X | |||||||||||
| 10.2+ | Form of Restricted Stock Unit Award Grant Notice (2022 Long Term Incentive Plan) | X | |||||||||||
| 10.3+ | Form of Restricted Stock Unit Award Grant Notice (2022 Omnibus Equity Incentive Plan) |
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| 10.4+ | X | ||||||||||||
| 10.5+ | Form of Stock Option Grant Notice and Option Agreement (2022 Omnibus Equity Incentive Plan) | X | |||||||||||
| 10.6 | Fourth Amendment to Credit Agreement | X | |||||||||||
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Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
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Inline XBRL Taxonomy Extension Schema Document |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||||||||
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This certification is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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| + | Management contract or compensatory plan or arrangement | ||||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Fluent, Inc. |
| August 21, 2023 |
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By: |
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/s/ Ryan Perfit |
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Ryan Perfit |
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Interim Chief Financial Officer |
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(Principal Financial and Accounting Officer) |