Fluent, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS.   FLUENT, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) (unaudited)       September 30, 2023     December 31, 2022   ASSETS:                 Cash and cash equivalents   $ 20,513     $ 25,547   Accounts receivable, net of allowance for doubtful accounts of $ 177 and $ 544 , respectively     48,515       63,164   Prepaid expenses and other current assets     8,069       3,506   Total current assets     77,097       92,217   Property and equipment, net     687       964   Operating lease right-of-use assets     3,833       5,202   Intangible assets, net     27,710       28,745   Goodwill     1,261       55,111   Other non-current assets     1,502       1,730   Total assets   $ 112,090     $ 183,969   LIABILITIES AND SHAREHOLDERS' EQUITY:                 Accounts payable   $ 11,841     $ 6,190   Accrued expenses and other current liabilities     25,746       35,626   Deferred revenue     492       1,014   Current portion of long-term debt     31,799       5,000   Current portion of operating lease liability     2,295       2,389   Total current liabilities     72,173       50,219   Long-term debt, net     —       35,594   Operating lease liability     2,220       3,743   Other non-current liabilities     2,207       458   Total liabilities     76,600       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 — 85,803,727 and 84,385,458 , respectively; and Shares outstanding — 81,192,158 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     426,473       423,384   Accumulated deficit     ( 379,619 )     ( 318,300 ) Total shareholders' equity     35,490       93,955   Total liabilities and shareholders' equity   $ 112,090     $ 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 September 30,     Nine Months Ended September 30,       2023     2022     2023     2022   Revenue   $ 66,239     $ 89,046     $ 225,638     $ 276,470   Costs and expenses:                                 Cost of revenue (exclusive of depreciation and amortization)     50,148       65,270       167,960       202,859   Sales and marketing     4,426       4,254       13,454       12,590   Product development     4,511       4,622       14,064       13,979   General and administrative     8,725       10,877       24,991       33,852   Depreciation and amortization     2,658       3,398       8,112       10,037   Goodwill impairment and write-off of intangible assets     29,705       —       55,405       55,528   Loss (gain) on disposal of property and equipment     —       ( 2 )     —       19   Total costs and expenses     100,173       88,419       283,986       328,864   Income (loss) from operations     ( 33,934 )     627       ( 58,348 )     ( 52,394 ) Interest expense, net     ( 936 )     ( 517 )     ( 2,420 )     ( 1,331 ) Income (loss) before income taxes     ( 34,870 )     110       ( 60,768 )     ( 53,725 ) Income tax (expense) benefit     1,243       3,003       ( 551 )     ( 2,119 ) Net income (loss)     ( 33,627 )     3,113       ( 61,319 )     ( 55,844 )                                   Basic and diluted income (loss) per share:                                 Basic   $ ( 0.41 )   $ 0.04     $ ( 0.74 )   $ ( 0.69 ) Diluted   $ ( 0.41 )   $ 0.04     $ ( 0.74 )   $ ( 0.69 )                                   Weighted average number of shares outstanding:                                 Basic     82,880,536       81,592,316       82,511,454       81,327,639   Diluted     82,880,536       81,699,966       82,511,454       81,327,639     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 June 30, 2023     85,751,226     $ 43       4,611,569     $ ( 11,407 )   $ 425,491     $ ( 345,992 )   $ 68,135   Vesting of restricted stock units and issuance of stock under incentive plans     52,501       —       —       —       —       —       —   Share-based compensation     —       —       —       —       982       —       982   Net loss     —       —       —       —       —       ( 33,627 )     ( 33,627 ) Balance at September 30, 2023     85,803,727     $ 43       4,611,569     $ ( 11,407 )   $ 426,473     $ ( 379,619 )   $ 35,490                                                             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     1,418,269       1       —       —       ( 1 )     —       —   Increase in treasury stock resulting from shares withheld to cover statutory taxes     —       —       311,417       ( 236 )     —       —       ( 236 ) Share-based compensation     —       —       —       —       3,090       —       3,090   Net loss     —       —       —       —       —       ( 61,319 )     ( 61,319 ) Balance at September 30, 2023     85,803,727     $ 43       4,611,569     $ ( 11,407 )   $ 426,473     $ ( 379,619 )   $ 35,490           Common stock     Treasury stock     Additional paid-in     Accumulated     Total shareholders'       Shares     Amount     Shares     Amount     capital     deficit     equity   Balance at June 30, 2022     84,146,082     $ 42       4,300,152     $ ( 11,171 )   $ 421,172     $ ( 253,925 )   $ 156,118   Vesting of restricted stock units and issuance of stock under incentive plans     96,880       —       —       —       —       —       —   Share-based compensation     —       —       —       —       818       —       818   Net income     —       —       —       —       —       3,113       3,113   Balance at September 30, 2022     84,242,962     $ 42       4,300,152     $ ( 11,171 )   $ 421,990     $ ( 250,812 )   $ 160,049                                                             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 restricted stock     1,185,879       —       —       —       211       —       211   Increase in treasury stock resulting from shares withheld to cover statutory taxes     —       —       208,329       ( 448 )     —       —       ( 448 ) Share-based compensation     —       —       —       —       2,720       —       2,720   Net loss     —       —       —       —       —       ( 55,844 )     ( 55,844 ) Balance at September 30, 2022     84,242,962     $ 42       4,300,152     $ ( 11,171 )   $ 421,990     $ ( 250,812 )   $ 160,049     See notes to consolidated financial statements   4 Table of Contents     FLUENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (unaudited)       Nine Months Ended September 30,       2023     2022   CASH FLOWS FROM OPERATING ACTIVITIES:                 Net loss   $ ( 61,319 )   $ ( 55,844 ) Adjustments to reconcile net loss to net cash provided by operating activities:                 Depreciation and amortization     8,112       10,037   Non-cash loan amortization expense     330       201   Share-based compensation expense     2,958       2,652   Goodwill impairment     55,405       55,400   Write-off of intangible assets     —       128   Loss on disposal of property and equipment     —       19   Provision for bad debt     ( 51 )     275   Changes in assets and liabilities, net of business acquisitions:                 Accounts receivable     14,700       2,406   Prepaid expenses and other current assets     ( 4,563 )     277   Other non-current assets     228       52   Operating lease assets and liabilities, net     ( 248 )     ( 127 ) Accounts payable     5,651       ( 1,212 ) Accrued expenses and other current liabilities     ( 10,869 )     ( 7,497 ) Deferred revenue     ( 522 )     456   Other     ( 117 )     ( 89 ) Net cash provided by operating activities     9,695       7,134   CASH FLOWS FROM INVESTING ACTIVITIES:                 Capitalized costs included in intangible assets     ( 4,093 )     ( 3,316 ) Business acquisitions, net of cash acquired     ( 1,250 )     ( 971 ) Acquisition of property and equipment     ( 25 )     ( 10 ) Net cash used in investing activities     ( 5,368 )     ( 4,297 ) CASH FLOWS FROM FINANCING ACTIVITIES:                 Repayments of long-term debt     ( 8,750 )     ( 3,750 ) Debt financing costs     ( 375 )     —   Taxes paid related to net share settlement of vesting of restricted stock units     ( 236 )     ( 448 ) Net cash used in financing activities     ( 9,361 )     ( 4,198 ) Net decrease in cash and cash equivalents     ( 5,034 )     ( 1,361 ) Cash and cash equivalents at beginning of period     25,547       34,467   Cash and cash equivalents at end of period   $ 20,513     $ 33,106   SUPPLEMENTAL DISCLOSURE INFORMATION                 Cash paid for interest   $ 2,234       1,162   Cash paid for income taxes   $ 114       603   Share-based compensation capitalized in intangible assets   $ 72       68   SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                 Contingent payments in connection with TAPP consolidation   $ 2,915     $ —   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 September 30, 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 and included in the 2022 Form 10 -K.   Going concern   In accordance with ASC 205 - 40, Presentation of Financial Statements – Going Concern, management must evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date these accompanying unaudited financial statements are issued (the “issuance date”). As part of this evaluation, management may consider the potential mitigating impact of its plans that have not been fully implemented as of the issuance date if (a) it is probable that management’s plans will be effectively implemented on a timely basis, and (b) it is probable that the plans, when implemented, will alleviate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date.   The Company has experienced a decline in its operating results, driven primarily by the continued economic slowdown and uncertainty, as well as the impacts of the recently imposed regulatory requirements (see Note 10, Contingencies) . As a result, as of  September 30, 2023 , the Company was not in compliance with the total leverage ratio covenant under its Credit Agreement (see Note 5, Long-term debt, net ) and such event of default continued until the Waiver (defined below) became effective. The Company has also projected a continued decline in its operating results, driven primarily by the same factors described above. Therefore, the Company does not expect to be in compliance with certain financial covenants under the Credit Agreement during certain quarters in the twelve months following the issuance date. If the Company is not in compliance with its covenants, under the Credit Agreement, it will be an event of default that would give lenders the right to accelerate maturities under the Credit Agreement. While the Company had cash and cash equivalents of $ 20.5 million as of  September 30, 2023  and had positive cash flow from operations in the prior two fiscal years and for the nine months ended September 30, 2023,  management does not expect the Company’s cash resources would be adequate to meet its obligations as they become due within the one -year period after the issuance date if maturities under the Credit Agreement were accelerated. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.   As discussed in Note 5, Long-term debt, net , on November 15,  2023, Fluent, LLC (the “Borrower”) entered into a Temporary Waiver Under Credit Agreement (the “Waiver”) to the Credit Agreement that is effective through the earlier of January 15, 2024 or an occurrence of any other event of default (the “Termination date”). In addition to temporarily waiving the event of default resulting from the breach of the total leverage ratio covenant during the three months ended September 30, 2023, the Waiver imposed new financial reporting obligations on the Borrower, including the delivery of the Company’s  2024 budget by November 22, 2023 for review by the business consultant retained by counsel to Citizens Bank. The Company intends for that budget to inform modified financial covenant levels and other provisions, as appropriate, for the quarters ending December 31, 2023 through December 31, 2024, which would be accomplished with an amendment to the Credit Agreement. The Borrower and Citizens Bank have previously entered into amendments to the Credit Agreement as needed, and management expects to be able to enter into a new amendment prior to the Termination date.   In light of the recent challenges the Company has faced in achieving its financial targets, the Company plans to implement cost reductions and focus resources on new growth opportunities that will enable the Company to meet its projected budget.   While management believes its plans to enter into a new amendment to the Credit Agreement with financial covenant levels that the Company can satisfy will alleviate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern, successfully entering into it is not entirely within the Company’s control. In addition, there is no guarantee that the planned cost reductions or growth opportunities will be successfully executed or have the expected benefits. As there can be no assurance that the Company will be able to effectively implement its plans within one year after the issuance date, based on the factors above, management concluded that there is substantial doubt about the Company's ability to continue as a going concern through such one -year period.   The accompanying unaudited financial statements do not include any adjustments relating to the possible future effects on the recoverability and classification of recorded assets and classification of liabilities that might result should the Company be unable to continue as a going concern.   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 the Company's 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 was effective for annual and interim periods beginning after December 15, 2022, and early adoption was 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 generated 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 the associated performance obligation. The Company elected the "right to invoice" practical expedient under Accounting Standards Codification ("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  September 30, 2023 and December 31, 2022 , the balance of deferred revenue was  $ 492 and $ 1,014 , respectively. The majority of the deferred revenue balance as of  December 31, 2022 was recognized as 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 earned, and the related amounts are recorded as unbilled revenue within accounts receivable on the consolidated balance sheets. As of  September 30, 2023 and December 31, 2022 , unbilled revenue included in accounts receivable was $ 23,374 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, valuation 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.   7 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)     ● 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 September 30, 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 September 30, 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 measurement, as certain inputs used to determine fair value are unobservable. See Note 4, Goodwill , for further discussion of impairment charges.     2. Income (loss) per share   Basic income (loss) per share is computed by dividing net income (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 and  nine months ended September 30, 2023 and 2022 , basic and diluted income (loss) per share were as follows:       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022   Numerator:                                 Net income (loss)   $ ( 33,627 )   $ 3,113     $ ( 61,319 )   $ ( 55,844 ) Denominator:                                 Weighted average shares outstanding     81,160,944       79,898,219       80,798,223       79,620,308   Weighted average restricted shares vested not delivered     1,719,592       1,694,097       1,713,231       1,707,331   Total basic weighted average shares outstanding     82,880,536       81,592,316       82,511,454       81,327,639   Dilutive effect of assumed conversion of restricted stock units     —       107,650       —         Total diluted weighted average shares outstanding     82,880,536       81,699,966       82,511,454       81,327,639   Basic and diluted income (loss) per share:                                 Basic   $ ( 0.41 )   $ 0.04     $ ( 0.74 )   $ ( 0.69 ) Diluted   $ ( 0.41 )   $ 0.04     $ ( 0.74 )   $ ( 0.69 )   Based on exercise prices compared to the average stock prices for the three and  nine months ended September 30, 2023 and 2022 , certain stock equivalents, including restricted stock units and stock options, have been excluded from the diluted weighted average share calculations due to their anti-dilutive nature.       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022   Restricted stock units     5,499,375       1,220,790       5,499,375       1,780,022   Stock options     1,831,000       2,139,000       1,831,000       2,139,000   Total anti-dilutive securities     7,330,375       3,359,790       7,330,375       3,919,022     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)     September 30, 2023     December 31, 2022   Gross amount:                         Software developed for internal use     3     $ 18,407       13,740   Acquired proprietary technology     3 - 5       16,972       15,965   Customer relationships     5 - 10       39,168       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                 124,459       117,685   Total gross amount                         Accumulated amortization:                         Software developed for internal use             ( 11,018 )     ( 8,097 ) Acquired proprietary technology             ( 14,978 )     ( 14,305 ) Customer relationships             ( 36,726 )     ( 35,156 ) Trade names             ( 6,689 )     ( 6,038 ) Domain names             ( 75 )     ( 68 ) Databases             ( 25,495 )     ( 23,508 ) Non-competition agreements             ( 1,768 )     ( 1,768 ) Total accumulated amortization             ( 96,749 )     ( 88,940 ) Net intangible assets:                         Software developed for internal use             7,389       5,643   Acquired proprietary technology             1,994       1,660   Customer relationships             2,442       2,912   Trade names             9,968       10,619   Domain names             120       127   Databases             5,797       7,784   Total intangible assets, net           $ 27,710     $ 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;  the acquisition of a 100 % interest in True North Loyalty, LLC, (the "True North Acquisition"), effective January 1, 2022 ( see Note 11 , Business acquisition), and the consolidation of TAPP Influencers Corp. ("TAPP") effective January 9, 2023 ( see Note 12, Variable Interest Entity).   9 Table of Contents   FLUENT, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   During the  second  quarter of  2023,  the Company determined that the effects of the recently imposed regulatory requirements on the Company constituted a triggering event. The Company also then determined that the decline in the market value of its publicly traded stock, which resulted in a corresponding decline in its market capitalization, along with the operating results for the  third  quarter of  2023, also constituted a triggering event. The Company conducted an interim test of the recoverability of its long-lived assets, which compared projected undiscounted cash flows to the carrying value of the asset group. The results of this approach indicated that its long-lived assets were  not  impaired as of  June 30, 2023  or  September 30, 2023.   Amortization expenses of $ 2,559   and $ 3,292  for the three months ended September 30, 2023 and 2022 , respectively, and $ 7,810  and $ 9,651  for the  nine months ended September 30, 2023 and 2022 , respectively, are included in depreciation and amortization expenses in the consolidated statements of operations. As of September 30, 2023 , intangible assets with a carrying amount of $ 919 , 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, 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   September 30, 2023   Remainder of 2023   $ 2,777   2024     7,547   2025     7,101   2026     2,886   2027     828   2028 and thereafter     6,571   Total   $ 27,710       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 September 30, 2023 , the total balance of goodwill was $ 1,261 , a decrease of $ 53,850  from December 31, 2022, as a result of a non-cash impairment charge of $ 55,405 , offset by a 1,555  increase in goodwill related to the TAPP consolidation, which was within the non-cash impairment charge (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.   For the three months ended March 31, 2023, the Company completed its quarterly triggering event assessments 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 therefore 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 the Fluent reporting unit’s 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)   For the three months ended June 30, 2023, the Company completed its quarterly triggering event assessments and determined that the effect of the recently imposed regulatory requirements and the effect of the continued economic slowdown on the Company’s expected operating results had each constituted a triggering event. The Company therefore conducted an interim test of the fair value of the Fluent reporting unit's goodwill for potential impairment related to both triggering events as of  June 30, 2023.  The Company applied a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The results of this approach indicated that the fair value exceeded its carrying value by  5 %. The Company therefore concluded that the Fluent reporting unit’s goodwill of $ 27,469  was  not  impaired.   For the three months ended September 30, 2023, the Company completed its quarterly triggering event assessments and determined that the decline in the market value of its publicly-traded stock, which resulted in a corresponding decline in its market capitalization, along with the impact of the continued economic slowdown on the Company’s expected operating results had both constituted a triggering event. The Company therefore conducted an interim test of the fair value of the Fluent reporting unit's goodwill for potential impairment related to both triggering events and All Others for potential impairment related to the economic slowdown. The Company applied a combination of income and market approaches to determine the fair value of the Fluent reporting unit and All Others. The results of this approach indicated that the Fluent reporting unit’s carrying value and All Others carrying value exceeded its fair value by 32 % and 29 %, respectively. The Company therefore concluded that the Fluent reporting unit’s goodwill was impaired and recorded a non-cash impairment for the remainder of the goodwill balance of $ 27,469 . In addition, the All Other goodwill of $ 3,497  was also concluded to be impaired, and the Company recorded a non-cash impairment charge of $ 2,236 .   5. Long-term debt, net   Long-term debt, net of unamortized discount and financing costs, related to the Credit Facility consisted of the following:       September 30, 2023     December 31, 2022   Credit Facility due 2026 (less unamortized discount and financing costs of $ 701 and $ 656 , respectively)   $ 31,799     $ 40,594   Less: Current portion of long-term debt     ( 31,799 )     ( 5,000 ) Long-term debt, net (non-current)   $ -     $ 35,594     Credit Facility   On March 31, 2021, Fluent, LLC (the "Borrower") entered into a credit agreement (as amended, modified, extended, restated, replaced, or supplemented from time to time, the "Credit Agreement") with certain subsidiaries of the Borrower as guarantors, the lenders thereto, and Citizens Bank, N.A. ("Citizens Bank") as administrative agent, lead arranger and bookrunner. The original Credit Agreement provided 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 May 15, 2023, the Borrower and Citizens Bank entered into a third amendment to the Credit Agreement, which amended certain provisions by adding an additional tier of applicable margin to the selected rates and providing for additional notice of certain material events and, for the remaining fiscal quarters of 2023, established the following, in each case pursuant to the terms and conditions under the Credit Agreement: (i) adjustments to the pricing floor and certain EBITDA add-backs; (ii) monthly financial reporting requirements; (iii) additional financial covenant testing conditions on Fluent’s ability to draw on the Revolving Loans; (iv) additional tiers to certain financial covenants and added a minimum cash liquidity financial covenant; (v) additional restrictions on the ability to (a) make loans and advances to officers, directors and employees; (b) invest in certain subsidiaries and joint ventures; and (c) make additional loans, investments or permitted acquisitions; and (vi) additional unrestricted cash requirements before the Company is permitted to pay dividends, make distributions or redeem or repurchase equity interests.   11 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   On August 21, 2023, the Borrower and Citizens Bank entered into a  fourth  amendment to the Credit Agreement (the “Fourth Amendment”), which (i) adjusted certain financial covenants for the remaining fiscal quarters of  2023,  including prohibiting the Company from drawing on the Revolving Loans until the issuance of the December 31, 2023 annual financial statements, (ii) temporarily adjusted interest rates, (iii) permitted Citizens Bank to retain a business consultant at the Borrower's expense to advise on the credit parties’ financial and operating performance; (iv) required weekly liquidity reports to Citizens Bank, and (v) required a $ 5,000  prepayment of the Term Loan and a reduction in the maximum amount of the Revolving Loans by the same amount to $ 10,000 . The $ 5,000  prepayment amount was paid as of  September 30, 2023 . In evaluating the amendments under ASC 470 - 50, Debt- Modifications and Extinguishments , the Company determined that the amendment should be treated as a debt modification with no gain or loss recognized.   On November 15, 2023, the Borrower and Citizens Bank entered into a Waiver to the Credit Agreement, pursuant to which Citizens Bank agreed to waive through the Termination date its rights and remedies arising from the Company’s breach of the total leverage ratio covenant during the quarter ending September 30, 2023.  The Waiver also added new reporting requirements, temporarily increased the applicable margin, and extended the term of the business consultant through January 15, 2024.  The Borrower must also provide a 2024 budget that has been reviewed by the business consultant retained by counsel to Citizens Bank. The Company intends for that budget to inform modified financial covenant levels and other provisions, as appropriate, for the quarters ending December 31, 2023 through December 31, 2024, which would be accomplished with an amendment to the Credit Agreement.   All obligations under the the Credit Agreement currently mature 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 September 30, 2023, the Company was in compliance with all of the financial covenants under the Credit Agreement except for the total leverage ratio covenant. As discussed above, this covenant breach was waived through the Termination date by the Waiver. However, based on projections, the Company does not expect to be in compliance with certain financial covenants during certain quarters in the next twelve months. If the Company is not in compliance with financial covenants, it will be an event of default that would give the lenders the right to accelerate maturities.  Accordingly, all borrowings under the Credit Agreement have been classified as current as of September 30, 2023.   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, (as defined in the Credit Agreement), LIBOR (as defined in the Credit Agreement) rate (subject to a floor of 0.25 %) prior to the election as of December 31, 2022 or Term SOFR (as defined in the Credit Agreement) (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 2.25 % 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 8.92 % (Term SOFR + 0.1 % + 3.50 %) as of September 30, 2023 .   The Credit Agreement also contains certain customary conditions applicable to extensions of credit, including that representations and warranties made in the Credit Agreement be materially true and correct at the time of such extension (once such extensions are no longer prohibited by the Fourth Amendment or a later amendment).    Maturities   As of September 30, 2023 , scheduled future maturities of the Credit Agreement are as follows, reflective of the debt being accelerated as of the termination date if a new amendment is not reached:   Year     September 30, 2023   Remainder of 2023   $ 1,250   2024     31,250   Total maturities   $ 32,500     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 ("AETR"). The Company updates its estimated AETR on a quarterly basis and, if the estimate changes, a cumulative adjustment is made.    As of  September 30, 2023 and December 31, 2022 , the Company 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 nine months ended September 30, 2023 , the Company's effective income tax expense rate of 0.9 % differed from the statutory federal income tax rate of 21 % primarily due to 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. For the  nine months ended September 30, 2022 , the Company's effective income tax expense rate of 4.0 % differed from the statutory federal income tax rate of 21 % primarily due to the projected federal and state cash tax expense expected to result in taxable income for full-year  2022  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.   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  September 30, 2023 and December 31, 2022 , the balance of unrecognized tax benefits was $ 1,480 . The unrecognized tax benefits, if sustained, would benefit the Company's tax provision. As of September 30, 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  September 30, 2023 and December 31, 2022 , the number of issued shares of common stock was  85,803,727 and 84,385,458 , respectively, which included shares of treasury stock of  4,611,569 and 4,300,152 , respectively.   For the nine months ended September 30, 2023 , the change in the number of issued shares of common stock was the result of an aggregate  1,418,269 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  September 30, 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 nine months ended September 30, 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. As of September 30, 2023 , the Company had  5,598,650 shares of common stock available for grants pursuant to the 2022 Plan, which includes  946,071  shares of common stock previously available for issuance under the 2018 Stock Incentive Plan.    The primary purpose of the 2022 Plan and prior 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.   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. 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 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 %, 177.78 %,  177.78 % and  177.78 %, respectively, 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, 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 %   14 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   For the nine months ended September 30, 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     —       —       —       —   Forfeited     ( 308,000 )     —       —       —   Outstanding as of September 30, 2023     1,831,000     $ 4.32       5.6     $ —   Options exercisable as of September 30, 2023     1,088,000     $ 3.88       5.6     $ —     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.   For the  nine months ended September 30, 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     —       —       —   Forfeited     ( 154,000 )     —       —   Vested     —       —       —   Unvested as of September 30, 2023     743,000     $ 4.95       5.6     Compensation expense recognized for stock options of $ 0 and $ 0  for the  three months ended September 30, 2023 and 2022 , respectively, and $ 0  and $ 125  for the  nine months ended September 30, 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 September 30, 2023 , there was $ 0 of unrecognized share-based compensation with respect to outstanding stock options.   15 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)   Restricted stock units and restricted stock   For the nine months ended September 30, 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     3,487,110     $ 0.89   Vested and delivered     ( 1,106,852 )   $ 3.09   Withheld as treasury stock (1)     ( 311,417 )   $ 1.82   Vested not delivered (2)     ( 19,592 )   $ 1.41   Forfeited     ( 773,030 )   $ 1.49   Unvested as of September 30, 2023     5,499,375     $ 4.09     ( 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 September 30, 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 nine months ended September 30, 2023 , there was a net increase in the vested not delivered balance as a result of the vesting of the  19,592  shares that were deferred due to timing of delivery of certain shares. As of September 30, 2023 ,  1,719,592 outstanding RSUs were vested not delivered.   Compensation expense recognized for RSUs of $ 982  and $ 818  for the three months ended September 30, 2023 and 2022 , respectively, and $ 3,090  and $ 2,595 for the  nine months ended September 30, 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 September 30, 2023 , unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $ 4,757 , which is expected to be recognized over a weighted average period of  1.3 years.   For the three and  nine months ended September 30, 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 September 30,     Nine Months Ended September 30,       2023     2022     2023     2022   Sales and marketing   $ 123     $ 107     $ 419     $ 420   Product development     158       125       485       383   General and administrative     680       569       2,114       1,849   Share-based compensation expense     961       801       3,018       2,652   Capitalized in intangible assets     21       17       72       68   Total share-based compensation   $ 982     $ 818     $ 3,090     $ 2,720     As of September  30, 2023, the Company recorded a liability of $ 15  related to PSUs that are to be settled in cash.   16 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)     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 September 30, 2023 , the Company had  two operating segments with two corresponding reporting units, "Fluent" and "All Other," and one reportable segment. "Fluent," for the purposes of segment reporting, represents the consolidated operating results of the Company excluding "All Other." "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.   Summarized financial information concerning the Company's segments for the three and  nine months ended September 30, 2023 and 2022 are shown in the following tables below:       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022   Fluent segment revenue(1):                                 United States     44,041     $ 53,853     $ 127,149     $ 169,197   International     20,060       33,209       92,199       99,841   Fluent segment revenue     64,101       87,062       219,348       269,038   All Other segment revenue(1):                                 United States     2,138     $ 1,984     $ 6,290     $ 7,360   International     —       —       —       72   All Other segment revenue     2,138     $ 1,984     $ 6,290     $ 7,432   Segment EBITDA                                 Fluent segment EBITDA   $ ( 28,879 )   $ 4,192     $ ( 47,773 )   $ ( 42,055 ) All Other segment EBITDA     ( 2,397 )     ( 167 )     ( 2,463 )     ( 302 ) Total EBITDA     ( 31,276 )     4,025       ( 50,236 )     ( 42,357 ) Depreciation and amortization     2,658       3,398       8,112       10,037   Total income (loss) from operations   $ ( 33,934 )   $ 627     $ ( 58,348 )   $ ( 52,394 ) ( 1 ) Revenue aggregation is based upon location of the customer.   17 Table of Contents   FLUENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) (unaudited)       September 30,     December 31,       2023     2022   Total assets:             Fluent   $ 99,807     $ 168,486   All Other     12,283       15,483   Total assets   $ 112,090     $ 183,969     As of September 30, 2023 , long-lived assets are all located in the United States.   For the  nine months ended  September 30, 2023 , the Company identified an international customer within the Fluent segment with revenue in the amount of $ 47,658  which represents 21 % 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.   On March 31, 2022, the Company reached a settlement for $ 1,700 with the New York State Department of Taxation and Finance (the "Tax Department") following a sales and use tax audit covering the period from December 1, 2010 to November 30, 2019. The Tax Department had asserted that revenue derived from certain of the Company’s customer acquisition and list management services were subject to sales tax, as a result of being deemed taxable information services. The settlement amount was paid on April 1, 2022. Since March 1, 2022, the Company has been collecting and remitting New York sales tax on certain types of revenue from New York-based clients.   On January 28, 2020, Fluent received a Civil Investigative Demand from the Federal Trade Commission ("FTC") regarding compliance with the FTC Act and the Telemarketing Sales Rule. 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. On January 12, 2023, the Company made an initial proposal of $ 5,000 for the civil monetary penalty contingent on successful negotiation of the remaining outstanding injunctions and other provisions. The Company accrued the same amount for the year ending December 31, 2022.  On  May 26, 2023, Fluent agreed to the terms of a Stipulated Order for Permanent Injunction, Monetary Judgment, Civil Penalty Judgment, and Other Relief (the "FTC Consent Order"). The FTC Consent Order imposed a civil penalty of $ 2,500 , required additional changes to the Company’s employment opportunities marketplace and programmatic advertising business, and resulted in the implementation of compliance measures across the business. The same day, Fluent transferred the amount of the civil penalty to a third -party escrow account. On July  17, 2023, the FTC filed its Complaint for Civil Penalties, Permanent Injunction, Monetary Relief, and Other Relief and, together with Fluent, filed a Joint Motion for Entry of Proposed Stipulated Order in the United States District Court for the Southern District of Florida. The FTC Consent Order was entered by the Court on August 11, 2023, and the escrow funds were released on August 15, 2023. The Company maintains insurance policies that cover certain legal costs, which include those incurred related to the FTC investigation. As of September 30, 2023, the Company had recognized $ 5,799  as contra-expense to general and administrative expenses with a remaining current asset of $ 1,777  related to these insurance policies.   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.  On May 18, 2023, the parties entered into a settlement and jointly filed a Consent Petition of Final Decree, wherein the Company agreed to injunctive relief and to pay the PAAG $ 250  for investigatory costs, all of which was paid as of June 30, 2023.   The Company has been involved in a Telephone Consumer Protection Act class action, Daniel Berman v. Freedom Financial Network , which was originally filed in 2018. On May 31, 2023, the p arties entered into an Amended Class Action Settlement Agreement (the "Berman Settlement Agreement"), which includes injunctive provisions and payment to plaintiffs of $ 9,750 for legal fees and a consumer redress fund. On July 28, 2023, the Court preliminarily approved the Berman Settlement Agreement, and the Company contributed $ 3,100 , payable following the final approval of the   settlement. The final approval of the settlement is expected in mid- 2024.  The Company’s contribution amounts were accrued as of  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 Network.     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 (i) $ 1,000 in cash at closing, (ii) $ 860 of deferred payments due at both the first and second anniversary of the closing date adjusted for net working capital, and (iii) 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 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.   Since January 1, 2022, the Company has used 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 one -year period and (ii) the fair value of the acquired customer relationships related to call centers of $ 1,180 , over a five -year period. 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 as of the reporting date.   On January 9, 2023, the Company entered into employment agreements with certain key employees of TAPP, an influencer-based business, which uses as an application to utilize its relationship with influencers 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, it was then determined that TAPP constituted a business. The deemed fair value of the consideration was $ 4,165 , which consisted of $ 1,250 of initial cash and $ 2,915 which was contingent based upon achievement of specified revenue and media margin targets over three years. The fair value of assets acquired, which excluded the immaterial net-working capital, were determined to be the publisher contracts of $ 1,100 , which were valued using the 'with or without' method, a variation of the income approach, to be amortized over a period of one year and industry-based trade secrets of $ 1,510 , which were valued using the excess earnings method, a variation of the income approach, to be amortized over a period of four 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  1,555  and primarily represents workforce and expected cash flow generation for the TAPP business that does not qualify for separate recognition as intangible assets included within the Fluent operating segment. For tax purposes, the value of the acquisition payments is treated as ordinary compensation for services rendered, deductible when paid and included in the employees’ wages. At and for the nine  months ended September 30, 2023 , the assets and revenues of TAPP totaled a de minimis percentage of the Company’s total assets and revenue.     20 Table of Contents