NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
1. Principal activities and organization
Principal activities
Fluent, Inc. (“Fluent,” or the “Company”), a Delaware corporation, is an industry leader in data-driven digital marketing services. The Company primarily performs customer acquisition services by operating highly scalable digital marketing campaigns, through which the Company connects its advertiser clients with consumers they are seeking to reach. The Company delivers data and performance-based marketing executions to its clients, which in 2022 included over 500 consumer brands, direct marketers and agencies across a wide range of industries, including Financial Products & Services, Media & Entertainment, Health & Wellness, Staffing & Recruitment and Retail & Consumer.
2. Summary of significant accounting policies
(a) Basis of preparation
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the "SEC").
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 (see Note 13, Business acquisitions and Note 14, Variable interest entity). Beginning September 1, 2021, Winopoly became a wholly owned subsidiary of the Company.
Principles of consolidation
All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation.
(b) Use of estimates
The preparation of consolidated financial statements in accordance with US 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 and income tax provision. 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.
(c) Cash, cash equivalents and restricted cash
Cash and cash equivalents consist of cash on hand and bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use. Restricted cash had included a separately maintained cash account, required under the terms of a lease agreement the Company entered into on October 10, 2018 for office space in New York City, which was released in 2021.
The Company’s cash, cash equivalents and restricted cash are held in major financial institutions located in the United States, which have high credit ratings. As of December 31, 2022 and 2021, cash and cash equivalents were available for use in servicing the Company's debt obligations and general operating purposes.
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist principally of cash investments. The Company places its temporary cash instruments with highly rated financial institutions within the United States, and, at times, may maintain balances in such institutions in excess of the $250 thousand U.S. Federal Deposit Insurance Corporation insurance limit. The Company monitors the credit ratings of its financial institutions to mitigate this risk.
(d) Accounts receivable and allowance for doubtful accounts
Accounts receivables are due from customers, which are generally unsecured, and consist of amounts earned but not yet collected. None of the Company’s accounts receivable bear interest.
The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Management determines this allowance based on reviews of customer-specific facts and circumstances along with an application of a percentage against the balance based upon aging and historic charge offs . Account balances are charged off against the allowance for doubtful accounts after all customary means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have off-balance sheet credit exposure related to its customers.
Movements within the allowance for doubtful accounts consist of the following:
| | Year Ended December 31, | |
(In thousands) | | 2022 | | | 2021 | |
Beginning balance | | $ | 313 | | | $ | 368 | |
Charges to expenses | | | 450 | | | $ | 91 | |
Write-offs | | | (219 | ) | | $ | (146 | ) |
Ending balance | | $ | 544 | | | $ | 313 | |
(e) Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation or amortization. Expenditures for maintenance, repairs and minor renewals are charged to expense in the period incurred. Betterments and additions are capitalized. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of their estimated useful lives or lease terms that are reasonably assured. The estimated useful lives of property and equipment are as follows:
| | Years | |
Computer and network equipment | | | 5 | |
Furniture, fixtures and office equipment | | | 7 | |
Leasehold improvements | | | 6 - 7 | |
Assets to be disposed of, and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell. When items of property and equipment are retired or otherwise disposed of, loss or income on disposal is recorded for the difference between the net book value and proceeds received therefrom.
(f) Business combination
The Company records acquisitions pursuant to ASC 805, Business Combinations, by allocating the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and estimated fair values of intangible assets acquired. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired intangible assets, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, the Company may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings.
(g) Intangible assets other than goodwill
The Company’s intangible assets are initially capitalized based on actual costs incurred, acquisition cost, or fair value if acquired as part of a business combination. These intangible assets are amortized on a straight-line basis over their respective estimated useful lives, which are the periods over which these assets are expected to contribute directly or indirectly to the future cash flows of the Company. The Company’s intangible assets represent purchased intellectual property, software developed for internal use, acquired proprietary technology, customer relationships, trade names, domain names, databases, and non-competition agreements, including those resulting from acquisitions. Intangible assets have estimated useful lives of 2-20 years.
In accordance with ASC 350-40, Software - Internal-Use Software, the Company capitalizes eligible costs, including applicable salaries and benefits, share-based compensation, travel, and other direct costs of developing internal-use software that are incurred in the application development stage. Once the internal-use software is ready for its intended use, it is amortized on a straight-line basis over its useful life.
Finite-lived intangible assets are evaluated for impairment periodically, or whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. In evaluating intangible assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with ASC 360-10-15. To the extent that estimated future undiscounted net cash flows are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value.
Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying values of assets are supported by their undiscounted future cash flows. In estimating future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, operating expenses, and terminal growth rates.
For the year ended December 31, 2022, the Company determined the value of intangible assets was recoverable except for certain internally developed software costs, as discussed in Note 6, Intangible assets, net. As of December 31, 2022 and 2021, the Company reviewed the indicators for impairment and concluded that no impairment of its finite-lived intangible assets existed.
(h) Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of net assets acquired, when accounted for by the acquisition method of accounting. As of December 31, 2022 and 2021, the goodwill balance relates to the acquisition of Fluent LLC Acquisition, the Q Interactive Acquisition, the AdParlor Acquisition, the Winopoly Acquisition, and the True North Loyalty Acquisition (as defined in Note 6, Intangible assets, net).
In accordance with ASC 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. For purposes of reviewing impairment and the recoverability of goodwill, we make certain assumptions regarding estimated future cash flows and other factors in determining the fair values, including market multiples and discount rates, among others. Goodwill is tested for impairment at the reporting unit level and is conducted by estimating and comparing the fair value of each of the Company’s reporting units to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the Company recognizes an impairment loss equal to the amount of the excess, limited to the amount of goodwill allocated to that reporting unit.
(i) Fair value of financial instruments
ASC 820, Fair Value Measurements and Disclosures, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value based on the extent to which inputs used in measuring fair value are observable in the market. These tiers include:
| • | Level 1 – defined as observable inputs, such as quoted prices in active markets; |
| | |
| • | Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
| | |
| • | Level 3 – defined as unobservable inputs, for which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The fair value of the Company’s cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying values because of the short-term nature of these instruments.
As of December 31, 2022, the Company regards the fair value of its long-term debt to approximate its carrying value. This fair value assessment represents a Level 2 measurement. See Note 8, Long-term debt, net.
The fair value of certain long-lived non-financial assets and liabilities may be required to be measured on a nonrecurring basis in certain circumstances, including when there is evidence of impairment. As of December 31, 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 7, Goodwill, for further discussion of the impairment charge.
(j) 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 concluded that the financial statement effects are not materially different than accounting for revenue on a contract-by-contract basis.
Revenue is recognized upon satisfaction of associated performance obligations. The Company's customers simultaneously receive and consume the benefits provided, which satisfies the Company's performance obligations. Furthermore, the Company elected the "right to invoice" practical expedient available within ASC 606-10-55-18 as the measure of progress, since the Company has a right to payment from a customer in an amount that corresponds directly with the value of the performance completed to date. The Company's revenue arrangements do not contain significant financing components. The Company has further concluded that revenue does not require disaggregation.
For each identified performance obligation in a contract with a customer, the Company assesses whether it or the third-party supplier is the principal or agent. In arrangements where Fluent has substantive control of the specified goods and services, is primarily responsible for the integration of products and services into the final deliverable to the customer, has inventory risk and discretion in establishing pricing, Fluent is considered to have acted as the principal. For performance obligations in which Fluent also acts as principal, the Company records the gross amount billed to the customer within revenue and the related incremental direct costs incurred as cost of revenue. If the third-party supplier, rather than Fluent, is primarily responsible for the performance and deliverable to the customer, and Fluent solely arranges for the third-party supplier to provide services to the customer, Fluent is considered to have acted as the agent. For performance obligations for which Fluent so acts as the agent, the net fees on such transactions are recorded as revenue, with no associated costs of revenue for the Company.
If a customer pays consideration before the Company's performance obligations are satisfied, such amounts are classified as deferred revenue on the consolidated balance sheets. As of December 31, 2022 and 2021, the balance of deferred revenue was $1,014 and $651, respectively. The majority of the deferred revenue balance as of December 31, 2021 will be 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 December 31, 2022 and 2021, unbilled revenue included in accounts receivable was $26,878 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.
Sales commissions are recorded at the time revenue is recognized and recorded in sales and marketing in the consolidated statements of operations. 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.
(k) Cost of revenue (exclusive of depreciation and amortization)
Cost of revenue primarily includes media and related costs, which consist of the cost to acquire traffic through the purchase of impressions, clicks or actions from publishers or third-party intermediaries, such as advertising exchanges, and technology costs that enable media acquisition. The costs also include enablement costs associated with call centers and tracking costs for consumer data. These costs are used primarily to drive user traffic to the Company's and its clients' media properties. Cost of revenue additionally consists of indirect costs such as call center software, hosting, and fulfillment costs. Cost of revenue is presented exclusive of depreciation and amortization expenses.
(l) Advertising costs
Advertising costs are charged to operations as incurred. For the years ended December 31, 2022 and 2021, advertising costs, included in sales and marketing expenses, were $1,067 and $661, respectively.
(m) Share-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, Compensation - Stock Compensation ("ASC 718"). Under ASC 718, for awards with time-based conditions, the Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award and generally recognizes such costs on a straight-line basis over the period the recipient is required to provide service in exchange for the award, which generally is the vesting period. For awards with market conditions, the Company recognizes costs on a straight-line basis, regardless of whether the market conditions are achieved and the awards ultimately vest. For awards with performance conditions, the Company begins recording share-based compensation when achievement of the performance criteria is probable. The Company recognizes forfeitures as they occur.
(n) Income taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the use of the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in income in the period that the change in tax rates or laws is enacted. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized based on management's review of historical results and forecasts.
ASC 740 clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in its financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s accounting policy is to accrue interest and penalties related to uncertain tax positions, if and when required, as interest expense and a component of other expenses, respectively, in the consolidated statements of operations.
(o) Income (loss) per share
Basic income (loss) per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods, 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 were exercised or converted into common stock and is calculated using the treasury stock method for stock options and unvested shares. Common equivalent shares are excluded from the calculation in loss periods, as their effects would be anti-dilutive.
(p) Segment data
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 in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision maker” to be its chief executive officer. The Company has determined it 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, a digital advertising solution for social media buying and is included in segment reporting for purposes of reconciliation of the respective balances to the consolidated financial statements. “Fluent,” for the purposes of segment reporting, represents the consolidated operating results of the Company excluding “All Other.”
(q) 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.
(r) Recently issued and adopted accounting standards
Accounting pronouncements not listed below were assessed and determined to be not applicable or are expected to have minimal impact on our Consolidated Financial Statements.
In January 2016, 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, 2022, and early adoption is permitted. The Company completed its assessment of the new guidance and determined it had no material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, 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 completed its assessment and concluded this update had no material impact on its consolidated financial statements.
3. Income (loss) per share
For the years ended December 31, 2022 and 2021 basic and diluted income (loss) per share was as follows:
|
|
Year Ended December 31, |
|
(In thousands, except share data) |
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(123,332 |
) |
|
$ |
(10,059 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
79,709,212 |
|
|
|
78,139,517 |
|
Weighted average restricted shares vested not delivered |
|
|
1,703,383 |
|
|
|
1,837,796 |
|
Total basic weighted average shares outstanding |
|
|
81,412,595 |
|
|
|
79,977,313 |
|
Dilutive effect of assumed conversion of restricted stock units |
|
|
— |
|
|
|
— |
|
Dilutive effect of assumed conversion of stock options |
|
|
— |
|
|
|
— |
|
Total diluted weighted average shares outstanding |
|
|
81,412,595 |
|
|
|
79,977,313 |
|
Basic and diluted income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.51 |
) |
|
$ |
(0.13 |
) |
Diluted |
|
$ |
(1.51 |
) |
|
$ |
(0.13 |
) |
Based on exercise prices compared to the average stock prices for the years ended December 31, 2022 and 2021, certain stock equivalents, including stock options and warrants, have been excluded from the diluted weighted average share calculations due to their anti-dilutive nature.
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Restricted stock units |
|
|
4,223,156 |
|
|
|
3,111,320 |
|
Stock options |
|
|
2,139,000 |
|
|
|
2,204,000 |
|
Warrants |
|
|
— |
|
|
|
833,333 |
|
Total anti-dilutive securities |
|
|
6,362,156 |
|
|
|
6,148,653 |
|
4. Lease commitments
At the inception of a contract, the Company determines whether the contract is or contains a lease based on the facts and circumstances present. Operating leases with terms greater than one year are recognized on the consolidated balance sheets as Operating lease right-of-use assets, Current portion of operating lease liability, and Operating lease liability, net. Financing leases with terms greater than one year are recognized on the consolidated balance sheets as Property and equipment, net, Accrued expenses and other current liabilities, and Other non-current liabilities. The Company has elected not to recognize leases with terms of one year or less on the consolidated balance sheets.
Lease obligations and their corresponding assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes an appropriate incremental borrowing rate, which is the rate incurred to borrow an amount equal to the applicable lease payments on a collateralized basis, over a similar term, and in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The components of a lease are split into three categories: lease components, non-lease components and non-components; however, the Company has elected to combine lease and non-lease components into a single component. Rent expense associated with operating leases is recognized over the expected term on a straight-line basis. In connection with financing leases, depreciation of the underlying asset is recognized over the expected term on a straight-line basis and interest expense is recognized as incurred.
The Company is party to several noncancelable operating and financing lease agreements that have original lease periods expiring between 2023 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, nor material restrictive covenants. Effective October 10, 2018, the Company entered into a seven-year operating lease agreement for approximately 42,685 square feet of office space in New York City. In connection with this lease agreement, the Company was required to establish and maintain a $1,480 cash collateral account, which had been recorded in restricted cash on the consolidated balance sheets and was released as of December 31, 2021. The Company still maintains a letter of credit of $1,480 as of December 31, 2022. Additionally, the Company obtained the right to use certain furniture, fixtures and office equipment already installed in the new office space, which the Company has treated as a capital lease.
For the year ended December 31, 2022 and 2021, the components of lease costs are as follows:
|
|
Year Ended December 31, |
|
(In thousands) |
|
2022 |
|
|
2021 |
|
Operating leases: |
|
|
|
|
|
|
|
|
Rent expense |
|
$ |
2,298 |
|
|
$ |
2,477 |
|
Financing lease: |
|
|
|
|
|
|
|
|
Leased furniture, fixtures, and office equipment depreciation expense |
|
|
49 |
|
|
|
292 |
|
Interest expense |
|
|
26 |
|
|
|
32 |
|
Short-term leases: |
|
|
|
|
|
|
|
|
Rent expense |
|
|
— |
|
|
|
— |
|
Total lease costs |
|
$ |
2,373 |
|
|
$ |
2,801 |
|
As of December 31, 2022 and 2021, the weighted average lease-term and discount rate of the Company's leases are as follows:
|
|
December 31, 2022 |
|
|
|
Operating Leases |
|
|
Financing Lease |
|
Weighted average remaining lease-term (in years) |
|
|
2.9 |
|
|
|
2.9 |
|
Weighted average discount rate |
|
|
4.9 |
% |
|
|
5.0 |
% |
As of December 31, 2022, scheduled future maturities of the Company's lease liabilities are as follows:
(In thousands) |
|
December 31, 2022 |
|
Year |
|
Operating Leases |
|
|
Financing Lease |
|
2023 |
|
$ |
2,424 |
|
|
$ |
169 |
|
2024 |
|
|
2,296 |
|
|
|
169 |
|
2025 |
|
|
1,890 |
|
|
|
142 |
|
Total undiscounted cash flows |
|
|
6,610 |
|
|
|
480 |
|
Less: imputed interest |
|
|
(478 |
) |
|
|
(33 |
) |
Present value of lease liabilities |
|
$ |
6,132 |
|
|
$ |
447 |
|
For the year ended December 31, 2022 and 2021, supplemental cash flow information related to leases is as follows:
|
|
Year Ended December 31, |
|
(In thousands) |
|
2022 |
|
|
2021 |
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows used for operating leases |
|
$ |
2,338 |
|
|
$ |
2,287 |
|
Operating cash flows used for financing lease |
|
$ |
26 |
|
|
$ |
32 |
|
Lease liabilities related to the acquisition of right-of-use assets: |
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
238 |
|
|
$ |
209 |
|
5. Property and equipment, net
Property and equipment, net consists of the following:
(In thousands) |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
Computer and network equipment |
|
$ |
592 |
|
|
$ |
572 |
|
Furniture, fixtures, and office equipment |
|
|
888 |
|
|
|
966 |
|
Leased furniture, fixtures, and office equipment |
|
|
875 |
|
|
|
875 |
|
Leasehold improvements |
|
|
1,260 |
|
|
|
1,290 |
|
Total cost of property and equipment |
|
|
3,615 |
|
|
|
3,703 |
|
Less: accumulated depreciation and amortization |
|
|
(2,651 |
) |
|
|
(2,246 |
) |
Property and equipment, net |
|
$ |
964 |
|
|
$ |
1,457 |
|
For the years ended December 31, 2022 and 2021, depreciation of property and equipment was $491 and $780, respectively.
6. Intangible assets, net
Intangible assets, net, other than goodwill, consist of the following:
(In thousands) | | Amortization period (years) | | | December 31, 2022 | | | December 31, 2021 | |
Gross amount: | | | | | | | | | | | | |
Software developed for internal use | | | 3 | | | $ | 13,740 | | | $ | 9,552 | |
Acquired proprietary technology | | | 3 - 5 | | | | 15,965 | | | | 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 | |
| | | | | | | 117,685 | | | | 112,190 | |
Accumulated amortization: | | | | | | | | | | | | |
Software developed for internal use | | | | | | | (8,097 | ) | | | (5,263 | ) |
Acquired proprietary technology | | | | | | | (14,305 | ) | | | (13,402 | ) |
Customer relationships | | | | | | | (35,156 | ) | | | (29,948 | ) |
Trade names | | | | | | | (6,038 | ) | | | (5,145 | ) |
Domain names | | | | | | | (68 | ) | | | (58 | ) |
Databases | | | | | | | (23,508 | ) | | | (20,859 | ) |
Non-competition agreements | | | | | | | (1,768 | ) | | | (1,768 | ) |
| | | | | | | (88,940 | ) | | | (76,443 | ) |
Net intangible assets: | | | | | | | | | | | | |
Software developed for internal use | | | | | | | 5,643 | | | | 4,289 | |
Acquired proprietary technology | | | | | | | 1,660 | | | | 1,442 | |
Customer relationships | | | | | | | 2,912 | | | | 7,938 | |
Trade names | | | | | | | 10,619 | | | | 11,512 | |
Domain names | | | | | | | 127 | | | | 133 | |
Databases | | | | | | | 7,784 | | | | 10,433 | |
| | | | | | $ | 28,745 | | | $ | 35,747 | |
The gross amounts associated with software developed for internal use primarily represent capitalized costs of internally developed software. The amounts relating to acquired proprietary technology, customer relationships, trade names, domain names, databases and non-competition agreements primarily represent the fair values of intangible assets acquired as a result of the acquisition of Fluent, LLC, effective December 8, 2015 (the "Fluent LLC Acquisition"); the acquisition of Q Interactive, LLC, effective June 8, 2016 (the "Q Interactive Acquisition"); the acquisition of substantially all the assets of AdParlor Holdings, Inc. and certain of its affiliates, effective July 1, 2019 (the "AdParlor Acquisition"); the acquisition of 50% interest in Winopoly, LLC (the "Initial Winopoly Acquisition"), effective April 1, 2020 (Note 13, Business acquisitions); and the acquisition of 100% interest in True North Loyalty, LLC, (the "True North Acquisition"), effective January 1, 2022 (Note 13, Business acquisitions). In connection with the Initial Winopoly Acquisition, the Company recorded 100% equity ownership for GAAP purposes, and no further intangible assets were acquired in connection with the Full Winopoly Acquisition described in Note 13, Business acquisition.
During the three months ended June 30, 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 three months ended September 30, 2022 and conducted another recoverability test of its long-lived assets. In addition, for the three months ended December 31, 2022 the Company had lower-than-expected operating results and an additional decline in the market value of its publicly-traded stock, which led to another recoverability test of its long-lived assets to be conducted. 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, September 30, 2022, or December 31, 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.
For the years ended December 31, 2022 and 2021, amortization expenses related to intangible assets, and included in depreciation and amortization expenses in the Company's consolidated statements of operations, were $12,723 and $12,390, respectively.
For the years ended December 31, 2022 and 2021, the Company capitalized $4,480 and $3,074, respectively, most of which was related to internally developed software, and wrote off $186 and $354, respectively, due to abandonment of certain internally developed software whose net carrying values were not recoverable.
As of December 31, 2022, estimated amortization expenses related to the Company’s intangible assets for 2023 through 2028 and thereafter are as follows:
(In thousands) | | | | |
Year | | December 31, 2022 | |
2023 | | $ | 8,837 | |
2024 | | | 6,644 | |
2025 | | | 4,589 | |
2026 | | | 1,277 | |
2027 | | | 828 | |
2028 and thereafter | | | 6,570 | |
Total | | $ | 28,745 | |
7. Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of net assets acquired, when accounted for by the acquisition method of accounting. As of December 31, 2022, the goodwill balance relates to the acquisition of Fluent LLC Acquisition, the Q Interactive Acquisition, the AdParlor Acquisition, the Initial Winopoly Acquisition (Note 13, Business acquisitions), and the True North Acquisition (Note 13, Business acquisitions). In connection with the Initial Winopoly Acquisition, the Company recorded 100% equity ownership for GAAP purposes, and no further goodwill was acquired in connection with the Full Winopoly Acquisition as described in Note 13, Business acquisition. As of December 31, 2022 and 2021, the change in the carrying value of goodwill for our operating segments (Note 12, Segment information), are listed below:
(In thousands) |
|
Fluent |
|
|
All Other |
|
|
Total |
|
Balance at Ended December 31, 2020 |
|
$ |
160,922 |
|
|
$ |
4,166 |
|
|
$ |
165,088 |
|
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance at December 31, 2021 |
|
|
160,922 |
|
|
|
4,166 |
|
|
|
165,088 |
|
True North acquisition |
|
|
1,092 |
|
|
|
— |
|
|
|
1,092 |
|
Goodwill impairment |
|
|
(110,400 |
) |
|
|
(669 |
) |
|
|
(111,069 |
) |
Balance at December 31, 2022 |
|
$ |
51,614 |
|
|
$ |
3,497 |
|
|
$ |
55,111 |
|
As of December 31, 2022, net goodwill was comprised of gross goodwill of $166,997 and accumulated impairment of $111,886.
During the three months ended June 30, 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 and 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 $162,014 was impaired and recorded a non-cash impairment charge of $55,400 during the three months ended June 30, 2022.
During the three months ended September 30, 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 and 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 $106,614 was not impaired since the results of the test indicated that the estimated fair value exceeded its carrying value by approximately 4%. Based on the results from the interim test as of September 30, 2022, the Company concluded no further triggering events existed as of October 1, 2022 that would indicate that it is more likely than not that the fair value was less than the carrying value for the Fluent reporting unit.
As of October 1, 2022, the Company performed our annual goodwill impairment test for the All Other reporting unit. Based on the results of this annual test, which used a combination of income and market approaches to determine the fair value, the Company concluded that All Other's goodwill of $4,166, was not impaired since the results of the annual test indicated that the estimated fair value exceeded its carrying value by approximately 78.0%.
During the three months ended December 31, 2022, the Company determined that the lower-than-expected operating results of the Company and the decline in the market value of its publicly-traded stock constituted a triggering event. As such, the Company conducted an interim test of the fair value of its goodwill for potential impairment as of December 31, 2022. Based on the results of this interim impairment test, which used a combination of the income and market approaches to determine the fair value of the Fluent reporting unit and All Others, the test indicated that the estimated carrying value exceeded its fair value by 39% and 17%, respectively. The Company therefore concluded its goodwill of $106,614 for the Fluent reporting unit was impaired and recorded a non-cash impairment charge of $55,000 in the fourth quarter of 2022. In addition, the All Other goodwill of $4,166 was also concluded to be impaired and the Company recorded a non-cash impairment charge of $669 in the fourth quarter of 2022, as well.
8. Long-term debt, net
Long-term debt, net, related to the New Credit Facility (as defined below) consisted of the following:
(In thousands) | | December 31, 2022 | | | December 31, 2021 | |
Credit Facility Term Loan due 2026 (less unamortized discount and financing costs of $656 and $921, respectively) | | $ | 40,594 | | | $ | 45,329 | |
Less: Current portion of long-term debt | | | (5,000 | ) | | | (5,000 | ) |
Long-term debt, net (non-current) | | $ | 35,594 | | | $ | 40,329 | |
Refinanced Term Loan
On March 31, 2021, Fluent, LLC redeemed in full $38,318 aggregate principal amount of its prior 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 a cost of early extinguishment of debt.
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 " Credit Facility"). On December 20, 2022, the Company entered into the second amendment to the Credit Agreement, which amended certain provisions to: (i) reflect the replacement of the current benchmark settings with TERM SOFR pursuant to an Early Opt-In Election; (ii) acknowledge certain litigation matters; and (iii) join additional subsidiaries of Borrower as guarantors of the loan facilities (the “Credit Facilities”) provided under the Credit Agreement.
Borrowings under the Credit Agreement bear interest at a rate per annum equal to the benchmark selected by the Borrower, which may be based on the Alternative Base Rate, LIBOR rate (subject to a floor of 0.25%) prior to the election as of December 31, 2022 or Term SOFR (Secured Overnight Financing Rate) (subject to a floor of 0.00%) subsequent to the election, plus a margin applicable to the selected benchmark. The applicable margin is between 0.75% and 1.75% for borrowings based on the Alternative Base Rate and 1.75% and 2.75% for borrowings based on LIBOR and Term SOFR, depending upon the Borrower's Total Leverage Ratio. The opening interest rate of the Credit Facility was 2.50% (LIBOR + 2.25%), which increased to 6.17% (Term SOFR + 0.1% + 1.75%) as of December 31, 2022.
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 December 31, 2022, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.
The proceeds of the Term Loan were used to repay all outstanding amounts under the Refinanced Term Loan, including transaction fees and expenses, and for working capital and other general corporate purposes.
The Credit Agreement contains negative covenants that, among other things, limit the Borrower's ability to: incur indebtedness; grant liens on its assets; enter into certain investments; consummate fundamental change transactions; engage in mergers or acquisitions or dispose of assets; enter into certain transactions with affiliates; make changes to its fiscal year; enter into certain restrictive agreements; and make certain restricted payments (including for dividends and stock repurchases, which are generally prohibited except in a few circumstances and/or up to specified amounts). Each of these limitations are subject to various conditions.
The Credit Agreement also contains certain affirmative covenants and customary events of default provisions, including, subject to thresholds and grace periods, among others, payment default, covenant default, cross default to other material indebtedness, and judgment default.
The Credit Agreement also contains certain customary conditions to extensions of credit, including that representations and warranties made in the Existing Credit Agreement be materially true and correct at the time of such extension. One such representation concerning the absence of litigation or proceedings is not currently true and correct as a result of the matters pending involving the Federal Trade Commission and the Pennsylvania Office of the Attorney General described in the Company’s Form 10-Q filed with the SEC on November 7, 2022. These matters do not represent events of default under the Credit Agreement, but the Borrower is not currently able to draw on the Revolving Credit Facility due the representation and warranty requirement for an extension of credit. The Company believes that it will have sufficient cash resources to finance its operations and expected capital expenditures for the next twelve months and beyond regardless of access to the Revolving Credit Facility.
Maturities
As of December 31, 2022, scheduled future maturities of the Credit Agreement, including the required principal prepayment based on a portion of the Company's quarterly excess cash flow and excluding potential future additional principal prepayments, are as follows:
(In thousands) |
|
|
|
|
Year |
|
|
|
|
2023 |
|
$ |
5,000 |
|
2024 |
|
|
5,000 |
|
2025 |
|
|
5,000 |
|
2026 |
|
|
26,250 |
|
Total maturities |
|
$ |
41,250 |
|
Fair value
As of December 31, 2022, the fair value of long-term debt is considered to approximate its carrying value. The fair value assessment represents a Level 2 measurement.
9. Income taxes
The Company is subject to federal and state income taxes in the United States. For the years ended December 31, 2022 and 2021, the provision for income taxes on income (loss) from operations consisted of the following:
| | Year Ended December 31 | |
(In thousands) | | 2022 | | | 2021 | |
Current: | | | | | | | | |
Federal | | $ | 1,392 | | | $ | — | |
State | | | 606 | | | | (108 | ) |
Foreign | | | 3 | | | | 156 | |
Total current | | | 2,001 | | | | 48 | |
Deferred: | | | | | | | | |
Federal | | | (3,730 | ) | | | (3,494 | ) |
State | | | (537 | ) | | | (813 | ) |
Foreign | | | 1 | | | | (102 | ) |
Less: valuation allowance | | | 4,041 | | | | 4,607 | |
Total deferred | | | (225 | ) | | | 198 | |
Total income tax expense | | $ | 1,776 | | | $ | 246 | |
For the years ended December 31, 2022 and 2021, the provision for income taxes differs from the amounts computed by applying the applicable federal statutory rates as follows:
| | Year Ended December 31, | |
(In thousands) | | 2022 | | | 2021 | |
Federal income taxes at the statutory rate | | $ | (25,527 | ) | | | 21.0 | % | | $ | (2,061 | ) | | | 21.0 | % |
Share-based compensation shortfall (windfall) | | | 8 | | | | (0.0 | ) | | | (876 | ) | | | 8.9 | |
Effect of state taxes, net of federal tax benefit | | | (2 | ) | | | 0.0 | | | | (915 | ) | | | 9.3 | |
Non-deductible items | | | 1,070 | | | | (0.9 | ) | | | (1,007 | ) | | | 10.3 | |
Goodwill impairment | | | 23,184 | | | | (19.1 | ) | | | — | | | | — | |
Return to provision adjustment | | | 493 | | | | (0.4 | ) | | | 9 | | | | (0.1 | ) |
Foreign rate difference | | | 1 | | | | (0.0 | ) | | | 13 | | | | (0.1 | ) |
Minority interest | | | 0 | | | | 0.0 | | | | 303 | | | | (3 | ) |
Deferred only adjustments | | | 444 | | | | (0.4 | ) | | | 214 | | | | (2.2 | ) |
Research and development credit | | | (1,960 | ) | | | 1.6 | | | | — | | | | — | |
Other | | | 24 | | | | (0.0 | ) | | | (41 | ) | | | 0.4 | |
Change in valuation allowance | | | 4,041 | | | | (3.3 | ) | | | 4,607 | | | | (46.9 | ) |
Income tax expense | | $ | 1,776 | | | | (1.5 | )% | | $ | 246 | | | | (2.5 | )% |
Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases the Company's deferred tax assets before valuation allowance and cash taxes payable.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2022 and 2021, the significant components of deferred tax assets and (liabilities) consist of the following:
(In thousands) | | December 31, 2022 | | | December 31, 2021 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carryforwards | | $ | 973 | | | $ | 3,348 | |
Share-based compensation | | | 5,344 | | | | 5,489 | |
Interest expense limitation | | | — | | | | 521 | |
Accounts receivable, net | | | 136 | | | | 79 | |
Acquisition costs | | | — | | | | 891 | |
Operating lease liability | | | 1,533 | | | | 1,990 | |
Accrued expense | | | 894 | | | | — | |
Capitalized research and experimental expenditures | | | 4,088 | | | | — | |
Other | | | — | | | | 203 | |
| | | 12,968 | | | | 12,521 | |
Valuation allowance | | | (11,171 | ) | | | (7,130 | ) |
Total deferred tax assets, net of valuation allowance | | | 1,797 | | | | 5,391 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Intangible assets, net | | | (407 | ) | | | (3,757 | ) |
Operating lease right-of-use asset | | | (1,300 | ) | | | (1,710 | ) |
Property and equipment, net | | | (222 | ) | | | (323 | ) |
Other | | | (42 | ) | | | — | |
| | | (1,971 | ) | | | (5,790 | ) |
Net deferred tax liability | | $ | (174 | ) | | $ | (399 | ) |
As of December 31, 2022, the Company has state net operating loss carryforwards of $17,585, which begin to expire in 2030.
As of December 31, 2022 and 2021, the Company recorded a full valuation allowance against its net deferred tax assets of $11,171 and $7,130, respectively, which is driven by the movement in the net deferred tax assets. For the year ended December 31, 2022, the movement in the net deferred tax assets are primarily a result of the capitalized research and experimental expenditures, an increase in the tax basis of amortizable intangibles, and utilization of federal and state net operating losses. The Company 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. 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.
The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company files tax returns in federal and certain state and local jurisdictions. The periods subject to examination are generally for tax years ended 2018 through 2021, including the following major jurisdictions: U.S. Federal, New York State, and New York City. Due to utilization of net operating losses in subsequent periods with open statutes, tax years 2015 and forward remain open to examination by Federal taxing authorities until the statute is closed on the tax year in which the net operating loss was utilized.
For the years ended December 31, 2022 and 2021, reconciliation of the gross amounts of unrecognized tax benefits, excluding accrued interest and penalties, consists of the following:
| | Year Ended December 31, | |
(In thousands) | | 2022 | | | 2021 | |
Unrecognized tax benefits, opening balance | | $ | 1,480 | | | $ | 1,480 | |
Change in unrecognized tax benefits | | | — | | | | — | |
Unrecognized tax benefits, ending balance | | $ | 1,480 | | | $ | 1,480 | |
If the Company’s tax positions are ultimately sustained, the Company’s liability would be reduced by $1,480, all of which would impact the Company’s tax provision.
The Company does not anticipate a significant increase or reduction in unrecognized tax benefits within the next twelve months.
10. Common stock, treasury stock and warrants
Common stock
As of December 31, 2022, 2021 and 2020, the number of issued shares of common stock was 84,385,458, 83,057,083 and 80,295,141, respectively, which included shares of treasury stock of 4,300,152, 4,091,823 and 3,945,867, respectively.
For the year ended December 31, 2022, the change in the number of issued shares of common stock comprised the following issuances:
• | An aggregate of 1,328,375 shares of common stock were issued as a result of the vesting of RSUs and included 208,329 shares of common stock withheld to cover withholding taxes upon such vesting, which are reflected as additions to treasury stock in the consolidated statements of changes in shareholders' equity. |
For the year ended December 31, 2021, the change in the number of issued shares of common stock comprised the following issuances:
• | An aggregate of 2,563,945 shares of common stock were issued as a result of the vesting of RSUs and included 145,956 shares of common stock withheld to cover withholding taxes upon such vesting, which are reflected as additions to treasury stock in the consolidated statements of changes in shareholders' equity. |
Treasury stock
As of December 31, 2022, 2021 and 2020, the Company held 4,300,152, 4,091,823 and 3,945,867 shares in treasury, with a cost of $11,171, $10,723, and $9,999, respectively. The Company's share-based incentive plans allow employees the option to either make cash payment or forfeit shares of common stock upon vesting to satisfy federal and state statutory tax withholding obligations associated with equity awards. The forfeited shares of common stock may be taken into treasury stock by the Company or sold on the open market.
For the year ended December 31, 2022, 208,329 shares were withheld to cover withholding taxes owed by certain employees, all of which were taken into treasury stock.
For the year ended December 31, 2021, 145,956 shares were withheld to cover withholding taxes owed by certain employees, all of which were taken into treasury stock.
Warrants
As of December 31, 2022, 2021 and 2020, the warrants to purchase an aggregate of 0, 833,333 and 833,333 shares of common stock were outstanding, respectively. 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.
Preferred stock
As of December 31, 2022 and 2021, the Company had 10 million shares of blank-check preferred stock with par value of $0.0001 per share authorized. No shares of preferred stock have been issued or are outstanding.
11. Share-based compensation
On June 8, 2022, the stockholders of the Company approved the Fluent, Inc. 2022 Omnibus Equity Incentive Plan (the "2022 Plan") that authorized for issuance 15,422,523 shares of the Company's common stock, which became effective on August 10, 2022 (“Effective Date”). With the 2022 Plan, no further awards are available to be issued under the 2018 Stock Incentive Plan (the “Prior Plan”), but all awards under the Prior Plans that are outstanding as of the Effective Date will continue to be governed by the terms, conditions and procedures set forth in the Prior Plans and any applicable award agreement. As of December 31, 2022, the Company had 15,422,523 shares of common stock available for grants pursuant to the 2022 Plan, which included 919,517 shares of common stock previously available for issuance under the Fluent Inc. 2018 Stock Incentive Plan (the "Prior Plan").
The primary purpose of the Company's stock compensation plan is to attract, retain, reward, and motivate certain individuals by providing them with opportunities to acquire or increase their ownership interests in the Company. In October 2022, the Company issued to certain of its senior officers and employees, restricted stock units (“RSUs”) (time-based), long-term incentive grants (performance and time-based vesting RSUs), or performance stock units (“PSUs”) (on achievement of targets, a cash payout) under the 2022 Plan.
Stock options
The Compensation Committee of the Company's Board of Directors approved the grant of stock options to certain Company officers, which were issued on February 1, 2019, December 20, 2019, March 1, 2020, and March 1, 2021, respectively, under the 2018 Plan. Subject to continuing service, 50% of the shares subject to these stock options will vest if the Company's stock price remains above 125%, 133.33%, 133.3% and 133.33%, respectively, of the exercise prices 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 prices for twenty consecutive trading days; provided, that no shares will vest prior to the first anniversary of the grant date. As of December 31, 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 years ended December 31, 2022 and 2021, the activity related to stock options consisted of the following:
|
|
Number of options |
|
|
Weighted average exercise price per share |
|
|
Weighted average remaining contractual term (years) |
|
|
Aggregate intrinsic value |
|
Outstanding as of December 31, 2020 |
|
|
2,294,000 |
|
|
$ |
4.34 |
|
|
|
8.0 |
|
|
$ |
2,256 |
|
Granted |
|
|
108,000 |
|
|
$ |
6.33 |
|
|
|
9.7 |
|
|
|
— |
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(198,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2021 |
|
|
2,204,000 |
|
|
$ |
4.41 |
|
|
|
7.1 |
|
|
|
— |
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(65,000 |
) |
|
|
1.10 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2022 |
|
|
2,139,000 |
|
|
$ |
4.37 |
|
|
|
6.3 |
|
|
|
— |
|
Options exercisable as of December 31, 2022 |
|
|
1,242,000 |
|
|
$ |
3.98 |
|
|
|
6.3 |
|
|
|
— |
|
The aggregate intrinsic value amounts in the table above represent the difference between the closing price of the Company’s common stock at the end of the reporting period and the corresponding exercise prices, multiplied by the number of in-the-money stock options as of the same date.
For the years ended December 31, 2022 and 2021, the unvested balance of stock options was as follows:
|
|
Number of options |
|
|
Weighted average exercise price per share |
|
|
Weighted average remaining contractual term (years) |
|
Unvested as of December 31, 2021 |
|
|
897,000 |
|
|
$ |
4.91 |
|
|
|
7.3 |
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
Vested |
|
|
— |
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2022 |
|
|
897,000 |
|
|
$ |
4.91 |
|
|
$ |
6.3 |
|
For the years ended December 31, 2022 and 2021, compensation expense recognized for stock options of $125 and $499, respectively was recognized in sales and marketing, product development and general and administrative expenses in the consolidated statement of operations. As of December 31, 2022, there was $0 of unrecognized share-based compensation with respect to outstanding stock options.
Restricted stock units and restricted stock
For the years ended December 31, 2022 and 2021, details of unvested restricted stock units ("RSUs") and restricted stock activity were as follows:
|
|
|
|
|
|
Weighted average |
|
|
|
Number of units |
|
|
grant date fair value |
|
Unvested as of December 31, 2020 |
|
|
3,377,097 |
|
|
$ |
7.09 |
|
Granted |
|
|
2,036,561 |
|
|
$ |
4.24 |
|
Vested and delivered |
|
|
(2,417,986 |
) |
|
$ |
2.90 |
|
Withheld as treasury stock (1) |
|
|
(145,956 |
) |
|
$ |
4.65 |
|
Vested not delivered (2) |
|
|
570,335 |
|
|
$ |
2.70 |
|
Forfeited |
|
|
(308,730 |
) |
|
$ |
4.57 |
|
Unvested as of December 31, 2021 |
|
|
3,111,321 |
|
|
$ |
8.03 |
|
Granted |
|
|
2,864,701 |
|
|
$ |
1.44 |
|
Vested and delivered |
|
|
(1,120,046 |
) |
|
$ |
3.55 |
|
Withheld as treasury stock (1) |
|
|
(208,329 |
) |
|
$ |
4.56 |
|
Vested not delivered (2) |
|
|
— |
|
|
$ |
3.30 |
|
Forfeited |
|
|
(424,491 |
) |
|
$ |
3.53 |
|
Unvested as of December 31, 2022 |
|
|
4,223,156 |
|
|
$ |
5.37 |
|
(1) |
As discussed in Note 10, Common stock, treasury stock and warrants, the increase in treasury stock was primarily attributable to shares withheld to cover statutory withholding taxes upon the vesting of RSUs. As of December 31, 2022 and 2021, there were 4,300,152 and 4,091,823 outstanding shares of treasury stock, respectively. |
(2) |
Vested not delivered represents vested RSUs with delivery deferred to a future time. During the year ended December 31, 2022, there was no net change in vested not delivered balance as a result of the timing of delivery of certain shares. During the year ended December 31, 2021, there was a net decrease of 570,335 shares included in vested not delivered balance as a result of the delivery of 650,333 shares, partially offset by the vesting of 79,998 shares with deferred delivery election. As of December 31, 2022 and 2021, there were 1,691,666 and 1,691,666 outstanding RSUs included in vested not delivered, respectively. |
For the years ended December 31, 2022 and 2021, the Company recognized compensation expense for RSUs of $3,989 and $4,379, respectively, in sales and marketing, product development and general and administrative in the consolidated statements of operations, and intangible assets in the consolidated balance sheets. As of December 31, 2022, there was $6,367 of unrecognized share-based compensation with respect to outstanding RSUs and restricted stock. 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 December 31, 2022, unrecognized share-based compensation expense associated with the granted RSUs, restricted stock and stock options is $6,367, which is expected to be recognized over a weighted average period of 1.9 years. For the years ended December 31, 2022 and 2021, share-based compensation for the Company’s equity awards were allocated to the following lines in the consolidated financial statements:
|
|
Year Ended December 31, |
|
(In thousands) |
|
2022 |
|
|
2021 |
|
Sales and marketing |
|
$ |
600 |
|
|
$ |
763 |
|
Product development |
|
|
556 |
|
|
|
879 |
|
General and administrative |
|
|
2,861 |
|
|
|
3,119 |
|
Share-based compensation expense |
|
|
4,017 |
|
|
|
4,761 |
|
Capitalized in intangible assets |
|
|
97 |
|
|
|
117 |
|
Total share-based compensation |
|
$ |
4,114 |
|
|
$ |
4,878 |
|
401(k) Profit Sharing Plan and Trust Plan
The Company maintains a 401(k) Profit Sharing Plan and Trust (“Plan”) covering all U.S. employees. Under the Plan, the Company makes a safe harbor matching contribution equal to 100% of an employee’s salary deferrals that do not exceed 3% of the employee’s compensation plus 50% of the employee’s salary deferrals between 3% and 5% of such employee’s compensation. This safe harbor matching contribution is 100% vested. During 2022, we made matching contributions to the Plan of $916. During 2021, we made matching contributions to the Plan of $729.
The Company also has a discretion to award eligible employees under the Plan, profit sharing contributions
12. Segment information
The Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The profitability measure employed by CODM is segment EBITDA. As of December 31, 2022, the Company has two operating segments and two corresponding reporting units, “Fluent” and “All Other,” and one reportable segment. “All Other” represents 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 is shown in the following tables below:
|
|
Year Ended December 31, |
|
(In thousands) |
|
2022 |
|
|
2021 |
|
Fluent segment revenue(1): |
|
|
|
|
|
|
|
|
United States |
|
$ |
218,981 |
|
|
$ |
247,320 |
|
International |
|
|
131,808 |
|
|
|
68,539 |
|
Fluent segment revenue |
|
$ |
350,789 |
|
|
$ |
315,859 |
|
All Other segment revenue(1): |
|
|
|
|
|
|
|
|
United States |
|
$ |
10,273 |
|
|
$ |
13,311 |
|
International |
|
|
72 |
|
|
|
80 |
|
All Other segment revenue |
|
$ |
10,345 |
|
|
$ |
13,391 |
|
Segment EBITDA |
|
|
|
|
|
|
|
|
Fluent segment EBITDA |
|
$ |
(106,109 |
) |
|
$ |
7,231 |
|
All Other segment EBITDA |
|
|
(268 |
) |
|
|
1,274 |
|
Total EBITDA |
|
|
(106,377 |
) |
|
|
8,505 |
|
Depreciation and amortization |
|
|
13,214 |
|
|
|
13,170 |
|
Total loss from operations |
|
$ |
(119,591 |
) |
|
$ |
(4,665 |
) |
(1) |
Revenue aggregation is based upon location of the customer. |
|
|
December 31, |
|
|
December 31, |
|
(In thousands) |
|
2022 |
|
|
2021 |
|
Total assets: |
|
|
|
|
|
|
|
|
Fluent |
|
$ |
168,486 |
|
|
$ |
297,768 |
|
All Other |
|
|
15,483 |
|
|
|
20,414 |
|
Total assets |
|
$ |
183,969 |
|
|
$ |
318,182 |
|
As of December 31, 2022, long-lived assets are all located in the United States.
For the year ended December 31, 2022, the Company identified an international customer within the Fluent segment with revenue in the amount of $79,600 that represents 22% of consolidated revenue.
13. 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 year December 31, 2022, the Company incurred transaction-related expenses of $59 and compensation expense related to non-compete agreements in connection with the acquisition of $500, 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 3% and 2%, respectively, of the Company's consolidated assets and revenues as of and for the year ended December 31, 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 True North |
|
|
|
|
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.
Winopoly acquisition
On April 1, 2020, the Company acquired, through a wholly owned subsidiary, a 50% membership interest in Winopoly, LLC (the "Initial Winopoly Acquisition") 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. As of the first quarter of 2021, the initial contingent consideration of $1,000 had been paid based on specific revenue targets having been met. 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, LLC is a contact center operation, which serves as a marketplace that matches consumers sourced by Fluent 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.
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.
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 Fluent, Inc. 2018 Stock Incentive Plan to certain Winopoly personnel valued at $1,360. Certain seller parties entered into employment and non-competition agreements with 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.
Although the sellers maintained an equity interest in Winopoly, LLC 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, LLC 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, LLC; however, such a liquidity event was considered unlikely. Therefore, no non-controlling interest had been 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. For the year ended December 30, 2021, compensation expense $3,213 related to the Put/Call Consideration was 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 year ended December 31, 2022.
14. Variable Interest Entity
The Company determined that, following the Initial Winopoly Acquisition, Winopoly, LLC qualified as a VIE, for which the Company was the primary beneficiary (as discussed in Note 13, Business acquisitions). 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 impact its economic performance. These significant activities include the compliance practices of Winopoly, LLC and the Company's provisioning of leads that Winopoly, LLC used to generate its revenue, which ultimately gave the Company its controlling interest. The Company therefore consolidated Winopoly, LLC 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 (see Note 6, Intangible assets, net, Note 7, Goodwill and Note 13, Business acquisition).
15. Related party transactions
For the year ended December 31, 2021, the Company recognized revenue from a client in which the then-CEO holds a significant ownership interest. Accounts receivable for this client was $0 as of December 31, 2021 and $33 of revenue was recognized and no expenses were incurred from this client for the year ended December 31, 2021. In accordance with Company's policies and procedures for determining allowances for doubtful accounts and write-offs, the Company wrote-off the outstanding accounts receivable from this client as of June 30, 2021.
16. Contingencies
Except as disclosed below, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of management, is likely to have a material adverse effect on the business, financial condition, results of operations or cash flows. Legal fees associated with such legal proceedings are expensed as incurred. The Company reviews legal proceedings and claims on an ongoing basis and follows the appropriate accounting guidance, including ASC 450, when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for the consolidated financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.
In addition, the Company may be involved in litigation from time to time in the ordinary course of business. It is the opinion of the Company's management that the ultimate resolution of any such matters currently pending will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty and there can be no assurance that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
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.
The New York State Department of Taxation and Finance (the “Tax Department”) performed a sales and use tax audit covering the period from December 1, 2010 to November 30, 2019. The Tax Department asserted that revenue derived from certain of the Company’s customer acquisition and list management services are subject to sales tax, as a result of being deemed taxable information services. The Company reached a settlement with the Tax Department for $1,700 which was paid on April 1, 2022. Starting in March 1, 2022, the Company has been collecting and remitting New York sales tax on certain of list management and hosted revenues from New York based clients.
On January 28, 2020, Fluent received a Civil Investigative Demand (“CID”) from the FTC regarding compliance with the FTC Act and the Telemarketing Sales Rule (“TSR”). On October 18, 2022, the FTC staff sent the Company a draft complaint and proposed consent order seeking injunctive relief and a civil monetary penalty. The Company has been negotiating resolution of the terms of the consent order with the FTC staff. On January 12, 2023, the Company made an initial proposal of $5.0 million for the civil monetary penalty contingent on successful negotiation of the remaining outstanding injunctions and other provisions. On January 30, 2023, FTC staff forwarded a complaint recommendation to the FTC’s Bureau of Consumer Protection for consideration. On March 3, 2023, the Company met with the Bureau of Consumer Protection and as a result of that meeting, the Company is continuing negotiation with the FTC staff. The Company believes it is more likely than not that it will be able to come to an agreement with the FTC staff on the terms of a consent order, including injunctive and civil monetary penalty provisions, but there is no assurance this will occur. The Company accrued $5,000 in connection with this matter for the year-ended December 31, 2022; however, a final civil monetary penalty could be higher or lower. The Company will continue to devote substantial resources and incur outside legal expenses to reach a settlement.
On October 6, 2020, the Company received notice from the Pennsylvania Office of the Attorney General (“PAAG”) that it was reviewing the Company’s business practices relating to telemarketing. After the Company and the PAAG were unable to reach agreement on a proposed Assurance of Voluntary Compliance (“AVC”), the Commonwealth of Pennsylvania filed a complaint for permanent injunction, civil penalties, and other relief in the United States District Court for the Western District of Pennsylvania on November 2, 2022. While the Company believes that its historical practices were in full compliance with the PA Consumer Protection Law and the TSR, the Company has updated its telemarketing practices. We are currently negotiating a potential Consent Order with the PAAG to resolve the matter.
The Company has been involved in a TCPA class action, Daniel Berman v. Freedom Financial Network, which was originally filed in 2018. Plaintiff's second Motion for Class Certification (the first such motion was denied) is pending and oral argument was scheduled for February 7, 2023. The parties have agreed to stay the proceeding as a result of a preliminary settlement reached by the parties. The parties are currently negotiating the terms of a Settlement Agreement which provides for payment to plaintiffs of $9,750 and injunctive provisions. The Company will contribute $3,100 towards the settlement, $1,100 on or about execution of the Settlement Agreement, and $2,000 pursuant to an interest-bearing note in favor of Freedom Financial which is payable over two years following entry of the order.