NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
(unaudited)
1. Summary of significant accounting policies
(a) Basis of preparation and liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared by Fluent, Inc., a Delaware corporation (the "Company" or "Fluent"), in accordance with accounting principles generally accepted in the United States ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.
The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending
December 31, 2019
.
The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2018
("2018 Form 10-K") filed with the SEC on March 18, 2019.
The condensed consolidated balance sheet as of
December 31, 2018
included herein was derived from the audited financial statements as of that date included in the 2018 Form 10-K.
Principles of consolidation
The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation.
Spin-off of Red Violet
On March 26, 2018, Fluent completed the previously announced spin-off (the "Spin-off") of its risk management business from its performance marketing business by way of a distribution of all the shares of common stock of Fluent's wholly-owned subsidiary, Red Violet, Inc. ("Red Violet"), to Fluent's stockholders of record as of March 19, 2018 and certain warrant holders.
In accordance with Accounting Standards Codification ("ASC") 205-20, "
Discontinued Operations
," the results of Red Violet through the date of the Spin-off are reflected in the Company's prior year condensed consolidated financial statements as discontinued operations and, therefore, are presented as loss from discontinued operations on the condensed consolidated statements of operations and cash activity from discontinued operations on the condensed consolidated statements of cash flows. See Note 3, "Discontinued operations," for details.
Reclassifications
During the year ended December 31, 2018, the Company reviewed its classification of certain expenses in its consolidated statement of operations in an effort to bring added transparency and conformity to its reporting. As a result of this review, the Company made a number of changes to the way it classifies operating expenses. Expenses for prior periods have been reclassified to conform to the current period presentation. For the
three months ended
March 31, 2018
, the reclassifications had no effect on loss from operations, net loss from continuing operations, or net loss.
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
The following table summarizes the reclassification activity for the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As previously reported (1)
|
|
Category expansion
|
|
Operating costs and expenses reclassification
|
|
As currently reported
|
Cost of revenue (exclusive of depreciation and amortization)
|
$
|
35,663
|
|
|
$
|
—
|
|
|
$
|
1,956
|
|
|
$
|
37,619
|
|
Sales and marketing
|
4,006
|
|
|
(481
|
)
|
|
(423
|
)
|
|
3,102
|
|
Product development
|
—
|
|
|
734
|
|
|
—
|
|
|
734
|
|
General and administrative
|
8,445
|
|
|
(253
|
)
|
|
(1,533
|
)
|
|
6,659
|
|
During 2018, the Company reclassified certain trade-related accruals from accounts payable (previously trade accounts payable) into accrued expenses and other current liabilities. As a result, for the
three months ended
March 31, 2018
, within cash flows from operating activities on the condensed consolidated statements of cash flows, the increase in accounts payable was reduced by
$4,455
resulting in a decrease of
$3,291
, and the decrease in accrued expenses and other current liabilities was reduced by
$4,455
resulting in an increase of
$359
.
Immaterial Correction of an Error
During the year ended
December 31, 2018
, the Company identified an error in its calculation of basic and diluted weighted average shares outstanding, in which shares that had vested but were subject to deferred delivery were not included in both the basic and diluted calculations. As a result, basic and diluted loss per share as previously reported for
three months ended
March 31, 2018
was overstated by an immaterial amount. For the
three months ended
March 31, 2018
, basic and diluted weighted average shares outstanding increased by
4,225,959
shares from
67,311,784
to
71,537,743
shares. The correction of the error resulted in a decrease in basic and diluted loss per share from discontinued operations and net loss from
$0.31
and
$0.40
per share to
$0.30
and
$0.37
per share, respectively.
(b) Recently issued and adopted accounting standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02 ("ASU 2016-02"),
Leases (Topic 842)
, and additional changes, modifications, clarifications or interpretations thereafter, which generally require companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach, utilizing transition guidance introduced in ASU 2018-11,
Leases: Targeted Improvements,
and elected the ‘package of practical expedients,’ which permits the Company not to reassess prior conclusions about lease identification, classification and initial direct costs.
As of January 1, 2019, the adoption of ASU 2016-02 resulted in the recording of right-of-use assets and operating lease liabilities of
$10,866
and
$11,138
, respectively, on the condensed consolidated balance sheets. The difference between the right-of-use assets and operating lease liabilities was recorded as a write-off of the previously recognized deferred rent liability included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. The standard did not impact the Company's condensed consolidated statements of operations or condensed consolidated statements of cash flows. The accounting for financing leases, previously referred to as capital leases, remained unchanged as a result of the adoption of this guidance.
Subsequent to the adoption of Accounting Standards Codification ("ASC") 842, the Company will continue to recognize, on a discounted basis, its minimum commitments under noncancelable operating leases on its consolidated balance sheets. ASC 842 also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. Accordingly, the Company will not recognize right-of-use assets or lease liabilities for qualifying leases, including existing short-term leases in effect at the transition date, and will recognize those payments on the consolidated statements of operations on a straight-line basis over the lease term. Additionally, the Company has elected the practical expedient to not separate lease and non-lease components for all of its leases. See Note 4,
Lease commitments
, for additional disclosures.
In January 2016, FASB issued ASU No. 2016-13,
Financial Instruments—Credit Losses,
and additional changes, modifications, clarifications or interpretations thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available-for-sale debt securities at the amount expected to be collected. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
(c) Revenue recognition
Revenue is recognized when control of goods or services is transferred to customers, in amounts that reflect the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is typically to (a) deliver data records, based on predefined qualifying characteristics specified by the customer or (b) generate conversions, based on predefined user actions (for example, a click, a registration or the installation of an app) and subject to certain qualifying characteristics specified by the customer.
The Company applies the practical expedient related to the review of a portfolio of contracts in reviewing the terms of customer contracts as one collective group, rather than by individual contract. Based on historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, the Company has concluded the financial statement effects are not materially different than accounting for revenue on a contract-by-contract basis.
Revenue is recognized upon satisfaction of the associated performance obligations. The Company's customers simultaneously receive and consume the benefits provided as the Company satisfies its performance obligations. Furthermore, the Company elected the "right to invoice" practical expedient available within ASC 606-10-55-18 as the measure of progress, since the Company has a right to payment from a customer in an amount that corresponds directly with the value of the performance completed to date. The Company's revenue arrangements do not contain significant financing components. The Company has further concluded that revenue does not require disaggregation.
If a customer pays consideration before the Company's performance obligations are satisfied, such amounts are classified as deferred revenue. As of
March 31, 2019
and
December 31, 2018
, the balance of deferred revenue was
$674
and
$444
, respectively. The majority of the deferred revenue balance as of
December 31, 2018
was recognized into revenue during the first quarter of
2019
.
If there is a delay between the period in which revenue is recognized and when customer invoices are issued, revenue is recognized and related amounts are recorded as unbilled revenue in accounts receivable on the condensed consolidated balance sheets. As of
March 31, 2019
and
December 31, 2018
, unbilled revenue included in accounts receivable totaled
$23,413
and
$25,545
, respectively. In line with industry practice, the unbilled revenue balance is recorded based on the Company's internally-tracked conversions, net of estimated variances between this amount and the amount tracked and subsequently confirmed by customers. The majority of invoices included within the unbilled revenue balance are issued within the month directly following the period of service. Historical estimates related to unbilled revenue are not materially different from actual revenue billed.
Sales commissions are recorded at the time revenue is recognized and recorded in sales and marketing expenses. The Company has elected to utilize a practical expedient to expense incremental costs incurred related to obtaining a contract.
In addition, the Company elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.
(d) Cash, cash equivalents and restricted cash
As of
March 31, 2019
and
2018
, the Company's cash, cash equivalents and restricted cash balances consist of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
18,707
|
|
|
$
|
5,368
|
|
Restricted cash
|
1,480
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
$
|
20,187
|
|
|
$
|
5,368
|
|
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") and restricted common stock that are vested 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. Common equivalent shares are excluded from the calculation in loss periods, as their effects would be anti-dilutive.
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
For the
three months ended
March 31, 2019
and
2018
, basic and diluted income (loss) per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands, except share data)
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
1,045
|
|
|
$
|
(5,558
|
)
|
Net loss from discontinued operations
|
|
—
|
|
|
(21,124
|
)
|
Net income (loss)
|
|
$
|
1,045
|
|
|
$
|
(26,682
|
)
|
Denominator:
|
|
|
|
|
Weighted average of shares outstanding
|
|
75,621,360
|
|
|
67,311,784
|
|
Weighted average restricted shares vested not delivered
|
|
3,476,066
|
|
|
4,225,959
|
|
Total basic weighted average shares outstanding
|
|
79,097,426
|
|
|
71,537,743
|
|
Dilutive effect of assumed conversion of restricted stock units
|
|
769,495
|
|
|
—
|
|
Dilutive effect of assumed conversion of warrants
|
|
197,068
|
|
|
—
|
|
Total weighted average diluted shares outstanding
|
|
80,063,989
|
|
|
71,537,743
|
|
Basic and diluted income (loss) per share: (1)
|
|
|
|
|
Continuing operations
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
(0.30
|
)
|
Net income (loss)
|
|
$
|
0.01
|
|
|
$
|
(0.37
|
)
|
(1)
Income (loss) per share tables may contain summation differences due to rounding.
The following potentially dilutive securities were excluded from the calculation of diluted income (loss) per share because their effects would have been anti-dilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Restricted stock units
|
|
2,164,404
|
|
|
3,814,128
|
|
Stock options
|
|
2,142,000
|
|
|
222,000
|
|
Warrants
|
|
1,665,443
|
|
|
2,623,776
|
|
Total anti-dilutive securities
|
|
5,971,847
|
|
|
6,659,904
|
|
3. Discontinued operations
In accordance with ASC 205-20,
Discontinued Operations,
the financial results of Red Violet are reflected in the Company's condensed consolidated financial statements as discontinued operations and, therefore, are presented as loss from discontinued operations on the condensed consolidated statements of operations and cash activity from discontinued operations on the condensed consolidated statements of cash flows.
For the
three months ended
March 31, 2018
, the financial results of operations of Red Violet were as follows:
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended March 31, 2018
|
Major classes of line items constituting loss from discontinued operations:
|
|
|
Revenue
|
|
$
|
3,325
|
|
Cost of revenue (exclusive of depreciation and amortization)
|
|
2,017
|
|
Sales and marketing expenses
|
|
1,089
|
|
General and administrative expenses
|
|
1,852
|
|
Depreciation and amortization
|
|
451
|
|
Loss from operations of discontinued operations, net of $0 income taxes
|
|
(2,084
|
)
|
Loss on disposal of discontinued operations, net of $0 income taxes
|
|
(19,040
|
)
|
Net loss from discontinued operations
|
|
$
|
(21,124
|
)
|
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
For the
three months ended
March 31, 2018
, included in the net loss from discontinued operations is a loss on disposal of discontinued operations of
$19,040
, of which an aggregate of
$16,030
represented non-cash charges. The loss on disposal of discontinued operations consisted of the following:
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended March 31, 2018
|
Share-based compensation expense (1)
|
|
$
|
15,548
|
|
Write-off of unamortized debt costs (2)
|
|
284
|
|
Write-off of certain prepaid expenses
|
|
198
|
|
Spin-off related professional fees
|
|
2,012
|
|
Spin-off related employee compensation
|
|
998
|
|
Loss on disposal of discontinued operations
|
|
$
|
19,040
|
|
|
|
(1)
|
As discussed and defined in Note 10, "Share-based compensation," share-based compensation expense represents non-cash expense in connection with the Acceleration of certain previously outstanding but unvested stock options, RSUs and restricted stock and additional Spin-off Grants, in connection with the Spin-off.
|
|
|
(2)
|
As discussed in Note 7, "Long-term debt, net," in connection with the Spin-off, the Company repaid the Promissory Notes to certain shareholders, which resulted in a write-off of unamortized debt costs of
$284
.
|
In addition, during the first quarter of
2018
, in connection with the Spin-off of Red Violet, an aggregate of
$7,708
was recognized in costs and expenses from continuing operations as spin-off transaction costs, and included non-cash share-based compensation expense of
$5,409
as a result of
2,041,000
shares of Transaction Grants (as defined in Note 10,
Share-based compensation
), and employee cash compensation of
$2,299
.
4. Lease commitments
At the inception of a contract, the Company determines whether the contract is or contains a lease based on the facts and circumstances present. Operating leases with a term greater than one year are recognized on the condensed consolidated balance sheets as right-of-use assets, current portion of operating lease liability and operating lease liability, net. Financing leases with a term greater than one year are recognized on the condensed consolidated balance sheets as property and equipment, net, accrued expenses and other current liabilities and other non-current liabilities. The Company has elected not to recognize leases with terms of one year or less on the condensed consolidated balance sheets.
Lease obligations and their corresponding assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The components of a lease should be split into three categories: lease components, non-lease components and non-components; however, the Company has elected to combine lease and non-lease components into a single component. Rent expense associated with operating leases is recognized over the expected term on a straight-line basis. In connection with financing leases, depreciation of the underlying asset is recognized over the expected term on a straight-line basis and interest expense is recognized as incurred.
The Company has entered into various noncancelable operating and financing lease agreements for certain offices and furniture, fixtures and office equipment. These leases have original lease periods expiring between 2021 and 2025. Although certain leases include options to renew, the Company does not assume renewals in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For the
three months ended
March 31, 2019
, the components of lease costs, lease term and discount rate are as follows:
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
|
|
|
|
|
(In thousands)
|
Three Months Ended March 31, 2019
|
Operating leases:
|
|
Rent expense
|
$
|
489
|
|
Financing lease:
|
|
Leased furniture, fixtures and office equipment depreciation expense
|
24
|
|
Interest expense
|
11
|
|
Short-term leases:
|
|
Rent expense
|
225
|
|
Total lease costs
|
$
|
749
|
|
|
|
Weighted average remaining lease term
|
|
Operating leases
|
6.5 years
|
|
Financing lease
|
6.6 years
|
|
|
|
Weighted average discount rate
|
|
Operating leases
|
5.0
|
%
|
Financing lease
|
5.0
|
%
|
As of
March 31, 2019
, scheduled future maturities of the Company's lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31, 2019
|
Year
|
Operating Leases
|
|
Financing Lease
|
Remainder of 2019
|
$
|
594
|
|
|
$
|
88
|
|
2020
|
2,160
|
|
|
157
|
|
2021
|
2,131
|
|
|
157
|
|
2022
|
2,082
|
|
|
158
|
|
2023
|
2,222
|
|
|
169
|
|
Thereafter
|
4,116
|
|
|
312
|
|
Total undiscounted cash flows
|
13,305
|
|
|
1,041
|
|
Less: imputed interest
|
(2,134
|
)
|
|
(160
|
)
|
Present value of lease liabilities
|
$
|
11,171
|
|
|
$
|
881
|
|
For the
three months ended
March 31, 2019
, supplemental cash flow information related to leases are as follows:
|
|
|
|
|
(In thousands)
|
Three Months Ended March 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows used for operating leases
|
$
|
399
|
|
Operating cash flows used for financing lease
|
$
|
13
|
|
Lease liabilities related to the acquisition of right-of-use assets:
|
|
Operating lease
|
$
|
69
|
|
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
5. Intangible assets, net
Intangible assets, other than goodwill, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortization period
|
|
March 31, 2019
|
|
December 31, 2018
|
Gross amount:
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
3 years
|
|
$
|
3,125
|
|
|
$
|
3,037
|
|
Acquired proprietary technology
|
|
5 years
|
|
11,459
|
|
|
11,459
|
|
Customer relationships
|
|
7-10 years
|
|
34,986
|
|
|
34,986
|
|
Trade names
|
|
20 years
|
|
16,357
|
|
|
16,357
|
|
Domain names
|
|
20 years
|
|
191
|
|
|
191
|
|
Databases
|
|
5-10 years
|
|
31,292
|
|
|
31,292
|
|
Non-competition agreements
|
|
2-5 years
|
|
1,768
|
|
|
1,768
|
|
Total gross amount
|
|
|
|
99,178
|
|
|
99,090
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
|
|
(1,210
|
)
|
|
(1,282
|
)
|
Acquired proprietary technology
|
|
|
|
(7,558
|
)
|
|
(6,987
|
)
|
Customer relationships
|
|
|
|
(15,613
|
)
|
|
(14,417
|
)
|
Trade names
|
|
|
|
(2,709
|
)
|
|
(2,504
|
)
|
Domain names
|
|
|
|
(32
|
)
|
|
(29
|
)
|
Databases
|
|
|
|
(11,475
|
)
|
|
(10,573
|
)
|
Non-competition agreements
|
|
|
|
(1,522
|
)
|
|
(1,486
|
)
|
Total accumulated amortization
|
|
|
|
(40,119
|
)
|
|
(37,278
|
)
|
Net intangible assets:
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
|
|
1,915
|
|
|
1,755
|
|
Acquired proprietary technology
|
|
|
|
3,901
|
|
|
4,472
|
|
Customer relationships
|
|
|
|
19,373
|
|
|
20,569
|
|
Trade names
|
|
|
|
13,648
|
|
|
13,853
|
|
Domain names
|
|
|
|
159
|
|
|
162
|
|
Databases
|
|
|
|
19,817
|
|
|
20,719
|
|
Non-competition agreements
|
|
|
|
246
|
|
|
282
|
|
Total net intangible assets
|
|
|
|
$
|
59,059
|
|
|
$
|
61,812
|
|
The gross amounts associated with software developed for internal use primarily represent capitalized costs for internally-developed software. The amounts relating to acquired proprietary technology, customer relationships, trade names, domain names, databases and non-competition agreements primarily represent the fair values of intangible assets acquired as a result of the acquisition of Fluent, LLC ("Fluent LLC"), effective on December 8, 2015 (the "Fluent LLC Acquisition"), and the acquisition of Q Interactive, LLC, effective on June 8, 2016 (the "Q Interactive Acquisition").
For the
three months ended
March 31, 2019
and
2018
, amortization expense related to intangible assets and included in depreciation and amortization expense in the Company's condensed consolidated statements of operations was
$3,125
and
$3,208
, respectively. As of
March 31, 2019
, intangible assets with a carrying amount of
$607
, included in the gross amount of software developed for internal use, have not commenced amortization, as they are not ready for their intended use.
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
As of
March 31, 2019
, estimated amortization expenses related to the Company's intangible assets for the remainder of
2019
through
2024
and thereafter are as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
Year
|
|
March 31, 2019
|
Remainder of 2019
|
|
$
|
9,525
|
|
2020
|
|
12,427
|
|
2021
|
|
8,886
|
|
2022
|
|
8,049
|
|
2023
|
|
3,967
|
|
2024 and thereafter
|
|
16,205
|
|
Total
|
|
$
|
59,059
|
|
6. Goodwill
Goodwill represents the cost in excess of fair value of net assets acquired in a business combination. As of
March 31, 2019
, the total balance of goodwill was
$159,791
, as a result of the acquisition of Interactive Data, LLC effective on October 2, 2014, the Fluent LLC Acquisition and the Q Interactive Acquisition.
In accordance with ASC Topic 350,
Intangibles - Goodwill and Other,
goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. The measurement date of the Company's annual goodwill impairment test is October 1.
For the
three months ended
March 31, 2019
, there were
no
events or changes in circumstances to indicate that goodwill is impaired.
7. Long-term debt, net
Long-term debt, net, related to the Refinanced Term Loan (as defined below) consisted of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Principal amount
|
|
$
|
59,445
|
|
|
$
|
60,320
|
|
Less: Unamortized debt issuance costs
|
|
(4,529
|
)
|
|
(4,848
|
)
|
Long-term debt, net
|
|
54,916
|
|
|
55,472
|
|
Less: Current portion of long-term debt
|
|
(4,824
|
)
|
|
(3,500
|
)
|
Long-term debt, net (non-current)
|
|
$
|
50,092
|
|
|
$
|
51,972
|
|
Refinanced Term Loan
In connection with the Spin-off of Red Violet, Fluent LLC refinanced and fully repaid the its existing term loans (the "Term Loans") and certain promissory notes (the "Promissory Notes"), which had been entered into on December 8, 2015, with a new term loan in the amount of
$70.0 million
("Refinanced Term Loan"), pursuant to a Limited Consent and Amendment No. 6 ("Amendment No. 6") to its Credit Agreement (the "Credit Agreement"), effective on March 26, 2018 (the "Refinancing").
The Refinanced Term Loan is guaranteed by the Company and its direct and indirect subsidiaries, and secured by substantially all of the assets of the Company and its direct and indirect subsidiaries, including Fluent LLC, in each case, on an equal and ratable basis. The Refinanced Term Loan accrues interest at the rate of either, at Fluent's option, (a) LIBOR (subject to a floor of
0.50%
) plus
7.00%
per annum, or (b) the base rate (generally equivalent to the U.S. prime rate) plus
6.0%
per annum, payable in cash. Interest under the Refinanced Term Loan is payable monthly. Scheduled principal amortization of the Refinanced Term Loan is
$875
per quarter, commencing with the fiscal quarter ended June 30, 2018. The Refinanced Term Loan matures on
March 26, 2023
.
On March 26, 2018, the Refinanced Term Loan was utilized to repay in full the outstanding principal amount plus accrued PIK interest of the Term Loans and Promissory Notes of
$55,586
and
$11,425
, respectively. Prepayment premiums and unamortized debt costs associated with the Term Loans of
$2,818
and
$3,136
, respectively, were capitalized in the balance of the Refinanced Term Loan and
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
are being amortized over the remaining period of the Refinanced Term Loan. In addition, refinancing costs paid to third parties of
$193
were recognized in loss on disposal of discontinued operations. See Note 3, "Discontinued operations," for details.
The Credit Agreement, as amended, requires the Company to maintain and comply with certain financial and other covenants, commencing with the fiscal quarter ended June 30, 2018. In addition, the Credit Agreement, as amended, includes certain prepayment provisions, including mandatory quarterly principal prepayments of the Refinanced Term Loan with a portion of the Company's excess cash flow, as defined in the Credit Agreement. For the
three months ended
March 31, 2019
, the quarterly prepayment resulting from excess cash flow was
$1,324
. As of
March 31, 2019
, this amount was reclassified to the current portion of long-term debt and will be paid during the second quarter.As of
March 31, 2019
, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.
Maturities
As of
March 31, 2019
, scheduled future maturities of the Refinanced Term Loan, including the required principal prepayment based on a portion of the Company's quarterly excess cash flow of
$1,324
for the first quarter of
2019
and excluding potential future additional principal prepayments, are as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
Year
|
|
|
|
Remainder of 2019
|
|
$
|
3,949
|
|
2020
|
|
3,500
|
|
2021
|
|
3,500
|
|
2022
|
|
3,500
|
|
2023
|
|
44,996
|
|
Total maturities
|
|
$
|
59,445
|
|
Fair value
As of
March 31, 2019
, the fair value of long-term debt is considered to approximate its carrying value, as the Refinanced Term Loan has a variable interest rate. This fair value assessment represents a Level 2 measurement.
8. Income taxes
The Company is subject to federal and state income taxes in the United States. The tax provision for interim periods is determined using an estimate of the Company's annual effective tax rate. The Company updates its estimated annual effective tax rate on a quarterly basis and, if the estimate changes, makes a cumulative adjustment.
The Company recorded a full valuation allowance against net deferred tax assets as of
March 31, 2019
and
December 31, 2018
and intends to continue maintaining a full valuation allowance on these net deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. Based on current income from continuing operations and anticipated future earnings, the Company believes there is a reasonable possibility that within the next 12 months sufficient positive evidence may become available to allow a conclusion to be reached that a significant portion, if not all, of the valuation allowance will be released. Release of some or all of the valuation allowance would result in the recognition of certain deferred tax assets and an increase in deferred tax benefit for any period in which such a release may be recorded, however, the exact timing and amount of any valuation allowance release are subject to change, depending upon the level of profitability that the Company is able to achieve and the net deferred tax assets available.
For the three months ended
March 31, 2019
and
2018
, the Company's effective income tax rate of
3%
, differed from the statutory federal income tax rates of
21%
and
34%
, respectively, with such differences resulting primarily from the application of the full valuation allowance against the Company's deferred tax assets.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than
50%
likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
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, 2019
and
December 31, 2018
, the balance of unrecognized tax benefits was
$1,480
. The unrecognized tax benefits, if recognized, would result in an increase to net operating losses that would be subject to a valuation allowance and, accordingly, result in no impact to the Company’s annual effective tax rate. As of
March 31, 2019
, the Company has not accrued any interest or penalties with respect to its uncertain tax positions.
The Company does not anticipate a significant increase or reduction in unrecognized tax benefits within the next twelve months.
9. Common stock, treasury stock and warrants
Common stock
As of
March 31, 2019
and
December 31, 2018
, the number of issued shares of common stock was
77,603,189
and
76,525,581
, respectively, which included shares of treasury stock of
1,554,829
and
1,233,198
, respectively.
For
three months ended
March 31, 2019
, the change in the number of issued shares of common stock was a result of an aggregate
1,077,608
shares of common stock issued upon vesting of RSUs, including
321,631
shares of common stock withheld to cover statutory taxes upon such vesting, which are reflected in treasury stock, discussed below.
Treasury stock
As of
March 31, 2019
and
December 31, 2018
, the Company held shares of treasury stock of
1,554,829
and
1,233,198
, with a cost of
$4,882
and
$3,272
, respectively.
The Company's share-based incentive plans, discussed in detail in Note 10,
Share-based compensation
, allow employees to forfeit shares of common stock to satisfy federal and state statutory tax withholding obligations upon the exercise of stock options and the vesting of RSUs and restricted stock 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, 2019
,
321,631
shares of common stock were withheld to cover statutory taxes owed by certain employees upon the vesting of their respective RSUs. These shares were taken into treasury stock.
Warrants
As of
March 31, 2019
and
December 31, 2018
, warrants to purchase an aggregate of
2,498,776
shares of common stock were outstanding, respectively, with exercise prices ranging from
$3.75
to
$6.00
per share.
On July 9, 2018 the Company entered into First Amendments (the "First Amendments") to the Amendments to Warrants and Agreements to Exercise ("Amended Whitehorse Warrants") with (i) H.I.G. Whitehorse SMA ABF, L.P. regarding
46,667
warrants to purchase common stock of the Company, par value
$0.0005
per share, at an exercise price of
$3.00
per share; (ii) H.I.G. Whitehorse SMA Holdings I, LLC regarding
66,666
warrants to purchase common stock of the Company at an exercise price of
$3.00
per share; and (iii) Whitehorse Finance, Inc. regarding
186,667
warrants to purchase common stock of the Company at an exercise price of
$3.00
per share. In November 2017, the Amended Whitehorse Warrants were exercised and the Company issued an aggregate of
300,000
shares of common stock of the Company (the "Warrant Shares") to the warrant holders. Pursuant to the First Amendments, the warrant holders have the right, but not the obligation, to require the Company to purchase from these warrant holders the
300,000
Warrant Shares at
$3.8334
per share (the "Put Right"), which may be exercised during the period commencing January 1, 2019 and ending December 15, 2019. In accordance with ASC 480,
Distinguishing Liabilities from Equity
, the Put Right has historically been classified within other current liabilities on the condensed consolidated balance sheets because the market price of the Company's common stock has been lower than the exercise price of
$3.8334
per share. As of March 29, 2019, the last reported sale price of the Company's common stock was
$5.62
per share, which resulted in the reclassification of the Put Right totaling
$1,150
from other current liabilities to equity, which is included within additional paid-in-capital on the condensed consolidated balance sheets as of
March 31, 2019
.
10. Share-based compensation
As of
March 31, 2019
, the Company maintains
two
share-based incentive plans: the Cogint, Inc. 2015 Stock Incentive Plan (the "2015 Plan") and the Fluent, Inc. 2018 Stock Incentive Plan (the "2018 Plan") which, combined, authorize the issuance of
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
21,104,836
shares of common stock. The primary purpose of the 2015 Plan and 2018 Plans, respectively, is to attract, retain, reward and motivate certain individuals by providing them with opportunities to acquire or increase their ownership interests in the Company.
As of
March 31, 2019
, there were
78,601
and
3,865,586
shares of common stock reserved for issuance under the 2015 Plan and the 2018 Plan, respectively.
Spin-off of Red Violet
On March 8, 2018, the Company's Compensation Committee approved the acceleration (the "Acceleration") of stock options, RSUs and restricted stock held by certain employees, consultants, and directors, including only those employees who were to continue with Red Violet upon completion of the Spin-off, subject to such employees still being employed or providing services on March 12, 2018 (the "Acceleration Date"). An aggregate of
5,157,998
shares were accelerated, including
47,500
stock options,
4,960,498
RSUs (inclusive of
500,000
shares to Marlin Capital and
2,500,000
to Michael Brauser), and
150,000
shares of restricted stock. Share-based compensation expense of
$14,667
resulting from the Acceleration was recognized in loss on disposal of discontinued operations during the first quarter of
2018
.
In connection with the Spin-off of Red Violet, common stock awards comprised of an aggregate of
304,000
shares were granted to certain employees of Red Violet ("Spin-off Grants") during the first quarter of
2018
, and related share-based compensation expense of
$881
was recognized in loss on disposal of discontinued operations. Additionally, an aggregate of
2,041,000
shares of common stock, subject to deferred delivery over a
three
-year period, were granted to certain Fluent employees as a result of the Spin-off ("Transaction Grants"), and related share-based compensation expense of
$5,409
was recognized in costs and expenses as part of the Spin-off transaction costs during the first quarter of
2018
.
In total, share-based compensation expense of
$15,548
, which resulted from the Acceleration and Spin-off Grants in connection with the Spin-off, was recognized in loss on disposal of discontinued operations during the first quarter of 2018. See Note 3, "Discontinued operations".
Stock options
On January 31, 2019, the Compensation Committee of the Company's Board of Directors granted to certain officers stock options, which were issued under the 2018 Plan on February 1, 2019. Subject to continuing service,
50%
of the shares subject to these stock options will vest if the Company's stock price remains above
125%
of the share price at the grant date for
20
consecutive trading days, and the remaining
50%
of the shares subject to these stock options will vest if the Company's stock price remains above
156.25%
of the share price at the grant date for
20
consecutive trading days; provided, that no shares will vest prior to the first anniversary of the grant date. 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 date of grant using a Monte Carlo simulation model. The range of the fair value of the stock options that were awarded is
$2.82
to
$2.87
per share. The key assumptions utilized to calculate the grant-date fair values for these awards are summarized below:
|
|
|
|
|
|
Key Assumptions
|
Grant date share price
|
|
$
|
4.64
|
|
Expected term
|
|
1.0 - 1.3 years
|
|
Expected volatility
|
|
65
|
%
|
Dividend yield
|
|
—
|
%
|
Risk-free rate
|
|
2.61
|
%
|
For the
three months ended
March 31, 2019
, details of stock option activity were as follows:
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
options
|
|
Weighted average exercise price per
share
|
|
Weighted average
remaining
contractual term
|
|
Aggregate
intrinsic
value
|
Outstanding as of December 31, 2018
|
|
112,000
|
|
|
$
|
13.98
|
|
|
2.8 years
|
|
$
|
—
|
|
Granted
|
|
2,030,000
|
|
|
$
|
4.64
|
|
|
|
|
|
Outstanding as of March 31, 2019
|
|
2,142,000
|
|
|
$
|
5.13
|
|
|
9.5 years
|
|
$
|
2,009
|
|
Options vested and expected to vest as of March 31, 2019
|
|
2,142,000
|
|
|
$
|
5.13
|
|
|
9.5 years
|
|
$
|
2,009
|
|
Options exercisable as of March 31, 2019
|
|
112,000
|
|
|
$
|
13.98
|
|
|
2.6 years
|
|
$
|
19
|
|
The aggregate intrinsic value amounts in the table above represent the difference between the closing price of the Company's common stock on March 29, 2019 of $
5.62
and the corresponding exercise prices, multiplied by the number of in-the-money stock options as of the same date.
The unvested balance of options is shown below for the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
options
|
|
Weighted average exercise price per share
|
|
Weighted average
remaining
contractual term
|
Unvested as of December 31, 2018
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Granted
|
|
2,030,000
|
|
|
$
|
4.64
|
|
|
|
Unvested as of March 31, 2019
|
|
2,030,000
|
|
|
$
|
4.64
|
|
|
9.8 years
|
|
For the
three months ended
March 31, 2019
, compensation expense recognized for these stock options of
$851
was recorded in sales and marketing and general and administrative expenses in the condensed consolidated statements of operations. For the
three months ended
March 31, 2018
, compensation expense recognized for these stock options of
$243
was recorded in discontinued operations in the condensed consolidated statements of operations. As of
March 31, 2019
, there was
$4,925
of unrecognized share-based compensation with respect to outstanding stock options.
Restricted stock units, common stock grants and restricted stock
For the
three months ended
March 31, 2019
, details of unvested RSU, common stock and restricted stock activity were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of units
|
|
Weighted average
grant-date fair value
|
Unvested as of December 31, 2018
|
|
3,831,965
|
|
|
$
|
7.95
|
|
Granted
|
|
1,725,930
|
|
|
$
|
4.78
|
|
Vested and delivered
|
|
(755,977
|
)
|
|
$
|
5.02
|
|
Withheld as treasury stock (1)
|
|
(321,631
|
)
|
|
$
|
5.25
|
|
Vested not delivered (2)
|
|
(673,338
|
)
|
|
$
|
7.25
|
|
Forfeited
|
|
(48,791
|
)
|
|
$
|
3.39
|
|
Unvested as of March 31, 2019
|
|
3,758,158
|
|
|
$
|
7.50
|
|
|
|
(1)
|
As discussed in Note 9, the increase in treasury stock was due to shares withheld to cover statutory withholding taxes upon the vesting of RSUs. As of
March 31, 2019
, there were
1,554,829
outstanding shares of treasury stock.
|
|
|
(2)
|
Vested not delivered represent vested RSUs or common stock grants with delivery deferred to a future time. For the
three months ended
March 31, 2019
, there was a net increase of
673,338
shares included in vested not delivered, as a result of the vesting of RSUs with deferred delivery elections. As of
March 31, 2019
, there were
3,583,255
outstanding RSUs or shares of common stock grants included in vested not delivered.
|
For the
three months ended
March 31, 2019
and
2018
, the Company recognized compensation (included in sales and marketing , product development, general and administrative and discontinued operations in the condensed consolidated statements of operations, and intangible assets in the condensed consolidated balance sheets) for RSUs, common stock and restricted stock of
$1,439
and
$22,701
, respectively. The fair value of the RSUs and restricted stock was estimated using the closing prices of the Company's common stock on the dates of grant.
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
As of
March 31, 2019
, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to
$18,985
, which is expected to be recognized over a weighted average period of
2.5
years.
For the
three months ended
March 31, 2019
and
2018
, share-based compensation for the Company's stock option, RSU, common stock and restricted stock awards were allocated to the following accounts in the condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Sales and marketing
|
|
$
|
369
|
|
|
$
|
666
|
|
Product development
|
|
245
|
|
|
158
|
|
General and administrative
|
|
1,661
|
|
|
415
|
|
Spin-off transaction costs
|
|
—
|
|
|
5,409
|
|
Discontinued operations
|
|
—
|
|
|
15,713
|
|
Total share-based compensation expense
|
|
2,275
|
|
|
22,361
|
|
Capitalized in intangible assets of continuing operations
|
|
15
|
|
|
159
|
|
Capitalized in intangible assets of discontinued operations
|
|
—
|
|
|
181
|
|
Total share-based compensation
|
|
$
|
2,290
|
|
|
$
|
22,701
|
|
11. Segment information
The Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker(s) in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision makers” to be its chief executive officer and its president. The Company has determined it operates in
one
operating segment and
one
reportable segment, as its chief operating decision makers review financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Revenue by country is based on the billing address of the customer. For the
three months ended
March 31, 2019
and
2018
, revenue by geographic area was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
United States
|
|
$
|
58,654
|
|
|
$
|
52,317
|
|
International
|
|
7,907
|
|
|
3,672
|
|
Revenue
|
|
$
|
66,561
|
|
|
$
|
55,989
|
|
Revenue from individual countries other than the United States did not exceed
10%
of total revenue for the periods presented. All significant long-lived assets are located in the United States.
12. Related party transactions
For the
three months ended
March 31, 2019
and
2018
, material related party transactions were as follows:
Business Consulting Agreement
Pursuant to a Business Consulting Agreement, Marlin Capital, an affiliate of Michael Brauser, held RSUs representing the right to receive
2,000,000
shares of the Company's common stock, for consulting services provided by Marlin Capital. These RSUs were to vest annually beginning from October 13, 2015 only if certain performance goals of the Company were met. The shares underlying such RSUs would not have been delivered until October 13, 2018, unless there was a change of control of the Company, termination of the agreement by the Company without cause, or termination of the agreement by Marlin Capital for good reason. The Company determined the performance goals were met as of
December 31, 2016
. For the
three months ended
March 31, 2018
, share-based
FLUENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
compensation expense of negative
$1,792
, as a result of the revaluation of the fair value of RSUs granted, was recognized in general and administrative expenses in association with shares under the Marlin Capital agreement. On March 12, 2018, the Company terminated the Business Consulting Agreement. The unvested
500,000
shares were accelerated and the related share-based compensation expense of
$906,000
was recognized fully in loss on disposal of discontinued operations during the first quarter of
2018
.
Promissory Notes
On December 8, 2015, the Company entered into the Promissory Notes, with an interest rate of
10%
per annum, with certain investors, for aggregate financing of
$10.0 million
, consisting of
$5.0 million
from Frost Gamma,
$4.0 million
from Michael Brauser and
$1.0 million
from another investor. During the
three months ended
March 31, 2018
, the Company repaid
$533
,
$426
and
$107
to Frost Gamma, Michael Brauser and another investor, respectively. On March 26, 2018, as part of the Refinancing associated with the Spin-off of Red Violet, the principal amounts plus accrued PIK interest of the Promissory Notes owing to Frost Gamma, Michael Brauser and such other investor, of
$5,713
,
$4,570
and
$1,143
, respectively, were fully repaid.
Consulting Agreement
On September 6, 2017, the Company entered into a Consulting Agreement with Michael Brauser, effective as of June 23, 2017, for a term of
four
years, under which Mr. Brauser served as a strategic advisor to the Company but received no salary for such services. In consideration for Mr. Brauser's services, the Consulting Agreement provided for continued vesting of all outstanding RSUs granted to Mr. Brauser under the Brauser Employment Agreement. For the
three months ended
March 31, 2018
, share-based compensation expense of
$302
, associated with the Consulting Agreement, was recognized in general and administrative expenses. In addition, upon the Acceleration, the remaining unvested
2,500,000
shares were accelerated, and related share-based compensation expense of
$6,468
was recognized in loss on disposal of discontinued operations during the first quarter of
2018
. The Consulting Agreement was terminated upon the Spin-off of Red Violet.
13. Contingencies
In the ordinary course of business, the Company is subject to loss contingencies that cover a range of matters. An estimated loss from a loss contingency, such as a legal proceeding or claim, is accrued if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, the Company evaluates, among other factors, the degree of probability and the ability to reasonably estimate the amount of any such loss.
On October 26, 2018, the Company received a subpoena from the New York Attorney General’s Office (“NY AG”) regarding compliance with
New York Executive Law § 63(12) and New York General Business Law § 349
,
as they relate to the collection, use, or disclosure of information from or about consumers or individuals submitted to the Federal Communication Commission (“FCC”) in connection with the FCC’s rulemaking proceeding captioned “Restoring Internet Freedom,” WC Docket No. 17-108. On December 13, 2018, the Company received a subpoena from the United States Department of Justice (“DOJ”) regarding the same issue
.
The Company has been fully cooperating with both the NY AG and the DOJ and is responding to the subpoenas. At this time, it is not possible to determine the duration or disposition of either matter. As such
, the Company is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.
14. Subsequent events
Management has made an evaluation for subsequent events requiring recognition or disclosure in these consolidated financial statements through
May 10, 2019
, which is the date these condensed consolidated financial statements were available to be issued. None were identified.