NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except 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 ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2020.
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. As of April 1, 2020, the Company has included Winopoly, LLC in its consolidated financial statements as a VIE (as further discussed in Note 11, Business acquisitions and Note 12, Variable interest entity).
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, 2019 ("2019 Form 10-K") filed with the SEC on March 13, 2020. The consolidated balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date included in the 2019 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, 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 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 new guidance on its consolidated financial statements.
(c) Revenue recognition
Revenue is recognized when control of goods or services is transferred to customers, in amounts that reflect the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is typically to (a) deliver data records, based on predefined qualifying characteristics specified by the customer or (b) generate conversions, based on predefined user actions (for example, a click, a registration or the installation of an app) and subject to certain qualifying characteristics specified by the customer.
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, 2020 and December 31, 2019, the balance of deferred revenue was $2,440 and $1,140, respectively. The majority of the deferred revenue balance as of December 31, 2019 was recognized into revenue during the first quarter of 2020.
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, 2020 and December 31, 2019, unbilled revenue included in accounts receivable was $27,518 and $29,061, 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.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
(d) 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, accruals for contingencies 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.
Except for the impairment of goodwill related to the Company’s All Other reporting unit, as discussed in Note 4, Goodwill, results of operations for the three and nine months ended September 30, 2020 did not include any adjustments to assets or liabilities due to the impact of COVID-19. While the Company has not incurred significant disruptions to its business thus far from the COVID-19 pandemic, management is unable to accurately predict the impact COVID-19 may have on its operations due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to customers' and suppliers' businesses and numerous other factors. Management will continue to evaluate the nature and extent that COVID-19 will impact its business, results of operations and financial condition.
2. Income (loss) per share
Basic income (loss) per share is computed by dividing net income by the weighted average number of common shares outstanding during the period, in addition to restricted stock units ("RSUs") and restricted common stock that are vested but not delivered. Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock are exercised or converted into common stock and is calculated using the treasury stock method for stock options, restricted stock units, restricted stock, warrants and deferred common stock. Common 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, 2020 and 2019, basic and diluted income (loss) per share was as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,169
|
|
|
$
|
(4,463
|
)
|
|
$
|
2,029
|
|
|
$
|
(2,703
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
76,315,973
|
|
|
|
76,769,339
|
|
|
|
76,111,405
|
|
|
|
76,296,825
|
|
Weighted average restricted shares vested not delivered
|
|
|
2,262,001
|
|
|
|
2,799,871
|
|
|
|
2,452,857
|
|
|
|
3,092,306
|
|
Total basic weighted average shares outstanding
|
|
|
78,577,974
|
|
|
|
79,569,210
|
|
|
|
78,564,262
|
|
|
|
79,389,131
|
|
Dilutive effect of assumed conversion of restricted stock units
|
|
|
594,604
|
|
|
|
—
|
|
|
|
650,357
|
|
|
|
—
|
|
Dilutive effect of assumed conversion of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dilutive effect of assumed conversion of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total diluted weighted average shares outstanding
|
|
|
79,172,578
|
|
|
|
79,569,210
|
|
|
|
79,214,619
|
|
|
|
79,389,131
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
The following potentially dilutive securities were excluded from the calculation of diluted income per share, as their effects would have been anti-dilutive for the periods presented:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Restricted stock units
|
|
|
1,589,498
|
|
|
|
3,794,227
|
|
|
|
1,639,561
|
|
|
|
3,794,227
|
|
Stock options
|
|
|
2,509,000
|
|
|
|
2,120,000
|
|
|
|
2,509,000
|
|
|
|
2,120,000
|
|
Warrants
|
|
|
833,333
|
|
|
|
2,398,776
|
|
|
|
833,333
|
|
|
|
2,398,776
|
|
Total anti-dilutive securities
|
|
|
4,931,831
|
|
|
|
8,313,003
|
|
|
|
4,981,894
|
|
|
|
8,313,003
|
|
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
3. Intangible assets, net
Intangible assets, net, other than goodwill, consist of the following:
|
|
Amortization period (in years)
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Gross amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
|
3
|
|
|
$
|
6,656
|
|
|
$
|
4,866
|
|
Acquired proprietary technology
|
|
|
3-5
|
|
|
|
14,735
|
|
|
|
13,661
|
|
Customer relationships
|
|
|
5-10
|
|
|
|
37,886
|
|
|
|
37,286
|
|
Trade names
|
|
|
4-20
|
|
|
|
16,657
|
|
|
|
16,657
|
|
Domain names
|
|
|
20
|
|
|
|
191
|
|
|
|
191
|
|
Databases
|
|
|
5-10
|
|
|
|
31,292
|
|
|
|
31,292
|
|
Non-competition agreements
|
|
|
2-5
|
|
|
|
1,768
|
|
|
|
1,768
|
|
Total gross amount
|
|
|
|
|
|
|
109,185
|
|
|
|
105,721
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
|
|
|
|
|
(3,181
|
)
|
|
|
(1,995
|
)
|
Acquired proprietary technology
|
|
|
|
|
|
|
(11,816
|
)
|
|
|
(9,516
|
)
|
Customer relationships
|
|
|
|
|
|
|
(23,334
|
)
|
|
|
(19,396
|
)
|
Trade names
|
|
|
|
|
|
|
(4,029
|
)
|
|
|
(3,359
|
)
|
Domain names
|
|
|
|
|
|
|
(46
|
)
|
|
|
(39
|
)
|
Databases
|
|
|
|
|
|
|
(16,889
|
)
|
|
|
(14,182
|
)
|
Non-competition agreements
|
|
|
|
|
|
|
(1,741
|
)
|
|
|
(1,631
|
)
|
Total accumulated amortization
|
|
|
|
|
|
|
(61,036
|
)
|
|
|
(50,118
|
)
|
Net intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
|
|
|
|
|
3,475
|
|
|
|
2,871
|
|
Acquired proprietary technology
|
|
|
|
|
|
|
2,919
|
|
|
|
4,145
|
|
Customer relationships
|
|
|
|
|
|
|
14,552
|
|
|
|
17,890
|
|
Trade names
|
|
|
|
|
|
|
12,628
|
|
|
|
13,298
|
|
Domain names
|
|
|
|
|
|
|
145
|
|
|
|
152
|
|
Databases
|
|
|
|
|
|
|
14,403
|
|
|
|
17,110
|
|
Non-competition agreements
|
|
|
|
|
|
|
27
|
|
|
|
137
|
|
Total intangible assets, net
|
|
|
|
|
|
$
|
48,149
|
|
|
$
|
55,603
|
|
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"), and the acquisition of a 50% interest in Winopoly, LLC (the "Winopoly Acquisition"), effective April 1, 2020 (see Note 11, Business acquisitions).
The Company determined that the effects of the macroeconomic conditions arising during the three months ended June 30, 2020 from the global COVID-19 pandemic and the social unrest throughout the United States, which changed the media buying patterns of certain customers directly impacting the All Other reporting unit, constituted an impairment triggering event. As such, the Company conducted an interim test of the recoverability of its long-lived assets as of June 30, 2020. Based on the results of this recoverability test, which measured the Company's projected undiscounted cash flows as compared to the carrying value of the asset group, the Company determined that, as of June 30, 2020, its long-lived assets were not impaired. Management believes that the assumptions utilized in this interim impairment testing, including the determination of estimated future cash flows, were reasonable. The Company completed its quarterly trigger event assessment for the three months ended September 30, 2020 and determined that no triggering event had occurred requiring further interim impairment assessments for its long-lived assets.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
Amortization expense of $3,711 and $3,456 for the three months ended September 30, 2020 and 2019, respectively, and $10,917 and $9,708, for the nine months ended September 30, 2020 and 2019, respectively, is included in depreciation and amortization expenses in the consolidated statements of operations. As of September 30, 2020, intangible assets with a carrying amount of $693, 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, 2020, estimated amortization expense related to the Company's intangible assets for the remainder of 2020 and through 2025 and thereafter are as follows:
Year
|
|
September 30, 2020
|
|
Remainder of 2020
|
|
$
|
3,579
|
|
2021
|
|
|
11,953
|
|
2022
|
|
|
10,492
|
|
2023
|
|
|
5,194
|
|
2024
|
|
|
4,470
|
|
2025 and thereafter
|
|
|
12,461
|
|
Total
|
|
$
|
48,149
|
|
4. Goodwill
Goodwill represents the cost in excess of fair value of net assets acquired in a business combination. As of September 30, 2020, the total balance of goodwill was $165,088, and relates to the acquisition of Interactive Data, LLC, the Fluent LLC Acquisition, the Q Interactive Acquisition, the AdParlor Acquisition, and the Winopoly Acquisition (see Note 11, Business acquisitions).
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. The measurement date of the Company's annual goodwill impairment test is October 1.
The Company determined that the effects of the macroeconomic conditions arising during the three months ended June 30, 2020 from the global COVID-19 pandemic and the social unrest throughout the United States, which changed the media buying patterns of certain customers directly impacting the All Other reporting unit, constituted an impairment triggering event. As such, the Company conducted an interim test of the fair value of its goodwill for potential impairment as of June 30, 2020. The results of this interim impairment test, which used a combination of the income and market approaches to determine the fair value of the All Other reporting unit, indicated that its carrying value exceeded its estimated fair value by 8.9%. The Company thereby concluded that All Other's goodwill of $4,983 was impaired by $817 at June 30, 2020. The Company believes that the assumptions utilized in its interim impairment testing, including the determination of an appropriate discount rate of 16%, long-term profitability growth projections, and estimated future cash flows, were reasonable. The interim goodwill impairment test reflected management's best estimate of the economic impact to its business, end-market conditions and recovery timelines.
The Company completed its quarterly trigger event assessment for the three months ended September 30, 2020 and determined that no triggering event had occurred requiring further interim impairment assessments for its remaining goodwill. However, if the ongoing economic uncertainty proves to be more severe than estimated, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in future impairment charges.
As of September 30, 2020 and December 31, 2019, the change in the carrying value of goodwill for the Company's operating segments are listed below:
|
|
Fluent
|
|
|
All Other
|
|
|
Total
|
|
Balance as of December 31, 2019
|
|
$
|
159,791
|
|
|
$
|
4,983
|
|
|
$
|
164,774
|
|
Winopoly Acquisition
|
|
|
1,131
|
|
|
|
—
|
|
|
|
1,131
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
(817
|
)
|
|
|
(817
|
)
|
Balance as of September 30, 2020
|
|
$
|
160,922
|
|
|
$
|
4,166
|
|
|
$
|
165,088
|
|
5. Long-term debt, net
Long-term debt, net, related to the Refinanced Term Loan and Note Payable (as defined below) consisted of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Refinanced Term Loan due 2023 (less unamortized discount and financing costs of $2,687 and $3,715, respectively)
|
|
$
|
39,924
|
|
|
$
|
48,571
|
|
Note Payable due 2021 (less unamortized discount of $36 and $100, respectively)
|
|
|
1,214
|
|
|
|
2,400
|
|
Long-term debt, net
|
|
|
41,138
|
|
|
|
50,971
|
|
Less: Current portion of long-term debt
|
|
|
(4,750
|
)
|
|
|
(6,873
|
)
|
Long-term debt, net (non-current)
|
|
$
|
36,388
|
|
|
$
|
44,098
|
|
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
Refinanced Term Loan
On March 26, 2018, Fluent, LLC refinanced and fully repaid its existing term loans and certain promissory notes, which had been entered into on December 8, 2015, with a new term loan in the amount of $70.0 million ("Refinanced Term Loan"), pursuant to a Limited Consent and Amendment No. 6 ("Amendment No. 6") to its Credit Agreement (the "Credit Agreement"). The Refinanced Term Loan is guaranteed by the Company and its direct and indirect subsidiaries, and is secured by substantially all of the assets of the Company and its direct and indirect subsidiaries, including Fluent, LLC, in each case, on an equal and ratable basis. The Refinanced Term Loan accrues interest at the rate of either, at Fluent's option, (a) LIBOR (subject to a floor of 0.50%) plus 7.00% per annum, or (b) the base rate (generally equivalent to the U.S. prime rate) plus 6.0% per annum, payable in cash.
The Refinanced Term Loan matures on March 26, 2023 and interest is payable monthly. Scheduled principal amortization of the Refinanced Term Loan is $875 per quarter, which commenced with the fiscal quarter ended June 30, 2018. The Credit Agreement, as amended, requires the Company to maintain and comply with certain financial and other covenants and includes certain prepayment provisions, including mandatory quarterly principal prepayments with a portion of the Company's excess cash flow. For the three months ended September 30, 2020, there was no quarterly prepayment resulting from excess cash flow. At September 30, 2020, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.
Note Payable
On July 1, 2019, in connection with the AdParlor Acquisition (as defined in Note 11, Business acquisitions), the Company issued a promissory note (the "Note Payable") in the principal amount of $2,350, net of discount of $150 from imputing interest on the non-interest bearing note using a 4.28% rate. The promissory note is guaranteed by the Company's subsidiary, Fluent, LLC, does not accrue interest except in the case of default, is payable in two equal installments on the first and second anniversaries of the date of closing of the acquisition and is subject to setoff in respect of certain indemnity and other matters. The first installment payment of $1,250 was made on July 1, 2020, using cash on hand.
Maturities
As of September 30, 2020, scheduled future maturities of the Refinanced Term Loan and Note Payable are as follows:
Year
|
|
|
September 30, 2020
|
|
Remainder of 2020
|
|
$
|
875
|
|
2021
|
|
|
4,750
|
|
2022
|
|
|
3,500
|
|
2023
|
|
|
34,736
|
|
2024
|
|
|
—
|
|
Total maturities
|
|
$
|
43,861
|
|
Fair value
As of September 30, 2020, the fair value of long-term debt is considered to approximate its carrying value. The fair value assessment represents a Level 2 measurement.
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, makes a cumulative adjustment.
As of September 30, 2020 and December 31, 2019, 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. Based on current income and anticipated future earnings, the Company believes there is a reasonable possibility that within the next twelve months sufficient positive evidence may become available to allow a conclusion to be reached that a significant portion, if not all, of the valuation allowance will be released. Release of some or all of the valuation allowance would result in the recognition of certain deferred tax assets and an increase in deferred tax benefit for any period in which such a release may be recorded, however, the exact timing and amount of any valuation allowance release are subject to change, depending upon the level of profitability the Company is able to achieve and the net deferred tax assets available.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
For the nine months ended September 30, 2020 and 2019, the Company's effective income tax rate of 3% and income tax benefit rate of 1%, respectively, 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, 2020 and December 31, 2019, 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, 2020, 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act includes several provisions for corporations, including increasing the amount of deductible interest, allowing companies to carryback certain Net Operating Losses (“NOLs”) and increasing the amount of NOLs that corporations can use to offset income. Management is currently assessing the future implications of these provisions pursuant to the CARES Act, but does not anticipate the impact to be material to the Company's consolidated financial statements.
7. Common stock, treasury stock and warrants
Common stock
As of September 30, 2020 and December 31, 2019, the number of issued shares of common stock was 80,260,475 and 78,642,078, respectively, which included shares of treasury stock of 3,936,755 and 2,768,399, respectively.
For the nine months ended September 30, 2020, the change in the number of issued shares of common stock was the result of an aggregate 1,618,397 shares of common stock issued upon vesting of RSUs, including 210,683 shares of common stock withheld to cover statutory taxes upon such vesting, which are reflected in treasury stock, as discussed below. Additionally, as discussed and defined below, the holders of the Amended Whitehorse Warrants exercised the Put Right to require the Company to purchase from the warrant holders the 300,000 Warrant Shares for an aggregate of $1,150. The Company funded such purchase with cash on hand.
Treasury stock
As of September 30, 2020 and December 31, 2019, the Company held shares of treasury stock of 3,936,755 and 2,768,399, with a cost of $9,974 and $8,184, 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 nine months ended September 30, 2020, 210,683 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. During the nine months ended September 30, 2020, the Company repurchased 657,673 of its own shares as part of a stock repurchase program authorized by the Company's Board of Directors on November 19, 2019, and 300,000 shares of common stock upon exercise of the Put Right (see Warrants, below).
Warrants
As of September 30, 2020 and December 31, 2019, warrants to purchase an aggregate of 833,333 and 2,398,776 shares, respectively, of common stock were outstanding with exercise prices ranging from $3.75 to $6.00 per share.
On July 9, 2018 the Company entered into First Amendments (the "First Amendments") to the Amendments to Warrants and Agreements to Exercise ("Amended Whitehorse Warrants") with (i) H.I.G. Whitehorse SMA ABF, L.P. regarding 46,667 warrants to purchase common stock of the Company, par value $0.0005 per share, at an exercise price of $3.00 per share; (ii) H.I.G. Whitehorse SMA Holdings I, LLC regarding 66,666 warrants to purchase common stock of the Company at an exercise price of $3.00 per share; and (iii) Whitehorse Finance, Inc. regarding 186,667 warrants to purchase common stock of the Company at an exercise price of $3.00 per share. In November 2017, the Amended Whitehorse Warrants were exercised and the Company issued an aggregate of 300,000 shares of common stock of the Company (the "Warrant Shares") to the warrant holders. Pursuant to the First Amendments, the warrant holders had the right, but not the obligation, to require the Company to purchase from these warrant holders the 300,000 Warrant Shares at $3.8334 per share (the "Put Right"), which could be exercised during the period commencing January 1, 2019 and ending December 15, 2019. On December 6, 2019, the Company entered into the Second Amendments to the Amended Whitehorse Warrants, pursuant to which the expiration of the Put Right was extended from December 15, 2019 to January 31, 2020. On January 31, 2020, the holders of the Amended Whitehorse Warrants exercised the Put Right, requiring the Company to purchase from the warrant holders the 300,000 Warrant Shares for an aggregate of $1,150. The Company funded such purchase with cash on hand.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
8. Share-based compensation
As of September 30, 2020, the Company maintains two share-based incentive plans: the Cogint, Inc. 2015 Stock Incentive Plan (the "2015 Plan") and the Fluent, Inc. 2018 Stock Incentive Plan (the "2018 Plan") which, combined, authorize the issuance of 21,132,372 shares of common stock. As of September 30, 2020, there were 1,868,050 shares of common stock reserved for issuance under the 2018 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.
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 and March 1, 2020, 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 125.00%, 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% 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, 2020, the first condition for the stock options issued on February 1, 2019 has been met; therefore, 50% of the shares subject to these stock options vested on February 1, 2020. 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
|
|
Fair value lower range
|
|
$
|
2.81
|
|
|
$
|
1.58
|
|
|
$
|
1.46
|
|
Fair value higher range
|
|
$
|
2.86
|
|
|
$
|
1.61
|
|
|
$
|
1.49
|
|
Exercise price
|
|
$
|
4.72
|
|
|
$
|
2.56
|
|
|
$
|
2.33
|
|
Expected term (in years)
|
|
|
1.0 - 1.3
|
|
|
|
1.0 - 1.6
|
|
|
|
1.0 - 1.5
|
|
Expected volatility
|
|
|
65
|
%
|
|
|
70
|
%
|
|
|
70
|
%
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Risk-free rate
|
|
|
2.61
|
%
|
|
|
1.85
|
%
|
|
|
1.05
|
%
|
For the nine months ended September 30, 2020, 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, 2019
|
|
|
2,120,000
|
|
|
$
|
5.21
|
|
|
|
8.7
|
|
|
$
|
—
|
|
Granted
|
|
|
478,000
|
|
|
$
|
2.48
|
|
|
|
9.3
|
|
|
|
|
|
Forfeited
|
|
|
(59,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2020
|
|
|
2,509,000
|
|
|
$
|
4.38
|
|
|
|
8.3
|
|
|
$
|
19
|
|
Options exercisable as of September 30, 2020
|
|
|
1,086,000
|
|
|
$
|
4.82
|
|
|
|
7.8
|
|
|
$
|
—
|
|
The aggregate intrinsic value amounts in the table above represent the difference between the closing price of the Company's common stock at the end of the reporting period and the corresponding exercise prices, multiplied by the number of in-the-money stock options as of the same date.
For the nine months ended September 30, 2020, the unvested balance of options was as follows:
|
|
Number of options
|
|
|
Weighted average exercise price per share
|
|
|
Weighted average remaining contractual term (in years)
|
|
Unvested as of December 31, 2019
|
|
|
2,008,000
|
|
|
$
|
4.72
|
|
|
|
9.1
|
|
Granted
|
|
|
478,000
|
|
|
$
|
2.48
|
|
|
|
9.3
|
|
Forfeited
|
|
|
(59,000
|
)
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(1,004,000
|
)
|
|
$
|
4.72
|
|
|
|
8.3
|
|
Unvested as of September 30, 2020
|
|
|
1,423,000
|
|
|
$
|
4.04
|
|
|
|
8.6
|
|
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
Compensation expense recognized for stock options of $73 and $1,250 for the three months ended September 30, 2020 and 2019, respectively, and $1,424 and $3,353 for the nine months ended September 30, 2020 and 2019, respectively, was recorded in sales and marketing, product development and general and administrative expenses in the consolidated statements of operations. As of September 30, 2020, there was $289 of unrecognized share-based compensation with respect to outstanding stock options.
Restricted stock units and restricted stock
For the nine months ended September 30, 2020, 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, 2019
|
|
|
3,394,370
|
|
|
$
|
8.03
|
|
Granted
|
|
|
1,638,532
|
|
|
$
|
2.02
|
|
Vested and delivered
|
|
|
(1,407,714
|
)
|
|
$
|
3.61
|
|
Withheld as treasury stock (1)
|
|
|
(210,683
|
)
|
|
$
|
4.13
|
|
Vested not delivered (2)
|
|
|
525,334
|
|
|
$
|
2.84
|
|
Forfeited
|
|
|
(334,991
|
)
|
|
$
|
2.91
|
|
Unvested as of September 30, 2020
|
|
|
3,604,848
|
|
|
$
|
6.91
|
|
(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, 2020, there were 3,936,755 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, 2020, there was a net decrease of 525,334 shares included in the vested not delivered balance as a result of the delivery of 655,333 shares, partially offset by the vesting of 129,999 shares with deferred delivery election. As of September 30, 2020, 2,262,001 outstanding RSUs were vested not delivered.
|
Compensation expense recognized for RSUs and restricted stock of $1,131 and $1,562 for the three months ended September 30, 2020 and 2019, respectively, and $3,544 and $4,733 for the nine months ended September 30, 2020 and 2019, respectively, was recorded in sales and marketing, product development and general and administrative in the consolidated statements of operations, and intangible assets 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, 2020, unrecognized share-based compensation expense associated with the granted RSUs and stock options amounted to $8,770, which is expected to be recognized over a weighted average period of 2.5 years.
For the three and nine months ended September 30, 2020 and 2019, share-based compensation for the Company's stock option, RSU, common stock and restricted stock awards were allocated to the following accounts in the consolidated financial statements:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Sales and marketing
|
|
$
|
172
|
|
|
$
|
292
|
|
|
$
|
659
|
|
|
$
|
821
|
|
Product development
|
|
|
291
|
|
|
|
278
|
|
|
|
814
|
|
|
|
800
|
|
General and administrative
|
|
|
707
|
|
|
|
2,220
|
|
|
|
3,375
|
|
|
|
6,398
|
|
Share-based compensation expense
|
|
|
1,170
|
|
|
|
2,790
|
|
|
|
4,848
|
|
|
|
8,019
|
|
Capitalized in intangible assets
|
|
|
34
|
|
|
|
22
|
|
|
|
120
|
|
|
|
67
|
|
Total share-based compensation
|
|
$
|
1,204
|
|
|
$
|
2,812
|
|
|
$
|
4,968
|
|
|
$
|
8,086
|
|
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
9. Segment information
The Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The profitability measure employed by CODM is segment income (loss) from operations. As of September 30, 2020, 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 for the three and nine months ended September 30, 2020 of AdParlor, LLC (see Note 11, Business acquisitions), 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:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Fluent segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
63,894
|
|
|
$
|
54,959
|
|
|
$
|
189,507
|
|
|
$
|
177,080
|
|
International
|
|
|
12,832
|
|
|
|
7,953
|
|
|
|
35,178
|
|
|
|
22,953
|
|
Fluent segment revenue
|
|
$
|
76,726
|
|
|
$
|
62,912
|
|
|
$
|
224,685
|
|
|
$
|
200,033
|
|
All Other segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,548
|
|
|
$
|
1,339
|
|
|
$
|
3,745
|
|
|
$
|
1,339
|
|
International
|
|
|
6
|
|
|
|
301
|
|
|
|
293
|
|
|
|
301
|
|
All Other segment revenue
|
|
$
|
1,554
|
|
|
$
|
1,640
|
|
|
$
|
4,038
|
|
|
$
|
1,640
|
|
Segment income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluent
|
|
$
|
4,062
|
|
|
$
|
(2,581
|
)
|
|
$
|
8,910
|
|
|
$
|
2,689
|
|
All Other
|
|
|
(1,511
|
)
|
|
|
(163
|
)
|
|
|
(2,634
|
)
|
|
|
(163
|
)
|
Total income from operations
|
|
|
2,551
|
|
|
|
(2,744
|
)
|
|
|
6,276
|
|
|
|
2,526
|
|
Interest expense, net
|
|
|
(1,317
|
)
|
|
|
(1,719
|
)
|
|
|
(4,182
|
)
|
|
|
(5,264
|
)
|
Income (loss) before income taxes
|
|
$
|
1,234
|
|
|
$
|
(4,463
|
)
|
|
$
|
2,094
|
|
|
$
|
(2,738
|
)
|
|
|
September 30
|
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
Total assets:
|
|
|
|
|
|
|
Fluent
|
|
$
|
290,588
|
|
|
$
|
296,714
|
|
All Other
|
|
|
14,725
|
|
|
|
20,379
|
|
Total assets
|
|
$
|
305,313
|
|
|
$
|
317,093
|
|
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
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. The Company has been fully cooperating with the NY AG and has been engaged in settlement discussions with the NY AG concerning the resolution of this matter. As of September 30, 2020, the Company accrued $1.45 million in connection with this matter, which the Company believes is the minimum amount of loss to be incurred. The ultimate amount of this loss may be greater depending on the results of settlement discussions with the NY AG, including any failure of the parties to agree on the terms of a settlement, at which point the matter may proceed to litigation. The Company is unable to estimate the amount or range of any additional loss at the current stage of this matter. In the event of an unfavorable outcome, the actual loss associated with this matter could have a material adverse effect on the Company’s business, results of operations or financial position.
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 been fully cooperating with the DOJ and the DC AG.
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 met with the Tax Department on March 4, 2020. During that meeting, the Company informed the Tax Department that a majority of the Proposed Audit Adjustments was attributable to revenue derived from transfers which were either excluded resales or sourced outside of New York, and renewed its challenge as to the taxability of its customer acquisition revenue. On July 22 and 31, 2020, the Company received notices of determination from the Tax Department totaling $3.0 million, including $0.7 million of interest. On October 16, 2020, the Company filed challenges to the notices of determination. Based on the foregoing, the Company believes it is probable that a sales tax liability may result from this matter, and has estimated the range of any such liability to be between $0.7 million and $3.0 million. The Company has accrued a liability associated with these sales and use tax audits at the low end of this range.
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. The Company has been fully cooperating with the FTC and is responding to the CID. 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 acquisitions
Winopoly acquisition
On April 1, 2020, the Company acquired, through a wholly owned subsidiary, a 50% membership interest in Winopoly, LLC (the "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. 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 Winopoly Acquisition constituted the purchase of a business. For the nine months ended September 30, 2020, the Company incurred transaction-related expenses of $126 in connection with the acquisition, which are recorded in general and administrative expenses in the consolidated statements of operations. Assets and revenues of Winopoly, LLC totaled 0.9% and 1.0%, respectively, of the Company's consolidated financial statements at and for the nine months ended September 30, 2020, and are included in the Fluent operating segment.
The preliminary 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 preliminary 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. The purchase accounting process has not yet been completed, primarily because the valuation of acquired assets and liabilities assumed has not been finalized. The Company expects to complete the purchase accounting as soon as practicable, but no later than one year from the acquisition date. The Company does not anticipate material adjustments.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
At any time between the fourth and sixth anniversary of the Winopoly Acquisition, the sellers may exercise a put option whereby the Company is required to acquire the remaining 50% membership interests in Winopoly, LLC. During this period, the Company also has the ability to exercise a call option whereby the sellers must sell the remaining 50% membership interests in Winopoly, LLC to the Company. The purchase price paid for the remaining 50% membership interests would be 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 month of put/call closing extending through six months following the month of put/call closing. In connection with the exercise of the put/call option, certain of the seller parties must enter into employment agreements with the Company in order to receive their respective shares of the consideration for the remaining 50% of the membership interests (the "Put/Call Consideration").
Although the sellers maintain an equity interest in Winopoly, LLC, the Company has deemed this equity interest to be non-substantive in nature, as the sellers will primarily benefit from the Winopoly Acquisition based on periodic distributions of the earnings of Winopoly, LLC and the Put/Call Consideration, both of which are 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 is considered unlikely. Therefore, no non-controlling interest has been recognized. Periodic distributions for services rendered will be recorded as compensation expense. In addition, the Company will estimate the amount of the Put/Call Consideration, which will be accreted over the six year estimated service period, consisting of the estimated four years until the put/call can be exercised and the additional two-year service requirement. For the three and nine months ended September 30, 2020, compensation expense of $654 and $1,184, respectively, related to the Put/Call Consideration was recorded in general and administrative on the consolidated statement of operations, with a corresponding liability in other non-current liabilities on the consolidated balance sheet.
AdParlor acquisition
On July 1, 2019, two wholly owned subsidiaries of the Company, AdParlor, LLC (formerly known as AdParlor Acquisition, LLC), a Delaware limited liability company, and Fluent Media Canada, Inc., a British Columbia company (together with AdParlor, LLC, each a "Buyer" and collectively "Buyers"), completed the acquisition of substantially all of the assets of AdParlor Holdings, Inc., a Delaware corporation ("AdParlor Holdings"), AdParlor International, Inc., a Delaware corporation ("AdParlor International"), AdParlor Media, Inc., a Delaware corporation ("AdParlor Media US"), and AdParlor Media ULC, a British Columbia unlimited liability company (together with AdParlor Holdings, AdParlor International and AdParlor Media US, each a "Seller" and collectively "Sellers"), pursuant to an Asset Purchase Agreement (the "Purchase Agreement") dated June 17, 2019, by and among Buyers, Sellers and the parent of the Sellers, v2 Ventures Group LLC, a Delaware limited liability company (the "AdParlor Acquisition"). The purpose of the acquisition was to expand the Company's performance-based marketing capabilities. In accordance with ASC 805, the Company determined that the AdParlor Acquisition constituted the purchase of a business.
At closing, the Buyers paid to Sellers cash consideration of $7,302, net of adjustments for working capital and indebtedness, and issued a promissory note to Sellers with a present value of $2,350 in exchange for substantially all of the assets of Sellers. This promissory note is guaranteed by Fluent, LLC, and will not accrue interest except in the case of default, is payable in two equal installments on the first and second anniversaries of the date of closing and is subject to setoff in respect of certain indemnity and other matters. See Note 5, Long-term debt, net for further detail. For the year ended December 31, 2019, the Company incurred transaction-related expenses of $483 in connection with the AdParlor Acquisition, which it recorded in general and administrative expenses in the consolidated statements of operations.
FLUENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share data)
(unaudited)
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the closing date:
|
|
July 1, 2019
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
56
|
|
Accounts receivable
|
|
|
7,835
|
|
Prepaid expenses and other current assets
|
|
|
54
|
|
Property and equipment
|
|
|
138
|
|
Intangible assets
|
|
|
4,700
|
|
Goodwill
|
|
|
4,983
|
|
Other non-current assets
|
|
|
28
|
|
Accounts payable
|
|
|
(7,691
|
)
|
Accrued expenses and other current liabilities
|
|
|
(418
|
)
|
Deferred revenue
|
|
|
(33
|
)
|
Total net assets acquired
|
|
$
|
9,652
|
|
The fair values of the identifiable intangible assets and goodwill acquired at the closing date are as follows:
|
|
Fair Value
|
|
|
Weighted Average Amortization Period (Years)
|
|
Trade name & trademarks
|
|
$
|
300
|
|
|
4
|
|
Developed technology
|
|
|
2,100
|
|
|
4
|
|
Customer relationships
|
|
|
2,300
|
|
|
6
|
|
Goodwill
|
|
|
4,983
|
|
|
|
|
Total intangible assets, net
|
|
$
|
9,683
|
|
|
|
|
With the assistance of a third-party valuation firm, the fair value of the acquired customer relationships was determined using the excess earnings method, a variation of the income approach, while the fair values of the acquired developed technology, and trade names & trademarks were determined using the relief from royalty method of the income approach. The amount of the purchase price in excess of the fair value of the net assets acquired was recorded as goodwill and primarily relates to intangible assets that do not qualify for separate recognition, including assembled workforce and synergies. For tax purposes, the goodwill is deductible over fifteen years.
12. Variable Interest Entity
The Company has determined that Winopoly, LLC (as discussed in Note 11, Business acquisitions) qualifies as a VIE, for which the Company is the primary beneficiary. 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.
Winopoly is a VIE, and the Company is its primary beneficiary, as contractual arrangements provide 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 provisions of leads that Winopoly, LLC uses to generate its revenue, which ultimately give the Company its controlling interest. The Company therefore consolidates Winopoly, LLC in its consolidated financial statements, inclusive of deemed compensation expense to the sellers for services rendered.
13. Related party transactions
The Company earns revenue and incurs expenses from a client in which the Company's Chief Executive Officer holds a significant ownership interest. For the three and nine months ended September 30, 2020, the Company recognized revenue from this client of $69 and $214, respectively. For the three and nine months ended September 30, 2020, the Company incurred expenses from this client of $0 and $1, respectively.