Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nasdaq  >  Fluent, Inc.    FLNT

FLUENT, INC.

(FLNT)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsPress ReleasesOfficial PublicationsSector newsMarketScreener StrategiesAnalyst Recommendations

FLUENT : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

10/30/2020 | 07:33am EST
You should read the following discussion in conjunction with our consolidated
financial statements and related notes included in this Quarterly Report on Form
10-Q. This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, (the "Exchange Act"), about our expectations, beliefs, or intentions
regarding our business, financial condition, results of operations, strategies,
the outcome of litigation, or prospects. You can identify forward-looking
statements by the fact that these statements do not relate strictly to
historical or current matters. Rather, forward-looking statements relate to
anticipated or expected events, activities, trends, or results as of the date
they are made. Because forward-looking statements relate to matters that have
not yet occurred, these statements are inherently subject to risks and
uncertainties that could cause our actual results to differ materially from any
future results expressed or implied by the forward-looking statements. Many
factors could cause our actual activities or results to differ materially from
the activities and results anticipated in forward-looking statements. These
factors include those contained in this and our other Quarterly Reports on Form
10-Q, as well as the disclosures made in the Company's Annual Report on Form
10-K for the year ended December 31, 2019 filed on March 13, 2020 ("2019 Form
10-K"), and other filings we make with the Securities and Exchange Commission
(the "SEC"). We do not undertake any obligation to update forward-looking
statements, except as required by law. We intend that all forward-looking
statements be subject to the safe harbor provisions of PSLRA. These
forward-looking statements are only predictions and reflect our views as of the
date they are made with respect to future events and financial performance.



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 in 2019 included over 500 consumer brands, direct marketers and
agencies across a wide range of industries, including Financial Products &
Services, Retail & Consumer, Media & Entertainment, Staffing & Recruitment and
Marketing Services.



We attract consumers at scale to our owned digital media properties primarily
through promotional offerings and employment opportunities. On average, our
websites receive over 900,000 first-party user registrations daily, which
include users' names, contact information and opt-in permission to present them
with offers on behalf of our clients. According to comScore, we reach 13% of the
U.S. digital population on a monthly basis through our owned media properties.
Nearly 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 with our sites, we integrate proprietary direct
marketing technologies to engage them with surveys, polls and other experiences,
through which we learn about their lifestyles, preferences and purchasing
histories. Based on these insights, we serve targeted, relevant offers to them
on behalf of our clients. As new users register and engage with our sites and
existing registrants re-engage, we believe 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, home address, telephone, push notifications and SMS text messaging. We
leverage our data primarily to serve advertisements that we believe will be
relevant to users based on the information they have provided. We have also
begun to leverage our existing database into new revenue streams, including
utilization-based models, such as programmatic advertising, as well as
services-based models, such as marketing research and insights.



Third Quarter Financial Summary

Three months ended September 30, 2020 compared to three months ended September 30, 2019:

  • Revenue increased 21% to $78.3 million, from $64.6 million.
  • Net income was $1.2 million, or $0.01 per share, compared to net loss
    of $4.5 million or $0.06 per share.
  • Media margin increased 39% to $29.7 million, from $21.3 million,
    representing 37.9% of revenue.
  • Adjusted EBITDA increased 167% to $11.6 million, based on net income

of $1.2 million, from $4.3 million, based on a net loss of $4.5 million.

• Adjusted net income was $6.3 million, or $0.08 per share, compared to adjusted

    net loss of $1.0 million, or $0.01 per share.



Nine months ended September 30, 2020 compared to nine months ended September 30, 2019:

  • Revenue increased 13% to $228.7 million, from $201.7 million.
  • Net income was $2.0 million, or $0.03 per share, compared to net loss
    of $2.7 million or $0.03 per share.
  • Media margin increased 17% to $78.4 million, from $67.3 million,
    representing 34.3% of revenue.
  • Adjusted EBITDA increased $6.9 to $30.0 million, based on net income

of $2.0 million, from $23.2 million, based on a net loss of $2.7 million.

  • Adjusted net income was $14.3 million, or $0.18 per share, compared
    to $7.7 million, or $0.10 per share.



Media margin, adjusted EBITDA and adjusted net income (loss) are non-GAAP financial measures.



COVID-19 Update



On March 11, 2020, the World Health Organization characterized COVID-19 as a
pandemic. At this time, our operations have not been significantly impacted by
the global economic impact of COVID-19, and we have taken appropriate
measures to ensure that we are able to conduct our business remotely without
significant disruptions. The economic uncertainty caused by COVID-19 has had
varying degrees of impact on certain of our advertiser clients in certain
industry verticals over the course of the pandemic. For example, the staffing
and recruitment vertical has generally exhibited reduced pricing and/or demand
since the onset of the pandemic, whereas other verticals, such as financial
products and services, experienced similar dynamics earlier on but have since
recovered. We have taken steps to manage our costs of acquiring traffic and to
match available consumers with those advertiser clients in the various
industries we serve who have exhibited appropriate demand during different
periods, thereby enabling us to more effectively manage our margins during this
time. We anticipate additional shifts in pricing and/or demand among affected
clients, as the trajectory of the pandemic and future economic outlook remain
uncertain.



                                       18

--------------------------------------------------------------------------------

Table of Contents




We implemented company-wide work-from-home beginning on March 13, 2020. While we
believe we have adapted well to a work-from-home environment, COVID-19 increases
the likelihood of certain risks of disruption to our business, such as the
incapacity of certain employees or system interruptions, which could lead to
diminishment of our regular business operations, technological capacity and
cybersecurity capabilities, as well as operational inefficiencies and
reputational harm.



Please see "Results of Operations" and Item 1A. Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

Definitions, Reconciliations and Uses of Non-GAAP Financial Measures

We report the following non-GAAP measures:

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. 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) goodwill
impairment, (5) write-off of long-lived assets, (6) accrued compensation expense
for Put/Call Consideration, (7) share-based compensation expense, (8)
acquisition-related costs, (9) restructuring and certain severance costs, (10)
certain litigation and other related costs, and (11) one-time items.



Adjusted net income (loss) is defined as net income (loss) excluding (1)
goodwill impairment, (2) write-off of long-lived assets, (3) accrued
compensation expense for Put/Call Consideration, (4) share-based compensation
expense, (5) acquisition-related costs, (6) restructuring and certain severance
costs, (7) certain litigation and other related costs, and (8) one-time items.
Adjusted net income (loss) is also presented on a per share (basic and diluted)
basis.


Below is a reconciliation of media margin from net income (loss), which we believe is the most directly comparable GAAP measure.



                                                                                     Nine Months Ended September
                                             Three Months Ended September 30,                    30,
                                                2020                  2019              2020             2019
Net income (loss)                          $         1,169       $        (4,463 )$    2,029$   (2,703 )
Income tax expense (benefit)                            65                     -             65              (35 )
Interest expense, net                                1,317                 1,719          4,182            5,264
Goodwill impairment                                      -                     -            817                -
Write-off of long-lived assets                           -                   280              -              280
Depreciation and amortization                        3,906                 3,642         11,492           10,265
General and administrative                          12,772                14,049         33,892           34,378
Product development                                  3,355                 2,040          9,201            6,485
Sales and marketing                                  2,925                 2,717          8,643            9,209
Non-media cost of revenue (1)                        4,173                 1,323          8,088            4,159
Media margin                               $        29,682$        21,307$   78,409$   67,302
Revenue                                    $        78,280$        64,552$  228,723$  201,673
Media margin % of revenue                             37.9 %                33.0 %         34.3 %           33.4 %



(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 income (loss), which we believe is the most directly comparable GAAP measure:



                                             Three Months Ended September 30,           Nine Months Ended September 30,
                                                2020                  2019                2020                  2019
Net income (loss)                          $         1,169       $        

(4,463 ) $ 2,029 $ (2,703 ) Income tax expense (benefit)

                            65                     -                  65                   (35 )
Interest expense, net                                1,317                 1,719               4,182                 5,264
Depreciation and amortization                        3,906                 3,642              11,492                10,265
Goodwill impairment                                      -                     -                 817                     -
Write-off of long-lived assets                           -                   280                   -                   280
Accrued compensation expense for
Put/Call Consideration                                 654                     -               1,184                     -
Share-based compensation expense                     1,170                 2,790               4,848                 8,019
Acquisition-related costs                               89                     -                 151                   448
Restructuring and certain severance
costs                                                  565                     -                 565                   360
Certain litigation and other related
costs                                                2,671                   375               4,693                 1,091
One-time items                                           -                     -                   -                   168
Adjusted EBITDA                            $        11,606       $         4,343     $        30,026$        23,157




                                       19

--------------------------------------------------------------------------------

Table of Contents




Below is a reconciliation of adjusted net income (loss) and adjusted net income
(loss) per share from net income (loss), which we believe is the most directly
comparable GAAP measure.



                                             Three Months Ended September 30,          Nine Months Ended September 30,
(In thousands, except share data)                2020                  2019                2020                 2019
Net income (loss)                          $           1,169       $      (4,463 )   $          2,029       $      (2,703 )
Goodwill impairment                                        -                   -                  817                   -
Write-off of long-lived assets                             -                 280                    -                 280
Accrued compensation expense for
Put/Call Consideration                                   654                   -                1,184                   -
Share-based compensation expense                       1,170               2,790                4,848               8,019
Acquisition-related costs                                 89                   -                  151                 448
Restructuring and certain severance
costs                                                    565                   -                  565                 360
Certain litigation and other related
costs                                                  2,671                 375                4,693               1,091
One-time items                                             -                   -                    -                 168
Adjusted net income (loss)                 $           6,318       $      (1,018 )   $         14,287       $       7,663
Adjusted net income (loss) per share:
Basic                                      $            0.08       $       (0.01 )   $           0.18       $        0.10
Diluted                                    $            0.08       $       (0.01 )   $           0.18       $        0.10
Weighted average number of shares
outstanding:
Basic                                             78,577,974          79,569,210           78,564,262          79,389,131
Diluted                                           79,172,578          79,569,210           79,214,619          79,389,131




We present media margin, 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 by our management 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 severance costs associated with department-specific
reorganizations and certain litigation and other related costs associated with
legal matters outside the ordinary course of business. Items are considered
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. Adjusted EBITDA for the nine months ended
September 30, 2019 excluded as one-time items $0.2 million of costs associated
with the move of our corporate headquarters. There were no other adjustments for
one-time items in the current period presented.



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. Adjusted net income for the nine
months ended September 30, 2019 excluded as one-time items $0.2 million of costs
associated with the move of our corporate headquarters. There were no other
adjustments for one-time items in the current period presented. We believe
adjusted net income (loss) affords investors a different view of the overall
financial performance of the Company than 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 not intended to be performance measures that should
be regarded as an alternative to, or more meaningful than, net income (loss) as
indicators of operating performance. None of these metrics are presented as
measures of liquidity. 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.



                                       20

--------------------------------------------------------------------------------

  Table of Contents



Results of Operations


Three months ended September 30, 2020 compared to three months ended September 30, 2019




Revenue. Revenue increased $13.7 million, or 21%, to $78.3 million for the three
months ended September 30, 2020, from $64.6 million for the three months ended
September 30, 2019. The increase was primarily attributable to higher
monetization of the consumer traffic to our websites through improved matching
of offers with consumers and an increase in consumers' completing offers
presented. The increase also reflected more effective re-engagement of consumers
after their initial experience on our websites, through SMS text messaging and
push notifications. As the trajectory of the pandemic and governmental, business
and individual responses to the same remain dynamic and unpredictable, we are
unable to assess the availability of consumer traffic to our websites in future
quarters. At the onset of the continuing COVID-19 pandemic, certain advertisers
in industry verticals such as staffing and recruitment and financial products
and services reduced their spend with us, while certain advertisers in other
verticals such as streaming services and mobile gaming increased their
demand. In the third quarter, we experienced an improvement in spend from
clients in our financial products and services vertical, though not fully to
pre-COVID levels. While changes in demand and pricing among clients in various
industry verticals did not result in a significant disruption to our business in
the quarter ended September 30, 2020, the trajectory of these trends is
uncertain.



Cost of revenue (exclusive of depreciation and amortization). Cost of revenue
increased $8.2 million, or 18%, to $52.8 million for the three months ended
September 30, 2020, from $44.6 million for the three months ended September 30,
2019. 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 and, historically, on behalf of
third-party advertisers, as well as the costs of fulfilling rewards earned by
consumers who complete the requisite number of advertiser offers.



The total cost of revenue as a percentage of revenue decreased to 67% for the
three months ended September 30, 2020, compared to 69% in the corresponding
period in 2019, attributable to lower growth in our cost of media as compared
with growth in revenues, partly offset by increased reward fulfillment
expense. Certain new promotional campaigns yielded higher reward fulfillment
costs during the quarter, generating relatively higher monetization that more
than offset the incremental fulfillment costs.



Sales and marketing. Sales and marketing expenses increased $0.2 million, or 8%,
to $2.9 million for the three months ended September 30, 2020, from $2.7 million
for the three months ended September 30, 2019. For the three months ended
September 30, 2020 and 2019, the amounts consisted mainly of employee salaries
and benefits of $2.5 million and $1.9 million, non-cash share-based compensation
expense of $0.2 million and $0.3 million, and advertising costs of $0.2 million
and $0.3 million, respectively. We are actively managing our sales and marketing
expenditures to reflect the rapidly shifting market dynamics associated with the
impact of COVID-19 on our and our advertiser clients' businesses. As a result,
past levels of sales and marketing expenditures may not be indicative of future
expenditures, which may increase or decrease as these uncertainties in our
business play out.



Product development. Product development increased $1.3, or 64%, to $3.4 million
for the three months ended September 30, 2020, from $2.0 million for the three
months ended September 30, 2019. For the three months ended September 30, 2020
and 2019, the amounts consisted mainly of salaries and benefits of $2.5 million
and $1.8 million, non-cash share-based compensation expense of $0.3 million in
both periods, and software license and maintenance costs of $0.3 million and
$0.0 million, respectively. The increase in product development expenses
reflects, in part, the development of new media properties. We have not
implemented any material changes to our product development strategy as a result
of the COVID-19 pandemic.



General and administrative. General and administrative expenses decreased $1.3
million, or 9%, to $12.8 million for the three months ended September 30, 2020,
from $14.0 million for the three months ended September 30, 2019. For the three
months ended September 30, 2020 and 2019, the amounts consisted mainly of
employee salaries and benefits of $4.3 million and $5.6 million, certain
litigation and related costs of $2.7 million and $0.4 million, professional fees
of $1.4 million in both periods, office overhead of $1.0 million in both
periods, non-cash share-based compensation expense of $0.7 million
and $2.2 million, accrued compensation expense for Put/Call Consideration from
the Winopoly Acquisition of $0.7 million and $0.0 million (see Note 11, Business
acquisitions, in the Notes to Consolidated Financial Statements), and provision
for bad debt of $0.0 million and $1.9 million, respectively. The decrease
was mainly the result of reduced provision for bad debt expense, non-cash
share-based compensation expense and salaries and benefits expense, partially
offset by an increase in certain litigation and related costs year over year, as
well as accrued compensation expense for the Put/Call Consideration. The
increase in certain litigation and related costs reflects an accrual of $1.45
million in connection with the New York Attorney General matter detailed in Note
10, Contingencies, as well as legal representation costs in connection with that
and other matters detailed in Note 10. At this time, we do not anticipate
material changes to our general and administrative expenditures due to the
COVID-19 pandemic. See "Item 1A Risk Factors" below.



Depreciation and amortization. Depreciation and amortization expenses increased $0.3 million, or 7%, to $3.9 million for the three months ended September 30, 2020, from $3.6 million for the three months ended September 30, 2019.




Write-off of long-lived asset. During the three months ended September 30, 2019,
we recognized $0.3 million of impairment loss related to software capitalized
for internal use, with no corresponding charge in the current period.



Interest expense, net. Interest expense, net, decreased $0.4 million,
or 23%, to $1.3 million for the three months ended September 30, 2020,
from $1.7 million for the three months ended September 30, 2019. The decrease
was attributable to a lower interest rate environment, as well as lower average
debt balance outstanding on the Refinanced Term Loan described below under
"Liquidity and Capital Resources".



Income (loss) before income taxes. For the three months ended September 30,
2020, income before income taxes increased $5.7 million to $1.2 million,
compared to net loss before income taxes of $4.5 million for the three months
ended September 30, 2019. The change was primarily due to an increase in revenue
of $13.7 million, a decrease in general and administrative expense
of $1.3 million, a decrease in interest expense of $0.4 million and the absence
of the write-off of long-lived assets of $0.3 million from the prior period,
partially offset by an increase in cost of revenue of $8.2 million, an increase
in product development of $1.3 million, an increase in depreciation and
amortization expense of $0.3 million and an increase in sales and marketing of
$0.2 million, discussed above.



                                       21

--------------------------------------------------------------------------------

Table of Contents

Income taxes. Income tax expense was $65.0 thousand and $0.0 thousand for the three months ended September 30, 2020 and 2019, respectively.




As of September 30, 2020 and 2019, 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 this allowance. Based on
various factors, including our history of losses, current income, estimated
future taxable income, exclusive of reversing temporary differences and
carryforwards, future reversals of existing taxable temporary differences and
consideration of available tax planning strategies, we believe there is a
reasonable possibility that, within the next twelve months, sufficient positive
evidence may become available to allow us to reach a conclusion that a
significant portion of the valuation allowance may be released. 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 on the
profitability that we are able to achieve and the net deferred tax assets
available.



Net income (loss). Net income of $1.2 million and net loss of $4.5 million were recognized for the three months ended September 30, 2020 and 2019, respectively, as a result of the foregoing.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019




Revenue. Revenue increased $27.1 million, or 13%, to $228.7 million for the nine
months ended September 30, 2020, from $201.7 million for the nine months ended
September 30, 2019. The increase in revenue was primarily attributable to higher
monetization of traffic to our websites, supported by advertiser demand for our
performance-based marketing services and increased consumer traffic to our
websites. At the onset of the COVID-19 pandemic, certain advertisers in industry
verticals such as staffing and recruitment and financial products and services
reduced their spend with us, while certain advertisers in other verticals such
as streaming services and mobile gaming increased their demand. In the third
quarter, we experienced an improvement in spend from clients in our financial
products and services vertical, though not fully to pre-COVID levels. Trends in
advertiser verticals, in aggregate, did not result in a significant disruption
to our business in the nine months ended September 30, 2020.



Cost of revenue (exclusive of depreciation and amortization). Cost of revenue
increased $19.9 million, or 14%, to $158.4 million for the nine months ended
September 30, 2020, from $138.5 million for the nine months ended September 30,
2019. The total cost of revenue as a percentage of revenue remained flat
at 69% for the nine months ended September 30, 2020. While the cost of media
increased less than the increase in revenue, this was offset by increased reward
fulfillment expense, as we tested certain changes to the consumer flows and
experience during the second quarter and expanded certain promotional campaigns
that yielded higher reward fulfillment costs in the third quarter.



Sales and marketing. Sales and marketing expenses decreased $0.6 million, or 6%,
to $8.6 million for the nine months ended September 30, 2020, from $9.2 million
for the nine months ended September 30, 2019. For the nine months ended
September 30, 2020 and 2019, the amounts consisted mainly of employee salaries
and benefits of $7.0 million and $6.6 million, non-cash share-based compensation
expense of $0.7 million and $0.8 million, and advertising costs of $0.6 million
and $1.1 million, respectively. The reduction in sales and marketing expenses
derived primarily from reduced advertising costs.



Product development. Product development increased $2.7, or 42%, to $9.2 million
for the nine months ended September 30, 2020, from $6.5 million for the nine
months ended September 30, 2019, partly owing to the development of new media
properties. For the nine months ended September 30, 2020 and 2019, the amounts
consisted mainly of salaries and benefits of $6.9 million and $5.5 million,
non-cash share-based compensation expense of $0.8 million and $0.8 million,
and software license and maintenance costs of $0.7 million and $0.0 million,
respectively.



General and administrative. General and administrative expenses
decreased $0.5 million, or 1%, to $33.9 million for the nine months ended
September 30, 2020, from $34.4 million for the nine months ended September 30,
2019. For the nine months ended September 30, 2020 and 2019, the amounts
consisted mainly of employee salaries and benefits of $13.0 million and
$13.5 million, certain litigation and related costs of $4.7 million and
$1.1 million, professional fees of $3.9 million and $4.5 million, non-cash
share-based compensation expense of $3.4 million and $6.4 million, office
overhead of $3.0 million and $2.8 million, accrued compensation expense for
Put/Call Consideration from the Winopoly Acquisition of $1.2 million and
$0.0 million, and provision for bad debt expense of $0.2 million
and $2.1 million, respectively. The decrease was mainly the result of lower
non-cash share-based compensation expense, provision for bad debt
expense, professional fees and salaries and benefits expense, partially offset
by increases in certain litigation and related costs year over year and accrued
compensation expense for Put/Call Consideration.



Depreciation and amortization. Depreciation and amortization expenses
increased $1.2 million, or 12%, to $11.5 million for the nine months
ended September 30, 2020, from $10.3 million for the nine months ended September
30, 2019, due to the timing of the AdParlor Acquisition, which was completed on
July 1, 2019.


Goodwill impairment. During the second quarter of 2020, we recognized $0.8 million of goodwill impairment related to the All Other reporting unit, with no corresponding impairment charge in the prior period.




Write-off of long-lived asset. During the nine months ended September 30, 2019,
we recognized $0.3 million of impairment loss related to software capitalized
for internal use, with no corresponding charge in the current period.



Interest expense, net. Interest expense, net, decreased $1.1 million, or 21%, to
$4.2 million for the nine months ended September 30, 2020, from $5.3 million for
the nine months ended September 30, 2019. The decrease was attributable to a
lower interest rate environment and a lower average debt balance outstanding on
the Refinanced Term Loan described below under "Liquidity and Capital
Resources".



Income (loss) before income taxes. For the nine months ended September 30, 2020,
income before income taxes increased $4.8 million to $2.1 million for the nine
months ended September 30, 2020, from a loss of $2.7 million for the nine months
ended September 30, 2019. The change was primarily due to an increase in revenue
of $27.1 million, decrease in interest expense of $1.1 million, decrease in
sales and marketing of $0.6, decrease in general and administrative expense
of $0.5 million and the absence of the write-off of long-lived assets of $0.3
million from prior period, partially offset by increased cost of revenue
of $19.9 million, increased product development of $2.7 million,
increased depreciation and amortization expense of $1.2 million and a goodwill
impairment charge of $0.8 million in the current year, discussed above.



                                       22

--------------------------------------------------------------------------------

Table of Contents

Income taxes. Income tax expense was $65.0 thousand and income tax benefit was $35.0 thousand for the nine months ended September 30, 2020 and 2019, respectively.




Net income (loss). Net income of $2.0 million and net loss of $2.7 million was
recognized for the nine months ended September 30, 2020 and 2019, respectively,
as a result of the foregoing.



Effect of Inflation



The rates of inflation experienced in recent years have had no material impact
on our financial statements. We attempt to recover increased costs by increasing
prices for our services, to the extent permitted by contracts and the
competitive environment within our industry.



Liquidity and Capital Resources




Cash flows provided by operating activities. For the nine months ended September
30, 2020 and 2019, net cash provided by operating activities was $12.9 million
and $26.6 million, respectively. Net income in the current period
of $2.0 million represents an increase of $4.7 million, as compared with net
loss of $2.7 million in the prior period. Adjustments to reconcile net income to
net cash provided by operating activities of $19.7 million in the current period
declined by $1.9 million, as compared with $21.6 million in the prior period,
primarily due to reductions in share-based compensation expense and provision
for bad debt, partly offset by the inclusion of an accrual for Put/Call
Consideration in the current period, with no corresponding amount in the prior
period. Changes in assets and liabilities consumed cash of $8.8 million in the
current period, as compared with providing a source of cash of $7.7 million in
the prior period, primarily due to changes in working capital.



Cash flows used in investing activities. For the nine months ended September 30,
2020 and 2019, net cash used in investing activities was $3.4 million and
$11.2 million, respectively. The decline was mainly due to reduced cash paid for
business acquisitions of $5.8 million and reduced capital expenditures
of $2.0 million year over year.



Cash flows used in financing activities. Net cash used in financing activities
for the nine months ended September 30, 2020 and 2019 was $12.7 million and
$8.9 million, respectively. The increase in cash used for the nine months ended
September 30, 2020 was mainly due to an increase in the repayment of long-term
debt of $5.0 million and the repurchase of treasury stock as part of a stock
repurchase program of $1.3 million in 2020, which was not in effect in the prior
period, partially offset by a $2.6 million decrease in statutory taxes paid
related to the net share settlement of vested restricted stock units.



As of September 30, 2020, we had noncancelable operating lease commitments of $11.3 million and long-term debt with $43.9 million principal balance. For the nine months ended September 30, 2020, we funded our operations using available cash.




As of September 30, 2020, we had cash, cash equivalents and restricted cash of
approximately $16.9 million, a decrease of $3.3 million from $20.2 million as of
December 31, 2019. We believe that we will have sufficient cash resources to
finance our operations and expected capital expenditures for the next twelve
months and beyond.



We may explore the possible acquisition of businesses, products and/or
technologies that are complementary to our existing business. We are continuing
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 assurances that any such acquisitions will be made or that we
will be able to successfully integrate any acquired business. 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 July 1, 2019, we acquired substantially all of the assets of AdParlor
Holdings, Inc. and certain affiliates for $7.3 million in cash, using cash on
hand, and a $2.4 million promissory note to the sellers. On April 1, 2020,
we acquired a 50% membership interest in Winopoly, LLC, for a deemed purchase
price of $2.6 million, comprised of $1.6 million in upfront cash paid to the
seller parties and contingent consideration with a fair value of $1.0 million,
payable based upon the achievement of specified revenue targets over the
eighteen-month period following the completion of the acquisition. See Note
11, Business acquisitions, in the Notes to Consolidated Financial Statements.



As of September 30, 2020, the Refinanced Term Loan has an outstanding principal
balance of $42.6 million and matures on March 26, 2023. The Credit Agreement,
along with the related Amendment No. 6 governing the Refinanced Term Loan and
subsequent amendments, contain restrictive covenants which impose limitations on
the way we conduct our business, including limitations on the amount of
additional debt we are able to incur and our ability to make certain investments
and other restricted payments. The restrictive covenants and prepayment
penalties in the Credit Agreement, as amended, may limit our strategic and
financing options and our ability to return capital to our shareholders through
dividends or stock buybacks. Furthermore, we may need to incur additional debt
to meet future financing needs. The Refinanced Term Loan is guaranteed by us and
our direct and indirect subsidiaries and is secured by substantially all of our
assets and those of our direct and indirect subsidiaries, including Fluent, LLC,
in each case, on an equal and ratable basis. The Refinanced Term Loan accrues
interest at the rate of either, at Fluent's option, (a) LIBOR (subject to a
floor of 0.50%) plus 7.00% per annum, or (b) base rate (generally equivalent to
the U.S. prime rate) plus 6.0% per annum, payable in cash. Principal
amortization of the Refinanced Term Loan is $0.9 million per quarter, which
commenced with the fiscal quarter ended June 30, 2018.



The Credit Agreement, as amended, requires us to maintain and comply with
certain financial and other covenants. While we were in compliance with the
financial and other covenants at September 30, 2020, we cannot assure that we
will be able to maintain compliance with such financial or other covenants. Our
failure to comply with these covenants could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
indebtedness, which would materially adversely affect our financial health if we
are unable to access sufficient funds to repay all the outstanding amounts.
Moreover, if we are unable to meet our debt obligations as they come due, we
could be forced to restructure or refinance such obligations, seek additional
equity financing or sell assets, which we may not be able to do on satisfactory
terms, or at all. In addition, the Credit Agreement includes certain prepayment
provisions, including mandatory quarterly prepayments of the Refinanced Term
Loan with a portion of our excess cash flow and prepayment penalties if we
prepay the Refinanced Term Loan before the fourth anniversary of Amendment No.
6. As long as the Refinanced Term Loan remains outstanding, the restrictive
covenants and mandatory quarterly prepayment provisions and prepayment penalties
could impair our ability to expand or pursue our business strategies or obtain
additional funding.



                                       23

--------------------------------------------------------------------------------

Table of Contents

Off-Balance Sheet Arrangements

As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

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 accounting principles generally accepted in the
United States ("US 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 receivables, lease
commitments, useful lives of intangible assets, recoverability of the carrying
amounts of goodwill and intangible assets, share-based compensation and income
taxes. 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.



During the three months ended March 31, 2020, we determined that the decline
in market value of our publicly traded stock and the macroeconomic conditions
arising from the global COVID-19 pandemic constituted an impairment triggering
event for our two reporting units, Fluent and All Other. As such,
we conducted an interim test of the fair value of our goodwill for potential
impairment as of March 31, 2020. Based on the results of this interim impairment
test, which used a combination of income and market approaches to determine the
fair value of our two reporting units, we concluded that Fluent's goodwill of
$159,791 and All Other's goodwill of $4,983 were not impaired, since the results
of the interim test indicated that the estimated fair values exceeded their
carrying values by approximately 18% and 4%, respectively. We believe that the
assumptions utilized in the interim impairment testing over our two reporting
units, including the determination of an appropriate discount rate of 13.0% for
Fluent and 16.5% for All Other, long-term profitability growth projections, and
estimated future cash flows, are reasonable. The risk of future impairment of
goodwill exists if actual results, such as lower than expected revenue,
profitability, cash flows, market multiples, discount rates and control
premiums, differ from the assumptions used in our interim impairment test. In
addition, a sustained decline in the market value of our publicly traded stock
could impact the fair value assessment.



During the three months ended June 30, 2020, we determined that the effects of
the macroeconomic conditions arising from the global COVID-19 pandemic and the
social unrest throughout the United States during June 2020, which changed the
media buying patterns of certain customers directly impacting the All Other
reporting unit, constituted an impairment triggering event. As such, we
conducted an interim test of the fair value of its goodwill for potential
impairment as of June 30, 2020. The results of this interim impairment test,
which used a combination of income and market approaches to determine the fair
value of the All Other reporting unit, indicated that its carrying value
exceeded its estimated fair value by 8.9%. We thereby concluded that All Other's
goodwill of $5.0 million was impaired by $0.8 million. We believe that the
assumptions utilized in the interim impairment testing, including the
determination of an appropriate discount rate of 16%, long-term profitability
growth projections, and estimated future cash flows, are reasonable. The interim
goodwill impairment test reflected management's best estimate of the economic
impact to its business, end market conditions and recovery timelines. While no
further triggering events were identified by management as of June 30, 2020, if
the ongoing economic uncertainty proves to be more severe than estimated, or if
the economic recovery takes longer to materialize or does not materialize as
strongly as anticipated, this could result in future impairment charges.



For additional information, please refer to our 2019 Form 10-K. There have been
no additional material changes to Critical Accounting Policies and Estimates
disclosed in the 2019 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.

© Edgar Online, source Glimpses

All news about FLUENT, INC.
01/15FLUENT : Announces Recipients of Inaugural Business Empowerment Program to Suppo..
AQ
01/15FLUENT, INC. : Results of Operations and Financial Condition, Financial Statemen..
AQ
01/15FLUENT : Revenue Outlook Above Street View
MT
01/14Fluent, Inc. Announces Preliminary Financial Metrics for 2020
GL
01/14FLUENT : Partners with Zendesk to Enhance Consumer Experience
PU
01/14FLUENT : Leading Digital and Tech Platforms Join Ad Council, White House, HHS an..
PU
01/13FLUENT : Thinking about buying stock in Jaguar Health, Diffusion Pharmaceuticals..
PR
01/07Fluent, Inc. to Present at the 23rd Annual Needham Growth Conference
GL
2020FLUENT, INC. : Change in Directors or Principal Officers (form 8-K)
AQ
2020FLUENT : Thinking about buying stock in Aqua Metals, Riot Blockchain, CleanSpark..
PR
More news