Fluent(FLNT) - 2021 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section covers unaudited consolidated financial statements and management's analysis for Q1 2021 Item 1. Financial Statements (unaudited) This section presents Fluent, Inc.'s unaudited consolidated financial statements for Q1 2021, including balance sheets, operations, cash flows, and comprehensive notes Consolidated Balance Sheets This section provides a snapshot of the company's financial position at March 31, 2021, and December 31, 2020 | ASSETS (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $32,660 | $21,087 | | Accounts receivable, net | $58,004 | $62,669 | | Total current assets | $93,967 | $86,191 | | Total assets | $315,287 | $310,220 | | LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands) | | | | Accounts payable | $13,484 | $7,692 | | Accrued expenses and other current liabilities | $24,175 | $31,568 | | Total current liabilities | $48,122 | $50,217 | | Total liabilities | $103,078 | $93,335 | | Total shareholders' equity | $212,209 | $216,885 | | Total liabilities and shareholders' equity | $315,287 | $310,220 | Consolidated Statements of Operations This section details the company's revenues, expenses, and net loss for the three months ended March 31, 2021 and 2020 | (Amounts in thousands, except share and per share data) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenue | $70,170 | $78,934 | | Total costs and expenses | $72,457 | $76,994 | | (Loss) income from operations | $(2,287) | $1,940 | | Interest expense, net | $(1,008) | $(1,532) | | Loss on early extinguishment of debt | $(2,964) | — | | (Loss) income before income taxes | $(6,259) | $408 | | Net (loss) income | $(6,258) | $408 | | Basic and diluted (loss) income per share: | | | | Basic | $(0.08) | $0.01 | | Diluted | $(0.08) | $0.01 | Consolidated Statements of Changes in Shareholders' Equity This section outlines changes in shareholders' equity, reflecting net loss, share-based compensation, and stock option exercises - Shareholders' equity decreased from $216,885 thousand at December 31, 2020, to $212,209 thousand at March 31, 2021, primarily due to a net loss of $6,258 thousand, partially offset by share-based compensation and exercise of stock options[17] Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities | CASH FLOWS (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $4,977 | $(247) | | Net cash used in investing activities | $(836) | $(632) | | Net cash provided by (used in) financing activities | $7,432 | $(4,714) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $11,573 | $(5,593) | | Cash, cash equivalents and restricted cash at end of period | $34,140 | $14,566 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements 1. Summary of significant accounting policies This section outlines the key accounting principles and methods used in preparing the financial statements - The financial statements are prepared in accordance with US GAAP and SEC interim reporting rules, reflecting normal recurring adjustments. The Company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary, including Winopoly, LLC since April 1, 2020[22][24][26] - Revenue is recognized when control of goods or services is transferred, typically involving delivery of data records, generation of conversions, verification of user interest, or media spend. Deferred revenue increased to $1,935 thousand as of March 31, 2021, from $1,373 thousand as of December 31, 2020[30][32] - The adoption of ASU 2019-12, Simplifying the Accounting for Income Taxes, on January 1, 2021, did not materially affect the consolidated financial statements. The Company is evaluating the impact of ASU 2016-13 (Credit Losses) and ASU 2020-04 (Reference Rate Reform)[27][28][29] 2. (Loss) income per share This section details the calculation of basic and diluted earnings per share for the reported periods Loss (Income) Per Share (in thousands, except per share data) | (Loss) Income Per Share | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(6,258) | $408 | | Basic EPS | $(0.08) | $0.01 | | Diluted EPS | $(0.08) | $0.01 | | Total anti-dilutive securities excluded | 6,080,206 | 8,183,592 | - Common equivalent shares were excluded from diluted EPS calculation in loss periods (Q1 2021) as their effects would be anti-dilutive[36][37] 3. Intangible assets, net This section provides details on the company's intangible assets, including amortization and impairment testing Intangible Assets, Net (in thousands) | Intangible Assets, Net (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------------------ | :------------- | :---------------- | | Total gross amount | $110,816 | $109,958 | | Total accumulated amortization | $(67,719) | $(64,541) | | Total intangible assets, net | $43,097 | $45,417 | - The Company conducted an interim recoverability test for long-lived assets as of March 31, 2021, due to reduced operating results and a decline in stock market value, concluding that assets were not impaired[40] Estimated Amortization Expense (in thousands) | Estimated Amortization Expense (in thousands) | | :-------------------------------------------- | | Remainder of 2021 | $9,226 | | 2022 | $11,542 | | 2023 | $5,319 | | 2024 | $4,549 | | 2025 | $4,024 | | 2026 and thereafter | $8,437 | | Total | $43,097 | 4. Goodwill This section details the goodwill balance and the results of the interim impairment test conducted - Goodwill balance was $165,088 thousand as of March 31, 2021, primarily from the Fluent LLC, Q Interactive, AdParlor, and Winopoly acquisitions[44] - An interim impairment test for goodwill was conducted as of March 31, 2021, triggered by reduced operating results and a decline in stock market value. The test concluded that goodwill of $160,922 thousand was not impaired, with estimated fair value exceeding carrying value by approximately 17%[46] 5. Long-term debt, net This section details the company's long-term debt, including refinancing activities and new credit facilities Long-term Debt, Net (in thousands) | Long-term Debt, Net (in thousands) | March 31, 2021 | December 31, 2020 | | :--------------------------------- | :------------- | :---------------- | | Refinanced Term Loan due 2023 | $— | $39,350 | | New Credit Facility Term Loan due 2026 | $48,858 | $— | | Note Payable due 2021 | $1,240 | $1,226 | | Long-term debt, net | $50,098 | $40,576 | | Less: Current portion of long-term debt | $(6,250) | $(7,293) | | Long-term debt, net (non-current) | $43,848 | $33,283 | - On March 31, 2021, Fluent, LLC redeemed the Refinanced Term Loan ($38,318 thousand principal) early, incurring a $2,964 thousand loss on early extinguishment of debt[49] - A new Credit Agreement was entered into on March 31, 2021, providing a $50.0 million Term Loan and a $15.0 million undrawn revolving credit facility, maturing on March 31, 2026. Proceeds were used to repay the Refinanced Term Loan[50][51][55] - The new Term Loan bears interest at LIBOR + 2.25% (opening rate 2.50%) and has scheduled quarterly principal amortization of $1,250 thousand starting June 30, 2021[52][55] 6. Income taxes This section discusses the company's income tax position, including valuation allowances and unrecognized tax benefits - The Company recorded a full valuation allowance against net deferred tax assets as of March 31, 2021, and December 31, 2020, resulting in a 0% effective income tax benefit rate for the three months ended March 31, 2021 and 2020[60][62] - Management believes there is a reasonable possibility that a significant portion, if not all, of the valuation allowance may be released within the next twelve months, depending on future profitability[60] - Unrecognized tax benefits were $1,480 thousand as of March 31, 2021, which, if recognized, would increase net operating losses subject to a valuation allowance, thus having no impact on the effective tax rate[64] 7. Common stock, treasury stock and warrants This section details changes in common stock, treasury stock holdings, and outstanding warrants - Issued common stock increased to 82,228,823 shares as of March 31, 2021, from 80,295,141 shares as of December 31, 2020, primarily due to RSU vesting and stock option exercises[66][67] - Treasury stock increased to 4,055,011 shares (cost $10,623 thousand) as of March 31, 2021, from 3,945,867 shares (cost $9,999 thousand) as of December 31, 2020, mainly due to shares withheld for statutory taxes on RSU vesting[68][69] - As of March 31, 2021, 833,333 warrants to purchase common stock were outstanding, with exercise prices ranging from $3.75 to $6.00 per share[70] 8. Share-based compensation This section details the share-based compensation expense and its allocation across different functions - Total share-based compensation expense decreased to $1,272 thousand for Q1 2021 from $2,436 thousand for Q1 2020[81] Share-based Compensation Allocation (in thousands) | Share-based Compensation Allocation (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Sales and marketing | $163 | $218 | | Product development | $268 | $237 | | General and administrative | $800 | $1,942 | | Capitalized in intangible assets | $41 | $39 | | Total share-based compensation | $1,272 | $2,436 | - As of March 31, 2021, unrecognized share-based compensation expense was $11,605 thousand, expected to be recognized over a weighted average period of 2.5 years[81] 9. Segment information This section provides financial data for the company's operating and reportable segments, with EBITDA as a key measure - The Company operates with two operating segments, 'Fluent' and 'All Other' (AdParlor, LLC), and one reportable segment. EBITDA is the primary profitability measure reviewed by the CODM[83] Segment Financials (in thousands) | Segment Financials (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Fluent segment revenue | $67,542 | $77,562 | | All Other segment revenue | $2,628 | $1,372 | | Fluent segment EBITDA | $1,410 | $5,889 | | All Other segment EBITDA | $(324) | $(216) | | Total EBITDA | $1,086 | $5,673 | | Total (loss) income from operations | $(2,287) | $1,940 | Total Assets (in thousands) | Total Assets (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------------- | :------------- | :---------------- | | Fluent | $300,057 | $292,616 | | All Other | $15,230 | $17,604 | | Total assets | $315,287 | $310,220 | 10. Contingencies This section outlines ongoing legal and regulatory matters, including penalties, investigations, and tax audits - The Company resolved a matter with the New York Attorney General's Office (NY AG) on May 6, 2021, agreeing to injunctive provisions and a $3.7 million penalty, which was in line with the Company's accrual as of March 31, 2021[86] - The Company is cooperating with subpoenas from the U.S. Department of Justice (DOJ) and the D.C. Attorney General (DC AG) regarding the same issue as the NY AG matter[87] - The Company is challenging sales and use tax audit determinations from the New York State Department of Taxation and Finance, which total $3.0 million (including $0.7 million interest). A liability at the low end of the estimated range ($0.7 million to $3.0 million) has been accrued[88] - The Company received a Civil Investigative Demand (CID) from the Federal Trade Commission (FTC) regarding advertising, marketing, text messages, and consumer privacy/data security, and is fully cooperating[89] 11. Business acquisition This section details the acquisition of Winopoly, LLC, including purchase price, goodwill, and acquired intangible assets - On April 1, 2020, the Company acquired a 50% membership interest in Winopoly, LLC for a deemed purchase price of $2,553 thousand, consisting of $1,553 thousand cash and $1,000 thousand contingent consideration[90] - The acquisition resulted in $1,131 thousand in goodwill, primarily related to intangible assets not qualifying for separate recognition, such as assembled workforce and synergies[92] - Acquired intangible assets included customer relationships ($600 thousand, amortized over 5 years) and developed technology ($800 thousand, amortized over 3 years)[91] 12. Variable Interest Entity This section explains the identification and consolidation of Winopoly, LLC as a Variable Interest Entity - Winopoly, LLC is identified as a Variable Interest Entity (VIE), and the Company is deemed its primary beneficiary due to contractual control over significant activities like compliance practices and provision of leads[96][97] - The Company consolidates Winopoly in its financial statements, including deemed compensation expense to sellers for services rendered[97] 13. Related party transactions This section discloses revenue generated from a client with significant ownership interest by the CEO - For the three months ended March 31, 2021, the Company recognized $33 thousand in revenue from a client in which its CEO holds a significant ownership interest, with no expenses incurred from this client[98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Fluent, Inc.'s Q1 2021 financial condition and results, covering business overview, performance, key trends, and non-GAAP measures - Fluent, Inc. is a leader in data-driven digital marketing, providing customer acquisition services by connecting advertiser clients with consumers through scalable digital marketing campaigns and performance-based marketing executions[100] - The Company leverages a large, proprietary database of first-party, self-declared user information and preferences to serve targeted offers and provide lead generation, with permission to contact users through multiple channels[103] First Quarter Financial Summary (Q1 2021 vs. Q1 2020) | Metric | Q1 2021 (in millions) | Q1 2020 (in millions) | Change (%) | | :----------------- | :-------------------- | :-------------------- | :--------- | | Revenue | $70.2 | $78.9 | -11% | | Net (Loss) Income | $(6.3) | $0.4 | -1675% | | Basic EPS | $(0.08) | $0.01 | -900% | | Media Margin | $24.9 | $23.9 | +4% | | Media Margin % | 35.4% | 30.3% | +5.1 pp | | Adjusted EBITDA | $4.7 | $9.0 | -48% | | Adjusted Net Income| $0.4 | $3.8 | -89% | Overview This section describes Fluent, Inc.'s business model as a data-driven digital marketing service provider - Fluent, Inc. specializes in data-driven digital marketing, connecting advertiser clients with consumers through scalable campaigns and performance-based lead generation. In 2020, it served over 500 consumer brands across various industries[100] - The Company attracts consumers to its digital media properties via promotional offers and employment opportunities, collecting first-party, self-declared user information and preferences to serve targeted advertisements[101][102][103] First Quarter Financial Summary This section provides a high-level summary of the company's financial performance for Q1 2021 versus Q1 2020 First Quarter Financial Summary (Q1 2021 vs. Q1 2020) | Metric | Q1 2021 (in millions) | Q1 2020 (in millions) | Change (%) | | :----------------- | :-------------------- | :-------------------- | :--------- | | Revenue | $70.2 | $78.9 | -11% | | Net (Loss) Income | $(6.3) | $0.4 | -1675% | | Basic EPS | $(0.08) | $0.01 | -900% | | Media Margin | $24.9 | $23.9 | +4% | | Media Margin % | 35.4% | 30.3% | +5.1 pp | | Adjusted EBITDA | $4.7 | $9.0 | -48% | | Adjusted Net Income| $0.4 | $3.8 | -89% | Trends Affecting our Business This section discusses key factors influencing the business, including traffic quality, seasonality, and COVID-19 impacts - The Company initiated a Traffic Quality Initiative in 2020, significantly curtailing lower quality affiliate traffic in Q4 2020 and Q1 2021 to improve traffic quality and monetization, which temporarily reduced revenue[107][108] - The business is subject to seasonality, with Q4 typically having higher advertiser budgets and Q1 experiencing declines, similar to overall industry trends[109] - COVID-19 has had varied impacts on advertiser clients; some verticals (staffing, financial products) saw reduced demand then recovery, while others (streaming, mobile gaming) saw increased and sustained demand[111] Definitions, Reconciliations and Uses of Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures used by management to evaluate performance - The Company reports non-GAAP measures: Media margin, Adjusted EBITDA, and Adjusted net income, which are used by management to evaluate operating performance and compensation decisions[115][121][122][123] - Media margin is defined as revenue minus variable cost of revenue, measuring the efficiency of the operating model and financial return on media costs[115][121] - Adjusted EBITDA and Adjusted net income exclude items like income taxes, interest, depreciation, amortization, loss on early debt extinguishment, accrued compensation for Put/Call Consideration, share-based compensation, acquisition-related costs, and certain litigation costs[116][117] Results of Operations This section analyzes the company's financial performance, detailing revenue, expenses, and net loss for the period - Revenue decreased by $8.8 million (11%) to $70.2 million for Q1 2021, primarily due to reduced traffic volumes from the Traffic Quality Initiative, which curtailed lower quality affiliate traffic[126] - Net loss before income taxes was $6.3 million for Q1 2021, a $6.7 million decrease from net income of $0.4 million in Q1 2020, driven by lower revenue, a $3.0 million loss on early debt extinguishment, and increased product development and G&A expenses[136] Key Operating Expenses (Q1 2021 vs. Q1 2020, in thousands) | Expense Category | Q1 2021 | Q1 2020 | Change ($) | Change (%) | | :------------------------------- | :------ | :------ | :--------- | :--------- | | Cost of revenue (excl. D&A) | $51,000 | $56,600 | $(5,600) | -10% | | Sales and marketing | $3,000 | $2,800 | $100 | +5% | | Product development | $3,400 | $2,700 | $700 | +26% | | General and administrative | $11,700 | $11,100 | $600 | +6% | | Depreciation and amortization | $3,400 | $3,700 | $(400) | -10% | | Interest expense, net | $1,000 | $1,500 | $(500) | -34% | | Loss on early extinguishment of debt | $3,000 | $0 | $3,000 | N/A | Liquidity and Capital Resources This section assesses the company's ability to generate and manage cash, including operating, investing, and financing activities - Net cash provided by operating activities was $5.0 million for Q1 2021, a significant improvement from $0.2 million cash used in Q1 2020, primarily due to non-cash adjustments and changes in working capital[141] - Net cash provided by financing activities increased by $12.1 million to $7.4 million for Q1 2021, driven by $49.6 million net proceeds from new long-term debt issuance, partially offset by $41.7 million debt repayments and a $0.8 million prepayment penalty[143] - Cash, cash equivalents, and restricted cash increased by $11.5 million to $34.1 million as of March 31, 2021. The Company believes it has sufficient cash resources for operations and capital expenditures for the next twelve months and beyond[145] - A new $50.0 million Term Loan facility was secured on March 31, 2021, maturing in March 2026, with proceeds used to repay the prior Refinanced Term Loan. This facility includes restrictive covenants[148][150] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements as of the reporting date - As of March 31, 2021, the Company did not have any off-balance sheet arrangements[153] Critical Accounting Policies and Estimates This section highlights key accounting policies and estimates requiring significant management judgment - Management's financial statements rely on estimates and judgments for revenue recognition, allowance for doubtful accounts, useful lives of intangible assets, goodwill recoverability, share-based compensation, and income taxes[154] - An interim impairment test for goodwill was conducted as of March 31, 2021, due to reduced operating results and stock market decline, concluding that goodwill was not impaired, with fair value exceeding carrying value by approximately 17%[155] Recently issued accounting and adopted standards This section refers to Note 1(b) for details on new and adopted accounting standards - Refer to Note 1(b) for details on recently issued and adopted accounting standards[157] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Fluent, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The Company is exempt from providing quantitative and qualitative disclosures about market risk as it qualifies as a smaller reporting company[159] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021, ensuring information required for SEC reports is recorded, processed, summarized, and reported timely[161][162] - There were no material changes to the Company's internal control over financial reporting during the quarter ended March 31, 2021[163] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information Item 1. Legal Proceedings This section details ongoing legal matters, including a resolved NY AG issue, cooperation with DOJ and DC AG, tax audit challenges, and an FTC Civil Investigative Demand - The Company resolved a subpoena from the New York Attorney General's Office (NY AG) on May 6, 2021, agreeing to a $3.7 million penalty and injunctive provisions related to political advocacy campaigns[168] - The Company is cooperating with subpoenas from the U.S. Department of Justice (DOJ) and the Office of the Attorney General of the District of Columbia (DC AG) concerning similar issues as the NY AG matter[169] - Challenges have been filed against the New York State Department of Taxation and Finance regarding sales and use tax audit determinations totaling $3.0 million, with a liability accrued at the low end of the estimated range[170] - A Civil Investigative Demand (CID) was received from the Federal Trade Commission (FTC) concerning advertising, marketing, text messages, and consumer privacy/data security, with the Company fully cooperating[171] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's 2020 Form 10-K - No material changes have occurred to the Risk Factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020[173] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports Q1 2021 common stock purchases, totaling 109,144 shares at $5.72 average price, mainly for tax withholding, with the repurchase program expired Issuer Purchases of Equity Securities (Q1 2021) | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | | :-------- | :----------------------------------- | :--------------------------- | :----------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------- | | January | 2,245 | $5.25 | — | — | | February | 106,899 | $5.73 | — | — | | March | — | — | — | — | | Total | 109,144 | $5.72 | — | — | - The shares purchased were to satisfy federal and state tax withholding obligations of employees upon the settlement of restricted stock units[177] - The stock repurchase program, authorized in November 2019 for up to $5.0 million, expired as of December 31, 2020[177] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - There were no defaults upon senior securities during the reported period[179] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable to Fluent, Inc[181] Item 5. Other Information The Company reported no other information - There is no other information to report under this item[183] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including organizational documents, the new Credit Agreement, and CEO/CFO certifications - Exhibits include the Certificate of Incorporation, Amended and Restated Bylaws, Form of Common Stock Certificate, and the Credit Agreement dated March 31, 2021[185] - Certifications by the Chief Executive Officer and Chief Financial Officer are filed pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) and 18 U.S.C. Section 1350[185][186] Signatures The report was signed by Alexander Mandel, Chief Financial Officer, on May 10, 2021 - The report was signed by Alexander Mandel, Chief Financial Officer (Principal Financial and Accounting Officer) on May 10, 2021[190]