Fluent(FLNT) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the three and nine months ended September 30, 2021, and 2020, including balance sheets, statements of operations, changes in shareholders' equity, and cash flows, along with detailed notes Consolidated Balance Sheets As of September 30, 2021, total assets were $309.5 million, a slight decrease from $310.2 million at year-end 2020, while total liabilities increased to $101.2 million from $93.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $94,391 | $86,191 | | Total Assets | $309,543 | $310,220 | | Total Current Liabilities | $52,993 | $50,217 | | Total Liabilities | $101,165 | $93,335 | | Total Shareholders' Equity | $208,378 | $216,885 | Consolidated Statements of Operations For Q3 2021, the company reported a net loss of $2.5 million, a decline from $1.2 million net income in Q3 2020, primarily due to higher cost of revenue Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $85,858 | $78,280 | $229,406 | $228,723 | | Cost of Revenue | $63,784 | $52,771 | $171,379 | $158,402 | | (Loss) Income from Operations | $(2,047) | $2,551 | $(9,086) | $6,276 | | Net (Loss) Income | $(2,452) | $1,169 | $(13,889) | $2,029 | | Diluted (Loss) Income per Share | $(0.03) | $0.01 | $(0.17) | $0.03 | Consolidated Statements of Cash Flows Net cash used in operating activities for the nine months ended September 30, 2021, was $6.9 million, a reversal from $12.9 million provided in the prior year, while financing activities provided $3.7 million Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(6,932) | $12,861 | | Net cash used in investing activities | $(2,263) | $(3,431) | | Net cash provided by (used in) financing activities | $3,723 | $(12,715) | | Net decrease in cash | $(5,472) | $(3,285) | | Cash at end of period | $17,095 | $16,874 | Notes to Consolidated Financial Statements These notes detail accounting policies, the acquisition of Winopoly, a new credit facility, ongoing legal contingencies, and segment reporting, with the 'Fluent' segment being the primary revenue driver - On March 31, 2021, the company entered into a new credit agreement for a $50.0 million term loan and a $15.0 million revolving credit facility, using the proceeds to repay its prior term loan[53][54] - The company is involved in several legal and regulatory matters, including a resolved NY AG inquiry that resulted in a $3.7 million penalty, and an ongoing NY State sales tax audit with a potential liability estimated between $0.8 million and $3.0 million, for which $0.8 million has been accrued[88][90] - On September 1, 2021, the company acquired the remaining 50% interest in Winopoly for $7.8 million, making it a wholly-owned subsidiary, following an initial 50% acquisition on April 1, 2020[93][98] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 10% revenue increase to $85.9 million in Q3 2021, driven by the Winopoly business and strong demand, but profitability declined due to increased media acquisition costs Q3 2021 Financial Summary vs. Q3 2020 | Metric | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Revenue | $85.9M | $78.3M | +10% | | Net (Loss) Income | $(2.5)M | $1.2M | - | | Diluted EPS | $(0.03) | $0.01 | - | | Adjusted EBITDA | $6.4M | $11.6M | -45% | | Media Margin | $24.2M | $29.7M | -19% | - A key business trend is the 'Traffic Quality Initiative,' which involves curtailing lower-quality affiliate traffic and increasing spend with major digital media platforms, expected to improve monetization and long-term value[113][114][115] - The company refinanced its debt in March 2021, securing a new $50 million term loan and a $15 million revolving credit facility with a lower interest rate, which significantly reduced interest expense[171][172] Results of Operations This section provides a detailed comparison of operational results for the three and nine-month periods ending September 30, 2021, and 2020, showing a 10% Q3 2021 revenue increase but a 21% rise in cost of revenue, leading to a net loss - Q3 2021 revenue increased by $7.6 million (10%) year-over-year, largely due to the expanded scale of the Winopoly business, strong demand in the staffing and recruitment vertical, and a new internally-developed email re-engagement capability[138] - Cost of revenue for Q3 2021 increased by $11.0 million (21%) year-over-year, raising it to 74% of revenue from 67% in Q3 2020, driven by higher traffic acquisition costs from major digital media platforms as part of the Traffic Quality Initiative[141][142] - For the nine months ended September 30, 2021, revenue was nearly flat year-over-year at $229.4 million, as growth from new initiatives was offset by reduced volumes from the Traffic Quality Initiative[152] Liquidity and Capital Resources As of September 30, 2021, the company held $17.1 million in cash, with net cash used in operations of $6.9 million for the first nine months, and believes it has sufficient cash to fund operations for the next twelve months - Cash, cash equivalents, and restricted cash decreased by $5.5 million to $17.1 million as of September 30, 2021, from $22.6 million at year-end 2020[168] - In March 2021, the company entered into a new credit agreement for a $50.0 million term loan and a $15.0 million revolving credit facility, which matures in March 2026, with an outstanding principal of $47.5 million as of September 30, 2021[172] - The company acquired the remaining 50% of Winopoly on September 1, 2021, for consideration of $7.8 million, consisting of cash at closing, deferred payments, and 500,000 shares of stock[169] Quantitative and Qualitative Disclosures About Market Risk The company, as a smaller reporting company, is not required to provide the information for this item - As a smaller reporting company, Fluent, Inc. is not required to provide quantitative and qualitative disclosures about market risk[183] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - The Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021[186] - There were no changes to internal control over financial reporting during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[187] PART II - OTHER INFORMATION Legal Proceedings This section details significant legal matters, including a resolved $3.7 million NY AG penalty, an ongoing NY State sales tax dispute with a potential $3.0 million liability, and cooperation with FTC and PA OAG investigations - The matter with the New York Attorney General's Office (NY AG) was resolved via an Assurance of Discontinuance, which included a $3.7 million penalty, paid in full as of June 30, 2021[192] - A New York State sales tax audit has resulted in a Notice of Determination totaling $3.0 million, which the company disputes, estimating a probable liability range of $0.8 million to $3.0 million and accruing for the low end of this range[194] - The company is cooperating with ongoing investigations from the Federal Trade Commission (FTC) and the Pennsylvania Office of the Attorney General (PA OAG) regarding its business practices[195][196] Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 - There have been no material changes to the Risk Factors previously disclosed in the company's 2020 Form 10-K[198] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, the company purchased 20,948 shares of its common stock to satisfy federal and state tax withholding obligations for employees upon the settlement of restricted stock units Issuer Purchase of Equity Securities (Q3 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1-31, 2021 | 10,623 | $2.74 | | August 1-31, 2021 | 8,478 | $2.13 | | September 1-30, 2021 | 1,847 | $2.72 | | Total | 20,948 | $2.49 | - The shares were purchased to satisfy employee tax withholding obligations upon the settlement of restricted stock units, not as part of a publicly announced repurchase program[202] Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including an amendment to the credit agreement and certifications by the Chief Executive Officer and Chief Financial Officer - Key exhibits filed include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act[209][210]