Fluent(FLNT) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis of Fluent, Inc ITEM 1. FINANCIAL STATEMENTS. Presents Fluent, Inc.'s unaudited consolidated financial statements and notes for periods ended Sep 30, 2019, and Dec 31, 2018 Consolidated Balance Sheets Provides a snapshot of Fluent, Inc.'s financial position, detailing assets, liabilities, and equity as of specific dates Consolidated Balance Sheet Highlights | Metric | Sep 30, 2019 (thousands) | Dec 31, 2018 (thousands) | | :----- | :----------------------- | :----------------------- | | Total Assets | $310,668 | $293,269 | | Total Liabilities | $101,215 | $86,103 | | Total Shareholders' Equity | $209,453 | $207,166 | | Cash and cash equivalents | $24,228 | $17,769 | | Accounts receivable, net | $45,745 | $48,652 | | Accounts payable | $17,396 | $7,855 | | Long-term debt, net | $46,929 | $51,972 | Consolidated Statements of Operations Details Fluent, Inc.'s revenues, expenses, and net income or loss over specific reporting periods Consolidated Statements of Operations Highlights | Metric | 3 Months Ended Sep 30, 2019 (thousands) | 3 Months Ended Sep 30, 2018 (thousands) | 9 Months Ended Sep 30, 2019 (thousands) | 9 Months Ended Sep 30, 2018 (thousands) | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Revenue | $64,552 | $66,535 | $201,673 | $179,459 | | Total costs and expenses | $67,296 | $60,191 | $199,147 | $171,701 | | (Loss) income from operations | $(2,744) | $6,344 | $2,526 | $7,758 | | Net (loss) income | $(4,463) | $4,462 | $(2,703) | $(19,575) | | Basic and diluted (loss) income per share (Continuing operations) | $(0.06) | $0.06 | $(0.03) | $0.02 | | Basic and diluted (loss) income per share (Net) | $(0.06) | $0.06 | $(0.03) | $(0.26) | Consolidated Statements of Changes in Shareholders' Equity Outlines the changes in Fluent, Inc.'s equity accounts, including common stock and accumulated deficit, over time Changes in Shareholders' Equity | Metric | Sep 30, 2019 (thousands) | Dec 31, 2018 (thousands) | | :----- | :----------------------- | :----------------------- | | Common Shares Outstanding | 78,574,482 | 76,525,581 | | Common Stock Amount | $39 | $38 | | Treasury Shares | 1,791,186 | 1,233,198 | | Treasury Stock Amount | $(6,368) | $(3,272) | | Additional Paid-in Capital | $403,854 | $395,769 | | Accumulated Deficit | $(188,072) | $(185,369) | | Total Shareholders' Equity | $209,453 | $207,166 | - For the nine months ended September 30, 2019, the increase in common stock issued was primarily due to the vesting of 2,048,901 restricted stock units (RSUs), with 557,988 shares withheld for statutory taxes and reflected in treasury stock[80] Consolidated Statements of Cash Flows Summarizes Fluent, Inc.'s cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights | Metric | 9 Months Ended Sep 30, 2019 (thousands) | 9 Months Ended Sep 30, 2018 (thousands) | | :------------------------------------ | :-------------------------------------- | :-------------------------------------- | | Net cash provided by operating activities | $26,615 | $16,647 | | Net cash used in investing activities | $(11,209) | $(22,216) | | Net cash (used in) provided by financing activities | $(8,947) | $6,366 | | Net increase in cash, cash equivalents and restricted cash | $6,459 | $797 | | Cash, cash equivalents and restricted cash at end of period | $25,708 | $17,361 | Notes to Consolidated Financial Statements Provides detailed explanations and additional information supporting the figures presented in the financial statements 1. Summary of Significant Accounting Policies Outlines the key accounting principles and methods used by Fluent, Inc. in preparing its financial statements - The Company adopted ASU 2016-02 (Leases) effective January 1, 2019, using a modified retrospective approach, resulting in recording right-of-use assets of $10,866 thousand and operating lease liabilities of $11,138 thousand on the balance sheet, with no impact on the consolidated statements of operations or cash flows[27][28] - Revenue is recognized when control of goods or services is transferred to customers, based on predefined qualifying characteristics or user actions, with the Company acting as a principal and recording gross revenue when it has substantive control and primary responsibility, otherwise recording net fees as revenue as an agent[33][36] Deferred and Unbilled Revenue | Metric | Sep 30, 2019 (thousands) | Dec 31, 2018 (thousands) | | :---------------- | :----------------------- | :----------------------- | | Deferred Revenue | $1,178 | $444 | | Unbilled Revenue (in Accounts Receivable) | $19,081 | $25,545 | 2. Loss (Income) Per Share Details the calculation of basic and diluted earnings per share, including the impact of anti-dilutive securities Basic and Diluted (Loss) Income Per Share | Metric | 3 Months Ended Sep 30, 2019 (thousands) | 3 Months Ended Sep 30, 2018 (thousands) | 9 Months Ended Sep 30, 2019 (thousands) | 9 Months Ended Sep 30, 2018 (thousands) | | :------------------------------------ | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Net (loss) income from continuing operations | $(4,463) | $4,462 | $(2,703) | $1,549 | | Net (loss) income | $(4,463) | $4,462 | $(2,703) | $(19,575) | | Total basic and diluted weighted average shares outstanding | 79,569,210 | 78,199,633 | 79,389,131 | 76,002,514 | | Basic and diluted (loss) earnings per share (Continuing operations) | $(0.06) | $0.06 | $(0.03) | $0.02 | | Basic and diluted (loss) earnings per share (Net) | $(0.06) | $0.06 | $(0.03) | $(0.26) | Anti-Dilutive Securities Excluded from Diluted EPS Calculation | Security Type | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Restricted stock units | 3,794,227 | 3,842,631 | 3,794,227 | 3,842,631 | | Stock options | 2,120,000 | 2,623,776 | 2,120,000 | 2,623,776 | | Warrants | 2,398,776 | 112,000 | 2,398,776 | 112,000 | | Total anti-dilutive securities | 8,313,003 | 6,578,407 | 8,313,003 | 6,578,407 | 3. Discontinued Operations Reports the financial results and disposal details of Red Violet, which was spun off as a discontinued operation - The financial results of Red Violet are reflected as discontinued operations following its spin-off on March 26, 2018[44] Financial Results of Discontinued Operations (Red Violet) for Nine Months Ended September 30, 2018 | Metric | Amount (thousands) | | :---------------------------------------------------- | :----------------- | | Revenue | $3,325 | | Loss from operations of discontinued operations, net of $0 income taxes | $(2,084) | | Loss on disposal of discontinued operations, net of $0 income taxes | $(19,040) | | Net loss from discontinued operations | $(21,124) | Loss on Disposal of Discontinued Operations Breakdown (Nine Months Ended September 30, 2018) | Component | Amount (thousands) | | :------------------------------------ | :----------------- | | Share-based compensation expense | $15,548 | | Write-off of unamortized debt costs | $284 | | Write-off of certain prepaid expenses | $198 | | Spin-off related professional fees | $2,012 | | Spin-off related employee compensation | $998 | | Total Loss on Disposal | $19,040 | 4. Lease Commitments Details Fluent, Inc.'s operating and financing lease obligations, including costs and future maturity schedules - The Company recognizes operating leases with terms greater than one year on the consolidated balance sheets as Operating lease right-of-use assets and corresponding liabilities, while short-term leases (one year or less) are not recognized on the balance sheet[48] Components of Lease Costs | Lease Type | 3 Months Ended Sep 30, 2019 (thousands) | 9 Months Ended Sep 30, 2019 (thousands) | | :------------------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Operating leases: Rent expense | $542 | $1,533 | | Financing lease: Depreciation expense | $73 | $170 | | Financing lease: Interest expense | $10 | $32 | | Short-term leases: Rent expense | $85 | $342 | | Total Lease Costs | $710 | $2,077 | Scheduled Future Maturities of Lease Liabilities as of September 30, 2019 | Year | Operating Leases (thousands) | Financing Lease (thousands) | | :---------------- | :--------------------------- | :-------------------------- | | Remainder of 2019 | $585 | $37 | | 2020 | $2,344 | $157 | | 2021 | $2,297 | $157 | | 2022 | $2,153 | $158 | | 2023 | $2,222 | $169 | | Thereafter | $4,110 | $312 | | Total Undiscounted Cash Flows | $13,711 | $990 | | Less: Imputed Interest | $(1,862) | $(138) | | Present Value of Lease Liabilities | $11,849 | $852 | 5. Intangible Assets, Net Presents the net carrying amounts and estimated future amortization expenses for Fluent, Inc.'s intangible assets Intangible Assets, Net as of September 30, 2019 | Asset Type | Gross Amount (thousands) | Accumulated Amortization (thousands) | Net Carrying Amount (thousands) | | :-------------------------------- | :----------------------- | :------------------------------- | :------------------------------ | | Software developed for internal use | $4,427 | $(1,724) | $2,703 | | Acquired proprietary technology | $13,559 | $(8,827) | $4,732 | | Customer relationships | $37,286 | $(18,116) | $19,170 | | Trade names | $16,657 | $(3,124) | $13,533 | | Domain names | $191 | $(36) | $155 | | Databases | $31,292 | $(13,280) | $18,012 | | Non-competition agreements | $1,768 | $(1,595) | $173 | | Total Intangible Assets, Net | $105,180 | $(46,702) | $58,478 | - Amortization expense was $3,456 thousand for the three months ended September 30, 2019, and $9,708 thousand for the nine months ended September 30, 2019[57] Estimated Future Amortization Expenses as of September 30, 2019 | Year | Amount (thousands) | | :---------------- | :----------------- | | Remainder of 2019 | $3,443 | | 2020 | $13,623 | | 2021 | $10,810 | | 2022 | $9,171 | | 2023 | $4,663 | | 2024 and thereafter | $16,768 | | Total | $58,478 | 6. Goodwill Reports the goodwill balance and the results of the interim impairment test conducted as of September 30, 2019 - As of September 30, 2019, the total goodwill balance was $164,774 thousand, primarily from the acquisitions of Interactive Data, Fluent LLC, Q Interactive, and AdParlor[59] - An interim impairment test was conducted as of September 30, 2019, due to declining operating results and a decline in stock market value, concluding that goodwill was not impaired, with the estimated fair value of the reporting unit exceeding its carrying value by approximately 12%[61] 7. Long-Term Debt, Net Details Fluent, Inc.'s long-term debt obligations, including the Refinanced Term Loan and Note Payable maturities Long-Term Debt, Net | Debt Type | Sep 30, 2019 (thousands) | Dec 31, 2018 (thousands) | | :---------------------------------------------------- | :----------------------- | :----------------------- | | Refinanced Term Loan due 2023 (less unamortized discount) | $50,612 | $55,472 | | Note Payable due 2021 (less unamortized discount) | $2,375 | — | | Total Long-Term Debt, Net | $52,987 | $55,472 | | Less: Current portion of long-term debt | $(6,058) | $(3,500) | | Long-Term Debt, Net (non-current) | $46,929 | $51,972 | - The Refinanced Term Loan, totaling $70.0 million, was entered into on March 26, 2018, to repay existing term loans and promissory notes, accruing interest at LIBOR plus 7.00% or base rate plus 6.0% per annum and maturing on March 26, 2023[63][64][66] - A Note Payable of $2,350 thousand was issued on July 1, 2019, in connection with the AdParlor Acquisition, payable in two equal installments on the first and second anniversaries of the closing date[69] Scheduled Future Maturities of Refinanced Term Loan and Note Payable as of September 30, 2019 | Year | Amount (thousands) | | :---------------- | :----------------- | | Remainder of 2019 | $3,433 | | 2020 | $4,750 | | 2021 | $3,500 | | 2022 | $3,500 | | 2023 | $41,786 | | Total Maturities | $56,969 | 8. Income Taxes Discusses Fluent, Inc.'s income tax provisions, valuation allowances, effective tax rates, and unrecognized tax benefits - The Company has recorded a full valuation allowance against its net deferred tax assets as of September 30, 2019, and December 31, 2018, due to historical losses and the need for sufficient positive evidence to support its release[72] - The effective income tax benefit rate was 1% for the nine months ended September 30, 2019, and 0% for the same period in 2018, primarily due to the full valuation allowance[75] - The balance of unrecognized tax benefits was $1,480 thousand as of September 30, 2019, and December 31, 2018, which, if recognized, would increase net operating losses and have no impact on the effective tax rate due to the valuation allowance[77] 9. Common Stock, Treasury Stock and Warrants Provides details on Fluent, Inc.'s issued common stock, treasury stock movements, and outstanding warrants Common Stock and Treasury Stock | Metric | Sep 30, 2019 (thousands) | Dec 31, 2018 (thousands) | | :-------------------------------- | :----------------------- | :----------------------- | | Issued Shares of Common Stock | 78,574,482 | 76,525,581 | | Treasury Stock Shares | 1,791,186 | 1,233,198 | | Treasury Stock Cost | $6,368 | $3,272 | - For the nine months ended September 30, 2019, 557,988 shares of common stock were withheld to cover statutory taxes upon vesting of equity awards and taken into treasury stock[82] - As of September 30, 2019, 2,398,776 warrants to purchase common stock were outstanding, and a 'Put Right' related to 300,000 Warrant Shares was reclassified to other current liabilities because the Company's stock price was lower than the exercise price[83][85] 10. Share-Based Compensation Outlines Fluent, Inc.'s stock incentive plans, compensation expenses, and the impact of the Red Violet spin-off - The Company maintains the 2015 Stock Incentive Plan and the 2018 Stock Incentive Plan, authorizing 21,178,330 shares of common stock for issuance[87] - In connection with the Red Violet spin-off in 2018, $15,548 thousand in share-based compensation expense was recognized in loss on disposal of discontinued operations due to accelerated stock options, RSUs, and restricted stock, and an additional $5,409 thousand was recognized in spin-off transaction costs for Transaction Grants[88][89][90] Share-Based Compensation Expense Allocation | Account | 3 Months Ended Sep 30, 2019 (thousands) | 3 Months Ended Sep 30, 2018 (thousands) | 9 Months Ended Sep 30, 2019 (thousands) | 9 Months Ended Sep 30, 2018 (thousands) | | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Sales and marketing | $292 | $717 | $821 | $2,125 | | Product development | $278 | $136 | $800 | $487 | | General and administrative | $2,220 | $1,741 | $6,398 | $3,835 | | Spin-off transaction costs | — | — | — | $5,409 | | Discontinued operations | — | — | — | $15,713 | | Total Share-Based Compensation Expense | $2,790 | $2,594 | $8,019 | $27,569 | | Capitalized in intangible assets (continuing operations) | $22 | $81 | $67 | $364 | | Capitalized in intangible assets (discontinued operations) | — | — | — | $181 | | Total Share-Based Compensation | $2,812 | $2,675 | $8,086 | $28,114 | 11. Segment Information Presents Fluent, Inc.'s revenue and operating results broken down by its 'Fluent' and 'All Other' segments - The Company operates with two segments: 'Fluent' (core operations) and 'All Other' (primarily AdParlor, acquired July 1, 2019)[100] Segment Revenue | Segment | 3 Months Ended Sep 30, 2019 (thousands) | 3 Months Ended Sep 30, 2018 (thousands) | 9 Months Ended Sep 30, 2019 (thousands) | 9 Months Ended Sep 30, 2018 (thousands) | | :-------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Fluent segment revenue | $62,912 | $66,535 | $200,033 | $179,459 | | All Other segment revenue | $1,640 | — | $1,640 | — | | Total Revenue | $64,552 | $66,535 | $201,673 | $179,459 | Segment (Loss) Income from Operations | Segment | 3 Months Ended Sep 30, 2019 (thousands) | 3 Months Ended Sep 30, 2018 (thousands) | 9 Months Ended Sep 30, 2019 (thousands) | 9 Months Ended Sep 30, 2018 (thousands) | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Fluent | $(2,581) | $6,344 | $2,689 | $7,758 | | All Other | $(163) | — | $(163) | — | | Total (Loss) Income from Operations | $(2,744) | $6,344 | $2,526 | $7,758 | 12. Related Party Transactions Details the termination of consulting agreements and repayment of promissory notes involving related parties - The Company terminated a Business Consulting Agreement with Marlin Capital Investments, LLC, and a Consulting Agreement with Michael Brauser (former Executive Chairman) upon the Red Violet spin-off, leading to accelerated share-based compensation expenses[103][105] - Promissory Notes totaling $10.0 million from Frost Gamma, Michael Brauser, and another investor were fully repaid on March 26, 2018, as part of the Refinancing associated with the Red Violet spin-off[104] 13. Contingencies Discusses ongoing legal and tax-related contingencies, including subpoenas and a sales tax audit - The Company is cooperating with subpoenas from the New York Attorney General's Office and the U.S. Department of Justice regarding compliance with laws related to the collection, use, or disclosure of consumer information submitted to the FCC's 'Restoring Internet Freedom' rulemaking proceeding, but cannot estimate the duration or disposition[107] - The New York State Department of Taxation and Finance is auditing the Company's sales and use tax, asserting that revenue from certain customer acquisition data services is subject to sales tax, which the Company disputes, believing it's an excluded advertising or non-taxable information service, though a sales tax liability is reasonably possible, but the amount cannot be estimated[108][109] 14. Business Acquisition Details the acquisition of AdParlor Holdings, Inc., including purchase price and preliminary fair values of assets - On July 1, 2019, the Company acquired substantially all assets of AdParlor Holdings, Inc. and affiliates for $7,302 thousand cash and a $2,350 thousand promissory note, aiming to expand performance-based marketing capabilities[111][112] Preliminary Fair Values of Assets Acquired and Liabilities Assumed in AdParlor Acquisition (July 1, 2019) | Asset/Liability | Amount (thousands) | | :---------------------------------------- | :----------------- | | Cash and cash equivalents | $56 | | Accounts receivable | $7,835 | | Property and equipment, net | $138 | | Intangible assets, net | $4,700 | | Goodwill | $4,983 | | Accounts payable | $(7,691) | | Accrued expenses and other current liabilities | $(418) | | Deferred revenue | $(33) | | Total Assets Acquired | $9,652 | Identifiable Intangible Assets Acquired in AdParlor Acquisition | Intangible Asset | Fair Value (thousands) | Weighted Average Amortization Period (Years) | | :----------------------- | :--------------------- | :------------------------------------------- | | Trade name & trademarks | $300 | 4 | | Developed technology | $2,100 | 4 | | Customer relationships | $2,300 | 6 | | Goodwill | $4,983 | N/A | | Total Intangible Assets, Net | $9,683 | N/A | 15. Subsequent Events Reports on the amendment to Fluent, LLC's Credit Agreement, modifying covenants and interest rates post-period end - On November 8, 2019, Fluent, LLC entered into Amendment No. 9 to its Credit Agreement, modifying certain financial covenants and increasing the interest rate by 0.50% when the total leverage ratio exceeds 2.5[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's analysis of Fluent, Inc.'s financial performance, liquidity, and critical accounting policies, including Q3 and nine-month summaries Overview Describes Fluent, Inc.'s business as a data-driven digital marketing service specializing in customer acquisition - Fluent, Inc. is a leader in data-driven digital marketing services, specializing in customer acquisition by connecting advertiser clients with consumers through highly-scalable digital marketing campaigns[119] - The Company attracts over 900,000 first-party user registrations daily to its owned digital media properties, amassing a large proprietary database of self-declared user information and preferences, which is leveraged for targeted advertising and new revenue streams like programmatic advertising and marketing research[120][121][122] Third Quarter Financial Summary Summarizes Fluent, Inc.'s key financial metrics for the three and nine months ended September 30, 2019 and 2018 Third Quarter Financial Summary | Metric | 3 Months Ended Sep 30, 2019 (millions) | 3 Months Ended Sep 30, 2018 (millions) | Change (%) | | :------------------------------------ | :------------------------------------- | :------------------------------------- | :--------- | | Revenue | $64.6 | $66.5 | -3% | | Net loss from continuing operations | $(4.5) | $4.5 (income) | N/A | | Net loss from continuing operations per share | $(0.06) | $0.06 (income) | N/A | | Media margin | $21.3 | $25.8 | -17% | | Media margin % of revenue | 33.0% | 38.8% | -5.8 pp | | Adjusted EBITDA | $4.3 | $12.4 | -65% | | Adjusted net loss | $(1.0) | $7.2 (income) | N/A | | Adjusted net loss per share | $(0.01) | $0.09 (income) | N/A | Nine Months Financial Summary | Metric | 9 Months Ended Sep 30, 2019 (millions) | 9 Months Ended Sep 30, 2018 (millions) | Change (%) | | :------------------------------------ | :------------------------------------- | :------------------------------------- | :--------- | | Revenue | $201.7 | $179.5 | +12% | | Net loss from continuing operations | $(2.7) | $1.5 (income) | N/A | | Net loss from continuing operations per share | $(0.03) | $0.02 (income) | N/A | | Net loss from discontinued operations | $0.0 | $21.1 | -100% | | Media margin | $67.3 | $67.1 | +0.3% | | Media margin % of revenue | 33.4% | 37.4% | -4.0 pp | | Adjusted EBITDA | $23.2 | $32.9 | -30% | | Adjusted net income | $7.7 | $16.7 | -54% | | Adjusted net income per share | $0.10 | $0.22 | -55% | Definitions, Reconciliations and Uses of Non-GAAP Financial Measures Defines and explains the Company's non-GAAP financial measures, including Media Margin, Adjusted EBITDA, and Adjusted Net Income - Media margin is defined as revenue minus cost of revenue (exclusive of depreciation and amortization) attributable to variable costs paid for media and related expenses, used to measure the efficiency of the Company's operating model[128][136] - Adjusted EBITDA is defined as net (loss) income from continuing operations, excluding income taxes, interest expense, depreciation and amortization, write-off of long-lived assets, share-based compensation, acquisition-related costs, restructuring/severance, litigation costs, and one-time items, serving as a primary metric for evaluating operating performance[129][137] - Adjusted net (loss) income is defined as net (loss) income from continuing operations, excluding write-off of long-lived assets, share-based compensation, acquisition-related costs, restructuring/severance, litigation costs, and one-time items, providing an alternative view of financial performance[130][138] Results of Operations Analyzes Fluent, Inc.'s financial performance, detailing revenue, cost of revenue, and expense changes for specific periods Three Months Ended September 30, 2019 vs. 2018 Compares Fluent, Inc.'s revenue, costs, and operating results for the third quarter of 2019 against 2018 - Revenue decreased by $2.0 million (3%) to $64.6 million, primarily due to a reduced supply of cost-effective media and associated traffic[141] - Cost of revenue increased by $2.8 million (7%) to $44.6 million, with the percentage of revenue rising to 69% from 63% due to higher media costs[142][143] - General and administrative expenses increased by $4.3 million (44%) to $14.0 million, mainly driven by a higher provision for bad debt[146] - The Company reported a loss before income taxes from continuing operations of $4.5 million, a significant decline from income of $4.5 million in the prior year, attributed to increased expenses and decreased revenue[149] Nine Months Ended September 30, 2019 vs. 2018 Compares Fluent, Inc.'s revenue, costs, and operating results for the nine months ended September 30, 2019 against 2018 - Revenue increased by $22.2 million (12%) to $201.7 million, primarily due to higher demand for performance-based marketing services[153] - Cost of revenue increased by $23.4 million (20%) to $138.5 million, with the percentage of revenue rising to 69% from 64% due to higher media costs to satisfy client demand[155][156] - Product development costs increased by $2.9 million (82%) to $6.5 million, reflecting increased investment in developing and innovating existing and new product offerings[158] - General and administrative expenses increased by $9.0 million (35%) to $34.4 million, driven by higher share-based compensation, bad debt provision, employee salaries, office overhead, and professional fees[159] - The Company recognized a loss before income taxes from continuing operations of $2.7 million, compared to income of $1.5 million in the prior year, primarily due to increased cost of revenue, G&A, and product development, partially offset by revenue growth and the absence of 2018 spin-off transaction costs[164] - Net loss from discontinued operations was $0.0 million in 2019, compared to $21.1 million in 2018, which included a $19.0 million loss on disposal related to the Red Violet spin-off[167] Effect of Inflation States that recent inflation rates have not materially impacted Fluent, Inc.'s financial statements - The rates of inflation in recent years have had no material impact on the Company's financial statements[170] Liquidity and Capital Resources Analyzes Fluent, Inc.'s cash flow, capital resources, and ability to meet short-term and long-term obligations Cash Flow Summary (9 Months Ended September 30) | Activity | 2019 (millions) | 2018 (millions) | | :------------------------------------ | :-------------- | :-------------- | | Net cash provided by operating activities | $26.6 | $16.6 | | Net cash used in investing activities | $(11.2) | $(22.2) | | Net cash (used in) provided by financing activities | $(8.9) | $6.4 | | Net increase in cash, cash equivalents and restricted cash | $6.5 | $0.8 | | Cash, cash equivalents and restricted cash at period end | $25.7 | $17.4 | - The decrease in net cash used in investing activities in 2019 was mainly due to the absence of a $19.7 million capital contribution to Red Violet (Spin-off related) in 2018, partially offset by the $7.3 million cash payment for the AdParlor Acquisition in 2019[174][178] - As of September 30, 2019, the Company had $25.7 million in cash, cash equivalents, and restricted cash, and believes it has sufficient cash resources for operations and capital expenditures for the next twelve months[177] - The Refinanced Term Loan has an outstanding principal balance of $57.2 million as of September 30, 2019, and contains restrictive covenants and mandatory prepayment provisions that may limit strategic and financing options[179][182] Off-Balance Sheet Arrangements Confirms that Fluent, Inc. had no off-balance sheet arrangements as of September 30, 2019 - As of September 30, 2019, the Company did not have any off-balance sheet arrangements[184] Critical Accounting Policies and Estimates Discusses key accounting policies and estimates, including the goodwill impairment test and changes from prior disclosures - An interim goodwill impairment test was conducted as of September 30, 2019, due to declining operating results and stock market value, concluding that goodwill was not impaired, with the estimated fair value of the reporting unit exceeding its carrying value by approximately 12%[186] - There have been no additional material changes to the Critical Accounting Policies and Estimates disclosed in the 2018 Form 10-K[187] Recently Issued Accounting and Adopted Standards Refers to Note 1(b) for details on recently issued and adopted accounting standards impacting Fluent, Inc - Refer to Note 1(b) in the Notes to Consolidated Financial Statements for details on recently issued and adopted accounting standards[188] Item 3. Quantitative and Qualitative Disclosures About Market Risk. States that there are no applicable quantitative and qualitative disclosures about market risk for Fluent, Inc - Not applicable[190] Item 4. Controls and Procedures. Management concluded that Fluent, Inc.'s disclosure controls were ineffective due to a material weakness in revenue recognition - The Company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were not effective as of September 30, 2019[193] - A material weakness was identified in internal control over financial reporting related to the revenue recognition process, specifically inadequate segregation of duties, significant deficiencies in IT general controls, and ineffective manual preventative and detective controls[195] - Remediation efforts include revising revenue confirmation processes, streamlining IT general controls, and implementing an enterprise resource planning (ERP) solution[196] - Management's assessment of internal control over financial reporting as of September 30, 2019, excluded the newly acquired AdParlor business, whose assets totaled $23 million and contributed less than 3% of revenue[199] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings. Details ongoing legal and tax-related proceedings, including subpoenas and a sales and use tax audit - The Company is cooperating with subpoenas from the New York Attorney General's Office and the U.S. Department of Justice regarding compliance with laws related to consumer information submitted to the FCC's 'Restoring Internet Freedom' rulemaking proceeding[204] - The New York State Department of Taxation and Finance is auditing the Company's sales and use tax, asserting that revenue from certain customer acquisition data services is subject to sales tax, which the Company disputes[205] Item 1A. Risk Factors. Confirms no material changes to the risk factors previously disclosed in Fluent, Inc.'s 2018 Form 10-K - There have been no material changes to the Risk Factors previously disclosed in the Company's 2018 Form 10-K[207] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Reports no unregistered sales of equity securities or use of proceeds for the specified period - None[209] Item 3. Defaults Upon Senior Securities. Reports no defaults upon senior securities for the specified period - None[211] Item 4. Mine Safety Disclosures. States that mine safety disclosures are not applicable to Fluent, Inc.'s operations - Not Applicable[213] Item 5. Other Information. Discloses a subsequent event regarding an amendment to Fluent, LLC's Credit Agreement on November 8, 2019 - On November 8, 2019, Fluent, LLC entered into Amendment No. 9 to its Credit Agreement, which modified certain financial covenants and increased the interest rate by 0.50% during periods when the total leverage ratio exceeds 2.5[215] Item 6. Exhibits. Lists all exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL documents - The exhibits include certifications from the CEO and CFO (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents[218][219] SIGNATURES Confirms the report's signing by Fluent, Inc.'s Chief Financial Officer on November 12, 2019 - The report was signed on November 12, 2019, by Alexander Mandel, Chief Financial Officer (Principal Financial and Accounting Officer) of Fluent, Inc[225]