Fluent(FLNT) - 2020 Q4 - Annual Report

PART I Item 1. Business Fluent, Inc. is a data-driven digital marketing company specializing in customer acquisition, leveraging first-party data and proprietary technology for over 500 clients - Fluent provides data and performance-based marketing to over 500 clients in sectors like Media & Entertainment, Financial Products, Health & Wellness, Retail, and Staffing[17] - The company attracts consumers to its owned media properties, collecting first-party data with opt-in permission, with approximately 90% of user engagement occurring on mobile devices[18] - A key strategic initiative in 2020 was the "Traffic Quality Initiative," which involved curtailing lower-quality affiliate traffic to improve monetization and long-term growth[40][41] - The company is subject to numerous regulations, including the FTC Act, TCPA, CCPA, and GDPR, which govern online advertising, data privacy, and consumer protection[54][55] Company Overview Fluent, Inc. is a data-driven digital marketing firm specializing in customer acquisition, connecting advertisers with consumers through scalable campaigns and leveraging proprietary first-party data Financial Performance | Financial Metric | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $310.7 million | $281.7 million | | Net Income (Loss) | $2.2 million | ($1.7 million) | | Adjusted EBITDA | $41.2 million | $34.7 million | - The company's primary business is customer acquisition through digital marketing campaigns for over 500 consumer brands, direct marketers, and agencies[17] - Fluent has built a large proprietary database of first-party, self-declared user data, with permission to contact users through multiple channels like email, phone, and SMS[20] Our Offerings and Solutions Fluent provides performance-based marketing solutions, including consumer data services and programmatic targeting, expanded by recent acquisitions in social media and telephony - Core offerings include performance campaigns where Fluent is paid for specific consumer actions (e.g., registrations, app installs)[28] - The company provides consumer data records with self-declared preferences, which it considers a competitive advantage over inferred data[30][31] - Acquisitions have added new service lines: social media strategy and buying through AdParlor (July 2019) and live call transfers via a 50% interest in Winopoly (April 2020)[34][35] Our Growth Strategy Fluent's growth strategy centers on enhancing traffic quality, increasing monetization, and developing new products, notably through its 2020 "Traffic Quality Initiative" - A key strategic pillar is the "Traffic Quality Initiative," which began in 2020 to improve the quality of sourced traffic, leading to higher monetization and long-term growth[40][41] - The company aims to increase monetization by better curating offers to consumer preferences, thereby strengthening advertiser relationships[42] - Product development efforts are focused on new consumer-facing creative, enhanced site experiences, and developing mobile apps to expand beyond the mobile web[43] Human Capital Fluent had 225 employees as of December 31, 2020, emphasizing employee growth, competitive compensation, DEI initiatives, and community service programs - Employee count grew by 17.2% to 225 employees as of December 31, 2020, compared to the previous year[59] - The company has a dedicated Diversity, Equity, and Inclusion (DEI) team with over 45 members, which organized numerous events and trainings in 2020[64] - Fluent launched a Business Empowerment Program in October 2020, providing $50,000 worth of digital marketing resources to five minority and women-owned businesses[65] Item 1A. Risk Factors Fluent faces significant legal, regulatory, business, industry, and financial risks, including evolving data privacy laws, COVID-19 impacts, intense competition, and restrictive credit covenants Risks Relating to Legal and Regulatory Matters Fluent is subject to complex and evolving data privacy and marketing regulations, facing costly compliance, ongoing governmental investigations, and potential penalties - The business is subject to numerous laws including the FTC Act, TCPA, CCPA, and GDPR, with non-compliance potentially leading to civil or criminal penalties[70][71] - The company has accrued $3.7 million related to an investigation by the New York Attorney General's Office (NY AG) concerning comments submitted to the FCC[82] - Fluent received a Civil Investigative Demand (CID) from the FTC in January 2020 regarding compliance with the FTC Act and Telemarketing Sales Rule (TSR), the outcome of which is currently unpredictable[83] - The New York State Department of Taxation and Finance has issued notices of determination totaling $3.0 million for sales and use tax, which the company is challenging, accruing a liability at the low end of its estimated range of $0.7 million to $3.0 million[112] Risks Related to Our Business Fluent's business risks include economic downturns, COVID-19 impacts, dependence on key personnel, challenges in managing growth, and complexities of international expansion - The COVID-19 pandemic poses risks of weakened demand from advertiser clients, though shifts in demand across verticals have not caused significant disruption to date[120][121] - The company depends heavily on key personnel, including CEO Ryan Schulke and President Matthew Conlin, and carries "key man" life insurance policies on them[124] - Future growth places significant demands on management and infrastructure, and the inability to scale effectively could harm client service and profitability[130][131] - Recent acquisitions of AdParlor and Winopoly require significant management time and resources for integration, and future acquisitions could compound these costs[143] Risks Related to Our Industry The rapidly evolving digital marketing industry poses risks from intense competition, negative public perception, and the challenge of meeting client performance metrics - The digital marketing industry is characterized by rapid changes in technology, evolving standards, and regulatory uncertainty, making business evaluation difficult[147][148] - Negative public perception about the data marketing industry could lead to reduced client demand and increased regulatory scrutiny[149][151] - The company competes with a broad range of entities, including digital ad agencies, internet portals (Google, Facebook), and in-house marketing groups[156] - In 2020, the top ten advertisers accounted for approximately 34% of revenue, indicating a concentration risk if a major client is lost[158] Risks Related to Financial Matters Fluent's financial risks include restrictive credit covenants, potential need for additional capital, and the ongoing management of internal controls over financial reporting - The Credit Agreement imposes significant restrictive covenants, limiting the ability to incur debt, make restricted payments (including dividends), and sell assets[202] - The Credit Agreement requires compliance with financial covenants, including minimum EBITDA levels, total leverage ratios, and fixed charge coverage ratios[203] - A material weakness in internal control over financial reporting related to revenue recognition was identified as of Dec 31, 2019, which the company believes was remediated as of Dec 31, 2020, after implementing a new ERP system (NetSuite)[213][214] Item 2. Properties Fluent's headquarters are in New York, NY, with an additional office in Toronto, and the company implemented a work-from-home policy due to COVID-19 - The company's headquarters are at 300 Vesey Street, New York, NY, under an 84-month lease for 42,685 sq. ft.[231] - A company-wide work-from-home policy was implemented on March 13, 2020, due to the COVID-19 pandemic[232] Item 3. Legal Proceedings Fluent is involved in significant legal and regulatory proceedings, including investigations by the NY AG, DOJ, and FTC, and a challenge to a $3.0 million sales tax determination - The company has accrued $3.7 million in connection with a matter involving the New York Attorney General's Office (NY AG) regarding information submitted to the FCC[236] - The company received related subpoenas from the Department of Justice (DOJ) on December 13, 2018, and the DC Attorney General on March 12, 2020[237] - The New York State Department of Taxation and Finance issued notices of determination totaling $3.0 million for sales and use tax, which the company is challenging and has accrued a liability at the low end of its estimated range of $0.7 million to $3.0 million[238] - On January 28, 2020, the company received a Civil Investigative Demand (CID) from the FTC regarding compliance with the FTC Act and Telemarketing Sales Rule (TSR), with an outcome not yet predictable[239] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Fluent's common stock trades on NASDAQ under 'FLNT', with no cash dividends paid in 2020 or 2019, and no plans for future dividends due to credit agreement restrictions - The company's common stock is listed on NASDAQ under the symbol "FLNT"[244] - The company paid no dividends in 2020 or 2019 and has no plans for future cash dividends, partly due to restrictions in its Credit Agreement[245] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fluent's 2020 financial performance showed revenue growth and net income, driven by improved traffic monetization, with solid liquidity and key accounting policies including revenue recognition and goodwill impairment Results of Operations In 2020, Fluent's revenue increased 10% to $310.7 million, resulting in a net income of $2.2 million, driven by higher traffic monetization despite volume reductions Financial Performance Summary | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $310.7M | $281.7M | | Net Income (Loss) | $2.2M | ($1.7M) | | Media Margin | $110.4M | $93.6M | | Adjusted EBITDA | $41.2M | $34.7M | | Adjusted Net Income | $19.7M | $13.8M | - Revenue increased by $29.0 million (10%) in 2020, driven by higher monetization through improved offer matching and re-engagement via SMS, push notifications, and telephony[279] - The company's "Traffic Quality Initiative" led to a curtailment of lower-quality affiliate traffic, reducing traffic volumes, particularly in Q4 2020[279] - General and administrative expenses decreased by $1.3 million, mainly due to lower share-based compensation and bad debt provisions, despite higher litigation-related costs[286] - A goodwill impairment charge of $0.8 million was recognized in Q2 2020 related to the 'All Other' reporting unit[287] Liquidity and Capital Resources Fluent generated $20.3 million in operating cash flow in 2020, ending the year with $22.6 million in cash and a $43.0 million outstanding term loan Cash Flow Activities | Cash Flow Activity (Year Ended Dec 31) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $20.3 million | $26.0 million | | Net cash used in investing activities | ($4.3 million) | ($12.0 million) | | Net cash used in financing activities | ($13.6 million) | ($13.2 million) | - The company ended 2020 with $22.6 million in cash, cash equivalents, and restricted cash, an increase of $2.4 million from 2019[300] - As of December 31, 2020, the outstanding principal balance on the Refinanced Term Loan was $43.0 million[303] - On April 1, 2020, the company acquired a 50% interest in Winopoly, LLC for a deemed purchase price of $2.6 million, including $1.6 million in upfront cash[302] Critical Accounting Policies and Estimates Fluent's critical accounting policies involve significant judgment, particularly in revenue recognition, business combinations, goodwill impairment testing, and income tax valuation allowances - Revenue is recognized when control of services is transferred, applying a practical expedient to review a portfolio of contracts collectively[309][310] - Goodwill is tested for impairment annually, with a Q2 2020 interim test on the 'All Other' reporting unit (AdParlor) resulting in a $0.8 million impairment charge due to macroeconomic conditions from COVID-19[322] - The annual goodwill impairment test as of October 1, 2020, indicated that the fair values of both the 'Fluent' and 'All Other' reporting units exceeded their carrying values by 40.7% and 6.3%, respectively[323] - The company maintains a full valuation allowance against its net deferred tax assets, as it is not more likely than not that they will be realized[333][488] Item 8. Financial Statements and Supplementary Data This section presents Fluent's audited consolidated financial statements for 2020 and 2019, with an unqualified auditor's opinion and identified critical audit matters regarding revenue recognition and goodwill - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[377][378] - Critical audit matters identified by the auditor were (1) the evaluation of revenue recognition due to the level of effort and subjective judgment required, and (2) the recoverability of the carrying value of goodwill due to significant management estimates[381][383][388] Consolidated Balance Sheet Summary | (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $310,220 | $317,093 | | Total Liabilities | $93,335 | $106,156 | | Total Shareholders' Equity | $216,885 | $210,937 | Consolidated Statement of Operations Summary | (in thousands) | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Revenue | $310,719 | $281,684 | | Income from Operations | $8,379 | $5,219 | | Net Income (Loss) | $2,207 | ($1,747) | Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with a previously identified material weakness in revenue recognition remediated - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[343] - A material weakness in internal control over revenue recognition, identified in 2019, was remediated as of December 31, 2020[346] - Remediation actions included implementing a new ERP system and strengthening controls for revenue recognition, with testing completed in Q4 2020[347] PART III Items 10-14 Information for Items 10-14, covering governance, executive compensation, security ownership, related transactions, and accounting fees, is incorporated by reference from the forthcoming 2021 proxy statement - Information regarding directors, executive compensation, security ownership, related transactions, and auditor fees is incorporated by reference from the forthcoming 2021 proxy statement[354][355][356][357][358] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and material contracts - This section provides a list of all financial statements, schedules, and exhibits filed with the Form 10-K[363][364] - Key exhibits include the Credit Agreement with Whitehorse Finance, Inc. and its numerous amendments, and employment agreements with key executives[365][367]