Fluent, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS.     FLUENT, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) (unaudited)       March 31, 2023     December 31, 2022   ASSETS:                 Cash and cash equivalents   $ 26,567     $ 25,547   Accounts receivable, net of allowance for doubtful accounts of $ 317 and $ 544 , respectively     56,759       63,164   Prepaid expenses and other current assets     5,588       3,506   Total current assets     88,914       92,217   Property and equipment, net     861       964   Operating lease right-of-use assets     4,743       5,202   Intangible assets, net     27,650       28,745   Goodwill     33,354       55,111   Other non-current assets     1,648       1,730   Total assets   $ 157,170     $ 183,969   LIABILITIES AND SHAREHOLDERS' EQUITY:                 Accounts payable   $ 12,929     $ 6,190   Accrued expenses and other current liabilities     33,189       35,626   Deferred revenue     1,005       1,014   Current portion of long-term debt     5,000       5,000   Current portion of operating lease liability     2,349       2,389   Total current liabilities     54,472       50,219   Long-term debt, net     34,404       35,594   Operating lease liability     3,242       3,743   Other non-current liabilities     2,128       458   Total liabilities     94,246       90,014   Contingencies (Note 10)                     Shareholders' equity:                 Preferred stock — $ 0.0001 par value, 10,000,000 Shares authorized; Shares outstanding — 0 shares for both periods     —       —   Common stock — $ 0.0005 par value, 200,000,000 Shares authorized; Shares issued — 85,545,397 and 84,385,458 , respectively; and Shares outstanding — 80,933,828 and 80,085,306 , respectively (Note 7)     43       42   Treasury stock, at cost — 4,611,569 and 4,300,152 Shares, respectively (Note 7)     ( 11,407 )     ( 11,171 ) Additional paid-in capital     424,531       423,384   Accumulated deficit     ( 350,243 )     ( 318,300 ) Total shareholders' equity     62,924       93,955   Total liabilities and shareholders' equity   $ 157,170     $ 183,969     See notes to consolidated financial statements   2 Table of Contents       FLUENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) (unaudited)       Three Months Ended March 31,       2023     2022   Revenue   $ 77,254     $ 89,063   Costs and expenses:                 Cost of revenue (exclusive of depreciation and amortization)     58,272       67,562   Sales and marketing     4,813       3,852   Product development     4,938       4,556   General and administrative     12,325       11,287   Depreciation and amortization     2,359       3,307   Goodwill impairment and write-off of intangible assets     25,700       128   Total costs and expenses     108,407       90,692   Loss from operations     ( 31,153 )     ( 1,629 ) Interest expense, net     ( 689 )     ( 384 ) Loss before income taxes     ( 31,842 )     ( 2,013 ) Income tax expense     ( 101 )     —   Net loss     ( 31,943 )     ( 2,013 )                   Basic and diluted loss per share:                 Basic   $ ( 0.39 )   $ ( 0.02 ) Diluted   $ ( 0.39 )   $ ( 0.02 )                   Weighted average number of shares outstanding:                 Basic     81,906,913       80,889,052   Diluted     81,906,913       80,889,052     See notes to consolidated financial statements   3 Table of Contents       FLUENT, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands, except share and per share data) (unaudited)       Common stock     Treasury stock     Additional paid-in     Accumulated     Total shareholders'       Shares     Amount     Shares     Amount     capital     deficit     equity   Balance at December 31, 2022     84,385,458     $ 42       4,300,152     $ ( 11,171 )   $ 423,384     $ ( 318,300 )   $ 93,955   Vesting of restricted stock units and issuance of stock under incentive plans     1,159,939       1       —       —       ( 1 )     —       —   Increase in treasury stock resulting from shares withheld to cover statutory taxes     —       —       311,417       ( 236 )     —       —       ( 236 ) Share-based compensation     —       —       —       —       1,148       —       1,148   Net loss     —       —       —       —       —       ( 31,943 )     ( 31,943 ) Balance at March 31, 2023     85,545,397     $ 43       4,611,569     $ ( 11,407 )   $ 424,531     $ ( 350,243 )   $ 62,924           Common stock     Treasury stock     Additional paid-in     Accumulated     Total shareholders'       Shares     Amount     Shares     Amount     capital     deficit     equity   Balance at December 31, 2021     83,057,083     $ 42       4,091,823     $ ( 10,723 )   $ 419,059     $ ( 194,968 )   $ 213,410   Vesting of restricted stock units and issuance of stock under incentive plans     926,504       —       —       —       211       —       211   Increase in treasury stock resulting from shares withheld to cover statutory taxes     —       —       208,329       ( 448 )     —       —       ( 448 ) Share-based compensation     —       —       —       —       1,015       —       1,015   Net loss     —       —       —       —       —       ( 2,013 )     ( 2,013 ) Balance at March 31, 2022     83,983,587     $ 42       4,300,152     $ ( 11,171 )   $ 420,285     $ ( 196,981 )   $ 212,175                                                               See notes to consolidated financial statements   4 Table of Contents       FLUENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (unaudited)       Three Months Ended March 31,       2023     2022   CASH FLOWS FROM OPERATING ACTIVITIES:                 Net loss   $ ( 31,943 )   $ ( 2,013 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                 Depreciation and amortization     2,359       3,307   Non-cash loan amortization expense     61       68   Share-based compensation expense     1,061       988   Goodwill impairment     25,700       —   Write-off of intangible assets     —       128   Provision for bad debt     ( 55 )     81   Deferred income taxes     —       —   Changes in assets and liabilities, net of business acquisitions:                 Accounts receivable     6,460       5,127   Prepaid expenses and other current assets     ( 2,082 )     451   Other non-current assets     82       ( 13 ) Operating lease assets and liabilities, net     ( 82 )     ( 42 ) Accounts payable     6,739       ( 3,348 ) Accrued expenses and other current liabilities     ( 3,362 )     ( 6,251 ) Deferred revenue     ( 9 )     ( 174 ) Other     ( 39 )     ( 85 ) Net cash provided by (used in) operating activities     4,890       ( 1,776 ) CASH FLOWS FROM INVESTING ACTIVITIES:                 Capitalized costs included in intangible assets     ( 1,134 )     ( 1,071 ) Business acquisitions, net of cash acquired     ( 1,250 )     ( 971 ) Acquisition of property and equipment     —       ( 7 ) Net cash used in investing activities     ( 2,384 )     ( 2,049 ) CASH FLOWS FROM FINANCING ACTIVITIES:                 Repayments of long-term debt     ( 1,250 )     ( 1,250 ) Taxes paid related to net share settlement of vesting of restricted stock units     ( 236 )     ( 448 ) Net cash used in financing activities     ( 1,486 )     ( 1,698 ) Net increase (decrease) in cash, cash equivalents and restricted cash     1,020       ( 5,523 ) Cash, cash equivalents and restricted cash at beginning of period     25,547       34,467   Cash, cash equivalents and restricted cash at end of period   $ 26,567     $ 28,944   SUPPLEMENTAL DISCLOSURE INFORMATION                 Cash paid for interest   $ 664       301   Cash paid for income taxes   $ 55       34   Share-based compensation capitalized in intangible assets   $ 27       27   SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                 Liability incurred for future contingent payments in connection with TAPP consolidation   $ 2,693     $ —   Liability incurred for deferred payment in connection with True North acquisition   $ —     $ 860   Contingent consideration in connection with True North acquisition   $ —     $ 250   Equity issued in connection with True North acquisition   $ —     $ 211     See notes to consolidated financial statements   5 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) (unaudited)     1. Summary of significant accounting policies   (a) Basis of preparation    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 ("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 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 ended March 31, 2023  and 2022 , respectively, 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, 2023 .   From time to time, the Company may enter into relationships or investments with other entities, and, in certain instances, the entity in which the Company has a relationship or investment may qualify as a variable interest entity (“VIE”). The Company consolidates a VIE in its financial statements if the Company is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has the power to direct activities that most significantly impact the operations of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE.    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, 2022 (" 2022 Form 10 -K") filed with the SEC on March 15, 2023 . The consolidated balance sheet as of  December 31, 2022 included herein was derived from the audited financial statements as of that date included in the 2022 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.   (b) Recently issued and adopted accounting standards   Accounting pronouncements not listed below were assessed and determined to be not applicable or are expected to have minimal impact on our consolidated financial statements.   In January 2016, the Financial Accounting Standards Board issued Accounting Standards Updates 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 amounts expected to be collected. The new guidance is effective for annual and interim periods beginning after December 15, 2022, and early adoption is permitted. The Company completed its assessment of the new guidance and determined it had no material impact on its consolidated financial statements.   6 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   (c) Revenue recognition   Revenue is when control of goods or services is transferred to customers, in the 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, (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, (c) verify user interest or transfer calls to advertiser clients as a part of the contact center operation, or (d) deliver media spend as a part of the business of AdParlor, LLC, a wholly-owned subsidiary of the Company.   Revenue is recognized upon satisfaction of associated performance obligation. The Company elected the “right to invoice” practical expedient under ASC 606 - 10 - 55 - 18 as a measure for revenue to be recognized, as it corresponds directly with the amounts that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.   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  March 31, 2023 and December 31, 2022 , the balance of deferred revenue was  $ 1,005 and $ 1,014 , respectively. The majority of the deferred revenue balance as of  December 31, 2022 was recognized into revenue during the first  quarter of 2023 .   When there is a delay between the period in which revenue is recognized and when a customer invoice is issued, revenue is recognized, and the related amounts are recorded as unbilled revenue within accounts receivable on the consolidated balance sheets. As of  March 31, 2023 and December 31, 2022 , unbilled revenue included in accounts receivable was $ 22,777 and $ 26,878 , 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.   (d) Use of estimates   The preparation of consolidated financial statements in accordance with GAAP requires the Company’s management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, the portion of revenue subject to estimates for variances between internally-tracked conversions and those confirmed by the customer, purchase accounting, consolidation of variable interest entity, accruals for contingencies, and income tax provisions. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results could differ from these estimates.   (e) Fair value   Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.   Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Accounting standards describe a fair value hierarchy based on the following three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:     ● Level  1  — Quoted prices in active markets for identical assets, liabilities, or funds.   ● Level  2—  Inputs other than Level  1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.   ● Level  3  — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.   The fair value of the Company’s cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values because of the short-term nature of these instruments.   As of March 31, 2023 , the Company regards the fair value of its long-term debt to approximate its carrying value. The fair value assessment represents a Level 2 measurement. See Note 5, Long-term debt, net.   The fair value of certain long-lived non-financial assets and liabilities may be required to be measured on a nonrecurring basis in certain circumstances, including when there is evidence of impairment. As of March 31, 2023 , certain non-financial assets have been measured at fair value subsequent to their initial recognition. The Company determined the estimated fair value to be a Level 3, as certain inputs used to determine fair value are unobservable, see Note 4, Goodwill , for further discussion of the impairment charge.   7 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)     2. Loss per share   Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, in addition to restricted stock units ("RSUs") that are vested but not delivered. Diluted income (loss) 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. Stock equivalent shares are excluded from the calculation in loss periods, as their effects would be anti-dilutive.   For the three months ended March 31, 2023 and 2022 , basic and diluted loss per share were as follows:       Three Months Ended March 31,       2023     2022   Numerator:                 Net loss   $ ( 31,943 )   $ ( 2,013 ) Denominator:                 Weighted average shares outstanding     80,210,282       79,161,367   Weighted average restricted shares vested not delivered     1,696,631       1,727,684   Total basic weighted average shares outstanding     81,906,913       80,889,052   Dilutive effect of assumed conversion of restricted stock units     —       —   Total diluted weighted average shares outstanding     81,906,913       80,889,052   Basic and diluted loss per share:                 Basic   $ ( 0.39 )   $ ( 0.02 ) Diluted   $ ( 0.39 )   $ ( 0.02 )   Based on exercise prices compared to the average stock prices for the  three months ended March 31, 2023 and 2022 , respectively, certain stock equivalents, including stock options and warrants, have been excluded from the diluted weighted average share calculations due to their anti-dilutive nature.       Three Months Ended March 31,       2023     2022   Restricted stock units     5,270,095       1,985,611   Stock options     2,139,000       2,139,000   Warrants     —       833,333   Total anti-dilutive securities     7,409,095       4,957,944     8 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)     3. Intangible assets, net   Intangible assets, net, other than goodwill, consist of the following:        Amortization period (in years)     March 31, 2023     December 31, 2022   Gross amount:                         Software developed for internal use     3     $ 15,403       13,740   Acquired proprietary technology     3 - 5       15,462       15,965   Customer relationships     5 - 10       38,068       38,068   Trade names     4 - 20       16,657       16,657   Domain names     20       195       195   Databases     5 - 10       31,292       31,292   Non-competition agreements     2 - 5       1,768       1,768   Total gross amount             118,845       117,685   Accumulated amortization:                         Software developed for internal use             ( 9,076 )     ( 8,097 ) Acquired proprietary technology             ( 14,446 )     ( 14,305 ) Customer relationships             ( 35,404 )     ( 35,156 ) Trade names             ( 6,261 )     ( 6,038 ) Domain names             ( 70 )     ( 68 ) Databases             ( 24,170 )     ( 23,508 ) Non-competition agreements             ( 1,768 )     ( 1,768 ) Total accumulated amortization             ( 91,195 )     ( 88,940 ) Net intangible assets:                         Software developed for internal use             6,327       5,643   Acquired proprietary technology             1,016       1,660   Customer relationships             2,664       2,912   Trade names             10,396       10,619   Domain names             125       127   Databases             7,122       7,784   Total intangible assets, net           $ 27,650     $ 28,745     The gross amounts associated with software developed for internal use primarily represent capitalized costs of 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, effective December 8, 2015 ( the "Fluent LLC Acquisition");  the acquisition of Q Interactive, LLC, effecti ve June 8, 2016 ( the "Q Interactive Acquisition"); the acquisition of substantially all the assets of AdParlor Holdings, Inc. and certain of its affiliates, effective July 1, 2019 ( the "AdParlor Acquisition"); the acquisition of  a 50 % interest in Winopoly, LLC (the "Initial Winopoly Acquisition"), effective April 1, 2020;  and the acquisition of a 100 % interest in True North Loyalty, LLC, (the "True North Acquisition"), effective January 1, 2022 ( see Note 11 , Business acquisition).   The Company completed its quarterly triggering event assessments for the  three months ended  March 31, 2023  and has determined that  no  triggering event had occurred requiring impairment assessments for its long-lived assets.   9 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   Amortization expense of $ 2,256   and $ 3,141  for the three months ended March 31, 2023 and 2022 , respectively, is included in depreciation and amortization expenses in the consolidated statements of operations. As of March 31, 2023 , intangible assets with a carrying amount of $ 971 , 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 March 31, 2023 , estimated amortization expenses related to the Company's intangible assets for the remainder of 2023  and through 2028  and thereafter are as follows:   Year   March 31, 2023   Remainder of 2023   $ 4,734   2024     6,816   2025     6,370   2026     2,332   2027     830   2028 and thereafter     6,568   Total   $ 27,650       4. Goodwill   Goodwill represents the difference between the purchase price and the estimated fair value of net assets acquired, when accounted for under business combination accounting. As of March 31, 2023 , the total balance of goodwill was $ 33,354 , a decrease of $ 25,700 from December 31, 2022, as a result of a non-cash impairment charge, offset by a $ 3,943 preliminary increase in goodwill related to the TAPP consolidation (see Note 12, Variable Interest Entities ). The balance also relates to the Fluent LLC Acquisition, the Q Interactive Acquisition, the AdParlor Acquisition, the Initial Winopoly Acquisition, and the True North Acquisition (see Note 11, Business acquisition ).   In accordance with ASC 350, Intangibles - Goodwill and Other, goodwill is assessed 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 set to October 1.   The Company completed its quarterly triggering event assessments for the three months ended March 31, 2023  and determined that the decline in the market value of its publicly-traded stock, which resulted in a corresponding decline in its market capitalization, constituted a triggering event . The Company conducted an interim test of the fair value of the Fluent reporting unit's goodwill for potential impairment as of March 31, 2023. The Company considered a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The Company determined that a market-based approach, which considered the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium, provided the best indication of fair value of the Fluent reporting unit. The results of this market-based approach indicated that its carrying value exceeded its fair value by 20 %. The Company therefore concluded that the Fluent reporting unit’s goodwill of $ 51,614  was impaired and recorded a non-cash impairment charge of $ 25,700 .     10 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   5. Long-term debt, net   Long-term debt, net of unamortized discount and financing costs, related to the Credit Facility consisted of the following:       March 31, 2023     December 31, 2022   Credit Facility due 2026 (less unamortized discount and financing costs of $ 596 and $ 656 , respectively)   $ 39,404     $ 40,594   Less: Current portion of long-term debt     ( 5,000 )     ( 5,000 ) Long-term debt, net (non-current)   $ 34,404     $ 35,594     Credit Facility   On March 31, 2021, Fluent, LLC entered into a credit agreement (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “Credit Agreement”) with certain subsidiaries of Fluent, LLC as guarantors, and Citizens Bank, N.A. as administrative agent, lead arranger and bookrunner. The Credit Agreement provides for a term loan in the aggregate principal amount of $ 50,000 funded on the closing date (the “Term Loan”), along with an undrawn revolving credit facility of up to $ 15,000  (the "Revolving Loans," and together with the Term Loan, the "Credit Facility"). On December 20, 2022, the Company entered into the second amendment to the Credit Agreement, which amended certain provisions to: (i) reflect the replacement of the current benchmark settings with Term Secured Overnight Financial Rate ("SOFR") pursuant to an early opt-in election; (ii) acknowledge certain litigation matters; and (iii) join additional subsidiaries of Borrower as guarantors of the loan facilities provided under the Credit Agreement.  On May 15, 2023, the Company entered into the third amendment to the Credit Agreement, which amended certain provisions to: (i) add an additional tier of applicable margin to the selected rates; (ii) establish the applicable pricing floor for the remaining fiscal quarters in 2023; (iii) modify and adjust certain EBITDA add-backs for certain fiscal quarters in 2023; (iv) add monthly financial reporting for the remaining fiscal quarters in 2023; (v) provide additional financial covenant testing conditions on Fluent’s ability to draw on the Revolving Loans for the remaining fiscal quarters in 2023; (vi) provide additional notice of certain material events; (vii) add tiers to certain financial covenants and add a minimum cash liquidity financial covenant for the remaining fiscal quarters in 2023; (viii) provide additional restrictions on the ability to make loans and advances to officers, directors and employees for the remaining fiscal quarters in 2023; (ix) provide additional restrictions on the ability to invest in certain subsidiaries and joint ventures for the remaining fiscal quarters in 2023; ( x ) provide additional restrictions on the ability to make additional loans, investments or permitted acquisitions for the remaining fiscal quarters in 2023; and (xi) add unrestricted cash requirements in order for the Company to be permitted to pay dividends, make distributions or redeem or repurchase equity interests, for the remaining fiscal quarters in 2023, in each case pursuant to the terms and conditions under the Credit Agreement.     Borrowings under the Credit Agreement bear interest at a rate per annum equal to the benchmark selected by the Borrower, which may be based on the Alternative Base Rate, LIBOR rate (subject to a floor of 0.25 %) prior to the election as of December 31, 2022 or Term SOFR (subject to a floor of 0.00 %) subsequent to the election, plus a margin applicable to the selected benchmark. The applicable margin is between 0.75 % and 2.75 % for borrowings based on the Alternative Base Rate and 1.75 % and 3.25 % for borrowings based on Term SOFR, depending upon the Borrower's total leverage ratio. The opening interest rate of the Credit Facility was 2.50 % (LIBOR + 2.25 %), which increased to 7.16 % (Term SOFR + 0.1 % + 2.25 %) as of March 31, 2023.   The Credit Agreement matures on March 31, 2026 and interest is payable monthly. Scheduled principal amortization of the Term Loan is $ 1,250 per quarter, which commenced with the fiscal quarter ended June 30, 2021. At March 31, 2023 , the Company was in compliance with all of the financial and other covenants under the Credit Agreement.   11 Table of Contents   The Credit Agreement contains negative covenants that, among other things, limit the Borrower's ability to: incur indebtedness; grant liens on its assets; enter into certain investments; consummate fundamental change transactions; engage in mergers or acquisitions or dispose of assets; enter into certain transactions with affiliates; make changes to its fiscal year; enter into certain restrictive agreements; and make certain restricted payments (including for dividends and stock repurchases, which are generally prohibited except in a few circumstances and/or up to specified amounts). Each of these limitations are subject to various conditions.   The Credit Agreement also contains certain affirmative covenants and customary events of default provisions, including, subject to thresholds and grace periods, among others, payment default, covenant default, cross default to other material indebtedness, and judgment default.   The Credit Agreement also contains certain customary conditions to extensions of credit, including that representations and warranties made in the Existing Credit Agreement be materially true and correct at the time of such extension. One such representation concerning the absence of litigation or proceedings is not currently true and correct as a result of the matters pending involving the Federal Trade Commission and the Pennsylvania Office of the Attorney General described in FN 10, Contingencies . These matters do not represent events of default under the Credit Agreement, but at March 31, 2023, the Borrower is not able to draw on the Revolving Credit Facility due the representation and warranty requirement for an extension of credit.    Maturities   As of March 31, 2023 , scheduled future maturities of the Credit Agreement are as follows:   Year     March 31, 2023   Remainder of 2023   $ 3,750   2024     5,000   2025     5,000   2026     26,250   Total maturities   $ 40,000     12 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)     6. 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 (“AETR”) on a quarterly basis and, if the estimate changes, a cumulative adjustment is made.    As of  March 31, 2023 and December 31, 2022 , 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 a portion of these allowances. 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.   For the three months ended March 31, 2023 , the Company's effective income tax expense rate of 0.3 % primarily represents the projected federal and state cash tax expense expected to result in taxable income for full-year  2023  after the impact of a non-deductible goodwill impairment against pre-tax year-to-date losses, offset by the benefit of federal research and development credits on expected federal cash tax expense. For the  three months ended March 31, 2022 , the Company's effective income tax benefit rate of 0 % differed from the statutory federal income tax rate of 21 %, 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 as of 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  March 31, 2023 and December 31, 2022 , 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 March 31, 2023 , 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.   7. Common stock, treasury stock and warrants   Common stock   As of  March 31, 2023 and December 31, 2022 , the number of issued shares of common stock was  85,545,397 and 84,385,458 , respectively, which included shares of treasury stock of  4,611,569 and 4,300,152 , respectively.   For the three months ended March 31, 2023 , the change in the number of issued shares of common stock was the result of an aggregate  1,159,939 shares of common stock issued upon vesting of RSUs, including  311,417 shares of common stock withheld to cover statutory taxes upon such vesting, which are reflected in treasury stock, as discussed below.   Treasury stock   As of  March 31, 2023 and December 31, 2022 , the Company held shares of treasury stock of 4,611,569  and 4,300,152 , respectively with a cost of $ 11,407 and $ 11,171 , respectively.   13 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)     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 three months ended March 31, 2023 , 311,417  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 8 , Share-based compensation.    8. Share-based compensation   On June 8, 2022, the stockholders of the Company approved the Fluent, Inc. 2022 Omnibus Equity Incentive Plan (the "2022 Plan") that authorized for issuance  15,422,523 shares of the Company's common stock, which became effective on August 10, 2022 ( “Effective Date”). With the  2022  Plan,  no  further awards are available to be issued under the  2018  Stock Incentive Plan (the “Prior Plan”), but all awards under the Prior Plans that are outstanding as of the Effective Date will continue to be governed by the terms, conditions and procedures set forth in the Prior Plans and any applicable award agreement. As of March 31, 2023 , the Company had  6,091,436 shares of common stock available for grants pursuant to the 2022 Plan, which includes  922,286  shares of common stock previously available for issuance under the Prior 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. In October 2022, the Company issued to certain of its senior officers and employees, restricted stock units (“RSUs”) (time-based vesting), long-term incentive grants (performance and time-based vesting RSUs), or performance share units (“PSUs”) (achievement of performance targets settled in cash) under the 2022 Plan.   14 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   Stock options   The Compensation Committee of the Company's Board of Directors approved the grant of stock options to certain Company executives, which were issued on February 1, 2019, December 20, 2019,  March 1, 2020, and March 1, 2021, under the Prior Plan. Subject to continuing service, 50 % of the shares subject to these stock options will vest if the Company's stock price remains above 125.00 %, 133.33 %, 133.33 % and 133.33 %, respectively, of the exercise price for twenty 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 %, 177.78 %,  177.78 % and  177.78 %, respectively, of the exercise price for twenty  consecutive trading days; provided, that no shares will vest prior to the first anniversary of the grant date. As of March 31, 2023 , the first condition for the stock options issued on February 1, 2019, December 20, 2019 and March 1, 2020 had been met and the second condition for the stock options issued on December 20, 2019 and March 1, 2020 had been met. 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 key assumptions utilized to calculate the grant-date fair values for these awards are summarized below:   Issuance Date   February 1, 2019     December 20, 2019     March 1, 2020     March 1, 2021   Fair value lower range   $ 2.81     $ 1.58     $ 1.46     $ 4.34   Fair value higher range   $ 2.86     $ 1.61     $ 1.49     $ 4.43   Exercise price   $ 4.72     $ 2.56     $ 2.33     $ 6.33   Expected term (in years)     1.0 - 1.3       1.0 - 1.6       1.0 - 1.5       1.0 - 1.3   Expected volatility     65 %     70 %     70 %     80 % Dividend yield     — %     — %     — %     — % Risk-free rate     2.61 %     1.85 %     1.05 %     1.18 %   For the three months ended March 31, 2023 , details of stock option activity were as follows:       Number of options     Weighted average exercise price per share     Weighted average remaining contractual term (in years)     Aggregate intrinsic value   Outstanding as of December 31, 2022     2,139,000     $ 4.37       6.3     $ —   Granted     —       —       —       —   Exercised     —       —       —       —   Expired     —       —       —       —   Outstanding as of March 31, 2023     2,139,000     $ 4.37       6.1     $ —   Options exercisable as of March 31, 2023     1,242,000     $ 3.98       6.1     $ —     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.   15 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   For the  three months ended March 31, 2023 , the unvested balance of stock options was as follows:       Number of stock options     Weighted average exercise price per share     Weighted average remaining contractual term (in years)   Unvested as of December 31, 2022     897,000     $ 4.91       6.3   Granted     —       —       —   Vested     —       —       —   Unvested as of March 31, 2023     897,000     $ 4.91       6.1     Compensation expense recognized for stock options of $ 0 and $ 105  for the  three months ended March 31, 2023 and 2022 , respectively, was recorded in sales and marketing, product development and general and administrative expenses in the consolidated statements of operations. As of March 31, 2023 , there was $ 0 of unrecognized share-based compensation with respect to outstanding stock options.   Restricted stock units and restricted stock   For the three months ended March 31, 2023 , details of unvested RSU activity were as follows:       Number of units     Weighted average grant-date fair value   Unvested as of December 31, 2022     4,223,156     $ 5.37   Granted     2,910,185     $ 1.43   Vested and delivered     ( 848,522 )   $ 3.42   Withheld as treasury stock (1)     ( 311,417 )   $ 1.82   Vested not delivered (2)     ( 14,416 )   $ 5.50   Forfeited     ( 688,891 )   $ 1.43   Unvested as of March 31, 2023     5,270,095     $ 4.24     ( 1 ) As discussed in Note 7 , Common stock, treasury stock and warrants,  the increase in treasury stock was due to shares withheld to cover statutory withholding taxes upon the delivery of shares following vesting of RSUs. As of March 31, 2023 , there were  4,611,569   outstanding shares of treasury stock. ( 2 ) Vested not delivered represents vested RSUs with delivery deferred to a future time. For the three months ended March 31, 2023 , there was a net increase in the vested not delivered balance as a result of the vesting of the  14,416  shares that were deferred due to timing of delivery of certain shares. As of March 31, 2023 ,  1,706,081 outstanding RSUs were vested not delivered.   Compensation expense recognized for RSUs of $ 1,148  and $ 910  for the three months ended March 31, 2023 and 2022 , respectively, was recorded in sales and marketing, product development and general and administrative in the consolidated statements of operations, and intangible assets, net in the consolidated balance sheets. 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 March 31, 2023 , unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $ 8,397 , which is expected to be recognized over a weighted average period of  2.1 years.   16 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   For the three months ended March 31, 2023 and 2022 , share-based compensation for the Company's stock options, RSUs, and common stock awards were allocated to the following accounts in the consolidated financial statements:       Three Months Ended March 31,       2023     2022   Sales and marketing   $ 167     $ 170   Product development     191       160   General and administrative     763       658   Share-based compensation expense     1,121       988   Capitalized in intangible assets     27       27   Total share-based compensation   $ 1,148     $ 1,015     As of March 31, 2023, the Company recorded a liability of $ 15  related to PSUs that are to be settled in cash.   9. 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 earnings before interest, taxes, depreciation, and amortization ("EBITDA"). As of March 31, 2023 , the Company has two operating segments and two corresponding reporting units, “Fluent” and “All Other,” and one reportable segment. “All Other” represents the operating results of AdParlor, LLC, 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 for the  three  months ended March 31, 2023 and 2022  are shown in the following tables below:       Three Months Ended March 31,       2023     2022   Fluent segment revenue (1) :                 United States   $ 42,908     $ 60,659   International     32,330     $ 25,375   Fluent segment revenue   $ 75,238     $ 86,034   All Other segment revenue (1) :                 United States   $ 2,016     $ 2,989   International     —       40   All Other segment revenue   $ 2,016     $ 3,029   Segment EBITDA                 Fluent segment EBITDA   $ ( 28,579 )   $ 1,921   All Other segment EBITDA     ( 215 )     ( 243 ) Total EBITDA     ( 28,794 )     1,678   Depreciation and amortization     2,359       3,307   Total income (loss) from operations   $ ( 31,153 )   $ ( 1,629 ) ( 1 ) Revenue aggregation is based upon location of the customer.       March 31,     December 31,       2023     2022   Total assets:             Fluent   $ 140,618     $ 168,486   All Other     16,552       15,483   Total assets   $ 157,170     $ 183,969     17 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   As of March 31, 2023 , long-lived assets are all located in the United States.   For the  three months ended  March 31, 2023 , the Company identified an international customer within the Fluent segment with revenue in the amount of $ 19,125  which represents 25 % of consolidated revenue.     10. 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. The Company does  not  accrue liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.   The New York State Department of Taxation and Finance (the “Tax Department”) performed a sales and use tax audit covering the period from December 1, 2010 to November 30, 2019. The Tax Department asserted that revenue derived from certain of the Company’s customer acquisition and list management services are subject to sales tax, as a result of being deemed taxable information services. The Company reached a settlement with the Tax Department for $ 1,700 which was paid on April 1, 2022. Starting on  March 1, 2022, the Company has been collecting and remitting New York sales tax on certain list management and hosted revenues from New York based clients.   On January 28, 2020, Fluent received a Civil Investigative Demand from the FTC regarding compliance with the FTC Act and the Telemarketing Sales Rule (“TSR”). On October 18, 2022, the FTC staff sent the Company a draft complaint and proposed consent order seeking injunctive relief and a civil monetary penalty. The Company has been negotiating resolution of the terms of the consent order with the FTC staff. On January 12, 2023, the Company made an initial proposal of $ 5.0 million for the civil monetary penalty contingent on successful negotiation of the remaining outstanding injunctions and other provisions. On January 30, 2023, the FTC staff forwarded a complaint recommendation to the FTC’s Bureau of Consumer Protection for consideration. On March 3, 2023, the Company met with the Bureau of Consumer Protection and, as a result of that meeting, the Company continued negotiation with the FTC staff. On April 12, 2023, the FTC staff recommended that the FTC’s Bureau of Consumer Protection forward a complaint recommendation to the Commission. The Company is scheduled to meet with the Commission on May 16, 2023 in an effort to continue negotiations on the limited outstanding issues.  The Company is seeking an agreement with the FTC on the terms of a consent order, including injunctive and civil monetary penalty provisions, but there is no assurance this will occur. The Company accrued $ 5,000 in connection with this matter for the year ended December 31, 2022, which it continues to maintain, however, a final civil monetary penalty could be higher or lower. The Company will continue to devote substantial resources and incur outside legal expenses until this matter is concluded.   18 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   On October 6, 2020, the Company received notice from the Pennsylvania Office of the Attorney General (“PAAG”) that it was reviewing the Company’s business practices relating to telemarketing. After the Company and the PAAG were unable to reach agreement on a proposed Assurance of Voluntary Compliance, the Commonwealth of Pennsylvania filed a complaint for permanent injunction, civil penalties, and other relief in the United States District Court for the Western District of Pennsylvania on November 2, 2022. While the Company believes that its historical practices were in full compliance with the PA Consumer Protection Law and the TSR, the Company has updated its telemarketing practices. On May 8, 2023, the Parties notified the Court that they had reached a settlement in principle and are coordinating on finalizing documentation for submission to the Court.  As part of the settlement in principle, the Company has agreed to pay the PAAG $ 250  for investigatory costs, of which $ 200  had been accrued for as of March 31, 2023.   The Company has been involved in a TCPA class action, Daniel Berman v. Freedom Financial Network, which was originally filed in 2018. Plaintiff's second Motion for Class Certification (the first such motion was denied) is pending and oral argument was scheduled for February 7, 2023.  The parties entered into a Class Action Settlement Agreement which provides for payment to plaintiffs of $ 9,750 and injunctive provisions. The Company will contribute $ 3,100 towards the settlement, payable following the approval of the Final Approval Order and Judgement anticipated to occur in approximately a year. This amount was accrued during the three months ended  December 31, 2022. This amount is payable $ 1,100 in cash and $ 2,000 pursuant to an interest-bearing note with a two -year term provided by co-defendant, Freedom Financial.   11. Business acquisition   True North Acquisition   On  January 1, 2022 ,  the Company acquired a  100 % membership interest in True North Loyalty, LLC for a deemed purchase price of $ 2,321 , which consisted of $ 1,000 in cash at closing, $ 860 of deferred payments due at both the first and second anniversary of the closing date adjusted for net-working capital, and contingent consideration with a fair value at the closing date of $ 250 , payable in common stock based upon the achievement of specified revenue targets over the  five -year period following the completion of the acquisition. The Company also issued  100,000  shares of fully-vested common stock under the Prior Plan to the sellers valued at $ 211 . Certain seller parties entered into employment and non-competition agreements with the Company in connection with the True North Acquisition. True North Loyalty, LLC is a subscription-based business that utilizes call center operations and other media channels to market recurring revenue services to consumers. In accordance with ASC  805,  the Company determined that the True North Acquisition constituted the purchase of a business.   On  January 1, 2022, the Company determined to use the excess earnings method, a variation of the income approach, to amortize: (i) the fair value of the acquired customer relationships related to subscribers of $ 170 over a period of  one  year, and (ii) the fair value of the acquired customer relationships related to call centers of $ 1,180 , over a period of  five  years. The amount of the purchase price in excess of the fair value of the net assets acquired was recorded as goodwill in the amount of $ 1,092  and primarily relates to intangible assets that do  not  qualify for separate recognition, including assembled workforce and synergies. For tax purposes, the goodwill is not deductible.   19 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)     12. Variable Interest Entity   A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary is the party that has the power to direct activities that most significantly impact the operations of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE. The Company assesses whether we are the primary beneficiary of a VIE at the inception of the arrangement and at each reporting date.   On January 9, 2023, the Company entered into employment agreements with certain key employees of TAPP, LLC (“TAPP”), an influencer-based business, which uses as an application to utilize its relationship with influencer to bring consumers to advertising clients. The Company is also a customer of TAPP and accounts for the majority of TAPP’s revenues. By virtue of TAPP’s key employees being employed by the Company and the significance of the Company to TAPP’s financial performance, the Company determined that TAPP qualified as a VIE in which the Company had a variable interest and that the Company is the primary beneficiary as a result of its significant influence and control over certain activities that most significantly impact its economic performance. As a result, the Company consolidates the TAPP operations. As the Company does not have an equity interest, 100 % of the net assets and results of the operations of TAPP are attributable to non-controlling interests.   As the Company gained control of TAPP, in accordance with ASC 805, Business Combinations (ASC 805 ), it was then determined that TAPP constituted a business. The deemed fair value of the consideration was $ 3,943 , which consisted of $ 1,250 of initial cash and $ 2,693 which was contingent based upon achievement of specified revenue and media margin targets over three - years. The purchase price allocation is based upon preliminary estimates as not all information relevant to determine these amounts were available as of March 31, 2023. Under these circumstances, the preliminary valuation was based upon initial internal estimates. The assets acquired include publisher contract intangibles and goodwill. The tax effects of this transaction are still being evaluated. Preliminary allocation to net-working capital and acquired assets is expected to be immaterial and as a result the initial allocation of the consideration resulted in goodwill of $ 3,943 . The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the transaction date, which is January 9, 2023. Finalization of the valuation during the measurement period could result in changes in the amounts recorded for the transaction date fair value. Goodwill was determined as the excess of the purchase price over the fair value of the assets acquired, and represents workforce and expected cash flow generation for the TAPP business that does not qualify for separate recognition as intangible assets. At and for the three months ended March 31, 2023, the assets and revenues of TAPP totaled a de minimis percentage of the Company’s total assets and revenue.   20 Table of Contents