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, 2022 and 2021, 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, 2022.
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. From April 1, 2020 through August 31, 2021, the Company had included Winopoly, LLC ("Winopoly") in its consolidated financial statements as a VIE (as further discussed in Note 11, Business acquisition and Note 12, Variable Interest Entity). Winopoly has been a wholly-owned subsidiary of the Company since September 1, 2021.
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, 2021 ("2021 Form 10-K") filed with the SEC on March 9, 2022. The consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date included in the 2021 Form 10-K.
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation.
(b) Recently issued and adopted accounting standards
In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2016-13, Financial Instruments—Credit Losses ("Topic 326"), and additional changes, modifications, clarifications or interpretations thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available-for-sale debt securities at the amounts expected to be collected. The new guidance is effective for annual and interim periods beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Topic 848"), which provides optional guidance to ease the potential burden in accounting for the discontinuation of a reference rate such as LIBOR, formerly known as the London Interbank Offered Rate, because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has completed its assessment and concluded this update has no material impact on its consolidated financial statements.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
(c) Revenue recognition
On January 1, 2018, we adopted and started applying the practical expedient offered under FASB Accounting Standards Codification ("ASC"), Revenue from Contracts with Customers, ("Topic 606"), which permits, under ASC 606-10-55-18, revenue to be 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, (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.
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, 2022 and
December 31, 2021, the balance of deferred revenue was
$1,331
and
$651, respectively. The majority of the deferred revenue balance as of
December 31, 2021 was recognized into revenue during the
first quarter of
2022.
When there is a delay between the period in which revenue is recognized and when a customer invoice is issued, revenue is recognized, and the related amounts are recorded as unbilled revenue within accounts receivable on the consolidated balance sheets. As of September 30, 2022 and December 31, 2021, unbilled revenue included in accounts receivable was $28,384 and $31,842, 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, put/call considerations, consolidation of variable interest entity, accruals for contingencies and allowance for deferred tax assets. 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
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, 2022, the fair value of long-term debt is considered to approximate its carrying value. The fair value assessment represents a Level 2 measurement.
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, 2022, certain non-financial assets have been measured at fair value subsequent to their initial recognition. The Company determined the estimated fair value to be Level 3, as certain inputs used to determine fair value are unobservable, see Note 4, Goodwill, for further discussion of the impairment charge.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
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 and restricted stock. 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, 2022 and 2021, basic and diluted income (loss) per share was as follows:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Numerator: | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 3,113 | | | $ | (2,452 | ) | | $ | (55,844 | ) | | $ | (13,889 | ) |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 79,898,219 | | | | 78,441,740 | | | | 79,620,308 | | | | 77,866,621 | |
Weighted average restricted shares vested not delivered | | | 1,694,097 | | | | 1,691,666 | | | | 1,707,331 | | | | 1,887,041 | |
Total basic weighted average shares outstanding | | | 81,592,316 | | | | 80,133,406 | | | | 81,327,639 | | | | 79,753,662 | |
Dilutive effect of assumed conversion of restricted stock units | | | 107,650 | | | | — | | | | — | | | | — | |
Total diluted weighted average shares outstanding | | | 81,699,966 | | | | 80,133,406 | | | | 81,327,639 | | | | 79,753,662 | |
Basic and diluted income (loss) per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.04 | | | $ | (0.03 | ) | | $ | (0.69 | ) | | $ | (0.17 | ) |
Diluted | | $ | 0.04 | | | $ | (0.03 | ) | | $ | (0.69 | ) | | $ | (0.17 | ) |
Based upon the exercise price and the average stock price for the three and nine months ended September 30, 2022 and 2021, respectively, certain stock equivalents, including stock options and warrants, have been excluded from diluted weighted average share calculations due to their anti-dilutive nature.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Restricted stock units | | | 1,220,790 | | | | 2,814,788 | | | | 1,780,022 | | | | 2,814,788 | |
Stock options | | | 2,139,000 | | | | 2,204,000 | | | | 2,139,000 | | | | 2,204,000 | |
Warrants | | | — | | | | 833,333 | | | | — | | | | 833,333 | |
Total anti-dilutive securities | | | 3,359,790 | | | | 5,852,121 | | | | 3,919,022 | | | | 5,852,121 | |
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, 2022 | | | December 31, 2021 | |
Gross amount: | | | | | | | | | | | | |
Software developed for internal use | | | 3 | | | $ | 12,842 | | | | 9,552 | |
Acquired proprietary technology | | | 3-5 | | | | 15,871 | | | | 14,844 | |
Customer relationships | | | 5-10 | | | | 38,068 | | | | 37,886 | |
Trade names | | | 4-20 | | | | 16,657 | | | | 16,657 | |
Domain names | | | 20 | | | | 195 | | | | 191 | |
Databases | | | 5-10 | | | | 31,292 | | | | 31,292 | |
Non-competition agreements | | | 2-5 | | | | 1,768 | | | | 1,768 | |
Total gross amount | | | | | | | 116,693 | | | | 112,190 | |
Accumulated amortization: | | | | | | | | | | | | |
Software developed for internal use | | | | | | | (7,301 | ) | | | (5,263 | ) |
Acquired proprietary technology | | | | | | | (14,131 | ) | | | (13,402 | ) |
Customer relationships | | | | | | | (34,053 | ) | | | (29,948 | ) |
Trade names | | | | | | | (5,815 | ) | | | (5,145 | ) |
Domain names | | | | | | | (65 | ) | | | (58 | ) |
Databases | | | | | | | (22,846 | ) | | | (20,859 | ) |
Non-competition agreements | | | | | | | (1,768 | ) | | | (1,768 | ) |
Total accumulated amortization | | | | | | | (85,979 | ) | | | (76,443 | ) |
Net intangible assets: | | | | | | | | | | | | |
Software developed for internal use | | | | | | | 5,541 | | | | 4,289 | |
Acquired proprietary technology | | | | | | | 1,740 | | | | 1,442 | |
Customer relationships | | | | | | | 4,015 | | | | 7,938 | |
Trade names | | | | | | | 10,842 | | | | 11,512 | |
Domain names | | | | | | | 130 | | | | 133 | |
Databases | | | | | | | 8,446 | | | | 10,433 | |
Total intangible assets, net | | | | | | $ | 30,714 | | | $ | 35,747 | |
The gross amounts associated with software developed for internal use primarily represents the 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, effective June 8, 2016 (the "Q Interactive Acquisition"), the acquisition of substantially all the assets of AdParlor, LLC, and certain of its affiliates, effective July 1, 2019 (the "AdParlor Acquisition"), the acquisition of a 50% interest in Winopoly (the "Initial Winopoly Acquisition"), effective April 1, 2020 (Note 11, Business acquisition), and the acquisition of 100% interest in True North Loyalty, LLC, (the "True North Acquisition"), effective January 1, 2022 (Note 11, Business acquisition). In connection with the Initial Winopoly Acquisition, the Company recorded 100% equity ownership for GAAP purposes due to Winopoly's status as a VIE for which the Company is a primary beneficiary, so no further intangible assets were acquired in connection with the Full Winopoly Acquisition described in Note 11, Business acquisition.
During the second quarter of 2022, the Company determined that the decline in its publicly traded stock price which resulted in a corresponding decline in its market capitalization constituted a triggering event. As such, the Company conducted an interim test of the recoverability of its long-lived assets. The Company continued to see a decline in its market capitalization for the third quarter of 2022 and conducted another recoverability test of its long-lived assets. Based on the results of the recoverability tests, which measured the Company's projected undiscounted cash flows as compared to the carrying value of the asset group, the Company determined that its long-lived assets were not impaired as of June 30, 2022 or September 30, 2022. The Company believes that the assumptions utilized in the impairment tests, including the estimation of future cash flows, were reasonable. Future tests may indicate impairment if actual future cash flows or other factors considered differ from the assumptions used in the prior interim impairment tests.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
Amortization expense of $3,292 and $3,006 for the three months ended September 30, 2022 and 2021, respectively, and $9,651 and $9,352, for the nine months ended September 30, 2022 and 2021, respectively, is included in depreciation and amortization expenses in the consolidated statements of operations. As of September 30, 2022, intangible assets with a carrying amount of $1,034, 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, 2022, estimated amortization expense related to the Company's intangible assets for the remainder of 2022 and through 2027 and thereafter are as follows:
Year | | September 30, 2022 | |
Remainder of 2022 | | $ | 3,098 | |
2023 | | | 7,182 | |
2024 | | | 6,574 | |
2025 | | | 5,184 | |
2026 | | | 1,277 | |
2027 and thereafter | | | 7,399 | |
Total | | $ | 30,714 | |
4. Goodwill
Goodwill represents the consideration paid in excess of the fair value of net assets acquired in a business combination. As of September 30, 2022, the total balance of goodwill was $110,780, a decrease of $54,308 from December 31, 2021, as a result of a non-cash impairment charge of $55,400 partially offset by $1,092 attributable to the True North Acquisition (Note 11, Business acquisition). The balance also includes goodwill from the acquisition of the Fluent LLC Acquisition, the Q Interactive Acquisition, the AdParlor Acquisition, and the Initial Winopoly Acquisition (Note 11, Business acquisition). In connection with the Initial Winopoly Acquisition, the Company recorded 100% equity ownership for GAAP purposes due to Winopoly's status as a VIE for which the Company is a primary beneficiary, so no further goodwill was acquired in connection with the Full Winopoly Acquisition described in 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.
During the second quarter of 2022, the Company determined that the decline in the market value of its publicly-traded stock price, which resulted in a corresponding decline in its market capitalization, constituted a triggering event. The Company conducted an interim test of the fair value of the Fluent reporting unit's goodwill for potential impairment as of June 30, 2022. The Company considered a combination of income and market approaches to determine the fair value of the Fluent reporting unit. The Company determined that a market-based approach, which considered the Company’s implied market multiple applied to management’s forecast and further adjusted for a control premium, provided the best indication of fair value of the Fluent reporting unit. The results of this market-based approach indicated that its carrying value exceeded its fair value by 27%. The Company therefore concluded that the Fluent reporting unit’s goodwill of $162,000 was impaired and recorded a non-cash impairment charge of $55,400 in the second quarter of 2022.
During the third quarter of 2022, the Company assessed the impact of the continued decline in the market value of its publicly-traded stock price and concluded that the continued decline constituted a triggering event. The Company conducted a test of the fair value of the Fluent reporting unit's goodwill for potential impairment as of September 30, 2022. The Company applied a combination of income and market approaches to determine the fair value of the Fluent reporting unit and concluded its goodwill of $106,600 was not impaired since the results of the test indicated that the estimated fair value exceeded its carrying value by approximately 4%. If there is a reduction in operating results or a further decline in the market value of the Company's publicly-traded stock, this could result in future impairment charges, which could affect the financial results.
The Company believes that the assumptions utilized in its interim impairment testing, including forecasted cash flows, market multiples and control premiums, are reasonable.
| | | Fluent | | | All Other | | | Total |
Balance as of December 31, 2021 | | | 160,922 | | | 4,166 | | | 165,088 |
True North acquisition | | | 1,092 | | | — | | | 1,092 |
Fluent goodwill impairment | | | (55,400) | | | — | | | (55,400) |
Balance as of September 30, 2022 | | | 106,614 | | | 4,166 | | | 110,780 |
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
5. Debt, net
Long-term debt, net of unamortized discount and financing costs, related to the Refinanced Term Loan and the New Credit Facility consisted of the following:
| | September 30, 2022 | | | December 31, 2021 | |
New Credit Facility due 2026 (less unamortized discount and financing costs of $720 and $921, respectively) | | $ | 41,780 | | | $ | 45,329 | |
Less: Current portion of long-term debt | | | (5,000 | ) | | | (5,000 | ) |
Long-term debt, net (non-current) | | $ | 36,780 | | | $ | 40,329 | |
Refinanced Term Loan
On March 31, 2021, Fluent, LLC, a wholly-owned subsidiary of the Company redeemed in full $38,318 in the aggregate principal amount of a term loan entered into on December 8, 2015 and due March 26, 2023 (the "Refinanced Term Loan"), prior to maturity, resulting in a loss of $2,964 as the cost of early extinguishment of the debt, $766 of which was a cash payment.
New Credit Facility
On March 31, 2021, Fluent, LLC entered into a credit agreement (the “Credit Agreement”) with certain subsidiaries of Fluent, LLC as guarantors, and Citizens Bank, N.A. as administrative agent, lead arranger and bookrunner. The Credit Agreement provides for a term loan in the aggregate principal amount of $50,000 funded on the closing date (the “Term Loan”), along with an undrawn revolving credit facility of up to $15,000 (the "Revolving Loans," and together with the Term Loan, the "New Credit Facility").
The proceeds of the Term Loan were used to repay all outstanding amounts due under the Refinanced Term Loan, including transaction fees and expenses, and for working capital and other general corporate purposes.
Borrowings under the Credit Agreement bear interest at a rate per annum equal to an applicable margin, plus, at the Company's option, either a base rate or a LIBOR rate (subject to a floor of 0.25%). The applicable margin is between 0.75% and 1.75% for base rate borrowings and 1.75% and 2.75% for LIBOR rate borrowings, depending upon the Company's consolidated leverage ratio. The opening interest rate of the New Credit Facility was 2.50% (LIBOR + 2.25%), which increased to 4.87% (LIBOR + 1.75%) as of September 30, 2022.
Borrowings under the Credit Agreement are secured by substantially all of the assets of Fluent, LLC and, subject to certain exclusions, each of its existing and future U.S. subsidiaries. Such assets include, subject to certain limitations, the equity interests of each of the existing and future direct and indirect U.S. subsidiaries of Fluent, LLC.
The Credit Agreement contains negative covenants that, among other things, limit Fluent, LLC's ability to: incur indebtedness; grant liens on its assets; enter into certain investments; consummate fundamental change transactions; engage in mergers or acquisitions or dispose of assets; enter into certain transactions with affiliates; make changes to its fiscal year; enter into certain restrictive agreements; and make certain restricted payments (including for dividends and stock repurchases, which are generally prohibited except in a few circumstances and/or up to specified amounts). Each of these limitations are subject to various conditions.
The Credit Agreement matures on March 31, 2026 and interest is payable monthly. Scheduled principal amortization of the Term Loan is $1,250 per quarter, which commenced with the fiscal quarter ended June 30, 2021. At September 30, 2022, the Company was in compliance with all of the financial and other covenants under the Credit Agreement. Effective September 1, 2021, the Credit Agreement was amended to add Winopoly as a party to that agreement following the consummation of the Full Winopoly Acquisition which transaction is more fully described in Note 11, Business acquisition, of this Quarterly Report on Form 10-Q. Effective April 29, 2022, the Credit Agreement was amended to add certain additional subsidiaries of Fluent, LLC as parties.
Maturities
As of September 30, 2022, scheduled future maturities of the Credit Agreement are as follows:
Year | | | September 30, 2022 | |
Remainder of 2022 | | $ | 1,250 | |
2023 | | | 5,000 | |
2024 | | | 5,000 | |
2025 | | | 5,000 | |
2026 | | | 26,250 | |
Total maturities | | $ | 42,500 | |
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
6. Income taxes
The Company is subject to federal and state income taxes in the United States. The tax provision for interim periods is determined using an estimate of the Company's annual effective tax rate. The Company updates its estimated annual effective tax rate on a quarterly basis and, if the estimate changes, a cumulative adjustment is made.
As of September 30, 2022 and December 31, 2021, the Company has recorded a full valuation allowance against net deferred tax assets and intends to continue maintaining a full valuation allowance on these net deferred tax assets until there is sufficient evidence to support the release of all or a portion of these allowances. Release of some or all of the valuation allowance would result in the recognition of certain deferred tax assets and an increase in deferred tax benefit for any period in which such a release may be recorded, however, the exact timing and amount of any valuation allowance release are subject to change, depending upon the level of profitability that the Company is able to achieve and the net deferred tax assets available.
For the nine months ended September 30, 2022, the Company's effective income tax expense rate of 4.0% primarily represents 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 on expected federal cash tax expense. For the nine months ended September 30, 2021, the Company's effective income tax benefit rate of 0% differed from the statutory federal income tax rate of 21%, with such differences resulting primarily from the application of the full valuation allowance against the Company's deferred tax assets.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances, and information available as of the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the Company's financial statements.
As of September 30, 2022 and December 31, 2021, the balance of unrecognized tax benefits was $1,480. The unrecognized tax benefits, if recognized, would result in an increase to net operating losses that would be subject to a valuation allowance and, accordingly, result in no impact to the Company’s annual effective tax rate. As of September 30, 2022, 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, 2022 and December 31, 2021, the number of issued shares of common stock was 84,242,962 and 83,057,083, respectively, which included shares of treasury stock of 4,300,152 and 4,091,823, respectively.
For the nine months ended September 30, 2022, the change in the number of issued shares of common stock was the result of an aggregate 1,185,879 shares of common stock issued upon vesting of RSUs, including 208,329 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, 2022 and December 31, 2021, the Company held shares of treasury stock of 4,300,152 and 4,091,823, respectively with a cost of $11,171 and $10,723, respectively.
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, 2022, 208,329 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.
Warrants
On May 22, 2022, the warrants to purchase an aggregate of 833,333 shares of common stock at prices ranging from $3.75 to $6.00 per share expired, unexercised.
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, 2022, the Company had 10,901,195 shares of common stock available for grants pursuant to the 2022 Plan, which includes 901,195 shares of common stock previously available for issuance under the Fluent, Inc. 2018 Stock Incentive Plan (the "Prior Plan"). The primary purpose of the plans is to attract, retain, reward, and motivate certain individuals by providing them with opportunities to acquire or increase their ownership interests in the Company.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
Stock options
The Compensation Committee of the Company's Board of Directors approved the grant of stock options to certain Company executives, which were issued on February 1, 2019, December 20, 2019, March 1, 2020, and March 1, 2021, under the Prior Plan. Subject to continuing service, 50% of the shares subject to these stock options will vest if the Company's stock price remains above 125.00%, 133.33%, 133.33% and 133.33%, respectively, of the exercise price for twenty consecutive trading days, and the remaining 50% of the shares subject to these stock options will vest if the Company's stock price remains above 156.25%, 177.78%, 177.78% and 177.78%, respectively, of the exercise price for twenty consecutive trading days; provided, that no shares will vest prior to the first anniversary of the grant date. As of September 30, 2022, the first condition for the stock options issued on February 1, 2019, December 20, 2019 and March 1, 2020 had been met and the second condition for the stock options issued on December 20, 2019 and March 1, 2020 had been met. Any shares that remain unvested as of the fifth anniversary of the grant date will vest in full on such date. The fair value of the stock options granted was estimated at the trading day before the date of grant using a Monte Carlo simulation model. The key assumptions utilized to calculate the grant-date fair values for these awards are summarized below:
Issuance Date | | February 1, 2019 | | | December 20, 2019 | | | March 1, 2020 | | | March 1, 2021 | |
Fair value lower range | | $ | 2.81 | | | $ | 1.58 | | | $ | 1.46 | | | $ | 4.34 | |
Fair value higher range | | $ | 2.86 | | | $ | 1.61 | | | $ | 1.49 | | | $ | 4.43 | |
Exercise price | | $ | 4.72 | | | $ | 2.56 | | | $ | 2.33 | | | $ | 6.33 | |
Expected term (in years) | | | 1.0 - 1.3 | | | | 1.0 - 1.6 | | | | 1.0 - 1.5 | | | | 1.0 - 1.3 | |
Expected volatility | | | 65 | % | | | 70 | % | | | 70 | % | | | 80 | % |
Dividend yield | | | — | % | | | — | % | | | — | % | | | — | % |
Risk-free rate | | | 2.61 | % | | | 1.85 | % | | | 1.05 | % | | | 1.18 | % |
For the nine months ended September 30, 2022, 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, 2021 | | | 2,204,000 | | | $ | 4.41 | | | | 7.1 | | | $ | — | |
Granted | | | — | | | | — | | | | — | | | | — | |
Exercised | | | — | | | | — | | | | — | | | | — | |
Expired | | | (65,000 | ) | | | 1.10 | | | | — | | | | — | |
Outstanding as of September 30, 2022 | | | 2,139,000 | | | $ | 4.37 | | | | 6.6 | | | $ | — | |
Options exercisable as of September 30, 2022 | | | 1,242,000 | | | $ | 3.98 | | | | 6.6 | | | $ | — | |
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.
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, 2022, 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, 2021 | | | 897,000 | | | $ | 4.91 | | | | 7.3 | |
Granted | | | — | | | | — | | | | — | |
Vested | | | — | | | | — | | | | — | |
Unvested as of September 30, 2022 | | | 897,000 | | | $ | 4.91 | | | | 6.6 | |
Compensation expense recognized for stock options of $0 and $105 for the three months ended September 30, 2022 and 2021, respectively, and $125 and $395 for the nine months ended September 30, 2022 and 2021, respectively, was recorded in sales and marketing, product development and general and administrative expenses in the consolidated statements of operations. As of September 30, 2022, there was $0 of unrecognized share-based compensation with respect to outstanding stock options.
Restricted stock units and restricted stock
For the nine months ended September 30, 2022, details of unvested RSU and restricted stock activity were as follows:
| | Number of units | | | Weighted average grant-date fair value | |
Unvested as of December 31, 2021 | | | 3,111,321 | | | $ | 8.03 | |
Granted | | | 200,000 | | | $ | 1.89 | |
Vested and delivered | | | (977,550 | ) | | $ | 3.79 | |
Withheld as treasury stock (1) | | | (208,329 | ) | | $ | 4.56 | |
Vested not delivered (2) | | | — | | | $ | 3.30 | |
Forfeited | | | (345,419 | ) | | $ | 3.80 | |
Unvested as of September 30, 2022 | | | 1,780,023 | | | $ | 10.90 | |
(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, 2022, there were 4,300,152 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, 2022, there was no net change in the vested not delivered balance as a result of the timing of delivery of certain shares. As of September 30, 2022, 1,691,666 outstanding RSUs were vested not delivered. |
Compensation expense recognized for RSUs and restricted stock of $818 and $1,063 for the three months ended September 30, 2022 and 2021, respectively, and $2,595 and $3,276 for the nine months ended September 30, 2022 and 2021, 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, 2022, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $4,190, which is expected to be recognized over a weighted average period of 1.4 years.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
For the three and nine months ended September 30, 2022 and 2021, 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, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Sales and marketing | | $ | 107 | | | $ | 188 | | | $ | 420 | | | $ | 560 | |
Product development | | | 125 | | | | 167 | | | | 383 | | | | 668 | |
General and administrative | | | 569 | | | | 790 | | | | 1,849 | | | | 2,349 | |
Share-based compensation expense | | | 801 | | | | 1,145 | | | | 2,652 | | | | 3,577 | |
Capitalized in intangible assets | | | 17 | | | | 23 | | | | 68 | | | | 94 | |
Total share-based compensation | | $ | 818 | | | $ | 1,168 | | | $ | 2,720 | | | $ | 3,671 | |
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, 2022, the Company has two operating segments and two corresponding reporting units, “Fluent” and “All Other,” and one reportable segment. “All Other” represents the operating results of AdParlor, LLC, and is included for purposes of reconciliation of the respective balances below to the consolidated financial statements. “Fluent,” for the purposes of segment reporting, represents the consolidated operating results of the Company excluding “All Other.”
Summarized financial information concerning the Company's segments for the three and nine months ended September 30, 2022 and 2021 are shown in the following tables below:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Fluent segment revenue: | | | | | | | | | | | | | | | | |
United States | | $ | 53,853 | | | $ | 62,533 | | | $ | 169,197 | | | $ | 180,091 | |
International | | | 33,209 | | | $ | 20,058 | | | | 99,841 | | | | 40,041 | |
Fluent segment revenue | | $ | 87,062 | | | $ | 82,591 | | | $ | 269,038 | | | $ | 220,132 | |
All Other segment revenue: | | | | | | | | | | | | | | | | |
United States | | $ | 1,984 | | | $ | 3,259 | | | $ | 7,360 | | | $ | 9,194 | |
International | | | — | | | | 8 | | | | 72 | | | | 80 | |
All Other segment revenue | | $ | 1,984 | | | $ | 3,267 | | | $ | 7,432 | | | $ | 9,274 | |
Segment EBITDA | | | | | | | | | | | | | | | | |
Fluent segment EBITDA | | $ | 4,192 | | | $ | 684 | | | $ | (42,055 | ) | | $ | 512 | |
All Other segment EBITDA | | | (167 | ) | | | 469 | | | | (302 | ) | | | 341 | |
Total EBITDA | | | 4,025 | | | | 1,153 | | | | (42,357 | ) | | | 853 | |
Depreciation and amortization | | | 3,398 | | | | 3,200 | | | | 10,037 | | | | 9,939 | |
Total income (loss) from operations | | $ | 627 | | | $ | (2,047 | ) | | $ | (52,394 | ) | | $ | (9,086 | ) |
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
Total assets: | | | | | | |
Fluent | | $ | 236,215 | | | $ | 297,768 | |
All Other | | | 16,803 | | | | 20,414 | |
Total assets | | $ | 253,018 | | | $ | 318,182 | |
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
As of September 30, 2022, long-lived assets are all located in the United States.
For the nine months ended September 30, 2022, the Company identified an international customer within the Fluent segment with revenue in the amount of $59,175 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.
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, as such information was 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 May 6, 2021, the Company and the NY AG executed an Assurance of Discontinuance (the “AOD”) to resolve this matter. The AOD imposed injunctive provisions on the Company’s practices with regard to political advocacy campaigns, most of which the Company had already implemented, and imposed a $3,700 penalty, which was in line with the Company's accrual as of March 31, 2021 and paid in full as of June 30, 2021.
On December 13, 2018, the Company received a subpoena from the United States Department of Justice (“DOJ”) regarding the same issue. On March 12, 2020, the Company received a subpoena from the Office of the Attorney General of the District of Columbia ("DC AG") regarding the same issue. The Company has not received any communications from either the DOJ or the DC AG since the second quarter of 2020. At this time, it is not possible to predict the ultimate outcome of this matter or the significance, if any, to the Company's business, results of operations or financial position.
On June 27, 2019, as a part of two sales and use tax audits covering the period from December 1, 2010 to November 30, 2019, the New York State Department of Taxation and Finance (the “Tax Department”) issued a letter stating its position that revenue derived from certain of the Company’s customer acquisition and list management services are subject to sales tax, as a result of being deemed information services. The Company disputed the Tax Department's position on several grounds, but on January 14 and 15, 2020, the Tax Department issued Statements of Proposed Audit Adjustment totaling $8.2 million, including $2.0 million of interest. The Company formally disagreed with the amount of the Proposed Audit Adjustments and notices of determination subsequently issued by the Tax Department totaling $3.0 million, including $0.7 million of interest. After a Conciliation Conference, the Company reached a settlement with the Tax Department for $1.7 million which was paid on April 1, 2022.
On January 28, 2020, the Company received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) regarding compliance with the Federal Trade Commission Act, 15 U.S.C. §45 or the Telemarketing Sales Rule, 16 C.F.R. Part 310, as they relate to the advertising, marketing, promotion, offering for sale, or sale of rewards and other products, the transmission of commercial text messages, and/or consumer privacy or data security. Since receipt of the CID, the Company has provided information and documentation and fully cooperated with the FTC. On October 18, 2022, the FTC sent the Company a draft complaint and proposed consent order seeking injunctive relief and a civil monetary penalty. A substantial majority of the injunctive provisions contained in the consent order are consistent with the Company’s current business practices. The FTC and the Company have commenced settlement negotiations. The Company believes that a loss from these matters is probable but it is not yet possible to reasonably estimate the magnitude of such loss. An unfavorable outcome of this matter could have a material adverse effect on the Company’s business, results of operations and/or financial position.
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 (“PA AG”) that it was reviewing the Company’s business practices for compliance under the Unfair Trade Practices and Consumer Protection Law, 73 P.S. § 201-1 et seq.; the Telemarketer Registration Act, 73 P.S. § 2241 et. seq., and the Telemarketing Sales Rule, 16 C.F.R. 310 et seq. The Company has been responsive and is fully cooperating with the PA AG. On July 27, 2022, the PA AG sent the Company a draft Assurance of Voluntary Compliance (“AVC”). The Company responded with a revised AVC but the PA AG indicated an unwillingness to negotiate the terms of the AVC, and on November 2, 2022, the Commonwealth of Pennsylvania filed a complaint for permanent injunction, civil penalties in the amount of $1,000 for each violation of the PA Consumer Protection Law and disgorgement of profits plus other monetary relief, and other equitable relief against Fluent, LLC and four of its subsidiaries in the United States District Court for the Western District of Pennsylvania. The Company believes its current practices are in compliance with the PA Consumer Protection Law and is currently evaluating this complaint. At this time, it is not possible to predict the ultimate outcome of this matter or the significance, if any, to the Company’s business, results of operations or financial position.
11. Business acquisition
True North Acquisition
On January 1, 2022, the Company acquired a 100% membership interest in True North Loyalty, LLC for a deemed purchase price of $2,321, which consisted of $1,000 in cash at closing, $860 of deferred payments due at both the first and second anniversary of the closing date adjusted for net-working capital, and contingent consideration with a fair value at the closing date of $250, payable in common stock based upon the achievement of specified revenue targets over the five-year period following the completion of the acquisition. The Company also issued 100,000 shares of fully vested stock under the Prior Plan to the sellers valued at $211. Certain seller parties entered into employment and non-competition agreements with the Company in connection with the True North Acquisition. True North Loyalty, LLC is a subscription-based business that utilizes call center operations and other media channels to market recurring revenue services to consumers. In accordance with ASC 805, the Company determined that the True North Acquisition constituted the purchase of a business. For the three and nine months ended September 30, 2022, the Company incurred transaction-related expenses of $0 and $59, respectively, and compensation expense related to non-compete agreements in connection with the acquisition of $125 and $375, respectively, which are recorded as part of general and administrative expenses in the consolidated statements of operations. Assets and revenues of True North Loyalty, LLC totaled 2% and 2%, respectively, of the Company's consolidated assets and revenues as of and for the nine months ended September 30, 2022 and are included in the Fluent operating segment.
On January 1, 2022, it was determined to use the excess earnings method, a variation of the income approach, to amortize: (i) the fair value of the acquired customer relationships related to subscribers of $170 over a period of one year, and (ii) the fair value of the acquired customer relationships related to call centers of $1,180, over a period of five years. The amount of the purchase price in excess of the fair value of the net assets acquired was recorded as goodwill in the amount of $1,092 and primarily relates to intangible assets that do not qualify for separate recognition, including assembled workforce and synergies. For tax purposes, the goodwill is not deductible.
Below is a summary of the purchase price allocation of the True North Acquisition: | | | | |
Cash | | $ | 29 | |
Accounts receivable, net | | | 3 | |
Prepaid expenses and other current assets | | | 84 | |
Intangible assets: | | | | |
Customer list | | | 182 | |
Developed technology | | | 1,180 | |
Goodwill | | | 1,092 | |
Other non-current assets | | | 7 | |
Liabilities assumed | | | (256 | ) |
Consideration transferred | | $ | 2,321 | |
Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
Winopoly acquisition
On April 1, 2020, the Company acquired, through a wholly-owned subsidiary, a 50% membership interest in Winopoly for a deemed purchase price of $2,553, which consisted of $1,553 in cash and contingent consideration with a fair value of $1,000 payable based upon the achievement of specified revenue targets over the eighteen-month period following the completion of the acquisition. The initial contingent consideration of $1,000 had been paid based on specific revenue targets having been met in the first quarter of 2021. On May 17, 2021, additional contingent consideration that was not previously deemed to be probable of payment in the amount of $500 was paid based on a specific revenue target having been met. Winopoly is a contact center operation, which serves as a marketplace that matches consumers sourced by Fluent and other third parties with advertiser clients. In accordance with ASC 805, the Company determined that the Initial Winopoly Acquisition constituted the purchase of a business.
On April 1, 2020, the fair value of the acquired customer relationships of $600, to be amortized over a period of five years, was determined using the excess earnings method, a variation of the income approach, while the fair value of the acquired developed technology of $800, to be amortized over a period of three years, was determined using the cost approach. 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 $1,131 and primarily relates to intangible assets that do not qualify for separate recognition, including assembled workforce and synergies. In connection with the Initial Winopoly Acquisition, the Company had recorded 100% equity ownership for GAAP purposes due to Winopoly's status as VIE for which the Company is a primary beneficiary.
In connection with the Initial Winopoly Acquisition, at any time between the fourth and sixth anniversary of the Initial Winopoly Acquisition, the sellers had the ability to exercise a put option to require the Company to acquire the remaining 50% membership interests in Winopoly. During this period, the Company also had the ability to exercise a call option to require the sellers to sell the remaining 50% membership interests in Winopoly to the Company. The purchase price to be paid upon exercise of the put or call option for the remaining 50% membership interests was calculated based on a multiple of 4.0 x EBITDA (as such term is defined in the agreement between the parties), applied to a twelve-month period spanning the five months prior to the month of the put/call closing extending through six months following the month of the put/call closing (the "Put/Call Consideration"). In connection with the exercise of the put/call option, certain of the seller parties would have been required to enter into employment agreements with the Company in order to receive their respective shares of the Put/Call Consideration.
Although the sellers maintained an equity interest in Winopoly through August 31, 2021, the Company had deemed this equity interest to be non-substantive in nature, as the sellers would primarily benefit from the Initial Winopoly Acquisition based on periodic distributions of the earnings of Winopoly and the Put/Call Consideration, both of which were dependent on the sellers' continued service. Without providing service, the sellers could benefit from their pro-rata share of the proceeds upon a third-party sale or liquidation of Winopoly; however, such a liquidity event was considered unlikely. Therefore, no non-controlling interest had been previously recognized. Periodic distributions for services rendered were recorded as compensation expense. In addition, the Company had estimated the amount of the Put/Call Consideration, which was accreted over the six-year estimated service period, consisted of the estimated four years until the put/call could be exercised and the additional two-year service requirement.
On September 1, 2021, the Company acquired the remaining 50% membership interest in Winopoly (the “Full Winopoly Acquisition”) in a negotiated transaction. The consideration was $7,785, which consisted of $3,425 of cash at closing, $2,000 of cash due on January 31, 2022, and $500 of deferred payments due at both the first and second anniversary of the closing. The Company also issued 500,000 shares of fully-vested stock under the Prior Plan to certain Winopoly personnel valued at $1,360. Certain seller parties entered into employment and non-competition agreements with the Company in connection with the Full Winopoly Acquisition. As a result, the Put/Call Consideration was terminated, partially offsetting the consideration paid in the Full Winopoly Acquisition, resulting in a net expense of $3,201 on the date of the Full Winopoly Acquisition which was recorded as general and administrative and product development expenses.
For the year ended December 31, 2021, the Company incurred transaction-related costs of $28 in connection with the Full Winopoly Acquisition which are also recorded as general and administrative expenses. For the three and nine months ended September 30, 2021, compensation expense of $586 and $3,213 respectively, related to the Put/Call Consideration were recorded in general and administrative on the consolidated statement of operations, which had a corresponding liability in other non-current liabilities on the consolidated balance sheet. There was no corresponding charge for the three and nine months ended September 30, 2022.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share data)
(unaudited)
12. Variable Interest Entity
The Company determined that, following the Initial Winopoly Acquisition, Winopoly qualified as a VIE for which the Company was the primary beneficiary (Note 11, Business acquisition). 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. We assess whether we are the primary beneficiary of a VIE at the inception of the arrangement and at each reporting date.
The Company's conclusion that Winopoly was a VIE, and the Company was its primary beneficiary, derived from contractual arrangements that provided the Company with control over certain activities that most significantly impacted its economic performance. These significant activities include the compliance practices of Winopoly and the Company's provisions of leads that Winopoly used to generate its revenue, which ultimately gave the Company its controlling interest. The Company therefore consolidated Winopoly in its consolidated financial statements from the inception of the Initial Winopoly Acquisition, inclusive of deemed compensation expense to the sellers for services rendered. On September 1, 2021, the Company completed the Full Winopoly Acquisition and Winopoly's status as a VIE terminated (Note 3, Intangible assets, net, Note 4, Goodwill and Note 11, Business acquisition).