Fluent, Inc. - Quarter Report: 2019 September (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549 

 

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FORM 10-Q

 

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(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                    

 

Commission file number 001-37893

 

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FLUENT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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Delaware	77-0688094
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

 

300 Vesey Street, 9th Floor

New York, New York 10282

(Address of Principal Executive Offices) (Zip Code)

 

(646) 669-7272

(Registrant's Telephone Number, Including Area Code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0005 par value per share		FLNT		The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  YES    ☐  NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  YES    ☐  NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. 

Large accelerated filer		☐	Accelerated filer	☒
Non-accelerated filer		☐	Smaller reporting company	☒
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES  ☐    NO  ☒

As of November 8, 2019, the registrant had 76,809,530 shares of common stock outstanding.

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FLUENT, INC.

 

TABLE OF CONTENTS FOR FORM 10-Q

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	2
	Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018	3
	Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2019 and 2018	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31

 

 

 

 

		September 30, 2019				December 31, 2018
ASSETS:
Cash and cash equivalents		$	24,228			$	17,769
Accounts receivable, net of allowance for doubtful accounts of $1,550 and $1,751, respectively			45,745				48,652
Prepaid expenses and other current assets			2,015				1,971
Total current assets			71,988				68,392
Restricted cash			1,480				1,480
Property and equipment, net			3,037				1,380
Operating lease right-of-use assets			10,332				—
Intangible assets, net			58,478				61,812
Goodwill			164,774				159,791
Other non-current assets			579				414
Total assets		$	310,668			$	293,269
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable		$	17,396			$	7,855
Accrued expenses and other current liabilities			17,069				21,566
Deferred revenue			1,178				444
Current portion of long-term debt			6,058				3,500
Current portion of operating lease liability			2,342				—
Total current liabilities			44,043				33,365
Long-term debt, net			46,929				51,972
Operating lease liability, net			9,507				—
Other non-current liabilities			736				766
Total liabilities			101,215				86,103
Shareholders' equity:
Preferred stock - $0.0001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018			—				—
Common stock - $0.0005 par value, 200,000,000 shares authorized; 78,574,482 and 76,525,581 shares issued at September 30, 2019 and December 31, 2018, respectively; and 76,783,296 and 75,292,383 shares outstanding at September 30, 2019 and December 31, 2018, respectively			39				38
Treasury stock, at cost, 1,791,186 and 1,233,198 shares at September 30, 2019 and December 31, 2018, respectively			(6,368	)			(3,272	)
Additional paid-in capital			403,854				395,769
Accumulated deficit			(188,072	)			(185,369	)
Total shareholders' equity			209,453				207,166
Total liabilities and shareholders' equity		$	310,668			$	293,269

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Revenue		$	64,552			$	66,535			$	201,673			$	179,459
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization)			44,568				41,744				138,530				115,120
Sales and marketing			2,717				3,640				9,209				9,909
Product development			2,040				1,680				6,485				3,556
General and administrative			14,049				9,775				34,378				25,387
Depreciation and amortization			3,642				3,352				10,265				10,021
Write-off of long-lived assets			280				—				280				—
Spin-off transaction costs			—				—				—				7,708
Total costs and expenses			67,296				60,191				199,147				171,701
(Loss) income from operations			(2,744	)			6,344				2,526				7,758
Interest expense, net			(1,719	)			(1,882	)			(5,264	)			(6,209	)
(Loss) income before income taxes from continuing operations			(4,463	)			4,462				(2,738	)			1,549
Income tax benefit			—				—				35				—
Net (loss) income from continuing operations			(4,463	)			4,462				(2,703	)			1,549
Discontinued operations:
Loss from operations of discontinued operations, net of $0 income taxes			—				—				—				(2,084	)
Loss on disposal of discontinued operations, net of $0 income taxes			—				—				—				(19,040	)
Net loss from discontinued operations			—				—				—				(21,124	)
Net (loss) income		$	(4,463	)		$	4,462			$	(2,703	)		$	(19,575	)
Basic and diluted (loss) income per share:
Continuing operations		$	(0.06	)		$	0.06			$	(0.03	)		$	0.02
Discontinued operations		$	—			$	—			$	—			$	(0.28	)
Net (loss) income		$	(0.06	)		$	0.06			$	(0.03	)		$	(0.26	)
Weighted average number of shares outstanding:
Basic and diluted			79,569,210				78,199,633				79,389,131				76,002,514

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		Common stock								Treasury stock								Additional paid-in				Accumulated				Total shareholders'
		Shares				Amount				Shares				Amount				capital				deficit				equity
Balance at June 30, 2019			78,534,774			$	39				1,785,489			$	(6,351	)		$	402,192			$	(183,609	)		$	212,271
Vesting of restricted stock units and issuance of restricted stock			39,708				—				—				—				—				—				—
Increase in treasury stock resulting from shares withheld to cover statutory taxes			—				—				5,697				(17	)			—				—				(17	)
Reclassification of puttable option from equity to liability			—				—				—				—				(1,150	)			—				(1,150	)
Share-based compensation expense			—				—				—				—				2,812				—				2,812
Net loss			—				—				—				—				—				(4,463	)			(4,463	)
Balance at September 30, 2019			78,574,482			$	39				1,791,186			$	(6,368	)		$	403,854			$	(188,072	)		$	209,453
Balance at December 31, 2018			76,525,581			$	38				1,233,198			$	(3,272	)		$	395,769			$	(185,369	)		$	207,166
Vesting of restricted stock units and issuance of restricted stock			2,048,901				1				—				—				(1	)			—				—
Increase in treasury stock resulting from shares withheld to cover statutory taxes			—				—				557,988				(3,096	)			—				—				(3,096	)
Share-based compensation expense			—				—				—				—				8,086				—				8,086
Net loss			—				—				—				—				—				(2,703	)			(2,703	)
Balance at September 30, 2019			78,574,482			$	39				1,791,186			$	(6,368	)		$	403,854			$	(188,072	)		$	209,453

		Common stock								Treasury stock								Additional paid-in				Accumulated				Total shareholders'
		Shares				Amount				Shares				Amount				capital				deficit				equity
Balance at June 30, 2018			76,509,709			$	38				1,225,085			$	(3,253	)		$	390,011			$	(191,474	)		$	195,322
Vesting of restricted stock units and issuance of restricted stock			6,706				—				—				—				—				—				—
Reduction in value of puttable option classified as liability			—				—				—				—				200				—				200
Share-based compensation expense			—				—				—				—				2,675				—				2,675
Net income			—				—				—				—				—				4,462				4,462
Balance at September 30, 2018			76,516,415			$	38				1,225,085			$	(3,253	)		$	392,886			$	(187,012	)		$	202,659
Balances at December 31, 2017			61,631,573			$	31				352,523			$	(1,274	)		$	392,687			$	(167,437	)		$	224,007
Issuance of common stock upon direct offering to certain investors, net of issuance costs of $108			2,700,000				1				—				—				13,391				—				13,392
Vesting of restricted stock units and issuance of restricted stock			12,184,842				6				—				—				(6	)			—				—
Increase in treasury stock resulting from shares withheld to cover statutory taxes			—				—				872,562				(1,979	)			—				—				(1,979	)
Reduction in value of puttable option classified as liability																			200								200
Share-based compensation expense			—				—				—				—				28,114				—				28,114
Net loss			—				—				—				—				—				(19,575	)			(19,575	)
Spin-off of Red Violet			—				—				—				—				(41,500	)			—				(41,500	)
Balance at September 30, 2018			76,516,415			$	38				1,225,085			$	(3,253	)		$	392,886			$	(187,012	)		$	202,659

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		Nine Months Ended September 30,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(2,703	)		$	(19,575	)
Net loss from discontinued operations			—				21,124
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization			10,265				10,021
Non-cash interest expense and related amortization			1,016				1,491
Share-based compensation expense			8,019				11,855
Provision for bad debt			2,082				462
Write-off of long-lived assets			280				—
Deferred income tax benefit			(35	)			—
Allocation of expenses to Red Violet			—				(325	)
Changes in assets and liabilities, net of business acquisition:
Accounts receivable			8,660				(3,910	)
Prepaid expenses and other current assets			10				(112	)
Other non-current assets			(137	)			533
Operating lease assets and liabilities, net			1,517				—
Accounts payable			1,850				(159	)
Accrued expenses and other current liabilities			(4,915	)			628
Deferred revenue			701				449
Other			5				—
Net cash provided by operating activities from continuing operations			26,615				22,482
Net cash used in operating activities from discontinued operations			—				(5,835	)
Net cash provided by operating activities			26,615				16,647
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment			(2,076	)			(107	)
Business acquisition, net of cash acquired			(7,246	)			—
Capitalized costs included in intangible assets			(1,887	)			(995	)
Capital contributed to Red Violet			—				(19,728	)
Net cash used in investing activities from continuing operations			(11,209	)			(20,830	)
Net cash used in investing activities from discontinued operations			—				(1,386	)
Net cash used in investing activities			(11,209	)			(22,216	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares, net of issuance costs			—				13,392
Proceeds from debt obligations, net of debt costs			—				67,182
Repayments of long-term debt			(5,851	)			(72,229	)
Taxes paid related to net share settlement of restricted stock units and issuance of restricted stock			(3,096	)			(1,979	)
Net cash (used in) provided by financing activities			(8,947	)			6,366
Net increase in cash, cash equivalents and restricted cash			6,459				797
Cash, cash equivalents and restricted cash at beginning of period			19,249				16,564
Cash, cash equivalents and restricted cash at end of period		$	25,708			$	17,361
SUPPLEMENTAL DISCLOSURE INFORMATION
Cash paid for interest		$	4,170			$	4,931
Cash paid for income taxes		$	—			$	—
Share-based compensation capitalized in intangible assets		$	67			$	364
Reduction in value of puttable common stock classified as liability		$	—			$	(200	)

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1. Summary of significant accounting policies

 

(a) Basis of preparation and liquidity

 

The accompanying unaudited consolidated financial statements have been prepared by Fluent, Inc., a Delaware corporation (the "Company" or "Fluent"), in accordance with accounting principles generally accepted in the United States ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2019.

 

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 ("2018 Form 10-K") filed with the SEC on March 18, 2019. The consolidated balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date included in the 2018 Form 10-K.

 

Principles of consolidation

 

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation.

 

Spin-off of Red Violet

 

On March 26, 2018, Fluent completed the previously announced spin-off (the "Spin-off") of its risk management business from its performance marketing business by way of a distribution of all the shares of common stock of Fluent's wholly-owned subsidiary, Red Violet, Inc. ("Red Violet"), to Fluent's shareholders of record as of March 19, 2018 and certain warrant holders. See Note 3, Discontinued operations, for details.

 

Reclassifications

 

During the year ended December 31, 2018, the Company reviewed the classification of certain expenses presented in the consolidated statement of operations in an effort to bring added transparency and conformity to its reporting. As a result of this review, the Company made a number of changes to classification of operating expenses. Expenses for prior periods have been reclassified to conform to the current period presentation. For the three and nine months ended September 30, 2018, the reclassifications had no effect on income from operations, net income from continuing operations, or net income (loss).

 

The following table summarizes the reclassification activity for the three months ended September 30, 2018:

 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

The following table summarizes the reclassification activity for the nine months ended September 30, 2018:

 

 

Immaterial Correction of an Error

 

During the year ended December 31, 2018, the Company identified an error in its calculation of basic and diluted weighted average shares outstanding, in which shares that had vested but were subject to deferred delivery were not included in both the basic and diluted calculations. As a result, the calculation for basic and diluted weighted average shares outstanding, and the corresponding changes to basic and diluted income (loss) per share as previously reported for three and nine months ended September 30, 2018 was adjusted by an immaterial amount as follows:

 

 

(1)

Contains summation difference due to rounding.

 

(b) Recently issued and adopted accounting standards

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02 ("ASU 2016-02"), Leases (Topic 842), and additional changes, modifications, clarifications or interpretations thereafter, which generally require companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach, utilizing transition guidance introduced in ASU 2018-11, Leases: Targeted Improvements, and elected the ‘package of practical expedients,’ which permitted the Company not to reassess prior conclusions about lease identification, classification and initial direct costs.

 

As of January 1, 2019, the adoption of ASU 2016-02 resulted in the recording of right-of-use assets and operating lease liabilities of $10,866 and $11,138, respectively, on the consolidated balance sheets. The difference between the right-of-use assets and operating lease liabilities was recorded as a write-off of the previously recognized deferred rent liability included in accrued expenses and other current liabilities on the consolidated balance sheets. ASU 2016-02 did not impact the Company's consolidated statements of operations or consolidated statements of cash flows. The accounting for financing leases, previously referred to as capital leases, was unchanged as a result of the adoption of ASU 2016-02.

 

Subsequent to the adoption of Accounting Standards Codification ("ASC") 842, the Company will continue to recognize, on a discounted basis, its minimum commitments under noncancelable operating leases on its consolidated balance sheets. ASC 842 also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. Accordingly, the Company will not recognize right-of-use assets or lease liabilities for qualifying leases, including existing short-term leases in effect at the transition date, and will recognize those payments on the consolidated statements of operations on a straight-line basis over the lease term. Additionally, the Company has elected the practical expedient to not separate lease and non-lease components for all of its leases. See Note 4, Lease commitments, for additional disclosures.

 

In January 2016, FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, and additional changes, modifications, clarifications or interpretations thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available-for-sale debt securities at the amount expected to be collected. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

(c) Revenue recognition

 

Revenue is recognized when control of goods or services is transferred to customers, in amounts that reflect the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is typically to (a) deliver data records, based on predefined qualifying characteristics specified by the customer or (b) generate conversions, based on predefined user actions (for example, a click, a registration or the installation of an app) and subject to certain qualifying characteristics specified by the customer.

 

The Company applies the practical expedient related to the review of a portfolio of contracts in reviewing the terms of customer contracts as one collective group, rather than by individual contract. Based on historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, the Company has concluded the financial statement effects are not materially different than accounting for revenue on a contract-by-contract basis.

 

Revenue is recognized upon satisfaction of the associated performance obligations. The Company's customers simultaneously receive and consume the benefits provided, as the Company satisfies its performance obligations. Furthermore, the Company elected the "right to invoice" practical expedient available within ASC 606-10-55-18 as the measure of progress, since the Company has a right to payment from a customer in an amount that corresponds directly with the value of the performance completed to date. The Company's revenue arrangements do not contain significant financing components. The Company has further concluded that revenue does not require disaggregation.

 

For each identified performance obligation in the contract with the customer, the Company assesses whether it or the third-party supplier is the principal or agent. In arrangements where Fluent has substantive control of the specified goods and services, is primarily responsible for the integration of products and services into the final deliverable to the customer, has inventory risk and discretion in establishing pricing, Fluent acts as the principal. For performance obligations in which Fluent acts as principal, the Company records the gross amount billed to the customer within revenue and the related incremental direct costs incurred as cost of revenue. If the third-party supplier, rather than Fluent, is primarily responsible for the performance and deliverable to the customer, and Fluent solely arranges for the third-party supplier to provide services to the customer, Fluent acts as the agent. For performance obligations for which Fluent acts as the agent, the net fees on such transactions are recorded as revenue with no associated costs of revenue for the Company.

 

If a customer pays consideration before the Company's performance obligations are satisfied, such amounts are classified as deferred revenue on the consolidated balance sheets. As of September 30, 2019 and December 31, 2018, the balance of deferred revenue was $1,178 and $444, respectively. The majority of the deferred revenue balance as of December 31, 2018 was recognized into revenue during the first quarter of 2019.

 

If there is a delay between the period in which revenue is recognized and when customer invoices are issued, revenue is recognized and related amounts are recorded as unbilled revenue in accounts receivable on the consolidated balance sheets. As of September 30, 2019 and December 31, 2018, unbilled revenue included in accounts receivable totaled $19,081 and $25,545, respectively. In line with industry practice, the unbilled revenue balance is recorded based on the Company's internally-tracked conversions, net of estimated variances between this amount and the amount tracked and subsequently confirmed by customers. Substantially all amounts included within the unbilled revenue balance are invoiced to customers within the month directly following the period of service. Historical estimates related to unbilled revenue have not been materially different from actual revenue billed.

 

Sales commissions are recorded at the time revenue is recognized and recorded in sales and marketing expenses. The Company has elected to utilize a practical expedient to expense incremental costs incurred related to obtaining a contract.

 

In addition, the Company elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.

 

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2. Loss (income) per share

 

Basic (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period, in addition to restricted stock units ("RSUs") and restricted common stock that are vested but not delivered. Diluted (loss) income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock are exercised or converted into common stock, and is calculated using the treasury stock method for stock options, restricted stock units, restricted stock, warrants and deferred common stock. Common equivalent shares are excluded from the calculation in loss periods, as their effects would be anti-dilutive.

 

For the three and nine months ended September 30, 2019 and 2018, basic and diluted (loss) income per share was as follows:

 

 

The following potentially dilutive securities were excluded from the calculation of diluted (loss) income per share, as their effects would have been anti-dilutive for the periods presented:

 

 

 

 

3. Discontinued operations

 

As a result of the Spin-off on March 26, 2018, the financial results of Red Violet are reflected in the Company's consolidated financial statements as discontinued operations and, therefore, are presented as loss from discontinued operations on the consolidated statements of operations, and cash activity from discontinued operations on the consolidated statements of cash flows. Further, the Company's additional paid-in capital was decreased by the net assets of Red Violet, as reflected in the consolidated statements of changes in shareholders' equity.

 

For the nine months ended September 30, 2018, the financial results of operations of Red Violet were as follows:

 

 

For the nine months ended September 30, 2018, included in the net loss from discontinued operations is a loss on disposal of discontinued operations of $19,040, of which an aggregate of $16,030 represented non-cash charges. The loss on disposal of discontinued operations consisted of the following:

 

 

(1)

As discussed and defined in Note 10, Share-based compensation, share-based compensation expense represents non-cash expense incurred in connection with the Acceleration of certain previously outstanding but unvested stock options, RSUs and restricted stock and additional Spin-off Grants, in connection with the Spin-off.

(2)	As discussed in Note 7, Long-term debt, net, in connection with the Spin-off, the Company repaid the Promissory Notes to certain investors, which resulted in a write-off of unamortized debt costs of $284.

 

In addition, during the first quarter of 2018, in connection with the Spin-off of Red Violet, an aggregate of $7,708 was recognized in costs and expenses from continuing operations as spin-off transaction costs, and included non-cash share-based compensation expense of $5,409 as a result of 2,041,000 shares of Transaction Grants (as defined in Note 10, Share-based compensation), and employee cash compensation of $2,299.

 

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4. Lease commitments

 

At the inception of a contract, the Company determines whether the contract is or contains a lease based on the facts and circumstances present. Operating leases with terms greater than one year are recognized on the consolidated balance sheets as Operating lease right-of-use assets, Current portion of operating lease liability, and Operating lease liability, net. Financing leases with terms greater than one year are recognized on the consolidated balance sheets as Property and equipment, net, Accrued expenses and other current liabilities, and Other non-current liabilities. The Company has elected not to recognize leases with terms of one year or less on the consolidated balance sheets.

 

Lease obligations and their corresponding assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes an appropriate incremental borrowing rate, which is the rate incurred to borrow an amount equal to the applicable lease payments on a collateralized basis, over a similar term, and in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The components of a lease are split into three categories: lease components, non-lease components and non-components; however, the Company has elected to combine lease and non-lease components into a single component. Rent expense associated with operating leases is recognized over the expected term on a straight-line basis. In connection with financing leases, depreciation of the underlying asset is recognized over the expected term on a straight-line basis and interest expense is recognized as incurred.

 

The Company is party to a number of noncancelable operating and financing lease agreements for certain offices and furniture, fixtures and office equipment. These leases have original lease periods expiring between 2021 and 2025. Although certain leases include options to renew, the Company does not assume renewals in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

For the three and nine months ended September 30, 2019, the components of lease costs are as follows:

 

 

As of September 30, 2019, the weighted average lease-term and discount rate of the Company's leases are as follows:

 

 

As of September 30, 2019, scheduled future maturities of the Company's lease liabilities are as follows:

 

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

For the three and nine months ended September 30, 2019, supplemental cash flow information related to leases are as follows:

 

 

(1)	For the nine months ended September 30, 2019, the Company received a cash reimbursement of $640 for tenant improvements made to its New York City corporate headquarters.

 

 

5. Intangible assets, net

 

Intangible assets, net, other than goodwill, consist of the following: 

 

 

The gross amounts associated with software developed for internal use primarily represent capitalized costs for internally-developed software. The amounts relating to acquired proprietary technology, customer relationships, trade names, domain names, databases and non-competition agreements primarily represent the fair values of intangible assets acquired as a result of the acquisition of Fluent, LLC ("Fluent LLC"), effective on December 8, 2015 (the "Fluent LLC Acquisition"), the acquisition of Q Interactive, LLC, effective on June 8, 2016 (the "Q Interactive Acquisition") and the acquisition of substantially all the assets of AdParlor Holdings, Inc. and certain of its affiliates, effective July 1, 2019 (see Note 14, Business Acquisition).

 

During the three months ended September 30, 2019, the Company determined that its declining operating results constituted a triggering event. As such, the Company conducted an interim test of the recoverability of its long-lived assets. Based on the results of this recoverability test, which measured the Company's projected undiscounted cash flows as compared to the carrying value of the asset group, the Company determined that, as of September 30, 2019, its long-lived assets were not impaired. The Company believes that the assumptions utilized in this interim impairment testing, including the determination of estimated future cash flows, are reasonable. Future tests may indicate impairment if actual future cash flows or other factors differ from the assumptions used in the Company's interim impairment test at September 30, 2019.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

Amortization expense of $3,456 and $3,228 for the three months ended September 30, 2019 and 2018 and $9,708 and $9,653 for the nine months ended September 30, 2019 and 2018, respectively, are included in depreciation and amortization expenses in the consolidated statements of operations. As of September 30, 2019, intangible assets with a carrying amount of $398, included in the gross amount of software developed for internal use, have not commenced amortization, as they are not ready for their intended use.

 

As of September 30, 2019, estimated amortization expenses related to the Company's intangible assets for the remainder of 2019 through 2024 and thereafter are as follows:

 

 

 

6. Goodwill

 

Goodwill represents the cost in excess of fair value of net assets acquired in a business combination. As of September 30, 2019, the total balance of goodwill was $164,774, as a result of the acquisition of Interactive Data, LLC effective on October 2, 2014, the Fluent LLC Acquisition, the Q Interactive Acquisition and the AdParlor Acquisition (as defined in Note 14, Business Acquisition).

 

In accordance with ASC Topic 350, Intangibles - Goodwill and Other, goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. The measurement date of the Company's annual goodwill impairment test is October 1.

 

During the three months ended September 30, 2019, the Company determined that its declining operating results, along with a decline in the market value of its publicly traded stock, constituted a triggering event. As such, the Company conducted an interim test of the fair value of its goodwill for potential impairment. Based on the results of this interim impairment test, which used a combination of income and market approaches to determine the fair value of the Fluent reporting unit (as defined in Note 11, Segment information), the Company concluded that, as of September 30, 2019, its goodwill was not impaired. The results of its interim impairment test indicated that the estimated fair value of the reporting unit exceeded its carrying value by approximately 12%. The Company believes that the assumptions utilized in its interim impairment testing, including the determination of an appropriate discount rate of 12.5%, long-term profitability growth projections, and estimated future cash flows, are reasonable. The risk of future impairment of its $159,790 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 the Company's interim impairment test. In addition, a sustained decline in the market value of its publicly traded stock could impact the Company’s fair value assessment.

 

 

7. Long-term debt, net

 

Long-term debt, net, related to the Refinanced Term Loan and Note Payable (as defined below) consisted of the following:

 

 

Refinanced Term Loan

 

In connection with the Spin-off of Red Violet, Fluent LLC refinanced and fully repaid the existing term loans (the "Term Loans") and certain promissory notes (the "Promissory Notes"), which had been entered into on December 8, 2015, with a new term loan in the amount of $70.0 million ("Refinanced Term Loan"), pursuant to a Limited Consent and Amendment No. 6 ("Amendment No. 6") to its Credit Agreement (the "Credit Agreement"), effective on March 26, 2018 (the "Refinancing").

 

The Refinanced Term Loan is guaranteed by the Company and its direct and indirect subsidiaries, and is secured by substantially all of the assets of the Company and its 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) the base rate (generally equivalent to the U.S. prime rate) plus 6.0% per annum, payable in cash. Interest under the

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

Refinanced Term Loan is payable monthly. Scheduled principal amortization of the Refinanced Term Loan is $875 per quarter, commencing with the fiscal quarter ended September 30, 2018. The Refinanced Term Loan matures on March 26, 2023.

 

On March 26, 2018, proceeds from the Refinanced Term Loan were utilized to repay, in full, the outstanding principal amount plus accrued PIK interest of the Term Loans and Promissory Notes of $55,586 and $11,425, respectively. Prepayment premiums and unamortized debt costs associated with the Term Loans of $2,818 and $3,136, respectively, were capitalized in the balance of the Refinanced Term Loan and are being amortized over the remaining period of the Refinanced Term Loan. In addition, refinancing costs paid to third parties of $193 were recognized in loss on disposal of discontinued operations. See Note 3, Discontinued operations.

 

The Credit Agreement, as amended, requires the Company to maintain and comply with certain financial and other covenants, commencing with the fiscal quarter ended September 30, 2018. In addition, the Credit Agreement, as amended, includes certain prepayment provisions, including mandatory quarterly principal prepayments of the Refinanced Term Loan with a portion of the Company's excess cash flow, as defined in the Credit Agreement. For the three months ended September 30, 2019, the quarterly prepayment resulting from excess cash flow was $1,308. As of September 30, 2019, this amount was reclassified to the current portion of long-term debt and will be paid during the fourth quarter. At September 30, 2019, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.

Note Payable

 

On July 1, 2019, in connection with the AdParlor Acquisition (as defined in Note 14, Business Acquisition), the Company issued a promissory note (the "Note Payable") in the principal amount of $2,350, net of discount of $150 from imputing interest on the non-interest bearing note using a 4.28% rate. The promissory note is guaranteed by the Company's subsidiary, Fluent, LLC, will not accrue interest except in the case of default, is payable in two equal installments on the first and second anniversaries of the date of closing of the acquisition and is subject to setoff in respect of certain indemnity and other matters.

 

Maturities

 

As of September 30, 2019, scheduled future maturities of the Refinanced Term Loan and Note Payable, including the required principal prepayment based on a portion of the Company's quarterly excess cash flow of $1,308 for the third quarter of 2019 and excluding potential future additional principal prepayments, are as follows:

 

 

Fair value

 

As of September 30, 2019, the fair value of long-term debt is considered to approximate its carrying value. The fair value assessment represents a Level 2 measurement.

 

 

8. Income taxes

 

The Company is subject to federal and state income taxes in the United States. The tax provision for interim periods is determined using an estimate of the Company's annual effective tax rate. The Company updates its estimated annual effective tax rate on a quarterly basis and, if the estimate changes, makes a cumulative adjustment. 

 

As of September 30, 2019 and December 31, 2018, the Company has recorded a full valuation allowance against net deferred tax assets, and intends to continue maintaining a full valuation allowance on these net deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. Based on current income from continuing operations and anticipated future earnings, the Company believes there is a reasonable possibility that within the next twelve months sufficient positive evidence may become available to allow a conclusion to be reached that a significant portion, if not all, of the valuation allowance will 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 upon the level of profitability that the Company is able to achieve and the net deferred tax assets available.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

For the nine months ended September 30, 2019 and 2018, the Company's effective income tax benefit rate of 1% and 0%, respectively, differed from the statutory federal income tax rates of 21% and 34%, respectively, with such differences resulting primarily from the application of the full valuation allowance against the Company's deferred tax assets.

 

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the Company's financial statements.

 

As of September 30, 2019 and December 31, 2018, the balance of unrecognized tax benefits was $1,480. The unrecognized tax benefits, if recognized, would result in an increase to net operating losses that would be subject to a valuation allowance and, accordingly, result in no impact to the Company’s annual effective tax rate. As of September 30, 2019, the Company has not accrued any interest or penalties with respect to its uncertain tax positions.

 

The Company does not anticipate a significant increase or reduction in unrecognized tax benefits within the next twelve months.

 

 

9. Common stock, treasury stock and warrants

 

Common stock

 

As of September 30, 2019 and December 31, 2018, the number of issued shares of common stock was 78,574,482 and 76,525,581, respectively, which included shares of treasury stock of 1,791,186 and 1,233,198, respectively.

 

For the nine months ended September 30, 2019, the change in the number of issued shares of common stock was a result of an aggregate 2,048,901 shares of common stock issued upon vesting of RSUs, including 557,988 shares of common stock withheld to cover statutory taxes upon such vesting, which are reflected in treasury stock, discussed below.

 

Treasury stock

 

As of September 30, 2019 and December 31, 2018, the Company held shares of treasury stock of 1,791,186 and 1,233,198, with a cost of $6,368 and $3,272, respectively.

 

The Company's share-based incentive plans allow employees the option to either make cash payment or forfeit shares of common stock upon vesting to satisfy federal and state statutory tax withholding obligations associated with equity awards. The forfeited shares of common stock may be taken into treasury stock by the Company or sold on the open market. For the nine months ended September 30, 2019, 557,988 shares of common stock were withheld to cover statutory taxes owed by certain employees for this purpose, all of which were taken into treasury stock. See Note 10, Share-based compensation.

 

Warrants

 

As of September 30, 2019 and December 31, 2018, warrants to purchase an aggregate of 2,398,776 and 2,498,776 shares of common stock were outstanding, respectively, with exercise prices ranging from $3.75 to $6.00 per share.

 

On July 9, 2018 the Company entered into First Amendments (the "First Amendments") to the Amendments to Warrants and Agreements to Exercise ("Amended Whitehorse Warrants") with (i) H.I.G. Whitehorse SMA ABF, L.P. regarding 46,667 warrants to purchase common stock of the Company, par value $0.0005 per share, at an exercise price of $3.00 per share; (ii) H.I.G. Whitehorse SMA Holdings I, LLC regarding 66,666 warrants to purchase common stock of the Company at an exercise price of $3.00 per share; and (iii) Whitehorse Finance, Inc. regarding 186,667 warrants to purchase common stock of the Company at an exercise price of $3.00 per share. In November 2017, the Amended Whitehorse Warrants were exercised and the Company issued an aggregate of 300,000 shares of common stock of the Company (the "Warrant Shares") to the warrant holders. Pursuant to the First Amendments, the warrant holders have the right, but not the obligation, to require the Company to purchase from these warrant holders the 300,000 Warrant Shares at $3.8334 per share (the "Put Right"), which may be exercised during the period commencing January 1, 2019 and ending December 15, 2019. In accordance with ASC 480, Distinguishing Liabilities from Equity, the Put Right should be classified within other current liabilities on the consolidated balance sheets when the market price of the Company's common stock is lower than the exercise price of $3.8334 per share. As of March 31, 2019, the last reported sale price of the Company's common stock was higher than the exercise price, resulting in the reclassification of the Put Right totaling $1,150 from other current liabilities to equity. However, as of September 30, 2019, the last reported sale price of the Company's common stock was lower than the exercise price and the Put Right was therefore reclassified to other current liabilities on the consolidated balance sheet as of September 30, 2019.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

 

10. Share-based compensation

 

As of September 30, 2019, the Company maintains two share-based incentive plans: the Cogint, Inc. 2015 Stock Incentive Plan (the "2015 Plan") and the Fluent, Inc. 2018 Stock Incentive Plan (the "2018 Plan") which, combined, authorize the issuance of 21,178,330 shares of common stock. As of September 30, 2019, there were 3,614,784 shares of common stock reserved for issuance under the 2018 Plan. The primary purpose of the plans is to attract, retain, reward and motivate certain individuals by providing them with opportunities to acquire or increase their ownership interests in the Company.

 

Spin-off of Red Violet

 

On March 8, 2018, the Company's Compensation Committee approved the acceleration (the "Acceleration") of stock options, RSUs and restricted stock held by certain employees, consultants and directors, including only those employees who were to continue with Red Violet upon completion of the Spin-off, subject to such employees still being employed or providing services on March 12, 2018 (the "Acceleration Date"). An aggregate of 5,157,998 shares were accelerated, including 47,500 stock options, 4,960,498 RSUs (inclusive of 500,000 shares to Marlin Capital and 2,500,000 to Michael Brauser), and 150,000 shares of restricted stock. Share-based compensation expense of $14,667 resulting from the Acceleration was recognized in loss on disposal of discontinued operations during the first quarter of 2018.

 

In connection with the Spin-off of Red Violet, common stock awards comprised of an aggregate of 304,000 shares were granted to certain employees of Red Violet ("Spin-off Grants") during the first quarter of 2018, and related share-based compensation expense of $881 was recognized in loss on disposal of discontinued operations. Additionally, an aggregate of 2,041,000 shares of common stock, subject to deferred delivery over a three-year period, were granted to certain Fluent employees as a result of the Spin-off ("Transaction Grants"), and related share-based compensation expense of $5,409 was recognized in costs and expenses as part of the Spin-off transaction costs during the first quarter of 2018.

 

In total, share-based compensation expense of $15,548, resulting from the Acceleration and Spin-off Grants in connection with the Spin-off was recognized in loss on disposal of discontinued operations during the first quarter of 2018. See Note 3, Discontinued operations.

 

Stock options

 

On January 31, 2019, the Compensation Committee of the Company's Board of Directors approved the grant of stock options to certain Company officers, which were issued on February 1, 2019 under the 2018 Plan. Subject to continuing service, 50% of the shares subject to these stock options will vest if the Company's stock price remains above 125% of the exercise price for 20 consecutive trading days, and the remaining 50% of the shares subject to these stock options will vest if the Company's stock price remains above 156.25% of the exercise price for 20 consecutive trading days; provided, that no shares will vest prior to the first anniversary of the grant date. As of September 30, 2019, the first condition has been met; therefore, subject to continuing service, 50% of the shares subject to these stock options will vest on February 1, 2020. Any shares that remain unvested as of the fifth anniversary of the grant date will vest in full on such date. The fair value of the stock options granted was estimated at the trading day before the date of grant using a Monte Carlo simulation model. The range of the fair value of the stock options that were awarded is $2.81 to $2.86 per share. The key assumptions utilized to calculate the grant-date fair values for these awards are summarized below:

 

 

For the nine months ended September 30, 2019, details of stock option activity were as follows:

 

 

The aggregate intrinsic value amounts in the table above represent the difference between the closing price of the Company's common stock at the end of the reporting period and the corresponding exercise prices, multiplied by the number of in-the-money stock options as of the same date.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

For the three and nine months ended September 30, 2019, compensation expense recognized for stock options of $1,250 and $3,353, respectively, was recorded in sales and marketing and general and administrative expenses in the consolidated statements of operations. For the three and nine months ended September 30, 2018, compensation expense recognized for stock options of $0 and $243, respectively, was recorded in discontinued operations in the consolidated statements of operations. As of September 30, 2019, there was $2,339 of unrecognized share-based compensation with respect to outstanding stock options.

 

Restricted stock units and restricted stock

 

For the nine months ended September 30, 2019, details of unvested RSU and restricted stock activity were as follows:

 

 

(1)	As discussed in Note 9, the increase in treasury stock was due to shares withheld to cover statutory withholding taxes upon the delivery of shares following vesting of RSUs and issuance of restricted stock. As of September 30, 2019, there were 1,791,186 outstanding shares of treasury stock.

(2)

Vested not delivered represents vested RSUs with delivery deferred to a future time. For the nine months ended September 30, 2019, there was a net decrease of 112,582 shares included in vested not delivered as a result of the delivery of Spin-off Grants of 740,334 shares, partially offset by the net activity from vesting of RSUs with deferred delivery of 627,752 shares. As of September 30, 2019, there were 2,797,335 outstanding RSUs included in vested not delivered.

 

 

FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share data)

(unaudited)

 

 

The Company recognized compensation (included in sales and marketing, product development, general and administrative and discontinued operations in the consolidated statements of operations, and intangible assets in the consolidated balance sheets) for RSUs and restricted stock of $1,562 and $2,675 for the three months ended and $4,733 and $27,871 for the nine months ended September 30, 2019 and 2018, respectively. The fair value of the RSUs and restricted stock was estimated using the closing prices of the Company's common stock on the dates of grant.

 

As of September 30, 2019, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $14,668, which is expected to be recognized over a weighted average period of 2.5 years.

 

For the three and nine months ended September 30, 2019 and 2018, share-based compensation for the Company's stock option, RSU, common stock and restricted stock awards were allocated to the following accounts in the consolidated financial statements:

 

 

 

11. Segment information

 

The Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The profitability measure employed by CODM is segment (loss) income from operations. As of September 30, 2019, the Company has two operating segments and two corresponding reporting units, “Fluent” and “All Other,” and one reportable segment. “All Other” represents three months of operating results of AdParlor, LLC, a digital advertising solution for social media buying (see Note 14 Business Acquisition) and is included for purposes of reconciliation of the respective balances below to the consolidated financial statements. “Fluent,” for the purposes of segment reporting, represents the consolidated operating results of the Company excluding “All Other.”

Summarized financial information concerning the Company's segments is shown in the following tables below:

 

 

 

 

 

 

12. Related party transactions

 

For the three and nine months ended September 30, 2019 and 2018, material related party transactions were as follows:

 

Business Consulting Agreement

 

Pursuant to a Business Consulting Agreement, Marlin Capital Investments, LLC, an affiliate of Michael Brauser, the Company's Executive Chairman prior to the Spin-off, held RSUs representing the right to receive 2,000,000 shares of the Company's common stock, for consulting services provided by Marlin Capital. These RSUs were to vest annually beginning from October 13, 2015 only if certain performance goals of the Company were met. The shares underlying such RSUs would not have been delivered until October 13, 2018, unless there was a change of control of the Company, termination of the agreement by the Company without cause, or termination of the agreement by Marlin Capital for good reason. The Company determined the performance goals were met as of December 31, 2016. For the nine months ended September 30, 2018, share-based compensation expense of negative $1,792, as a result of the revaluation of the fair value of RSUs granted, was recognized in general and administrative expenses in association with shares under the Marlin Capital agreement. On March 12, 2018, the Company terminated the Business Consulting Agreement. The unvested 500,000 shares were accelerated and the related share-based compensation expense of $906,000 was recognized fully in loss on disposal of discontinued operations during the first quarter of 2018.

 

Promissory Notes

 

On December 8, 2015, the Company entered into the Promissory Notes, with an interest rate of 10% per annum, with certain investors, for aggregate financing of $10.0 million, consisting of $5.0 million from Frost Gamma, $4.0 million from Michael Brauser and $1.0 million from another investor. During the nine months ended September 30, 2018, the Company repaid $533, $426 and $107 to Frost Gamma, Michael Brauser and another investor, respectively. On March 26, 2018, as part of the Refinancing associated with the Spin-off of Red Violet, the principal amounts plus accrued PIK interest of the Promissory Notes owing to Frost Gamma, Michael Brauser and such other investor, of $5,713, $4,570 and $1,143, respectively, were fully repaid.

 

Consulting Agreement

 

On September 6, 2017, the Company entered into a Consulting Agreement with Michael Brauser, effective as of June 23, 2017, for a term of four years, under which Mr. Brauser served as a strategic advisor to the Company but received no salary for such services. In consideration for Mr. Brauser's services, the Consulting Agreement provided for continued vesting of all outstanding RSUs granted to Mr. Brauser under the Brauser Employment Agreement. For the nine months ended September 30, 2018, share-based compensation expense of $302 associated with the Consulting Agreement was recognized in general and administrative expenses. In addition, upon the Acceleration, the remaining unvested 2,500,000 shares were accelerated and related share-based compensation expense of $6,468 was recognized in loss on disposal of discontinued operations during the first quarter of 2018. The Consulting Agreement was terminated upon the Spin-off of Red Violet.

 

 

13. Contingencies

 

In the ordinary course of business, the Company is subject to loss contingencies that cover a range of matters. An estimated loss from a loss contingency, such as a legal proceeding or claim, is accrued if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, the Company evaluates, among other factors, the degree of probability and the ability to reasonably estimate the amount of any such loss.

 

On October 26, 2018, the Company received a subpoena from the New York Attorney General’s Office (“NY AG”) regarding compliance with New York Executive Law § 63(12) and New York General Business Law § 349, as they relate to the collection, use, or disclosure of information from or about consumers or individuals submitted to the Federal Communication Commission (“FCC”) in connection with the FCC’s rulemaking proceeding captioned “Restoring Internet Freedom,” WC Docket No. 17-108. On December 13, 2018, the Company received a subpoena from the United States Department of Justice (“DOJ”) regarding the same issue. The Company has been fully cooperating with both the NY AG and the DOJ and is responding to the subpoenas. At this time, it is not possible to determine the duration or disposition of either matter. As such, the Company is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.

 

On June 27, 2019, as a part of a sales and use tax audit, the New York State Department of Taxation and Finance (the “Tax Department”) issued a letter stating its position that revenue derived from certain of the Company’s customer acquisition data services is subject to sales tax, as an information service. The Company believes this revenue should not be subject to sales tax in New York State because it is either an excluded advertising service or an information service not subject to sales tax in New York State, and the Company has responded to the Tax Department outlining this position. The determination as to whether such revenue is deemed a taxable information service and, if taxable, the amount of any taxes owed and the periods for which they may be owed is complex and fact-intensive, and the law in this area is unsettled. Given these uncertainties, the Company believes that it is reasonably possible that a sales tax liability may result from an unfavorable outcome in this matter, but it is unable to estimate the amount or range of any such liability at this time.

 

 

 

14. Business Acquisition

 

On July 1, 2019, two wholly owned subsidiaries of the Company, AdParlor, LLC (formerly known as AdParlor Acquisition, LLC), a Delaware limited liability company, and Fluent Media Canada, Inc., a British Columbia company (together with AdParlor, LLC, each a "Buyer" and collectively "Buyers"), completed the acquisition of substantially all of the assets of AdParlor Holdings, Inc., a Delaware corporation ("AdParlor Holdings"), AdParlor International, Inc., a Delaware corporation ("AdParlor International"), AdParlor Media, Inc., a Delaware corporation ("AdParlor Media US"), and AdParlor Media ULC, a British Columbia unlimited liability company (together with AdParlor Holdings, AdParlor International and AdParlor Media US, each a "Seller" and collectively "Sellers") pursuant to an Asset Purchase Agreement (the "Purchase Agreement") dated June 17, 2019, by and among Buyers, Sellers and the parent of the Sellers, v2 Ventures Group LLC, a Delaware limited liability company (the "AdParlor Acquisition"). The purpose of the acquisition was to expand the Company's performance-based marketing capabilities. In accordance with ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, the Company determined that the AdParlor Acquisition constituted the purchase of a business. 

 

At closing, the Buyers paid to Sellers cash consideration of $7,302, net of adjustments for working capital and indebtedness, and issued a promissory note to Sellers with a present value of $2,350 in exchange for substantially all of the assets of Sellers. This promissory note is guaranteed by Fluent, LLC, and will not accrue interest except in the case of default, is payable in two equal installments on the first and second anniversaries of the date of closing and is subject to setoff in respect of certain indemnity and other matters. See Note 7, Long-term debt, net for further detail. For the nine months ended September 30, 2019, the Company incurred transaction-related expenses of $448 in connection with the AdParlor Acquisition, which it recorded in general and administrative expenses in the consolidated statements of operations.

 

The following table summarizes the preliminary fair values of the assets acquired and the liabilities assumed at the closing date:

 

 

The preliminary fair values of the identifiable intangible assets and goodwill acquired at the closing date are as follows:

 

 

With the assistance of a third-party valuation firm, the fair value of the acquired customer relationships was determined using the excess earnings method, a variation of the income approach, while the fair value of the acquired developed technology, trade names and trademarks were determined using the relief from royalty method of the income approach. The amount of the purchase price in excess of the fair value of the net assets acquired was recorded as goodwill and primarily relates to intangible assets that do not qualify for separate recognition, including assembled workforce and synergies. For tax purposes, the goodwill is deductible over 15 years. The purchase accounting process has not been completed primarily because the valuation of acquired assets and liabilities assumed has not been finalized. The Company expects to complete the purchase accounting as soon as practicable but no later than one year from the acquisition date. The Company does not believe there will be material adjustments.

 

 

 

15. Subsequent events

 

On November 8, 2019, Fluent, LLC entered into Amendment No. 9 to Credit Agreement (the “Amendment”), among Fluent, LLC, as Borrower, the Company, certain subsidiaries of the Company party thereto, the financial institutions party thereto, as lenders, and Whitehorse Finance, Inc., as Administrative Agent, amending the term loan facility originally dated as of December 8, 2015. The Amendment, among other things, modified certain financial covenants of the Company and increased the interest rate by 0.50% during any period when the total leverage ratio (as defined in the Credit Agreement) exceeds 2.5.

 

 

 

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