UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 20172022
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
Commission File Number: 001-37893
COGINT,FLUENT, INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0688094 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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2650 North Military Trail, Suite 300 Vesey Street, 9th Floor
Boca Raton, Florida 33431New York, New York 10282
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (561) 757-4000(646) 669-7272
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.0005 par value per share | FLNT | The |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed allal(l reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒
On June 30, 2017,2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value (based on the closing per share sales price of its common stock on that date) of the voting stock held by non-affiliates of the registrant was approximately $104.0 approximately $52.8 million.
The number of shares outstanding of the registrant’s common stock, as ofof March 13, 2018,2023, was 72,060,119.80,311,256.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to its 20182023 Annual Meeting of Stockholders to be filed with the SECSecurities and Exchange Commission ("SEC") within 120 days after the end of the fiscal year ended December 31, 20172022 are incorporated herein by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS FOR FORM 10-K
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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Item 9. |
| Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
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Item 9B. |
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Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. | 35 | |
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Item 10. |
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Item 11. |
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Item 12. |
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
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Item 13. |
| Certain Relationships and Related Transactions, and Director Independence. |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2022 contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as "expects," "plans," "projects," "will," "may," "anticipates," "believes," "should," "intends," "estimates," "will likely result," "could," and other words of similar meaning.
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Actual results could differ materially from those contained in forward-looking statements. Many factors could cause actual results to differ materially from those in forward-looking statements, including those matters discussed below, as well as those listed in Item 1A. Risk Factors.
Other unknown or unpredictable factors that could also adversely affect our business, financial condition, and results of operations may arise from time to time. Given these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of Fluent’s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.
This business description should be read in conjunction with our audited consolidated financial statements and accompanying notes thereto appearing elsewhere in this Annual Report on Form 10-K for the year ended December 31, 20172022 (the “2017“2022 Form 10-K”), which are incorporated herein by this reference.
Company Overview
Cogint,
Fluent, Inc. (“we,” “us,” “our,” “cogint,“Fluent,” or the “Company”), a Delaware corporation, is aan industry leader in data-driven digital marketing services. We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach. We deliver data and analytics company providing cloud-based mission-criticalperformance-based marketing executions to our clients, which in 2022 included over 500 consumer brands, direct marketers and agencies across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer and Staffing & Recruitment.
We attract consumers at scale to our owned digital media properties primarily through promotional offerings where they are rewarded for completing activities within the platforms. To register on our sites, consumers provide their names, contact information and performance marketing solutionsopt-in permission to enterprises in a varietypresent them with relevant offers on behalf of industries. cogint’s mission isour clients. Approximately 90% of these users engage with our media on their mobile devices or tablets. Our always-on, real-time capabilities enable users to transform data into intelligence utilizingaccess our media whenever and wherever they choose.
Once users have registered on our sites, we integrate our proprietary technology platformsdirect marketing technologies and analytics to solve complex problems forengage them with surveys, polls, and other experiences, through which we learn about their lifestyles, preferences and purchasing histories. Based on these insights, we serve targeted, relevant offers to them on behalf of our clients. HarnessingAs new users register and engage with our sites and existing registrants re-engage, we believe the powerenrichment of our database expands our addressable client base and improves the effectiveness of our performance-based campaigns.
Since our inception, we have amassed a large, proprietary database of first-party, self-declared user information and preferences. We have consented permission to contact the majority of users in our database through multiple channels, such as email, home address, telephone, push notifications and SMS text messaging. We leverage this data fusionin our performance offerings primarily to serve advertisements that we believe will be relevant to users based on the information they provide when they engage with our sites, and powerful analytics, we transformin our data into intelligence, in a fast and efficient manner,offerings to provide our clients with users' contact information so that our clients canmay communicate with them directly. We may also leverage our existing database into new revenue streams, including utilization-based models, such as programmatic advertising and call centers.
We generate revenue by delivering measurable online marketing results to our clients. We differentiate ourselves from other marketing alternatives by our abilities to provide clients with a cost-effective and measurable return on advertising spend their time("ROAS") (a measure of profitability of sales compared to the money spent on what matters most, running their organizationsads), to manage highly targeted and highly fragmented online media sources and to provide access to our owned digital media properties and technology platforms. We are predominantly paid on a negotiated or market-driven “per click,” “per lead,” or other “per action” basis that aligns with confidence. the customer acquisition cost targets of our clients. We bear the costs of sourcing traffic from publishers for our owned digital media properties that ultimately generate qualified clicks, leads, calls, app downloads or customers for our clients.
Through our intelligent platforms, CORETM and Agile Audience EngineTMAdParlor Holdings, Inc. (“AdParlor”), we uncoverconduct our non-core business which offers clients various social media strategies through the relevanceplanning and buying of disparate data pointsmedia on different platforms.
Market Opportunity
According to deliver end-to-end, ROI-driven resultseMarketer, aggregate spending on digital media exceeded the aggregate spending on offline media in the U.S. for our customers. Our analytical capabilities enable us to build comprehensive datasetsthe first time in real-time and provide insightful views of people, businesses, assets and their interrelationships. We empower clients across markets and industries to better execute all aspects of their business, from managing risk, identifying fraud and abuse, ensuring legislative compliance, and debt recovery, to identifying and acquiring new customers. With the goal of reducing the cost of doing business and enhancing the consumer experience, our solutions enable our clients to optimize overall decision-making and2019. Industry spending on digital media is projected by eMarketer to have a holistic view of their customers.
We provide unique and compelling solutions essential to the daily workflow of organizations within both the public and private sectors. Our cloud-based data fusion and customer acquisition technology platforms, combined with our massive database consisting of public-record, proprietary and publicly-available data, as well as a unique repository of self-reported information on millions of consumers, enables the delivery of differentiated products and solutions used for a variety of essential functions. These essential functions include identification and authentication, investigation and validation, and customer acquisition and retention.
The Company operates through two reportable segments: (i) Information Services and (ii) Performance Marketing. For financial information relating to our segments and by geographic areas, see Note 15, “Segment information” in our Notes to Consolidated Financial Statements.
Information Services—Leveraging leading-edge technology, proprietary algorithms, and massive datasets, and through intuitive and powerful analytical applications, we provide solutions to organizations within the risk management and consumer marketing industries. CORE is our next generation data fusion platform, providing mission-critical information about individuals, businesses and assets to a variety of markets and industries. Through machine learning and advanced analytics, our Information Services segment uses the power of data fusion to ingest and analyze data at a massive scale. The derived information from the data fusion process ultimately serves to generate unique solutions for banking and financial services companies, insurance companies, healthcare companies, law enforcement and government, the collection industry, law firms, retail, telecommunications companies, corporate security and investigative firms. In addition, our data acquisition solutions enable clients to rapidly grow their customer databases by using self-declared consumer insights to identify, connect with, and acquire first-party consumer data and multi-channel marketing consent at massive scale.
Built in a secure Payment Card Industry (PCI) compliant environment, our cloud-based next generation technology delivers greater than four 9s of service uptime. By leveraging our proprietary infrastructure design within the cloud, we currently operate in six datacenters spread geographically across the U.S. and are able to dynamically and seamlessly scale as needed. Using our intelligent framework and leveraging a micro services architecture where appropriate, we reduce operational cost and complexity, thus delivering superior performance at greatly reduced costs compared to traditional datacenter architectures. Since the release of our CORE platform in May 2016, we have added billions of data records and continue to add approximately over a billion records per month on average. Our average query response time for a comprehensive profile is less than 250 milliseconds versus competitive platforms that measure comprehensive profile response times in seconds.
Performance Marketing—Our Agile Audience Engine drives our Performance Marketing segment, which provides solutions to help brands, advertisers and marketers find the right customers in every major business-to-consumer (B2C) vertical, including internet and telecommunications, financial services, health and wellness, consumer packaged goods, career and education, and retail and entertainment. We deterministically target consumers across various marketing channels and devices, through the user- supplied acquisition of personally identifiable information on behalf of our clients, such as email addresses, other identifying information and
responses to dynamically-populated survey questions. Additionally, 80% of our consumer interaction comes from mobile, a highly-differentiated characteristic compared to our competitors whose platforms are not mobile-first.
We own hundreds of media properties, through which we engage millions of consumers everyday with interactive content, such as job postings, cost savings, surveys, promotions and sweepstakes that generate on average over 850,000 consumer registrations and over 8.8 million compiled survey responses daily, with a record high of over 1.0 million registrations and over 10.3 million compiled survey responses in a single day. Our owned media properties alone have created a database of approximately 150 million U.S. adults with detailed profiles, including 224 million unique email addresses, across over 75 million households. With meaningful, people-based interaction that focuses on consumer behavior and declared first-party data, leveraged on a mobile-centric platform that provides seamless omni-channel capabilities, we have the ability to target and develop comprehensive consumer profiles that redefine the way advertisers view their most valuable customers.
For the years ended December 31, 2017, 2016 and 2015, we had revenue of $220.3 million, $186.8 million, and $14.1 million, net loss attributable to cogint of $53.2 million, $29.1 million and $84.5 million, and adjusted EBITDA of $24.2 million, $15.0 million, and negative $6.6 million, respectively. Adjusted EBITDA is a non-GAAP financial measure equal to net loss, the most directly comparable financial measure based on US GAAP, adding back net loss from discontinued operations, interest expense, income tax benefit, depreciation and amortization, share-based compensation expense, and other adjustments, as noted in the tables included in “Use and Reconciliation of Non-GAAP Financial Measures” of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The target markets for our data and analytical solutions today consist primarily of businesses within the risk management and consumer marketing industries.
International Data Corporation, a global provider of market intelligence and advisory services, estimates that worldwide revenue for big data and business analytics services will be $150.8exceeded $240 billion in 2017 and is expected to be more than $210.0 billion in the year 2020,2022, representing a CAGRapproximately 70% of 11.9% from 2017 through 2020. The big data and analytics sector continues to grow at an accelerated pace due to the proliferation of data generated by technological advancements and changing consumer behavior. Continued, rapid adoption and use of smartphones and other mobile devices, socialtotal media and online purchasing channels, and the necessity of organizations to sort through this sea of data to glean actionable intelligence to support their daily operations, serve as key drivers of the sector’s growth.
Risk management and fraud analytics has become increasingly important not only in the banking and financial services sectors but across multiple other industries and use cases. According to the market research company MarketsAndMarkets, the risk analytics software market is projected to grow from $17.6 billion in 2017, with North America estimated to hold the largest market share in the risk analytics market, to $35.9 billion by 2022, owing to unprecedented growth of data in the region driven by the increasing adoption of mobile and Internet of Things technologies and the direct presence of major risk analytics vendors. Data fusion analytics and the information derived therefrom is now the primary service product for risk management associated with key purchasers such as banking and financial services companies, insurance companies, healthcare companies, law enforcement and government, collection agencies, law firms, retail, telecommunications companies and private investigative firms. Primary use cases include, but are not limited to, obtaining information on consumers, businesses and assets (and their interrelationships) to facilitate the location of individuals and assets, identity verification, and to support criminal, legal, financial, insurance, and corporate investigations, due diligence and the assessment of counterparty risk.
According to the Interactive Advertising Bureau (IAB)’s “Internet Advertising Revenue Report, 2017 first six months results,” total digital ad spend in the U.S. was $40.1 billion for the first six months of 2017, a 22.6% increase over the first six months of 2016. Mobile was the leading ad format accounting for 54% of revenue, and performance-based advertising was the leading pricing model accounting for 65% of total U.S. digital advertising spending.
Consumer marketing, which consists of paid advertising, public relations, sales strategy, customer communications and market research, is a multi-trillion-dollar global industry. Digital marketing is the fastest growing subset of this marketplace, with performance marketing being the most dominant format utilized across the industry. Advertisers prefer performance marketing because they only pay when specific actions are completed by consumers in response to their ads, such as making purchases, filling out information request forms, or clicking through to websites. In addition, performance marketing campaigns that target registered and validated consumers are referred to as “people-based” marketing campaigns, and are gaining favor over cookie-based campaigns which target anonymous site visitors. People-based performance marketing campaigns improve the effectiveness of advertising, increase return on ad spend, and facilitate the deterministic targeting of consumers across digital channels such as display, social, search, video and addressable television.
According to eMarketer’s, a leading market research company, worldwide spend on paid media will increase to $584.1 billion in 2017, and is expected to grow to $757.4 billion by 2021, representingat a CAGRcompound annual rate of 6.7%. Although growth will vary by region, North America is projected to remain the number one advertising region in the world.
Companies in all industries are inundated with data sourced from9.5% through 2025. Software-driven, programmatic ad-spending makes up a large and growing numbershare of digital mediums including e-commerce, mobiledisplay ad spending. In 2019, more than 86% of U.S. display ad spending was transacted programmatically representing $61 billion of the digital display ad spending, and social media, which provide new information on a daily basis. Companies struggleit is expected that will exceed 91% and $142 billion of the segment in 2023, according to parse through the data available to them to make decisions in real-time that improve scale and efficiency while helping them achieve and exceed their strategic goals. Our platform, solutions, and analytical capabilities directly address these issues in an industry-agnostic manner to solve complex problems in a robust and growing marketplace.eMarketer.
Key Challenges Facing our CustomersClients
While performance-based pricing models dominate digital media spend, we believe that a significant portion of such spend represents an intermediary step in an advertiser’s process of procuring new customers, such as a click on a banner advertisement. According to The Nielsen Global Annual Marketing Report 2022, marketer’s confidence in their ability to measure full-funnel return on investment ("ROI") stands at just 54%. We believe advertisers are operating in an environment where greater accountability is being mandated and, therefore, are increasingly focused on the ability to precisely measure return on their media spend.
In addition, many companies seeking to learn more about their existing customers or target new customers either gather data themselves or purchase data to inform their advertising and marketing strategies. However, the data they obtain is often either not first-party, not sufficiently recent or sufficiently complete. Moreover, these companies may not have the ability to capture real-time signals that are indicated by a consumer’s behavior, even if it is observable. As a result, we believe many companies who offer products and services to consumers do not have ready access to accurate consumer data or timely alerts through which they could programmatically target their advertising, nor do they have the ability to resolve data sets and thereby confirm consumer identities or enrich data profiles.
Our Offerings and Solutions to Clients
We primarily provide performance marketing solutions to our clients based on their desired outcomes, or specific actions in their marketing funnels, including the submission of a registration form, an app installation, or a completed transaction. Our owned and operated media properties include Flash Rewards, The Smart Wallet, and Find Dream Jobs, among others. We believe our productssolutions are well-aligned with the needs and solutions addressobjectives of our clients, notably, due to our ability to provide them with measurability, scalability, and flexibility. In addition, by using the challengesdata consumers provide about themselves when registering on our sites, our advertiser clients are able to reach the precise audiences they are targeting through the modes of contact these consumers, who have opted to be marketed to, prefer and at the times they are most receptive to being contacted.
• Performance Campaigns
For clients who seek the completion of certain actions by consumers, such as the submission of a registration form, the installation of a mobile app, or a trial subscription of a good or service, we provide performance campaigns that meet the criteria specified by the client.
We bear the cost and risk of paying various media sources to generate consumer traffic to our digital media properties or to media properties owned or operated by our clients, without the assurance of a subsequent revenue-generating event from such activity. By leveraging our scale and expertise in acquiring consumer traffic, we work with our clients to define billable events and pricing tolerances that meet both our and our clients' profitability objectives, the latter of which may be difficult for them to achieve themselves economically, if at all.
• Consumer Data
We also generate revenues by providing clients with qualifying customer data of consumers, who have opted to be marketed to, directly through means such as direct mail, email, telephone, messaging, and other channels. Our clients then use this customer data to conduct their own marketing campaigns.
The data records we provide contain varying depths of user profiles, ranging from basic contact information to in-depth self-declared preferences and behaviors. We believe the scale and depth of first-party, self-declared information captured on our websites and reflected in our data profiles is a competitive advantage within the industry. Many other providers of consumer data offer data or information that is inferred from a consumer’s behavior but not directly observed or otherwise provided by a consumer. We believe our first-party data is more reliable and reflective of consumers' current interests and preferences.
• Programmatic Data Offerings
Since 2018, we have been offering data sets pertaining to certain audience segments from our database in programmatic environments, thereby enabling advertisers, such as those in the healthcare industry, faces today, which include:
Actionable Big Data Insights Through A Single Platform— As thevelocityand volumeof datacontinues to grow exponentially,enterpriseshave becomeoverwhelmedwith dataand theirinabilityto gleanintelligence fromleverage such data in an anonymized, privacy-minded manner to derivesuccessfulbusinessdecisionsin real-time.Customersdemandfull-suite,turn-key solutionsthatareagile,flexible,target high-intent prospects for their offerings. The programmatic data offering has grown considerably since its inception. Although still representing a small percentage of our overall revenue, we believe it represents a strategically significant and availableon-demandin orderincremental revenue stream for our existing database.
• Social Media Campaigns
Through AdParlor Holdings, Inc. we offer clients a sophisticated suite of social media strategy, planning and buying, along with highly tailored creative services.
• Call Center Solutions
Through our Fluent Sales Solutions ("FSS") service, we maintain a contact center operation which serves as a marketplace to gainthespeed,scaleand insightnecessary to drivetheirbusinessmodels.As thebreadthand depthof dataincreases,providerswillneed to deploynew technologiesthatenableboth theingestionof dataatmassivescalein real-time,irrespectiveof structureor form, and theanalyticscomponentsnecessaryto functionacrossmultiplechannels.The continueddigitizationof humaninteractions,and thecorrespondingavailabilityof thedataresultingtherefrom,isdrivingdemandfordata capture,managementand analysissoftware.As a result,customersarelookingforflexibleand efficientsolutions to fusedisparatesetsof not only transactionaldatabut alsodemographic,ethnographicand behavioraldataas well,in orderto provideinsightsthataretrulyactionable.
Engaging Customers Across All Devices—Accordingmatch consumers, we have sourced, to the IAB, mobileneeds of our advertising inclients. Through FSS, we offer clients a high-value source of live call transfers and phone verified prospective customers for their businesses. Through this capability, we provide a positive and high-quality consumer experience enabling us to capture greater value from the U.S. totaled $21.7 billion for the first halfleads we initially source.
Pricing Methodology—Historically, internet advertising has been sold on a cost-per-impression (CPM) model where an advertiser is charged each time an advertisement is displayed, regardless of user engagement with the advertisement. This dated methodology has made it difficult to truly gauge the effectiveness of advertising campaigns, and determine the actual costs associated with successful user engagement. Today’s advertising landscape now has several options for pricing advertisements, including the historical CPM method, as well as cost-per-click (CPC) which is most common in search advertising, cost-per-action (CPA), and hybrid models that may combine aspects of the various models. With chief marketing officers increasingly accountable for demonstrating concrete return on their marketing investments, CPA and CPC models are more favorable alternatives to CPM-based offerings.
Cost and Performance Pressures—As our customersfaceconstantcostpressures,theyneed to continually improvethevaluetheyreceivefromtheirinformationsolutions.Whetheritisright-partycontact,managingrisk, skiptracingor regulatorycompliance,customersareincreasinglymoresophisticated,requiringenhanced performancethatprovidesfast,accurate,and cost-effectivesolutionsto satisfytheirbusinessobjectives. Improvingperformancecan meandeliveringtherightdataattherighttime,or providingthemostintuitive informationas rapidlyas possibleto capitalizeon opportunitiesor reducerisk.Superiordatafusionwith unique datasourcesdeliverscustomersan advantageas theycope with thesepressures.
Difficult Delivery of Solutions for Complex Problems and Data Analytics at Scale—The larger and more complex a campaign or dataset, the more difficult it is to sustain the same level of performance and insight. The highly-fragmented nature of the internet display landscape, proliferation of data and lack of robust technology limits the ability to target the correct users on the correct device at the correct time and on the correct portal. There is an inherent need for solutions that allow advertisers to deliver high-performing campaigns regardless of size and duration.
Our Competitive Strengths
We believe our leading-edge technology platforms, massive database of holistic views of consumers, and dynamic and intuitive solutions deliver differentiated capabilities to our customers. Our solutions enable our customers to make more informed inquiries regarding their problems and better decisions to solve their most complex problems. We believe the following competitive strengths will continue to deliver an unrivaledenable us to provide a compelling value proposition to our clients and drive differentiation of our offerings in the marketplace.
•Scale and Experience in Purchasing Media - Our ability to effectively access, at scale, channels and sources of media that further drivessupply consumer traffic to our differentiation:media properties and those of our clients has been critical to our growth. Since our inception, we have deployed approximately $2 billion in media spend. Our team has gained knowledge and experience that we believe allows us to generate higher levels of profitability from given media sources, thereby enabling us to acquire media more competitively than others. This capability allows us to run thousands of campaigns simultaneously and cost-effectively for our clients, at acceptable media costs and margins to us.
•Proprietary and Innovative Technology Platforms—Through the convergence of our platforms, CORE and Agile Audience Engine, we offer a comprehensive suite of information solutions. Our cloud-based, data and industry agnostic platform, CORE, allows us to assimilate, structure, and fuse billions of disparate records to create comprehensive views of individuals and to present these views in real-time via analytical applications.Platform - We believe our platform’s speed, power, and scalability are key differentiatorsinternally developed technology platform is unique in the marketplace.industry, having been purpose-built for performance marketing and developed with a mobile-first user experience in mind. Our Agile Audience Engine enables brandsplatform deploys proprietary machine-learning capabilities to target, engage, qualify,build upon our experience with various promotional offers, consumer segments and communicate with relevant consumers across mobile, web and in-app content environments. Furthermore,advertisers, through which we utilize proprietary targeting algorithms and a dynamic survey module to match consumers with the most relevant advertisers, content, and media across all devices. Wecontinuously optimize campaigns by leveraging each advertiser’s performance data. Most valuable customer profiles (MVCs), as determined by factors such as individual-level engagement with ads and/or conversion or purchasing histories, are used to fuel lookalike modeling enabling the targeting of individuals who share similar attributes to those MVCs. This results in broadening the scale of acquisition campaigns and enhancing campaign performance.our digital marketing campaigns.
Massive
•Database of Holistic Views of Consumers—Data is the lifeblood of our technology platforms. First-Party Consumer Information - We leverage our CORE and Agile Audience Engine platformsattract consumers to build massive proprietary datasets and apply analytics in real-time to provide actionable insights. Our Information Services data is compiled from a myriad of online and offline sources, both structured and unstructured, including public record data, publicly-available data, and proprietary data. Public record data includes personally identifiable information, as well as property, identity, bankruptcy, lien, judgment, automotive, phone and other information aggregated from companies specializing in data aggregation, public record repositories, and publicly-available sources. Proprietary data includes data internally generated by proprietary algorithms and analytic processes as well as data which is compiled through our owned media properties including valuable self-reported consumer information collected through voluntary surveys, promotionson a daily basis and contests. Through next-generation machine learning technologycollect demographic, behavioral and proprietary algorithms, we efficiently ingest these datasets, structure them into common form, and utilize the process ofother data fusion to connect or fuse theas they engage with our direct marketing experiences. This data sois generated in real-time, as to create an actionable, real-time view of the data for various use cases, delivering greater intelligence to our customers and enhancing their decision-making capabilities across all markets and industries.
In addition, our technology platforms and systems enable us to collect four distinct types of user data:
Meta-data—information gleaned by the system such as the user’s IP address, browser type, operating system, and, for mobile connected devices, the device model, device ID, browser, and mobile carrier;
Demographic data—self-reported user information such as name, address, gender, email address and telephone number;
Ethnographic data—user responsesconsumers respond to dynamically curated andpopulated survey questions, thereby enabling targeted ads to be served survey questions; and,
Behavioral data—purchase history, interests, likes and dislikes, preferences and frequencies.
We also use our public record database and third-party services in order to verify and supplement collected data.response. This data is also stored and analyzed and can be further enhanced in real-time whenas consumers respondreturn to dynamically populated survey questions, enabling precise targetingour sites and profilingdeclare and exhibit additional preferences and behaviors through additional surveying, allowing for ad servingthe development of deeper insights and customer acquisition purposes. By using the system and the insights gained, we can develop deep and relevant insights into each individual consumer.additional monetization opportunities.
Our platformsGrowth Strategy
We believe that the performance marketing industry has significant opportunities for growth. Elements of our strategy include:
•Increasing Traffic Quality to Our Owned Digital Media Properties. As our business has grown, we have attracted larger and user volume has enabled usmore sophisticated clients to accumulateour platform. To further increase our value proposition to clients and to fortify our leadership position in relation to the evolving regulatory landscape of our industry, we implemented a massive, owned data warehouse, which contains:
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People-based Platform Enabling Deterministic, Omni-channel Marketing—Our collection of holistic information serves as the genesisTraffic Quality Initiative ("TQI") in 2020 to remove lower quality customer traffic, including traffic that did not consistently meet regulatory standards from our platform. We have created a more sustainable foundation for our operations andbusiness by improving the key foundationquality of customer traffic we sourced to providing actionable consumer data. Through our data-centric approach to analyzing consumer characteristics and intent, we are capable of producing highly-deterministic advertisements across multiple devices, including desktops, laptops, smartphones and tablets. By analyzing a consumer’s characteristics and integrating that data into our Agile Audience Engine, we are able to create comprehensive profiles that deliver highly-relevant and targeted advertisements on the most effective medium based on the consumer’s habits.
Performance Driven Pricing Model that Drives Heightened Return-On-Investment—We recognize performance marketing revenue when the conversions are generated based on predefinedmedia properties, with through increased user actions such as a click, a registration, an app install or a coupon print. As a result, our revenue is synonymous with customer success, and we only get paid when a user engages with our advertisements. By using a performance-driven pricing model, we enjoy a number of advantages, including increased efficiencies, the ability to exceed ROI projections for customers, and optimized marketing budget allocations limited onlyparticipation rates on our abilitysites, leading to deliver results. Our
performance-driven pricing model presents unique opportunities to work within uncapped marketing budgets which in turn create recurring revenue streams fromhigher conversion rates and more 'name brand' advertiser clients, who depend on our solutions. Many of our partners view our Performance Marketing solutions as cost of sales and are incentivized to continue utilizing our solutions that directly drive consumer engagement and revenue.
Predictive Solutions For Complex Advertising Needs—Our proprietary, predictive software algorithm identifies, in real-time, consumers likely to be receptive to our customers’ advertisements, thereby focusing marketing spend on the most efficient and effective channel. Additionally, through targeting and optimization, we provide distinctive solutions that aim to serve the needs of our clients and provide them with the deepest insights possible, in order to make more informed decisions. Through our dynamic surveys, we are able to collect self-reported data from 850,000 consumers every day and learn valuable information that would otherwise be unavailable. This symbiotic relationship allows us to capture extremely timely and meaningful information that ultimately shapes the insights we create. Using this information, we are able to curate custom databases and audience clusters in real-time, layered with additional data from our Information Services segment to create a truly customized and unique dataset for our customers. We aim to fuse self-reported data with transactional public record data, in order to create the most comprehensive view of an individual or business. Our ability to capture as well as integrate data from these two sources allows us to establish a lasting competitive advantage. The marriage of these two complementary data sources in addition to our analytic capabilities is highly unique and differentiated in the market.
Our Platforms and Solutions
cogint’s CORE and Agile Audience Engine platforms combine the best of both worlds to provide mission-critical information and performance marketing solutions. Our dynamic solutions provide unlimited potential to solve complex problems through customization, vast aggregation of data and ability to ingest any dataset. The marriage of our CORE and Agile Audience Engine platforms allows us to ingest, fuse, and customize datasets of self-reported, transactional and public record data. The exchange and fusion of data and capabilities across industry verticals equally benefit both our Information Services and Performance Marketing segments.
The Company’s operations are organized in two reportable segments: (i) Information Services and (ii) Performance Marketing.
(i) Information Services—Leveraging leading-edge technology, proprietary algorithms, and massive datasets, and through intuitive and powerful analytical applications, we provide industry-agnostic analytical solutions for businesses within the risk management and consumer marketing industries. These businesses use our services to acquire new customers, identify cross-selling opportunities, collect debt, verify consumer identities, investigate fraud and abuse, mitigate risk, and to connect and analyze online, offline, customer and partner data to better know their customers. The core capabilities and technology systems in our Information Services segment allow us to serve multiple industries and solve a broad range of business issues. Solutions within our Information Services segment include:
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(ii) Performance Marketing—Provides solutions to help brands, advertisers and marketers find the right customers in every major B2C vertical, including internet and telecommunications, financial services, health and wellness, consumer packaged goods, careers and education, and retail and entertainment. We deterministically target consumers across various marketing channels and devices, through the user-supplied acquisition of personally identifiable information on behalf of our clients, such as email addresses, other identifying information and responses to dynamically populated survey questions. Solutions within our Performance Marketing segment include:
Audience Solutions—empowering clients to target their ads with precision and drive qualified prospects at scale. Marketers can leverage our proprietary media network or activate our first-party data across the digital ecosystem to drive traffic to their websites, only paying when consumers take specified actions.
Mobile User Acquisition Solutions—offers marketers the precision targeting capabilities of our Agile Audience Engine combined with unique mobile web media inventory to reach qualified audiences of consumers with the highest propensity to download mobile applications and become high lifetime value users.
Our Sales, Distribution and Marketing
Inside Sales—Our insidesalesteamcultivatesrelationships,and ultimatelyclosesbusiness,with their end-usermarkets.These professionalsarerelationship-basedsellerswith experiencein identifyingclients’needs and clearlyexplainingand definingproductsthatprovidesolutionsto thoseneeds.
Strategic Sales—Whilethemajorityof our directsaleseffortsaresupportedthroughprofessionalinside salesstaff,majoraccountswithincertainindustriesrequirea morepersonal,face-to-facesalesapproach.We continueto expand thisteamto meetthedemandof themarkets.
Distributors, Resellers, and Strategic Partners—In conjunction with direct-to-client sales efforts, we engage value-added distributors, resellers, and strategic partners that have a significant foothold in many of the industries that we have not historically served, as well as to further penetrate those industries that we do serve. This allows us to rapidly penetrate these markets while also significantly reducing overhead associated with direct sales and support efforts.
Marketing—We have implemented several methods to market our products, including participation in trade shows and seminars, advertising, public relations, distribution of sales literature and product specifications and ongoing communication with prospective clients, distributors, resellers, strategic partners and our installed base of current clients.
Our Strategy
We are committed to developing unique technology and using our analytical capabilities to deliver solutions that transform the way organizations view data. We are advancing our business through a “three-prong,” strategic approach:
The Risk Management Industry—providing actionable intelligence in support of such use cases as the verification and authentication of consumer identities, due diligence, prevention of fraud and abuse, legislative compliance, and debt collection.
The Consumer Marketing Industry—deploying advanced data analytics to better identify and segment consumers in support of highly-scalable, people-based marketing, resulting in increased customer acquisitionmonetization and retention.ultimately increasing revenue.
Custom Analytics—enablingThrough TQI, we have improved the publicquality of the customer traffic that we source ourselves and private sectors to leveragewe demand the same from our advanced data fusion platform and analytical applications to obtain insight essential to decision-making processes throughout each client organization.
suppliers. We will remain focused on building the business organicallybelieve these actions have and will continue to devote resourcesbenefit the Company over time, providing the foundation to support sustainable long-term growth and positioning us as an industry leader.
We are also building out our influencer marketing capabilities to diversify our current internal media buys on social media platforms and capture available opportunities in the influencer market. According to the following2023 Influencer Marketing Benchmark Report, influencer marketing is estimated to ensure that we are well positioned withingrow to approximately $21.1 billion in 2023 and is expected to account for an increasing share of the industry.
Add New Customers and Verticals by Expanding Our Core Data Fusion Technology—marketing spend of a majority of companies. We believe that our robust data fusion platform, highly-scalable systems and expansive user database affords us numerous opportunities to leverage our technology into the following areas:
Paid CRM—leverage our database to accelerate the retargetinginfluencers will represent an increasing share of consumers in order to drive greater customer lifetime value (CLV) usingour paid media such as Google, Facebook, paid search, display and mobile platforms.
Data Products—monetize our proprietary data assets outsideby operating our own platforminfluencer network, we will be better able to ensure compliant operations, effectively manage our media spend by delivering ad targetingeliminating middlemen, and consumer insights solutions (e.g., developmentafford our clients access to our stable of custom audiences for targeting in specific verticals such as finance and insurance).influencers.
Market Research—monetize our proprietary survey module by gathering consumer insights for B2C brands and marketing service providers. Surveys can be utilized for internal product strategy development as well as for external thought leadership (white papers, etc.)
Continuous Advancement•Increasing Monetization of Our Technology and DataTraffic. By presenting consumers with a broad array of offers particularly curated to Cross-sell and Up-sell—We strongly believe that our ability to continually innovate and invest resources into our technology and data is a key foundationtheir preferences, as informed by their responses to our success. In additionsurveys and our platform’s ad serving logic, we seek to facilitate transactions that are beneficial for the advertiser, the consumer and us. As we continue to improve consumer engagement on our platform, we expect to strengthen our relationships with existing advertisers and build new relationships with potential advertisers. We continuously enhance our product offerings for consumers and targeting capabilities for advertisers to ensure we are optimizing the value of our traffic.
•Developing and Enhancing Products that Increase the Quality of Our Offering to Consumers, Advertisers and Partners. Our product development efforts are intended to appeal to consumers, drive traffic, increase monetization and increase affiliate and partner opportunities. Examples of some areas on which our product development team is currently focused include designing new consumer-facing creative concepts, enhancing site experiences, developing mobile app products to expand our media footprint beyond our mobile web presence, and improving the reputation of our predictive softwaredomains.
•Post-Transaction Ad Solutions. Leveraging our acquisition of True North Loyalty, LLC (“True North”), we have developed and underlying technology platforms,launched an e-commerce post purchase ad serving solution to access a new pool of users for our advertiser clients. We deploy an “ad module” on the e-commerce website that offers a series of curated offers to users after check-out. We compensate our e-commerce partners by either sharing revenue proceeds or by remunerating them on an impression basis. Although we also aim to provide new solutions from our data repositoryare still in an effort to offer the greatest valueinitial launch phase, we believe this ad solution will become a meaningful contributor to our clients. operations.
Sales and Marketing
We believe this allocation of resources will augment our value proposition for both existing and prospective clients. As we invest in our technology platforms and data assets, we will always do so with a view towards providing solutions that deliver scalability, functionality and interoperability. Our technology platforms operate at significant scale and are programmed to functionally deliver reliable and accurate informationgenerate new client sales primarily through our machine learning algorithms whose performance accelerates with each new item of data about a user, creating a perpetual series of network effects. As a result of our ability to process transactional data, self-reported data, and other proprietary datasets at massive scale, we are focused on creating a dynamic platform that maximizes interoperability and continues to drive growth opportunities within our installed customer base.
Expanding our Sales Team to Enter New International Markets—We intend to continue to grow our existingin-house sales team. Increased sales capability will enable usWe service established clients through our in-house account directors and managers, who seek to work with more direct advertisers, target specific industry verticals, and realize margin upside. Additionally, we believe that a larger sales force provides significant opportunitiesoptimize results for us to grow in the U.S. market as well as enter and expand operations in new geographic markets, such as Europe and Asia.our business with these clients.
Selective Acquisitions—In addition to organic growth, we may, in the future, make acquisitions of businesses or technologies that advance our objectives and that enhance shareholder value. We are focused on identifying complementary technologies and businesses that advance our “three-prong” strategic approach. The acquisitions of Fluent, LLC (“Fluent”) in December 2015 and Q Interactive, LLC (“Q Interactive”) in June 2016 are examples of our entry into the consumer marketing industry while offering a multitude of beneficial synergies. These acquisitions provide greater diversity of customers, markets, products, and revenue generated therefrom, within the significantly larger addressable market of the consumer marketing industry. Further, these acquisitions present substantial revenue growth opportunities within the U.S. through new markets, cross-selling opportunities, the application of our data fusion technology to the consumer marketing industry, the enhancement of existing products and solutions, the development and commercialization of new products and solutions, and the increased aggregation and fusion of consumer data, including our massive first-party consumer database, creating more robust consumer profiles to be utilized for both risk management and consumer marketing, among other uses. While we maintain our long-term strategy of increasing revenue, gaining market share and enhancing shareholder value through internal development and organic growth, we will continually seek to identify and pursue acquisition opportunities that fit within our strategy.
Grow Direct and Indirect Channels—Ownership of personally identifiable information including valid primary email addresses on over 90% of our consumer database facilitates the deterministic targeting of those consumers across multiple platforms and devices, extending our reach across email, mobile, display, search, social, and eventually addressable television. We intend to grow our owned media properties and increase our partnerships with third-party publishers to further our reach and scale in the market.
Our Competition
Competition in the big data and analytics sector centers on innovation, product stability, pricing and customer service. The market for our products and services is highly competitive and is subject to constant change. We compete on the basis of differentiated solutions, analytical capabilities, integration with our clients’ technology, client relationships, service stability, innovation and price. We believe we are well-positioned to effectively compete on all fronts.
In our Information Services segment, our competitors vary widely in size and nature of the products and services they offer. There are a large number of competitors who offer competing products and services in specialized areas, such as fraud prevention, risk management and decisioning solutions. We believe our next-generation data fusion technology, analytical capabilities, robust database, and intelligent design of our cloud-based infrastructure will allow us to differentiate ourselves from our competition in flexibility, capability, service and price.
In our Performance Marketing segment, ourOur traditional competitors have been digital marketing and database marketing services providers, online and traditional media companies, and advertising agencies. We believe the competitive landscape is changing and becoming more complex. We believe our ad-servingdata and dataour ad serving and customer acquisition technology platform enablestechnologies enable our clients to better target, engage, qualify, and communicate with relevant consumers, in a more profitable manner across mobile, web and in-app content environments than our competitors.
Some of our competitors have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base. Even if we introduce advanced products that meet evolving customer requirements in
Concentration
We have an extensive list of clients across a timely manner, there can be no assurance that our new products will gain market acceptance.
Certain companies in the big data and analytics sector have expanded their product lines or technologies in recent years as a resultwide range of acquisitions. Further, more companies have developed products which conform to existing and emerging industry standards and have sought to compete on the basis of price. We anticipate increased competition from large data and analytics vendors. Increased competition in the big data and analytics sector could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully in the future with current or new competitors.
Concentration of Customers
industries. For the year ended December 31, 2017, there was no individual customer that2022, a single long-standing advertiser client of the Company accounted for more than 10%22.1% of the totalconsolidated revenue. For the yearsyear ended December 31, 2016 and 2015, the Company recognized revenue from one major customer, accounting2021, this same client accounted for 12% and 14%11.7% of the totalCompany's consolidated revenue, respectively. Such customer, however, managesrevenue.
Acquisitions
• On July 1, 2019 we completed the ad platformsacquisition of leading search engines and represents a consortium of advertisers, which limits overall concentration risk.
As of December 31, 2017 and 2016, there was no individual customer that accounted for more than 10%substantially all of the Company’s accounts receivable, net.assets of AdParlor Holdings, Inc.
• On April 1, 2020 we acquired a fifty percent (50%) interest in Winopoly, LLC, and acquired the remaining fifty percent (50%) interest on September 1, 2021.
• On January 1, 2022 we acquired a one-hundred percent (100%) interest in True North Loyalty, LLC.
Our Intellectual Property
We avail ourself of applicablerely on trade secret, trademark and unfair competition lawscopyright law, confidentiality agreements, and technical measures to protect our proprietary technology, trademark lawintellectual property rights. With respect to protect our trademarks, we maintain a portfolio of perpetual common law and domain names,federally registered trademark rights across several brands and copyright laws to protect our content relating to, among other things, websites and marketing materials. Our intellectual property rights are embodied in confidential and proprietary technology and data, trademarked brandsdomains relating to our business units, products, services, and solutions,solutions. We claim copyright protection in our original content that is published on our materials such as websites and included in our marketing materials, and domain names. With respect to our trademarks, we maintain an extensive portfolio of perpetual common law and federally-registered trademark rights across several brands. We have also sought protection and registration of certain brands and trademarks internationally, such as in Europe and Canada. At present, we do not hold any issued patents.materials.
We use data acquired through licensing rights from approximately 20 providers. The loss of any one of these providers could have an immediate near-term impact on our financial position, results of operations, and liquidity. We rely on declarative, first-party data supplied by our users and supplemented and verified with third-party data sources.
Regulatory Matters
Our Information Services segment is subject to various federal, state, and local laws, rules, and regulations, including, without limitation, the Driver’s Privacy Protection Act (18 U.S.C. §§ 2721- 2725) (“DPPA”), the Gramm-Leach-Bliley Act (15 U.S.C. §§ 6801- 6809) (“GLBA”), the Health Insurance Portability and Accountability Act (“HIPAA”), the Federal Trade Commission Act (the “FTC Act”), the Telephone Consumer Protection Act (“TCPA”), and the CAN SPAM Act of 2003 (“CAN-SPAM Act”). A change in any one of a number of the laws, rules, or regulations applicable to our business or the enactment of new or amended legislation or industry regulations to consumer or private sector privacy issues could have a material adverse effect on our financial condition and our ability to provide products or services to its customers. Legislation or industry regulations regarding consumer or private sector privacy issues could place restrictions upon the collection, sharing and use of information that is currently legally available, which could materially increase our cost of collecting and maintaining some data. These types of legislation or industry regulations could also prohibit us from collecting or disseminating certain types of data, which could adversely affect our ability to meet our clients’ requirements and our profitability and cash flow targets.
Our Performance Marketing segment is subject to a varietysignificant number of federal, state, local and localinternational laws, rules, and regulations applicable to online or digital advertising, commercial email marketing, telemarketing and text messaging. We are also subject to laws, rules, and regulations regarding data collection, privacy and data security, intellectual property ownership and infringement, sweepstakes and promotions and taxation, among others. Some of our clients operate in regulated industries, such as financial services, credit repair, gambling, consumer and mortgage lending, healthcare and medical services, health insurance including but not limitedMedicare Advantage and related Medicare insurance plans and secondary education, and, to the FTC Act, TCPA, Do Not Call Implementation Act, CAN-SPAM Act, Telemarketing Sales Rule (“TSR”)extent applicable, we must comply with the laws, rules, and California Business & Professions Code § 17529 (theregulations applicable to marketing activities in those industries. We own and operate consumer facing websites in the United Kingdom, Canada, and Australia and are subject to the laws, rules, and regulations of those countries as they impact our operations.
“California Anti- Spam Act”).
These laws, rules, and regulations, which generally are constantly changingdesigned to regulate and keeping our businessprevent deceptive practices in compliance with or bringing our business into compliance with new laws may be costly, affect our revenue and harm our financial results.
Seasonality
Our results are subject to seasonal fluctuation. Historically, certain products within our Information Services segment experience strength during the second and third quarters, while other products, including within our Performance Marketing segment, tend to be strongest in the fourth quarter, due to holiday advertising, budgets, which traditionally carry over into the first quarter.
Management Team
Our management team has a track record of strong performance and significant expertise in the markets we serve. We have built the leading companies in our industry, creating significant shareholder value. We continue to attract and retain experienced management talent for our business. Our team has deep knowledge of the big data and analytics sector and the online marketing, and digital advertisingtelemarketing, protect individual privacy rights and prevent the misuse and unauthorized disclosure of personal information, are complex, change frequently and have tended to become more stringent over time. In addition, the application and interpretation of these laws, rules, and regulations are often uncertain, particularly in the rapidly evolving industry in which we operate.
We have been involved in investigations with federal and expertise acrossstate regulators over our practices including with the various industries that we serve. Our team has overseenNew York Attorney General (“NYAG”), the expansion of our proprietary technology platforms, while managing ongoing initiativesFederal Trade Commission (“FTC”) and the strategic acquisitionPennsylvania Office of synergistic businessesthe Attorney General (“PAAG”). These investigations and technologies.claims have been and will likely continue to be expensive to defend, will divert management’s time away from our operations and may result in changes to our business practices that adversely affect our results of operations. See Item 1A. Risk Factors - Risks Relating to Legal and Regulatory Matters and Item 3. Legal Proceedings for further discussion of the impacts of these proceedings and various laws, rules, and regulations on our business.
Human Capital
Fluent is dedicated to certain core principles and values which include continuous learning, pace, collaboration, and high-performance. Fluent is committed to providing our employees with opportunities to grow and develop in their careers, supported by competitive compensation and comprehensive medical and wellness benefits. We embrace challenges and welcome opportunities to make improvements in our corporate culture and employee benefits. As a result,we continue to evolve and grow as an organization, we are well positioneddedicated to continuecreating an inclusive and safe work environment where each person feels they belong and add a fresh, unique perspective to successfully drive growth both organicallyour business and through acquisitions.culture.
Our Employees
We employ 209 personshave been the recipients of many awards for our corporate culture including regularly being on Crains’s Best Places to Work for in recent years.
As of December 31, 2022, we had275 employees, of which 272 were full-time employees. This represents an increase of 3.8% over the number of employees as of December 31, 2017. 2021. None of our employees are represented by a labor organization, and none are party to any collective bargaining agreement.agreement with us. We have not experienced any work stoppages and consider our relationsstrive to maintain a positive relationship with our employeesteam. As the impact of the COVID-19 pandemic began to subside during 2022, we modified our policy to a hybrid model to encourage people to come into the office. While we believe we adapted well to a work-from-home model, we are now focused on a hybrid strategy based around flexibility and collaboration. We have demonstrated that we can be good. fully remote without business interruption, but we have implemented a flexible hybrid model as we know the importance of flexibility and in person collaboration. See Item 1A. Risk Factors – “Unfavorable global economic conditions, including lingering health and safety concerns from the pandemic, could adversely affect our business, financial condition, and results of operations.” and “If we lose the services of any of our key personnel, it could adversely affect our business.” for further information about the risks of our hybrid work model.
Investing in our People
Competition in the recruitingrecruitment of personnel in the big datatop talent within our industry remains constant and analytics sector is intense. We believe that our future success will depend in part on our continued ability to hire, motivate, and retain qualifiedexceptional colleagues across the business inclusive of sales and marketing, executive, and administrative, creative, and technical personnel. To date,colleagues. As the business evolves, we continue to source talent to complement the existing team with different strengths, experience, and ideas. Additionally, over the past few years we have not experienced significant difficultiesworked to support internal mobility for those who have excelled in attracting or retaining qualified employees.
Spin-off of Red Violettheir roles and Business Combination Agreement
On September 6, 2017, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with BlueFocus International Limited (“BlueFocus”), a private company limited by shares registeredare looking to gain new experience in Hong Kong. Under the termsother areas of the Business Combination Agreement,business that align with their individual career goals. As a performance-based organization, Fluent offers generous and competitive salaries and bonus/commission plans to both attract and retain our employees. We match up to 4% of employees’ contributions in their 401(k) to help our employees plan for their futures. We reward positive performance and celebrate our employees for their persistent drive to succeed.
We also prioritize the Company would issuehealth and well-being of our people, who we want to BlueFocus sharesbe their best and authentic selves both personally and professionally. We offer multiple health insurance plans to choose from, on-demand wellness sessions, and mental health resources like virtual and in-person therapy, coaching, mental wellness screenings, and self-help exercises.
We encourage curiosity and provide our people with the tools and resources to learn and grow. From internal Fluent University courses, company-wide Diversity, Equity, and Inclusion (DEI) workshops, and corporate She Runs It memberships, we offer continuous opportunities for personal and professional development. In 2022 through these courses, we created approximately1,800hours of learning for our employees.We also launched LinkedIn Learning in 2022 to provide colleagues with real time access to top content to help them develop areas of focus to fuel their growth.
To ensure our people take time to recharge, we offer discretionary time off, that provides vacation days throughout the Company’s common stock, representing 63%year in addition to our 13 paid company holidays. Our goal is to create a flexible work environment that fuels creativity and results.
Diversity, Equity, & Inclusion (DEI)
We are constantly striving to make Fluent a more inclusive and compassionate place to work. We make a concerted effort to post roles and source top candidates to present a diverse candidate slate for our hiring teams. Our dedicated DEI team is designed to create opportunities for connection, education, and service that drive reflection, empathy, and positive change at Fluent – as well as in our communities and industry. Fluent continues to invest in our colleagues by providing DEI trainings and creating opportunities to connect to discuss real events. In 2022, our Women Leader’s Group sponsored their second mentorship program which has now increased to 54 participants. We are proud to foster a learning and coaching culture to support the development and growth for all of our employees.
Additionally, at Fluent, giving back is at our core. We’ve always been strong believers in paying it forward. From the Company’s common stock on a fully diluted, post-transaction basis (the “Purchased Shares”), in consideration oftop down, our people are generous, compassionate, and eager to make real impact. We organize company-wide community service days, match employees’ donations to the contribution of the equity interests of certain entitiescauses they value and $100.0 million in cash by BlueFocus (the “Business Combination Transaction”). BlueFocus would also repay, assume, or refinance indebtedness of the Company. Before closing of the Business Combination Transaction, cogint would contribute its datasupport, and analytics operations and assets into its wholly-owned subsidiary, Red Violet, Inc. (“Red Violet”), and the shares of Red Violet would be distributedregularly come together as a stock dividendteam to cogint stockholdershelp those in need. In 2022, we partnered with the Hope Program so that our employees could share their expertise to help people develop their interview skills to secure employment. People in the Hope Program consists of record as ofindividuals facing deep structural barriers to employment, including histories with the record date (the “Record Date”)criminal legal system, current and/or past homelessness, substance abuse disorders, low educational attainment, and to certain warrant holders (the “Spin-off”).
As a condition to closing ofmore.In 2022 we partnered again with Daymaker, and through this partnership, the Business Combination Transaction, BlueFocus and the Company sought regulatory approval by the Committee on Foreign Investment inFluent team donated gifts from across the United States (“CFIUS”). CFIUS has indicated its unwillingnessand Canada to approve the transaction, therefore, on February 20, 2018, the parties withdrewgive gifts to children in need accompanied with personal holiday notes. We believe these service-based activities and donation matches help our employees stay engaged with, and give back to their application with CFIUS and terminated the Business Combination Agreement in accordance with its terms. communities which creates positive change.
On February 12, 2018, the Company’s Board of Directors approved the plan to accelerate the Spin-off. Despite the termination of the Business Combination Agreement, the Company will continue with the accelerated Spin-off of Red Violet, which is governed by a Separation and Distribution Agreement (the “Separation Agreement”) as well as other related agreements between cogint and Red Violet, each entered into on February 27, 2018. The Company will contribute $20.0 million in cash to Red Violet upon completion of the Spin-off. Red Violet has filed with the SEC a Registration Statement on Form 10, registering under the Exchange Act, the shares of Red Violet to be distributed in the Spin-off. As a result, upon completion of the Spin-off, cogint stockholders will hold shares of two public companies, cogint and Red Violet. cogint common stock will continue trading on The NASDAQ Stock Market (“NASDAQ”).
On March 7, 2018, the Company announced that the Board of Directors established March 19, 2018 as the Record Date and March 26, 2018 as the distribution date (the “Distribution Date”) for the Spin-off. On March 9, 2018, in order to meet NASDAQ initial listing requirement of a minimum $4.00 bid price, the Company adjusted the Spin-off ratio so that on the Distribution Date, stockholders of the Company will receive, by way of a dividend, one share of Red Violet common stock for each 7.5 shares of cogint common stock held as of the Record Date. On March 13, 2018, NASDAQ approved Red Violet’s application to list its common stock on NASDAQ under the symbol “RDVT.”
On March 8, 2018, the Compensation Committee of the Board of Directors of cogint approved the acceleration of an aggregate of 5,222,561 shares of stock options, RSUs and restricted stock held by certain employees, consultants, and directors, including only those employees who will continue with Red Violet upon completion of the Spin-off, subject to such employees still being employed or providing services on the acceleration date. The acceleration date was subsequently determined to be March 12, 2018. The share-based compensation expense of $15.3 million resulting from the above-mentioned acceleration is expected to be recognized in discontinued operations during the first quarter of 2018.
Available Information
cogint’s
Fluent’s principal executive offices are located at 2650 North Military Trail, Suite 300 Boca Raton, Florida 33431Vesey Street, 9th Floor, New York, New York 10282, and our telephone number is (561) 757-4000.(646) 669-7272. Our internet website is www.cogint.comwww.fluentco.com. The website address provided in this 20172022 Form 10-K is not intended to function as a hyperlink and information obtained on the websiteswebsite is not and should not be considered part of this 20172022 Form 10-K and is not incorporated by reference in this 20172022 Form 10-K or any filing with the Securities and Exchange Commission (the “SEC”).SEC. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on cogint’sour Investor Relations website at www.cogint.comhttp://investors.fluentco.com/ as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also read and copy any materials we fileOur periodic reports are filed or furnished electronically with the SEC under SEC File Number 001-37893, and can be accessed at the SEC’s Public Reference Roomwebsite at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SECwww.sec.gov, and specifically at 1-800-SEC-0330. The SEC also maintains an internet website located at http:https://www.sec.gov that contains the information we file or furnish electronically with the SEC.
January 2018 Registered Direct Offering
Pursuant to a definitive securities purchase agreement on January 10, 2018 (the “January 2018 Securities Purchase Agreement”) with certain qualified institutional buyers, the Company issued an aggregate of 2,700,000 shares of common stock in a registered direct offering for gross proceeds of $13.5 million, with a purchase price of $5.00 per share, which was received in January 2018. Simultaneously, the Company issued such institutional buyers, for no additional consideration, warrants to purchase an aggregate of 1,350,000 shares of common stock. The warrants have an exercise price of $6.00 per share and are exercisable from the date of issuance and expire on the earlier of the close of business on the two-year anniversary of (i) the date the registration statement registering the resale of the underlying shares is declared effective by the SEC or (ii) the commencement date that such warrants may be exercised by means of a “cashless exercise.”
Executive Officers of the Registrant
Our executive officers are as follows:www.sec.gov/edgar/browse/?CIK=1460329.
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Mr. Derek Dubner, 46, presentlyservesas theChiefExecutiveOfficerof the Company,and as a memberof the Company’sBoard sinceMarch2015, as wellas ChiefExecutiveOfficerof InteractiveData, a cogintsubsidiary. Mr.Dubner servedas our Co-ChiefExecutiveOfficerfromMarch2015 untilMarch2016, when he was appointedthe Company’sChiefExecutiveOfficer. Also, Mr. Dubner served as our Interim President from July 2016 to June 2017. Mr.Dubner has over15 yearsof experiencein thedatafusion industry.Mr.Dubner has servedas theChiefExecutiveOfficerof cogintsubsidiaryThe Best One, Inc.(“TBO”, now known as theIDI Holdings,LLC (“IDI Holdings”)), a holdingcompanyengagedin theacquisitionof operatingbusinesses and theacquisitionand developmentof technologyassetsacrossvariousindustries,and itssubsidiary,Interactive Data, sinceOctober2014. Priorto TBO,Mr.Dubner servedas GeneralCounsel of TransUnionRisk and AlternativeData Solutions,Inc.(“TRADS”) fromDecember2013 to June 2014. Mr.Dubner servedas General Counsel and Secretaryof TLO,LLC(“TLO”), an informationsolutionsprovider,frominceptionin 2009 through December2013.
Mr. James Reilly, 43, has servedas Presidentof the CompanysinceJuly1, 2017, and previouslyfromJune 2015 untilJune 30, 2016, and as Presidentand ChiefOperatingOfficerof two of cogint’ssubsidiaries,IDI Holdingsand InteractiveData, fromOctober2014 untilJune 30, 2016. FromJuly1, 2016 throughJune 30, 2017, Mr.Reillywas enjoinedfromprovidingservicesforcogintor itssubsidiaries.Previously,Mr.Reillyservedas Vice Presidentof SalesatTRADS.FromAugust 2010 throughits acquisitionof substantiallyallof theassetsby TRADSin December2013, Mr.Reillyservedas SeniorVice Presidentof TLO.
Mr. Daniel MacLachlan, 39, has servedas theChiefFinancialOfficerof the CompanysinceMarch2016 and bringsovera decadeof experienceas thechieffinancialofficerof data-driventechnologycompanies. Mr.MacLachlanservedas an IndependentDirector,Audit and CompensationCommitteeChairmanforVapor Corp., a U.S.-based distributorand retailerof vaporizers,e-liquidsand electroniccigarettes,fromApril2015 throughApril2016. FromOctober2014 untilearlyFebruary2015, Mr.MacLachlanservedas theChief FinancialOfficerof TBO.Priorto TBO,Mr.MacLachlanservedin therolesof Directorof Financeand Chief FinancialOfficerforTRADS,afteritacquiredsubstantiallyallof theassetsof TLO,througha 363 saleprocess in December2013. Mr.MacLachlanwas theChiefFinancialOfficerof TLOsinceitsinceptionin 2009. From 2005 to 2009, Mr.MacLachlanservedas theChiefFinancialOfficerof JARI ResearchCorporation(“JARI”),a partnershipwith theMayo Clinicadvancingproprietarycancertherapeutictechnologyusingtargetedradioactive therapy.Priorto JARI, Mr.MacLachlanservedas a SpecialAgent in theFederalBureau of Investigation(FBI) specializingin thecriminalinvestigationof publiccorruptionand civilrightsviolations.
Mr. Jeff Dell, 46, has servedas theChiefInformationOfficerof the CompanysinceSeptember2016 and servedas theInterimChiefInformationOfficerof the CompanyfromJune 2016 throughSeptember2016. FromJuly2015 throughMay 2016, Mr.Dellservedas theVPInformationSecurityof the Company.FromJune 2012 to June 2015, Mr.Dellservedas Founder and ChiefExecutiveOfficerof EnduranceTracker,Inc.,a sports-baseddataanalytics solution.FromAugust 2009 to May 2012, Mr.Dellservedas Lead ArchitectatTripwire,Inc.FromOctober 2008 to August 2009, Mr.Dellservedas ChiefInformationSecurityOfficerof TLO.FromSeptember2003 to August 2009, Mr.Dellservedas Founder and ChiefExecutiveOfficerof Activeworx,Inc.,a leadinginformation securitydataanalyticscompany.FromJanuary2001 to August 2003, Mr.Dellservedas ChiefInformation SecurityOfficerof Seisint,Inc.,a leadingproviderin thedatafusionindustry.
Summary of Risk Factors
Investing in our common stock involves a high degree of risk. The following summary identifies certain material risks and uncertainties facing our business, many of which are beyond our control. A more complete discussion of each these and other risks and uncertainties is set forth under “Risk Factors.” Our business, financial condition, operating results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth below and elsewhere in this 20172022 Form 10-K, the occurrence of any one of which could have a material adverse effect on our actual results.
Risks Related to Our Business
Risks Related to Current Regulatory Actions
● | Active regulatory actions with the FTC and the PAAG |
Risks Related to Our Industry
● | Operate in a rapidly evolving industry |
● | Competition with other digital marketing and advertising companies | |
● | High concentration associated with the gaming industry | |
● | Unfavorable publicity and perception of our industry | |
● | Fluctuation and seasonality of our clients’ needs | |
● | Credit risk and payment disputes with our clients |
Risks Related to Our Publishers
● | Competition buying media | |
● | Need to connect with users in specific media channels | |
● | Impact of unauthorized or unlawful acts by third-party publishers or vendors | |
● | Limitations on our ability to collect user data |
Risks Related to Our Owned Media Properties
● | Need to evolve our products and services to meet client and user needs and changing technologies | |
● | Need to connect with users through mobile apps | |
● | Detection of click-through and/or other fraud | |
● | Rewards fulfillment costs |
Other Business Risks
● | Growth of operations, effective management, and ability to scale | |
● | Increased challenges of international operations | |
● | Impact of acquisitions on operations | |
● | Unfavorable global economic conditions | |
● | Dependence on key personnel | |
● | Ability to attract and retain employees | |
● | Dependence on third-party service providers |
Risks Relating to Legal and Regulatory Matters
● | Impact of governmental laws and regulations | |
● | Laws and regulations regarding privacy, data protection and personal information | |
● | Environmental, employment, social and governance matters | |
● | Litigation, inquiries, investigations, examinations, or other legal proceedings | |
● | Sales and use and other taxes |
Risks Relating to Data Security and Intellectual Property
● | Need to safeguard personal information and other data | ||
● | Need to protect our intellectual propertyrights | ||
● | Third party claims from creation and use of digital media content |
Risks Related to Financial Matters
● | Restrictions on operations from covenants in Credit Agreement | |
● | Impact of change of credit facility terms | |
● | Need for additional capital | |
● | Earnings charges from impairment of goodwill and/or intangible assets |
Risks Related to Our Common Stock and the Securities Markets
● | Fluctuations in stock price | |
● | Failure to meet listing requirements may result in delisting | |
● | Trading of shares impacted by delisting | |
● | Concentration of stock ownership | |
● | Dilution from future share issuances from acquisitions or stock incentive plans | |
● | No cash dividends for foreseeable future | |
● | Status as a "smaller reporting company" |
Risk Factors
Risks Relating to Our Business
We
Risks Related to Current Regulatory Actions
The FTC and the PAAG have a history of losses and negative cash flow from operations which makes our future results uncertain.
Since inception, we have incurred operating losses and negative cash flow from operations. We need to generate greater revenue fromactive investigations pending against the sale of our products and services if we are to achieve and sustain profitability.Company. If we are unable to resolve these actions, or similar actions by other regulators, on favorable terms, our business and results of operations could be adversely affected.
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 on the terms of a consent order, including injunctive and monetary provisions. The Company has accrued $5.0 million in connection with this matter; 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. An unfavorable outcome of this matter could have a material adverse effect on the Company’s business, results of operations and financial position.
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 updated its telemarketing practices. We are currently negotiating a potential Consent Order with the PAAG to resolve the matter.
Even if the Company is able to resolve the FTC and PAAG matters on acceptable terms, the Company could be subject to additional regulatory actions from other state attorneys general. Moreover, the TCPA plaintiffs’ bar and individual claimants may file claims and lawsuits against the Company based on the Company’s prior telemarketing practices. Such actions could have substantial adverse impact on the Company’s reputation and its ability to continue to buy media cost effectively and the willingness of the Company’s advertiser clients to continue to do business with the Company, which could in turn materially and adversely affect the Company's results of operations and financial position.
Risks Related to Our Industry
We operate in an industry that is rapidly evolving, which makes it difficult to evaluate our business.
We derive substantially all of our revenue from digital marketing services, which is an industry that has undergone rapid and significant changes in its relatively short history, and which is characterized by rapidly changing internet media and advertising technology, evolving industry standards, regulatory uncertainty, and changing user and client demands. Our future success depends on our ability to effectively respond to the rapidly changing needs of our clients, respond to competitive technological developments and industry changes and cost effectively acquire media from our publishers. As a result of this continual evolution, we face risks and uncertainties such as:
• | changes in the economic condition, market dynamics, regulatory enforcement or legislative environment affecting our, our third-party publishers’, and our clients’ businesses; |
• | our dependence on the availability and affordability of quality media from third-party publishers; |
• | our ability to manage cybersecurity risks and costs associated with maintaining a robust security infrastructure; |
• | our ability to continue to collect and monetize user information and remain compliant with existing and new state data privacy laws and regulations that have been and are expected to be enacted; |
• | our ability to maintain and expand existing client relationships; | |
• | our ability to maintain user interaction with our owned-and-operated websites on mobile devices; and | |
• | our ability to comply with and avoid additional regulatory scrutiny in a rapidly evolving legal and regulatory environment. |
If we are unable to address these risks, our business, financial condition, and results of operations may be adversely affected.
The market for digital marketing is intensely competitive, and we expect this competition to continue and to increase in the future, both from existing and new competitors. We compete for advertiser clients against other digital marketing companies on the basis of a number of factors, including return on advertising spend ("ROAS"), price, and client service. We also compete for our clients’ overall marketing and advertising budgets with online and traditional media companies. When our clients reduce their advertising budgets, newer media sources such as those we offer can often be the first expenditures to be cut. Our advertiser clients have expectations as to their ROAS, as well as the quality and conversion rates of the leads that we generate. The expectations of our clients may change over time, and the ROAS on leads that we supply to our clients may not always meet these expectations. Conversion rates for leads can be impacted by factors other than the lead quality, many of which are outside our control, such as competition in our clients’ industries and our clients’ sales practices. Lower conversion rates could be even more likely as we expand our services and relationships with our clients by moving our conversion point further “down the funnel,” closer to where our clients are able to monetize the leads we provide. Our clients may curtail their advertising spend with us or stop using our services altogether if we fail to meet their expectations in terms of their ROAS or the quality and convertibility of leads or otherwise fail to compete effectively against other online marketing and advertising companies.
A material percentage of our consolidated revenue is derived from gaming (apps) advertisers and we have one gaming client that accounted for 22.1% of our consolidated revenue.As such we are exposed to risks associated with the gaming industry in general and one gaming client in particular.
Approximately 35% of our consolidated revenue was derived from gaming advertisers. This revenue derives from app installs and app-related user actions. The stability and potential growth of this client base depends in part on the state of the app-based gaming industry, which is subject to numerous risks including:
● | the relative availability and popularity of other forms of entertainment; |
● | changes in consumer demographics, tastes, and preferences; |
● | general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending; |
● | social perceptions of gaming, especially those related to the impact of gaming on health and social development; and |
● | the introduction of legislation or other regulatory restrictions on gaming, such as restrictions addressing violence in video games and addiction to video games, also referred to as Gaming Disorder by the World Health Organization. |
One of our gaming advertiser clients accounted for 22.1% of consolidated revenue in 2022, an increase from 11.7% of consolidated revenue in 2021. We do not have a long-term contract with this client and this client may cease transacting with us at any time. We expect that future sales of our services to this client will continue to fluctuate on a quarterly and annual basis and that such fluctuations may affect our operating results in future periods. If that client were to reduce, or stop using our services, or materially bid down the price it is willing to pay for our services, our results of operations would be materially adversely affected.
Unfavorable publicity and negative public perception about our industry or us may damage our reputation, which could harm our business, financial condition, and results of operations.
As described above under "The FTC and the PAAG have active investigations pending against the Company...", we are involved in two investigations commenced by the FTC and the PAAG that challenges certain of our business practices. Even if we are able to reach an acceptable resolution of these matters, there may be press releases and other communications by the regulators that cast us in a negative light and may damage our reputation. As a consequence, our ability to buy media cost effectively may be impacted and some of our advertiser clients may no longer wish to do business with us. We are also subject to litigation and other claims which may damage our reputation regardless of the outcome of any such action. Any damage to our reputation, including from publicity from governmental proceedings, legal proceedings against us or companies that work within our industry, class action litigation, or the disclosure of information security breaches or private information misuse, may adversely affect our business, financial condition, and results of operations.
With the growth of online advertising and e-commerce, there is increasing awareness and concern among the general public, privacy advocates, mainstream media, governmental bodies and others regarding online marketing, advertising, telecommunications and privacy matters, particularly as they relate to individual privacy interests. Certain other companies within our industry may engage in activities that others may view as unlawful or inappropriate. These activities by third parties, including our competitors, or even companies in other data-focused industries, may be seen as indicative of the behavior of our industry as a whole, which may thereby harm the reputation of all participants in our industry, including us. Additionally, as a large player in our niche of the industry, smaller competitors frequently design their websites to look like they are owned and operated by us. If these competitors engage in non-compliant activities, it can have a particularly damaging impact on our relationships with our users and/or clients who are unaware that the non-compliant websites are not ours.
Moreover, any such unfavorable publicity or negative public perception could lead to digital publishers, platforms, and app stores such as those operated by Meta, Alphabet, and Apple, changing their business practices, or attracting additional regulatory scrutiny or lawmaking, which could adversely affect us or our industry. Heightened scrutiny on the part of the public or regulators may lead to general distrust of our industry, consumer reluctance to share and permit use of personal data and increased consumer opt-out rates, any of which could negatively influence, change or reduce our current and prospective clients’ demand for our products and services, and adversely affect our business, financial condition, and results of operations.
Our business is dependent on attracting a large number of visitors to our websites and providing clicks, calls, emails, text messages, application installations, sign-ups, and customers to our clients, which depends in part on our reputation within the industry, with our clients and with our users. Our ability to attract potential users and, thereby, clients, also depends in part on users earning rewards, getting prizes, and samples and accessing other content, as well as accessing attractive offers from our advertiser clients. If our users are not satisfied with the content of our websites, the incentives or opportunities offered or our clients’ offerings, our reputation and therefore our ability to attract additional users and clients could be harmed.
We do not have long term agreements with our clients. Clients' needs are subject to seasonality and may fluctuate significantly from period to period which could have a negative impact on our business and results of operations.
Because the majority of our contracts with our advertiser clients do not have fixed commitments, these clients have the ability to unilaterally terminate their agreements with us, pause their campaigns, or materially reduce the amount of business they conduct with us at any time, with little or no prior notice. There is no guarantee that we will be able to retain or renew existing agreements with any of our clients on acceptable terms, or at all. Moreover, some of our advertiser clients seek specific sub-sets of consumers and, despite the return they are able to achieve on the leads we provide, may determine not to renew their agreements with us because we are unable to provide significant additional user profiles that meet their criteria.
Additionally, because of the nature of our performance-based agreements, we typically bear the costs of purchasing media without the assurance of advertising spend by any particular advertiser client. We must be able to generate greatermore revenue from our users than our cost to acquire such users in order to be profitable. Our ability to do so is dependent on many factors, including having the right media sources to drive users who engage with our sites, providing content and experiences that retain users' attention and displaying relevant advertisements and other content to users. Other factors, some of which are outside of our control, such as competition, changing consumer tastes, and general economic conditions, may inhibit our ability to operate our business profitably, which could adversely affect our results of operations.
Our results are also subject to fluctuation as a result of seasonality and cyclicality in our and our clients’ businesses. The costs to acquire media from our publishers is also subject to seasonal variability with media cost typically increasing in the fourth quarter. Our results of operations have in the past been adversely affected when we were unable to respond to the fluctuations in the price and availability of media, and similar effects may occur in the future.
Certain clients have budgets that start stronger at the beginning of quarterly or monthly periods, may reach limits during such periods, but then may have needs to satisfy their performance objectives at the end of such periods. In years prior to 2022, advertisers that had unused budgets coming into the fourth quarter would often spend those budgets during the fourth quarter. We did not see this occur in 2022, which we believe was due to many reasons including economic uncertainty and other factors outside of our control. Beyond these budgetary constraints and buying patterns of clients, other factors affecting our business may include macroeconomic conditions affecting the digital media industry and the various market verticals we serve. Poor macroeconomic conditions could decrease our clients’ advertising spending and, thereby, have a material adverse effect on our business and results of operations.
We regularly extend payment terms to our clients, which exposes us to risk of bad debt. In addition, some of our clients are thinly capitalized and pose credit risks, and we may have difficulty collecting on amounts owed to us. Some of our clients may challenge the determination of amounts we believe they owe or generate positive cash flow from operationsmay refuse to pay because of performance-related or other claims. In these circumstances, we may have difficulty collecting on amounts we believe are owed.
A small portion of our client business is sourced through advertising agencies and brokers. In many cases, agencies are not required to pay us unless and until they are paid by the underlying client. In addition, many agencies and brokers are thinly capitalized and have or may develop high-risk credit profiles. If an agency or broker becomes insolvent, or if an underlying client does not pay the agency or broker, we may be required to write off accounts receivable as bad debt.
We have exposure with respect to clients in particular verticals where there is a risk of tightening regulations or restrictions on sourcing consumer traffic. For example, if new regulations affect our clients such that their businesses are no longer viable, our clients may become insolvent or otherwise unable to pay amounts owed to us. In such circumstances, we may be exposed to risks of significant bad debt, which could have a material adverse effect on our results of operations.
On March 10, 2023, the Federal Deposit Insurance Corporation (the “FDIC”) took control of Silicon Valley Bank and created the National Bank of Santa Clara to hold the deposits of SVB after SVB was unable to continue its operations. SVB’s deposits are insured by the FDIC in an amount up to $250,000 for any depositor. On March 12, 2023, the U.S. Department of the Treasury, the Federal Reserve and the FDIC announced that the FDIC will complete its resolution of SVB in a manner that fully protects all depositors, including those with deposits over $250,000, and that all funds on deposit would be available to depositors on March 13, 2023. Some of our clients were customers of SVB and others may be clients of smaller regional banks. Continued uncertainty in the future.banking industry may therefore present credit risk to our company,
Risks Related to Our Publishers
Our productssuccess depends on our ability to attract users to our websites and generate revenues from their activities thereon in a cost-effective manner. A substantial majority of our revenue is attributable to visitor traffic originating from third-party publishers, including ad networks, social media platforms and search engines. Our ability to maintain the number of users who come to our and our third-party publishers’ websites is not entirely within our control. Third-party publishers can change the media inventory they make available to us at any time, change the pricing of such media and/or place significant restrictions on our content offerings. Many of these publishers have their own guidelines on acceptable content, advertisements and the types of advertisers and websites that can advertise on their properties. These guidelines change frequently and can often be unpublished. If a third-party publisher decides not to make media inventory available to us, decides to demand higher pricing or a higher revenue share, or places significant restrictions on the use of such inventory, we may not be able to find media inventory from other media sources that satisfy our requirements in a timely and cost-effective manner.
We increasingly focus our media spend on social media platforms and influencers. If we are unable to cost-effectively source enough media traffic that meets our quality standards and volume needs, we may not be able to increase our registration volume back to levels prior to initiation of the TQI.
Many of the influencers that supply media to us post their content on TikTok. Currently, the federal government and certain states have banned the use of TikTok on government issued devices, citing security concerns because of TikTok’s Chinese ownership. Some college campuses have banned the use of TikTok on college-provided internet services and legislation has been proposed that would prohibit TikTok from offering its services in the U.S. Were that to happen, our influencers that use TikTok would need to post their content on other social media platforms, which may not reach as many users as those that use TikTok and may come at a higher cost, thereby adversely affecting results of operations.
Our business could be harmed if we or our third-party publishers are highly technicalunable to contact users through specific channels.
We and our third-party publishers use email, text messages, push notifications, telephone calls and social media, among other channels, to reach users for marketing purposes. The laws, rules, and regulations governing such usage continue to evolve, and changes in technology, the marketplace, or consumer preferences may lead to the adoption of or changes in laws, rules, or regulations. If new laws, rules, or regulations are adopted or existing laws and regulations are interpreted or enforced to impose additional restrictions on our ability to use email, text messages, push notifications or social media to contact users, or engage in telemarketing, we and our third-party publishers may not be able to communicate with users in a cost-effective manner.
Additionally, if they contain undetected errors,email service providers (“ESPs”) or internet service providers ("ISPs") implement new or more restrictive email or content delivery or accessibility policies, it may become more difficult to deliver emails to consumers or for consumers to access our websites and services. For example, certain ESPs including Google, may categorize our emails as “promotional,” and these emails may be directed to an alternate, and less readily accessible, section of a consumer’s inbox. We have also experienced deliverability issues with Yahoo! and Google. If ESPs materially limit or halt the delivery of emails advertising our websites, or if we fail to deliver emails to users in a manner compatible with email providers’ handling or authentication technologies, our ability to contact users through email could be significantly restricted. In addition, if we are placed on “spam” lists or lists of entities that have been involved in sending unwanted, unsolicited emails, our operating results and financial condition could be substantially harmed. Further, if ISPs prioritize or provide superior access to our competitors’ content, our business and results of operations may be adversely affected.
Similarly, telephone carriers may block or put consumer warnings on calls originating from call centers or block or limit text messages from marketers. Recently, the Federal Communications Commission (“FCC”) issued rules to require wireless carriers to block text messages on a “reasonable” do not originate list and proposed rules that would extend the National Do Not Call Registry to text messages. The FCC also proposed a rule that would ban marketers from obtaining a single consumer consent as grounds for delivering calls and text messages from multiple marketers on subjects beyond the scope of the original consent. If the proposed rules are adopted, we would have to alter our process for obtaining TCPA consent which could limit our and our marketing partners’ ability to contact users. With a heightened aversion to calls, consumers increasingly screen or block their incoming telephone calls, texts, and emails and therefore it is possible that users may not reliably receive our messaging. If we are unable to contact users effectively by email, telephone, text, or other means as a result of legislation, regulatory rules or interpretive positions, blockage, screening technologies or otherwise, our business, operating results and financial condition would be harmed.
In addition, as we expand our usage of text messaging and push notifications to contact users, we become more dependent on third-party providers that control the dissemination and deliverability of such communications. These third-party providers and the wireless carriers may block text messages or shut down our text message service providers' ability to send text messages. Some carriers will not approve our applications to lease short codes for our internal messaging campaigns, hampering our ability to re-engage with our users. These third parties, which may include mobile operating systems, ISPs, wireless carriers, aggregators, and internet browsers, may each have its own guidelines on acceptable content. Recently, wireless carriers have been requiring service providers who use long codes – ten-digit telephone numbers – to register under the 10dlc registration requirements. If our service providers are unable to register the long codes, they use to send text messages for us under the 10dlc registration requirements, our ability to send text messages to re-engage with our mobile users or on behalf of our third-party advertisers could be adversely affected causing our results of operations to be adversely affected.
Third-party publishers or vendors may engage in unauthorized or unlawful acts that could subject us to significant liability, cause us to lose advertisers and other clients or damage our reputation.
We generate a significant portion of our web visitors from online media that we purchase from third-party publishers. While we actively monitor our publishers’ activities and have adopted more stringent publisher requirements and instituted periodic review of advertising creatives for our largest publishers, we cannot police all such behavior. Any activity by third-party publishers that our advertisers and other clients view as potentially damaging to their brands or reputation, even if prohibited by our contracts with our publishers and our internal policies and procedures, could harm our relationships with our advertisers or other clients, in which instance they may refuse to pay or terminate their relationships with us, resulting in a loss of revenue. Additionally, when we cease working with third-party publishers who engage in inappropriate practices, we may havebe unable to defend lawsuits or pay damages in connection withquickly find alternative supply at acceptable quality and prices.
We may also face liability for any alleged or actual failure of our productsthird-party publishers or vendors to comply with legal and services.regulatory requirements. Users or clients may complain about the content of publisher ads or the methods by which ads are delivered by third-party publishers, which may expose us to lawsuits and regulatory scrutiny or cause advertisers to withhold payment to us. Publishers may use unapproved marketing channels, such as text messaging, to drive users to our sites, which may expose us to liability under the Telephone Consumer Protection Act ("TCPA") and other laws regulating telemarketing and text messaging. Despite our efforts to monitor and deter unauthorized or unlawful actions by these third-party publishers, and to contractually limit our liability in such instances, it is possible that we could be held responsible for this behavior. As a result, we could experience significant reputational harm and/or become subject to costly litigation, which, if we are unsuccessful in defending, could lead us to incur damages for the unauthorized or unlawful acts of third-party publishers or vendors.
Our products
Limitations on our or our third-party publishers’ ability to collect and use data derived from user activities, as well as new technologies that eliminate cookies, block our or our third-party publishers’ ability to deliver internet-based advertising, could both increase the cost of media and significantly diminish the value of our services, are highly technicalwhich would adversely affect our results of operations.
When a user visits our websites, we use technologies to collect information including self-declared registration data that users choose to share with us in return for an ability to earn certain rewards. We also ask users for responses to our dynamically populated survey questions to create robust user profiles; users can decline to provide survey responses and complex. Our products and services have contained and may contain one or more undetected errors, defects or security vulnerabilities. Some errorsstill earn a reward. We use survey responses in our productstargeted ad serving, lead generation and servicesconsumer data offerings. We also use technologies to track user interactions with our advertiser offers to track conversions and our users’ progress towards earning rewards. Permission to use personal information provided by a consumer, which includes transactional data, is subject to evolving laws and regulations, regulatory scrutiny, litigation, and industry self-regulatory activities.
Technologies, tools, and applications (including new and enhanced web browsers) have been developed, and are likely to continue to be developed, that can block or allow users to opt-out of on-line advertising or shift their location to a less favorable location. For example, app developers have developed ad blocking apps for smartphones and other mobile devices which may only be discovered after a producthinder marketing activities to smartphone users. The adoption of such technologies, tools, software, and applications could reduce the number of display and search advertisements that we or service has been used by end customers. Any errors or security vulnerabilities discoveredour third-party publishers are able to deliver and this, in our products after commercial release could result in loss of revenue or delay in revenue recognition, or loss of customers, any of whichturn, could adversely affect our business and results of operations.
Major browsers such as Google Chrome and Apple Safari either block by default or permit users to block access from third-party cookies. In addition,general, while we rely on internally created identifiers to associate returning users with their user profile, we and our third-party advertisers use cookies to track user attributes and conversions. While the digital advertising industry has sought to mitigate the impact of the elimination of cookies by using other conversion tracking technologies, the impact of these changes on our business is uncertain.
More significantly, companies and new laws and regulations such as the California Consumer Privacy Act (“CCPA”) are moving to limit online user-level tracking including conversion data as part of the push for enhanced data privacy protection. Use of conversion data such as whether a user downloads and installs an app may be limited which may inhibit our clients and our ability to use this data, making it harder to efficiently manage our respective operations. For example, Apple’s 2021 update to iOS defaults to blocking ad tracking which makes it difficult for us and our advertiser clients to track conversions and for clients’ to determine their ROAS. This may lead some advertisers to curtail their ad spend or may force other clients to stop online advertising all together.
The move away from user level tracking may also adversely impact the efficiency of ad platforms such as those operated by Alphabet and Meta and other social media platforms which could lead to publishers reducing their spend on social media platforms or
increases in the cost of media. Many of our publishers buy media on these platforms and they may seek to pass along their increased media costs to us or be unable to supply us with media at the volume and price we require, either of which could adversely affect our results.
Interruptions, failures, or defects in our data collection systems, as well as privacy concerns and regulatory changes or enforcement actions affecting our ability to collect user data, could also limit our ability to analyze data from, and thereby optimize, our clients’ marketing campaigns. If our access to data is limited in the future, we may be unable to provide effective services to clients and may lose clients and revenue.
Risks Related to Our Owned Media Properties
The digital advertising and marketing industry is characterized by rapidly changing standards and technologies, frequent new product and service introductions, and changing user and client demands. As our users’ and clients’ needs evolve, we will need to continue to enhance our services and solutions to address these needs in order to maintain these relationships. We have invested in developing new products, markets, services, and technologies, including migrating our legacy database to a new environment and developing a replacement for the back-end system that currently supports our consumer facing websites. We have also expanded our work force to enable us to upgrade our systems to meet the needs of our users and clients and continue to grow our revenues and business. However, based on our experience, new websites, systems, products, and services may be less predictable and have lower margins than more established websites, products and services and may be more prone to technological instability or failure. Further, we may not be able to develop and bring new products and services to market in a timely manner, or at all. The time, expense and effort associated with developing and offering new and enhanced products, services, and back-end systems may be greater than anticipated. If we are unsuccessful in enhancing and upgrading our websites, products, services, and back-end systems, we may fail to maintain our profitability, attract new clients, or grow our revenue, or we may suffer service disruptions. Moreover, if we are unable to develop and bring to market additional products and services, and enhancements in a timely manner, or at all, we could lose market share to competitors who are able to offer such new products and services, which could have a material adverse effect on our business, financial condition, and results of operations.
Additionally, the introduction of new technologies and services, including voice assistance, artificial intelligence, internet-of-things and machine learning, and the emergence of new industry standards and practices related to these technological developments could render our existing technologies and services obsolete and unmarketable or require unanticipated investments in technology. In particular, as we continue to transition to cloud-based technology and migrate our database to a new environment, we may face new and additional costs to operate our business.
While we continually make enhancements and other modifications to our proprietary technologies, such changes may contain design or performance defects that are not readily apparent. If our proprietary technologies fail to achieve their intended purpose or are less effective than technologies used by our competitors, our business could be harmed.
Our future success will depend in part on our ability to successfully adapt to our clients’ and users’ needs and the rapidly changing digital media formats and other technologies. If we fail to adapt successfully or as quickly as our competitors, it could damage our reputation and our relationships with our clients, which could have a material adverse effect on our business and results of operations.
An increasing number of people are accessing content on their mobile devices through mobile applications. Our ability to remain competitive with the shift to mobile apps is critical to maintaining our revenue and profitability.
Mobile devices are the primary means by which people access online content. While our websites are designed with a “mobile first” approach, the vast majority of consumers' time accessing content on mobile devices is increasingly through mobile applications, rather than mobile browsers. Mobile applications are not a primary driver of our business, which could place us at a competitive disadvantage in the marketplace. If we experience difficulties developing mobile apps, getting them available in the Google Play and Apple App stores and ultimately installed and used by consumers, or if we experience problems promoting our apps on social media platforms such as Facebook, Snapchat, Instagram or TikTok, our consumer acquisition capabilities and our growth may be impaired.
As a result of eliminating the use of cookies, blocking user level tracking and changes in mobile app measurement analytic tools, advertisers and mobile app providers will have to develop new strategies to manage and optimize their campaigns. These changes may make it more difficult for our mobile app initiatives to achieve profitability.
We could lose clients if we fail to adequately detect click-through or other fraud on advertisements.
We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party publishers’ websites, which could lead our clients to become dissatisfied with our campaigns and, in turn, lead to a loss of clients and related revenue. Click-through fraud occurs when automated systems (sometimes called "bots") are used to create an individual click on an ad displayed on a website, with the intent of generating a revenue share payment to the publisher, rather than an individual user actually viewing the underlying content. If fraud occurs when online lead forms are completed with false or fictitious information in an effort to increase a publisher’s compensable actions. The risk of fraud may increase as bots become more sophisticated and difficult to detect. We do not charge our clients for fraudulent clicks or actions when they are detected, and such fraudulent activities could negatively affect our profitability or harm our reputation. If fraudulent clicks or actions are not detected, the affected clients may experience a reduced return on their investment in our marketing programs, which could lead the clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and related revenue. Additionally, we have terminated and may, in the future, terminate our relationships with publishers who we believe to have engaged in fraud. We may not be able to replace the terminated publishers with new publishers which could result in a reduction in traffic to our sites and registrations.
Our rewards fulfillment costs fluctuate, which has impacted and may continue to impact our results of operations.
Our rewards sites generate the majority of our revenues and gross profit. Users who complete the program requirements and are verified during the claims for product liabilityprocess can earn valuable rewards such as gift cards and cash equivalents. Moreover, we are also subject to the risk of users who seek to claim rewards but are not entitled to do so because of their use of bots or breachother deceptive means. Our results could be adversely affected if users are successful in claiming rewards they are not entitled to. Conversely, if we deny rewards to users who we believe are not entitled to claim, these users may seek to damage our reputation by filing complaints with the Better Business Bureau or State consumer protection agencies or by posting negative online reviews, which could adversely affect our results of personally identifiable information. Defendingoperations.
Other Business Risks
Our operations have grown over the past several years, which may make it difficult to effectively manage any future growth and scale our infrastructure and products quickly enough to meet our business's and our clients’ needs while maintaining profitability.
We have historically experienced growth in our operations and have relied in large part on proprietary systems. As a lawsuit, regardlessresult of its merit, isthis growth and the need to update our systems to be more scalable and to accommodate changes in data privacy and data protection laws, we are consistently upgrading our systems and infrastructure. Future growth will continue to place significant demands on our management and our operational and financial infrastructure.
Our future success depends in part on the efficient performance of our ad serving and lead generation systems and technology infrastructure. As the number of websites and internet users and the amount of data collected increases, we have begun to revamp our technology infrastructure to accommodate this increased volume. Moreover, we have rearchitected our database of consumer information to accommodate users' exercise of their privacy rights in their personal information under new data privacy and data protection laws such as the CCPA and the United Kingdom General Data Privacy Regulation ("UK-GDPR"). Unexpected constraints on our technology infrastructure could lead to slower website response times or system failures and adversely affect the availability of our websites and the level of user responses received, which could result in the loss of clients or revenue or have a material adverse effect on our business and results of operations.
We are continuing to upgrade our other systems, procedures, processes, and controls to support our future operations. We have incurred significant expenditures and have been forced to reallocate valuable management resources to facilitate these upgrades. We have incurred substantial costs to secure hosting, other technical services, and additional data storage and to upgrade our technology and network infrastructure to handle increased traffic on our owned-and-operated websites. We have also deployed new products and services and third-party solutions to respond to an increasing volume of data privacy requests. These upgrades and expansion in our technical capabilities are costly and complex and could result in inefficiencies or operational failures which could damage our reputation and cause us to lose current and potential users and clients and could harm our operating results.
As we continue to grow, we may divert management’s attention. In addition, ifnot be able to increase our market share or sustain our recent growth. Our inability to sustain our growth could cause our performance and outlook to be below the expectations of securities analysts and investors.
The expansion of our international operations subjects us to increased challenges and risks.
We have been expanding our website offerings into additional international markets beyond the United Kingdom into Canada and Australia and we may expand further into additional countries. Our ability to manage our business liability insurance coverageand conduct our operations internationally requires considerable management attention and resources and is inadequatesubject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, legal and regulatory systems, taxation regimes, and commercial infrastructures. Continued international expansion will require us to invest significant funds and other resources and may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:
• | compliance with applicable foreign laws and regulations and adapting to foreign customs and practices as they relate to our business; | |
• | compliance with the UK-GDPR and other foreign data privacy, data protection and information security laws and regulations and the risks and costs of noncompliance; | |
• | cross-border data transfers among us, our subsidiaries, and our customers, vendors, and business partners; | |
• | difficulties and added costs of conducting our business in foreign countries, including the need to retool our consumer facing product offerings to better align with local customs, practices, and consumer acceptance of our product offerings; | |
• | credit risk and higher levels of payment fraud, as well as longer sales or collection cycles in some countries; | |
• | compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act; |
• | recruiting, training, managing, and retaining contractors and service providers in foreign countries; | |
• | increased competition from local providers; | |
• | economic and political instability in some countries, including as a result of health concerns, terrorist attacks and civil unrest; | |
• | less protective or restrictive intellectual property laws; | |
• | compliance with the laws of the foreign taxing jurisdictions in which we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws; and | |
• | overall higher costs of doing business internationally. |
If our revenue from our international operations does not exceed the expense of establishing and maintaining these operations, our business and operating results could suffer, and we may decide to make changes to our business or exit certain jurisdictions in an effort to mitigate losses. If we are unable to successfully manage the risks and costs associated with international operations, it could adversely affect our business and/or results of operations.
As we continue to grow our business, we may acquire additional businesses or personnel, which could divert our management’s attention, disrupt our operations, or otherwise subject us to risks inherent in identifying, acquiring, and operating newly acquired business units.
As we continue to grow our business, we have acquired and may continue to acquire additional business units and personnel that we believe will complement or expand our current business or offer growth opportunities. We may experience difficulties identifying potential acquisition candidates that complement our current business at appropriate prices. We cannot guarantee that our acquisition strategy will be successful. We may spend significant management time and resources in analyzing and negotiating acquisitions or investments that are not consummated or cannot be implemented successfully. Furthermore, for business units that we have acquired, the ongoing process of integrating an acquired business unit or personnel is distracting, time-consuming, expensive and requires continuous optimization and allocation of resources, any of which could disrupt our operations.
Moreover, if we use stock as consideration for any future coverage is unavailableacquisition, this will dilute our existing shareholders, and if we use cash, this will reduce our liquidity and impact our financial flexibility. We may seek debt financing for particular acquisitions, which may not be available on acceptablecommercially reasonable terms, or at all. If we cannot overcome these and other challenges associated with a business acquisition strategy, we may not consummate or realize tangible benefits from any future acquisitions, which could impair our overall business results.
Additionally, as a part of our continuous efforts to invest in opportunities to grow the Fluent business, we have occasionally done so via the addition of personnel at all levels and the investment of time and resources into ventures that expand beyond our core operations. When certain of these ventures have failed to achieve key performance milestones, we have scaled back our investments, up to and including reductions in our work force. We will continue to explore opportunities to grow our business, and if we determine that certain of these ventures are not viable, we will need to make similar cutbacks, which may have a significant impact to our business and operating results.
Unfavorable global economic conditions, including lingering health and safety concerns from the pandemic, could adversely affect our business, financial condition, could be harmed.and results of operations.
Because our networks and information technology systems are critical to our success, if unauthorized persons hack into our systems or our systems otherwise cease to function properly, our
Our results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of our control. The U.S. economy is in an uncertain state as the Federal Reserve attempts to control inflation by raising the Federal Funds Rate. These rate increases coupled with a strong labor market and reduced consumer confidence result in uncertainty and may cause our customers and/or clients to be cautious in their ad spending.
The pandemic had a range of impacts on different advertising verticals. As we emerge from the pandemic, we anticipate additional shifts in pricing and/or demand among affected clients. While the combination of these trends did not result in a significant disruption to our business for the year ended December 31, 2022, the trajectory of these trends is uncertain. These trends, or others that have yet to be identified, may persist, or change and could have a material adverse impact on our business, financial condition, and results of operations in subsequent periods. The extent of any impact is uncertain and cannot be reasonably estimated at this time.
Additionally, our business relies heavily on people, and adverse events such as health-related concerns about working in our offices and other matters affecting the general work environment could harm our business. We implemented company-wide work-from-home beginning on March 13, 2020. Beginning in September 2022, we modified the policy to now require minimum in office attendance for employees. During the pandemic, many employees relocated away from our New York City headquarters. It is uncertain whether employees will be willing to return to the office and while we have adapted to a work-from-home environment, we believe it is preferable to have our workforce on premises. Having a large part of our workforce working remotely creates challenges to our technological capacity and cybersecurity capabilities, as well as causes operational inefficiencies and may lead to the diminution in the loyalty and goodwill of our employees. Despite not utilizing our offices at pre-pandemic levels, we have not been able to reduce our occupancy costs to this point.
If we lose the services of any of our key personnel, it could adversely affect our business.
Our future success depends, in part, on our ability to attract and retain key personnel, including Donald Patrick, our Chief Executive Officer, Ryan Schulke, our Chief Strategy Officer, Matthew Conlin, our Chief Customer Officer and other key employees in all areas of our organization, each of whom is important to the management of certain aspects of our business and operations and the development of our strategic direction, and each of whom may be difficult to replace. The loss of the services of these key individuals and the process to replace these individuals could involve significant time and expense and could significantly delay or prevent the achievement of our business objectives.
Additionally, given the number of employees we have relative to our revenue, we rely heavily upon certain key employees to support different operational functions, with limited redundancy in capacity. The loss of any of these key employees could adversely affect our operations until a qualified replacement is hired and trained. Since we began working remotely, we have experienced greater turnover and due to the current tight job environment, we have had to increase compensation packages to attract new hires and retain our existing employees, all of which has added to our human capital costs.
We also believe that, as our business continues to grow, our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, technical, and operational personnel. Competition for such personnel is considerable, and there can be no assurance that we will be successful in attracting and retaining such skilled personnel.
Because the majority of our employees have been working remotely, our ability to attract and retain employees based on corporate culture may be adversely affected and, if we are unable to maintain our corporate culture, our business, financial condition, and results of operations could be harmed.
During the pandemic when our employees were largely working remotely, we were not able to have the types of events and interpersonal connections that helped foster our culture. We have updated our policies and require our employees to be in the office at least two days a week and have recently begun having events that bring our employees together. As is the case with many organizations, we have experienced higher levels of turnover during the pandemic and hiring has been increasingly difficult with new hires commanding higher salaries. The failure to maintain the key aspects of our culture as our organization grows could result in decreased employee satisfaction, increased difficulty in attracting top talent, increased turnover and could compromise the quality of our client service, all of which are important to our success and to the effective execution of our business strategy. If we are unable to maintain our corporate culture as we grow, our business, financial condition, and results of operations could be harmed.
We are dependent upon third-party service providers in our operations.
We utilize numerous third-party service providers in our operations such as cloud-based hosting services, enterprise resource planning systems and other software as a service (“SaaS”) platforms and services. Failure by a third-party service provider could expose us to an inability to operate our websites, connect our advertiser clients with users, provide online marketing and advertising services or track the performance and results of our online marketing activities and our operations in general. As with all software and web applications and systems, there may be, from time to time, technical malfunctions that arise with some of these third-party providers. It is possible that to remedy any such situation would require substantial time, resources, and technical knowledge that we may not have or be able to acquire in a timely fashion. Additionally, some of these third-party service providers may face financial instability, which could lead to extended periods in which their platforms or applications are unavailable or fail to accurately track or account for online activity. If any of these platforms or applications goes down for an extended period of time, it is possible that we may lose clients and/or incur significant costs to either internalize some of these services or find suitable alternatives, which could have a material adverse effect on our business or results of operations.
Risks Relating to Legal and Regulatory Matters
Our business is subject to a significant number of laws and regulations. Compliance with these laws and regulations may cause us to incur significant expenses or reduce the availability or effectiveness of our solutions, and failure to comply with them could subject us to civil or criminal penalties or other liabilities.
Our business is subject to regulation under a number of federal, state, and local laws and regulations. Our operations in the United Kingdom (“UK”), Canada and Australia are subject to laws, rules, and regulations affecting our operations in those countries. These U.S. federal, state, local, and foreign laws and regulations are generally designed to regulate and prevent deceptive practices in advertising, online marketing and telemarketing, to protect the privacy of the public, and to prevent the misuse of personal information available in the marketplace. Many of these laws and regulations, which can be enforced by government entities or, in some cases, private parties, are complex, change frequently, and have tended to become more stringent over time. In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the rapidly evolving industry in which we operate, and they may be interpreted and applied inconsistently across jurisdictions or with our current policies and practices. New laws or regulations or changes in enforcement of existing laws or regulations applicable to our clients' businesses could affect their activities or operations and, therefore, lead to reductions in their levels of business with us. We incur significant expenses in our attempt to maintain or bring our business in compliance with these new and existing laws and in defending ourselves in litigation, all of which can be costly to the business and could adversely affect our revenue or results of operations.
We supply data to Fluent Sales Solutions ("FSS"), our captive call center, as well as third-party call center clients for telemarketing and text messaging campaigns and manage text messaging campaigns to re-engage with our users, all of which may subject us or our clients to claims under the TCPA and the Amended Telemarketing Sales Rule (“TSR”) and State telemarketing laws. In recent years, the TCPA has become a fertile source for both individual and class action lawsuits and regulatory actions. Although we have not experienced material losses from TCPA claims to this point, we have expended considerable resources to comply with the TCPA and defend ourselves against legal claims. Changes in the interpretation of the TCPA or the TSR may adversely impact our telemarketing clients and our text messaging campaigns. Our failure to adhere to or successfully implement appropriate processes and procedures in response to and to defend against TCPA- and TSR-related claims could result in legal and monetary liability, significant fines and penalties, or damage to our reputation in the marketplace, any of which could have a material adverse effect on our business, financial condition, and results of operations.
FSS promotes Medicare Supplement and Affordable Care Act plans by supplying call transfers and contract information of interested users to insurance agencies, brokers and other parties participating in the sale of these policies. Recently, the Centers for Medicare & Medicaid Services ("CMS") has proposed revising the existing rules that would substantially curtail the ability of “third party marketing organizations” such as FSS to generate interested users in this vertical. Where FSS has joined in making comments to CMS to seek modifications to the proposed rules before they take effect, there can be no assurances that the proposed rules will be modified. If the proposed rules take effect in their current form, our business and results of operations could be adversely affected.
As noted above, the FCC issued rules regulating text messaging and proposed a rule that would ban marketers from obtaining a single consumer consent as grounds for delivering calls and text messages from multiple marketers. If the proposed rules are adopted, we would have to alter our process for obtaining TCPA consent which could limit our and our marketing partners’ ability to contact users. Were that to occur, our business, operating results and financial condition would be harmed.
We operate internal email campaigns to promote our owned and operated websites and utilize third party publishers who use email to generate traffic for our websites and to promote our advertisers’ products. As a result of these activities, we and our email publishers are subject to various state and federal laws regulating commercial email communications, including the CAN-SPAM Act of 2003 (“CAN Spam”) and the California Business and Professions Code Sec. 17529.5 (“CAL Anti-Spam Act”). If we or any of our third-party publishers fail to comply with any provisions of these laws or regulations, we could be subject to regulatory investigation, enforcement actions, litigation, or claims. Moreover, the deliverability of our emails could be adversely affected by spam filters employed by email service providers such as Gmail and Outlook and by users which could adversely affect the performance of our email marketing efforts.
Laws and regulations regarding privacy, data protection and the handling of personal information are complex and evolving. While we strive to comply with all legal and contractual obligations regarding these matters, any failure or perceived failure to do so could have a material adverse effect on our business, financial condition, and results of operations.
Because we collect, store, process, use and sell data, some of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations, as well as contractual requirements, regarding privacy, data protection and the collection, maintenance, protection, use, transmission, disclosure, and disposal of personal information. These laws and regulations involve matters central to our business, including user privacy, data protection, content, intellectual property, electronic contracts and other communications, e-commerce, sweepstakes, rewards and other promotional marketing campaigns, competition, protection of minors, consumer protection, taxation, libel, defamation, internet or data usage, and online payment services. Both in the United States and abroad, these laws and regulations continuously evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the rapidly evolving industry in which we operate.
The GDPR, which was adopted by the European Union (“EU”) and took effect on May 25, 2018. The GDPR imposed new requirements on entities and granted individuals new rights in connection with the collection, use and storage of the personal information of EU residents. The UK adopted the UK-GDPR which took effect prior to Brexit is largely identical to the GDPR and together with the provisions of the UK Data Protection Act of 2018 and the Data Protection, Privacy and Electronic Communications regulate data privacy and data protection in the UK. The fines for failing to comply with the GDPR, and starting in 2021, the UK GDPR, are significant (up to 4% of global turnover capped at £20 million), and the potential ways that the regime could be applied to a business such as ours are uncertain.
California enacted the California Consumer Privacy Act of 2018 (“CCPA”), the first U.S. comprehensive data privacy law, which took effect on January 1, 2020 and established requirements for businesses who collect and sell personal information and granted individual rights with respect to their personal information. California recently amended the CCPA to expand the rights afforded California consumers with respect to their personal information, adopts certain GDPR principles such as data minimization and established the California Privacy Protection Agency, which has investigatory, rulemaking and enforcement powers. Virginia, Colorado, Utah, and Connecticut recently adopted data privacy laws similar to the CCPA and the GDPR that include additional consumer privacy rights and which impose additional obligations on businesses that collect and sell personal information. These laws take effect during 2023. We are currently updating our data privacy practices and procedures to comply with these new laws, rules, and regulations. To do so, we need to devote internal resources and use third parties to support our data privacy compliance efforts. Because the laws have been recently enacted, the application of these new data privacy laws to our operations is uncertain.
Currently, there are bills pending in more than a dozen states that deal with data privacy according to the US State Privacy Litigation Tracker (2023) published by the International Association of Privacy Professionals Westin Research Center. The proposed laws provide for data privacy rules similar to the CCPA and/or the GDPR, and some of the proposed laws include a private right of action to enforce noncompliance, which, if enacted, would expose us to potential litigation and claims. If some or all of the proposed privacy laws are enacted, it will be extremely difficult and expensive to comply with this “patchwork” of data privacy laws. There can be no assurance that we will be able to do so or that the costs of compliance will not be prohibitively expensive, either of which could have a material adverse effect on our business and results of operations.
Because of the volume of user registrations on our owned-and-operated websites, we receive requests from a number of users per day seeking to exercise their data privacy rights. We elected to implement a third-party solution to support our systems and processes to handle these requests. We have already devoted significant resources to handling data privacy requests and expect to incur additional costs to maintain compliance with the evolving data privacy and data protection laws and regulations.
The increasedscrutiny regarding environmental, employment, social, and governance ("ESG") matters could adversely impact our reputation, our ability to retain employees, and the willingness of customers and others to do business with us.
There is an increasing focus from investors, regulators, employees, and other corporate stakeholders on corporate policies addressing ESG matters. Stakeholder expectations regarding appropriate corporate conduct on these matters are continually evolving, as are expectations regarding appropriate methods and types of related corporate disclosure. Investors, regulators, employees, or other corporate stakeholders may not be satisfied with our existing ESG practices or those of our customers, advertisers, publishers, or vendors. These stakeholders may also be dissatisfied with the pace at which any revisions to our practices or the practices of our advertisers, publishers, or vendors are adopted and implemented. Further, investors and other stakeholders may object to the societal costs or ethical or other implications, or the perceived costs or implications, associated with the use of our services or the products made by one or more of our advertisers. If any of these events were to occur, our reputation, our ability to retain employees, and the willingness of advertisers, publishers, and others to do business with us may be materially and adversely impacted. We may also incur additional costs and require additional resources to monitor, report, and comply with related corporate disclosure obligations in the future, whether those obligations are imposed by law, regulation, or market expectation.
While we strive to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy and data protection, to the extent possible, it is possible that these obligations may be interpreted and applied in new ways or in a manner that is inconsistent across jurisdictions and may conflict with other rules or our practices, or that new regulations could be enacted. Any failure or perceived failure by us to comply with our privacy policies, privacy-related obligations to users, or other third parties, or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of sensitive information, which may include personally identifiable information or other user data, may result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could seriously harm our business. Additionally, compliance with privacy and security laws, requirements, and regulations may result in cost increases due to new constraints on our business, the development of new processes, the effects of potential non-compliance by us or third-party service providers, and enforcement actions.
The outcome of litigation, inquiries, investigations, examinations, or other legal proceedings in which we are involved, in which we may become involved, or in which our clients or competitors are involved could distract management, increase our expenses, or subject us to significant monetary damages or restrictions on our ability to do business.
Due to the complex regulatory scheme in which we operate and the heightened scrutiny on our business, legal proceedings arise periodically in the normal course of our business. These may include individual consumer cases, class action lawsuits and inquiries, investigations, examinations, regulatory proceedings, or other actions brought by federal (e.g., FTC) or state (e.g., state attorneys general) authorities. As discussed above, we are currently subject to various pending governmental and regulatory investigations, and we could lose revenuebe subject to more in the future. Any negative outcomes from regulatory actions or proprietary information, alllitigation or claims, including monetary penalties or damages or injunctive provisions regulating or restricting how can we conduct our business could have a material adverse effect on our business, financial condition, results of operations and reputation. We and the other defendants in Daniel Berman v Freedom Financial, a TCPA class action, have reached a $9.75 million settlement in that action to which we are contributing. We are a defendant in other TCPA litigations and the fact that we have settled a TCPA class action may increase the risk that these plaintiffs will believe that they are more likely to prevail in their litigations. Moreover others who may be considering bringing TCPA claims against us, may be more likely to do so given this settlement. Were either of these to occur, our result of operations could be adversely affected.
Regardless of whether any current or future claims in which we are involved have merit, or whether we are ultimately held liable or subject to payment of penalties or consumer redress, such investigations and claims have been and may continue to be expensive to defend, may divert management’s time away from our operations and may result in changes to our business practices that adversely affect our results of operations.
The scope and outcome of these proceedings is often difficult to assess or quantify. Plaintiffs in lawsuits may seek recovery of large amounts, and the cost to defend such litigation may be significant. There may also be adverse publicity and uncertainty associated with investigations, litigation, and orders (whether pertaining to us, our clients, or our competitors) that could diminish consumers' view of our services and/or result in material discovery expenses. In addition, a court-ordered injunction or an administrative cease-and-desist order or settlement may require us to modify our business practices or prohibit conduct that would otherwise be legal and in which our competitors may engage. Many of the complex and technical statutes to which we are subject, including state and federal financial privacy requirements, may provide for civil and criminal penalties and may permit consumers to bring individual or class action lawsuits against us and obtain statutorily prescribed damages. Additionally, our clients might face similar proceedings, actions or inquiries which could affect their businesses and, in turn, our ability to do business with those clients.
Such events are inherently uncertain and adverse outcomes could result in significant monetary damages, penalties, or injunctive relief against us, any of which could materiallyhave a material adverse effect on our business, results of operations, and financial position.
Our business and the businesses of our advertiser clients may be subject to sales and use tax and other taxes.
The application of sales and use tax, goods and services tax, business tax and gross receipt tax on our digital marketing/advertising services is complex and evolving. In general, advertising services are considered a service and are generally not subject to sales and use tax, but some States may seek to impose sales tax on some or all of our revenue streams. We generate revenue from users who sign up for streaming services on our websites and some states have imposed taxes on streaming services which could make streaming services less attractive to our users. Other states, including New York, impose a sales tax on “information services.” In New York, the sales tax explicitly excludes “advertising” services from sales and use tax; however, the line between non-enumerated services, excluded advertising services and taxable information services may, in practice, be unclear. Further complicating the determination of the sales taxability of services is the need to determine where the revenues from the services are sourced (i.e., where the service is rendered, where the service is consumed or where the information is accessed).
In addition, many state governments are increasingly looking for ways to increase revenues to make up for budget shortfalls and/or offset sales tax revenues lost from online sales of merchandise. Since the 2018 Supreme Court decision in South Dakota v Wayfair, Inc., states have adopted an economic nexus test that requires remote sellers of goods and services to collect and remit sales taxes on sales to customers within these states. In these states some may seek to tax specified enumerated services which could include our services. In that case, we may have to collect and remit sales tax, which adds complexity and compliance costs and could increase the overall cost of our service, could make our service offerings less attractive and adversely affect our business.business.
As
We were audited by the New York State Department of Taxation and Finance (the “Tax Department”), which took the position that revenue derived from certain of our businesscustomer acquisition and list management services is conducted largely online, it is dependentsubject to sales tax, as a result of being deemed information services. We settled the audits for $1.7 million, which was paid on our networks being accessibleApril 1, 2022, and secure. If anwe began collecting sales and use tax in New York. See Item 3. Legal Proceedings for more information on this matter.
Risks Relating to Data Security and Intellectual Property
We collect, process, store, share, disclose and use personal information and other data, and our actual or perceived breachfailure to safeguard such data and user privacy could damage our reputation and brand and harm our business and results of network security occurs, regardless of whether the breach is attributableoperations.
We maintain data that contains user information such as name, age, personal address, phone number, email address, survey responses and transactional data. Our ability to our network security controls, the market perception of the effectiveness of our network security could be harmed resulting in loss of currentprotect such information and potential end user customers, data suppliers, or cause us to lose potential value-added resellers. Our business is largely dependent on our customer-facing websites and our websites may be inaccessible because of service interruptions or subject to hacking or computer attacks. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques. If an actual or perceived breach were to occur, we cannot assure you that we would not lose revenue or not sustain operating losses as a result.
We also rely heavily on large information technology databases and the ability to provide services using that information. A party whosuch information without unauthorized disclosure is able tocritical, and a breach of the security measures on our networkssystems or on those of our third-party vendors could misappropriateresult in the misappropriation of either our proprietary information or the personal information of consumersusers that we collect, or the interruption or breakdown of our operations. Our business is largely dependent on consumer-facing websites, which could become inaccessible due to service interruptions, denial of service attacks, or are subject to hacking or computer attacks. If our websites are unavailable when users attempt to access them, or if they do not load as quickly as expected, users may not return as often in the future, or at all.
Although we continue to enhance our physical and cyber security controls and associated procedures, we cannot guarantee that our websites, database and information technology systems, and those of our third-party service providers, will be free of security breaches, computer malware or viruses, phishing impersonation attacks, misplaced or lost data, programming and/or human errors, ransomware and similar incidents or disruptions from unauthorized use of our database and systems.
Cybersecurity risks have significantly increased in recent years, in part, because of the proliferation of new technologies, the use of the internet and telecommunications technologies to exchange information and conduct transactions, and the increased sophistication and activities of computer hackers, organized crime, terrorists, and other external parties, including foreign state actors. We have been subject to and are likely to continue to be the target of future cyberattacks. These cyberattacks could include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, improper access by employees or third-party partners or other security breaches that have or could in the future result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our confidential, proprietary and other information, confidential and other information concerning employees or consumers, monetary loss, or otherwise cause interruptionsmaterially disrupt our or malfunctionsour other third party partners’ network access or business operations.
We cannot be certain that our efforts, as well as those of our third-party partners and service providers, will be able to prevent breaches of the security of our information systems and technology. If we, or any of our third-party partners and service providers, experience compromises to security that result in performance or availability of our websites or mobile application, the complete shutdown of our websites or mobile applications or the loss or unauthorized disclosure, access, acquisition, alteration or use of confidential information, consumers, publishers and advertisers may lose trust and confidence in us, and consumers may decrease the use of our websites, advertisers may stop using our services and/or publishers may stop providing media to us. Further, outside parties may attempt to fraudulently induce employees or our users, to disclose sensitive information in order to gain access to our operations. Hacking of computer data systems, isinformation or our consumers’ information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a growing problem throughouttarget, and may originate from less regulated and remote areas around the United States. Ifworld, we grow and obtain more visibility, we may be more vulnerable to hacking. Moreover, the increased use of mobile devices also increases the risk of intentional and unintentional theft or disclosure of data including personally identifiable information. We may be unable to anticipateproactively address these techniques or to implement adequate preventative measures.
Any or all of these vulnerabilitiesissues could adversely affect our ability to attract new users and implement adequate preventative measuresincrease engagement by existing users, cause advertisers to not use our services or cause publishers to stop providing media or subject us to governmental or third-party lawsuits, investigations, regulatory fines or other actions or liability, thereby harming our business. Although we are not aware of any material information security incidents to date, we have detected common types of attempts to attack our information systems and data using means that have included denial of service attacks and phishing.
There are numerous federal, state and local laws in some cases, we may not be able to immediately detect a security incident. Any security incident may also result in a misappropriation of our proprietarythe United States and around the world regarding privacy and the collection, processing, storing, sharing, disclosing, using, cross-border transfer and protecting personal information or that of our users, clients, and third-party publishers, which could result in legal and financial liability, as well as harm to our reputation.
We may be required to expend significant capital and other resourcesdata, the scope of which are changing, subject to protect against such threats or to alleviate problems caused by breaches in security. Additionally, any server interruptions, break-downs or system failures, including failuresdiffering interpretations, and which may be attributablecostly to events withincomply with, may result in regulatory fines or penalties, and may be inconsistent between countries and jurisdictions or conflict with other rules. We are subject to the terms of our control,privacy policies and privacy-related obligations to third parties. While we strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection, to the extent possible, it is possible that these obligations may be interpreted and applied in new ways or in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices or that new laws or regulations could increase our future operating costs and causebe enacted. Any failure or perceived failure by us to lose business. We maintain insurancecomply with our privacy policies, covering losses relatingour privacy-related obligations to our network systemsconsumers or other assets. However, these policiesthird parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of sensitive information, which could include personally identifiable information or other user data, may not cover the entire costresult in governmental investigations, enforcement actions, regulatory fines, litigation or public statements against us by consumer advocacy groups or others, and could cause consumers and our advertisers and publishers to lose trust in us, all of a claim. Any future disruptions in our information technology systems, whether caused by hacking or otherwise, maywhich could be costly and have a materialan adverse effect on our future results.
Privacy concerns relatingbusiness. In addition, new and changed rules and regulations regarding privacy, data protection and cross-border transfers of consumer information could cause us to delay planned uses and disclosures of data to comply with applicable privacy and data protection requirements. Moreover, if third parties that we work with violate applicable laws or our data collection practicespolicies, such violations also may put user information at risk and any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of our network by an unauthorized party, employee theft, misuse, or error could in turn harm our reputation, impair our ability to attract website visitors and to attract and retain clients, result in a loss of confidence in the security of our products and services, or subject us to claims or litigation arising from damages suffered by consumers, and thereby harm our business, and results of operations. In addition,operating results.
If we could incur significant costs for which our insurance policies maydo not adequately cover and cause us to expend significant resources in protecting against security breaches and complying with the multitude of state, federal and foreign laws regarding data privacy and data breach notification obligations.
We must adequately protect our intellectual property in orderrights, our competitive position and business may suffer.
Our ability to prevent loss of valuablecompete effectively depends upon our proprietary information.
systems and technology. We rely primarily upon a combination of patent, copyright,on trade secret, trademark and trade secret laws, as well as other intellectual property laws,copyright law, confidentiality agreements, and confidentiality procedures and contractual agreements, such as non-disclosure agreements,technical measures to protect our proprietary technology. However,rights. We enter into confidentiality agreements with our employees, consultants, advisers, client vendors and publishers. These agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our services or obtaining and using our proprietary information. Further, these agreements may not provide an adequate remedy in the event of unauthorized disclosures or uses, and we cannot guarantee that our rights under such agreements will be enforceable.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or reverse-engineer aspects of our productswebsite features, software and functionality or services or to obtain and use information that we regard asconsider proprietary. Policing unauthorized useFor example, third party website operators have created look-alike sites of our products reward sites, some of which contain links to our Terms, Privacy Policies and/or services is difficult,customer service. These sites divert traffic away from our sites, expose us to regulatory scrutiny as the look-alike sites often have compliance issues, create consumer confusion, and could damage our reputation. When we cannotbecome aware of look-alike sites, we use available means to have them removed. Despite our efforts to monitor the Internet for look-alike sites, there can be certainno assurance that the steps we have taken will prevent misappropriation of our intellectual property. If the protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments without compensation to us, resulting in potential cost advantages to our competitors.
Some of our systemsquickly detect and technologies are not covered by any copyright, patent or patent application. We cannot guarantee that: (i) our intellectual property rights will provide us with a competitive advantage; (ii) our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will be effective; (iii) our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; (iv) any of the patent, trademark, copyright, trade secret or other intellectual property rights that we presently employ inremove look-alike sites which can adversely affect our business, will not lapseimpair our reputation, or be invalidated, circumvented, challenged, or abandoned; (v) competitors will not design around our protected systems and technology; or (vi) that we will not lose the abilityexpose us to assert our intellectual property rights against others.regulatory scrutiny.
Policing unauthorized use of our proprietary rights can be difficult and costly. Litigation, while it may be necessary to enforce or protect our intellectual property rights, could result in substantial costs and diversion of resources and management attention, and could adversely affect our business, even if we are successful on the merits. In addition, others may independently discover trade secrets and proprietary information, and in such cases, we could not assert any trade secret rights against such parties.
We depend, in part, on strategic alliances, joint ventures and acquisitions to grow our business. If we are unable to make strategic acquisitions and develop and maintain these strategic alliances and joint ventures, our growth may be adversely affected.
An important focus of our business is to identify business partners who can enhance our services, enable us to develop solutions that differentiate us from our competitors, drive users to our websites and monetize our data. We have entered into several alliance agreements or license agreements with respect to certain of our datasets and services and may enter into similar agreements in the future. These arrangements may require us to restrict our use of certain of our technologies or datasets among certain customer industries, restrict content on our websites or grant licenses on terms that ultimately may prove to be unfavorable to us, any of which could adversely affect our business, financial condition or results of operations. Relationships with our alliance agreement partners may include risks due to incomplete information regarding the marketplace and commercial strategies of our partners, and our alliance agreements or other licensing agreements may be the subject of contractual disputes. If we or our alliance agreements’ partners are not
successful in maintaining or commercializing the alliance agreements’ services, such commercial failure could adversely affect our business.
If we consummate any future acquisitions, we will be subject to the risks inherent in identifying, acquiring and operating a newly acquired business.
On March 21, 2015, we acquired IDI Holdings and transformed the nature of our business. IDI Holdings, in turn, had acquired Interactive Data, its core business, in October 2014 shortly following IDI Holdings’ incorporation. On December 8, 2015, we acquired Fluent, a company that had greater revenue and headcount than cogint prior to the acquisition. On June 8, 2016, we acquired Q Interactive. We may, in the future, acquire additional businesses, which we believe could complement or expand our current business or offer growth opportunities. We may experience difficulties in identifying potential acquisition candidates that complement our current business at appropriate prices, or at all. We cannot assure you that our acquisition strategy will be successful. We may spend significant management time and resources in analyzing and negotiating acquisitions or investments that are not consummated. Furthermore, the ongoing process of integrating an acquired business is distracting, time consuming, expensive, and requires continuous optimization and allocation of resources. Additionally, if we use stock as consideration, this would dilute our existing shareholders and if we use cash, this would reduce our liquidity and impact our financial flexibility. We may seek debt financing for particular acquisitions, which may not be available on commercially reasonable terms, or at all. We face the risks associated with the business acquisition strategy, including:
the potential disruption of our existing businesses, including the diversion of management attention and the redeployment of resources;
entering new markets or industries in which we have limited prior experience;
our failure in due diligence to identify key issues specific to the businesses we seek to acquire or the industries or other environments in which they operate, or, failure to protect against contingent liabilities arising from those issues;
unforeseen, hidden or fraudulent liabilities;
our difficulties in integrating, aligning and coordinating organizations which will likely be geographically separated and may involve diverse business operations and corporate cultures;
our difficulties in integrating and retaining key management, sales, research and development, production and other personnel;
the potential loss of key employees, customers or distribution partners of the acquired businesses;
our difficulties in incorporating the acquired business into our organization;
the potential loss of customers, distributors or suppliers;
our difficulties in integrating or expanding information technology systems and other business processes to accommodate the acquired business;
the risks associated with integrating financial reporting and internal control systems, including the risk that significant deficiencies or material weaknesses may be identified in acquired entities;
the potential for future impairments of goodwill and other intangible assets if the acquired business does not perform as expected;
the inability to obtain necessary government approvals for the acquisition, if any; and
our successfully operating the acquired business.
If we cannot overcome these challenges, we may not realize actual benefits from past and future acquisitions, which will impair our overall business results. If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction.
Our business is subject to various governmental regulations, laws and orders, compliance with which may cause us to incur significant expenses or reduce the availability or effectiveness of our solutions, and the failure to comply with which could subject us to civil or criminal penalties or other liabilities.
Our businesses are subject to regulation under the GLBA, DPPA, HIPAA, FTC Act, TCPA, CAN-SPAM Act and various other federal, state and local laws and regulations. These laws and regulations, which generally are designed to protect the privacy of the public and to prevent the misuse of personal information available in the marketplace and prevent deceptive practices in advertising and online marketing and telemarketing are complex, change frequently and have tended to become more stringent over time. We have already incurred significant expenses in our attempt to ensure compliance with these laws.
These U.S. federal and state and foreign laws and regulations, which can be enforced by government entities or, in some cases, private parties, are constantly evolving and can be subject to significant change. Keeping our business in compliance with or bringing our business into compliance with new laws may be costly, and may affect our revenue and/or harm our financial results. In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction and inconsistently with our current policies and practices. Parts of our business, which rely on third party publishers to drive traffic to our sites, could be adversely impacted if we or any of our third-party publishers or our clients violate applicable laws. In addition, new laws or regulations or changes in enforcement of existing laws or regulations applicable to our clients could affect the activities or strategies of such clients and, therefore, lead to reductions in their level of business with us.
The following legal and regulatory developments also could have a material adverse effect on our business, financial condition or results of operations:
amendment, enactment or interpretation of laws and regulations that restrict the access and use of personal information and reduce the availability or effectiveness of our solutions or the supply of data available;
changes in cultural and consumer attitudes in favor of further restrictions on information collection and sharing, which may lead to regulations that prevent full utilization of our solutions;
failure of data suppliers or customers to comply with laws or regulations, where mutual compliance is required;
failure of our solutions to comply with current laws and regulations; and
failure of our solutions to adapt to changes in the regulatory environment in an efficient, cost-effective manner.
Changes in applicable legislation or regulations that restrict or dictate how we collect, maintain, combine and disseminate information could adversely affect our business, financial condition or results of operations. In the future, we may be subject to significant additional expense to ensure continued compliance with applicable laws and regulations and to investigate, defend or remedy actual or alleged violations.
We supply data to call center clients for telemarketing which may subject them to claims under the TCPA, which has become a fertile source for both individual and class action lawsuits and regulatory actions. We have expended considerable resources to comply with the TCPA and incurred additional costs to insure against TCPA-related claims and have not experienced material losses from TCPA claims. Our failure to adhere to or successfully implement appropriate processes and procedures in response to and to defend against TCPA related claims could result in legal and monetary liability, significant fines and penalties, or damage to our reputation in the marketplace, any of which could have a material adverse effect on our business, financial condition, and results of operations.
In connection with our third-party publishers’ email campaigns to generate traffic for our websites, we are subject to various state and federal laws regulating commercial email communications, including the CAN-SPAM Act and the California Anti-Spam Act. If we or any of our third-party publishers fail to comply with any provisions of these laws or regulations, we could be subject to regulatory investigation, enforcement actions, and litigation and claims. Any negative outcomes from such regulatory actions or litigation or claims, including monetary penalties or damages, could have a material adverse effect on our financial condition, results of operation, and reputation.
The outcome of litigation, inquiries, investigations, examinations or other legal proceedings in which we are involved, in which we may become involved, or in which our customers or competitors are involved could subject us to significant monetary damages or restrictions on our ability to do business.
Legal proceedings arise frequently as part of the normal course of our business. These may include individual consumer cases, class action lawsuits and inquiries, investigations, examinations, regulatory proceedings or other actions brought by federal (e.g., the FTC) or state (e.g., state attorneys general) authorities. The scope and outcome of these proceedings is often difficult to assess or quantify. Plaintiffs in lawsuits may seek recovery of large amounts and the cost to defend such litigation may be significant. There may also be adverse publicity and uncertainty associated with investigations, litigation and orders (whether pertaining to us, our customers or our competitors) that could decrease customer acceptance of our services or result in material discovery expenses. In addition, a court-ordered injunction or an administrative cease-and-desist order or settlement may require us to modify our business practices or may prohibit conduct that would otherwise be legal and in which our competitors may engage. Many of the technical and complex statutes to which we are subject, including state and federal financial privacy requirements, may provide for civil and criminal penalties and may permit consumers to maintain individual or class action lawsuits against us and obtain statutorily prescribed damages. Additionally, our customers might face similar proceedings, actions or inquiries which could affect their business and, in turn, our ability to do business with those customers.
Whilewe do not believethattheoutcomeof any pendingor threatenedlegalproceeding,investigation, examinationor supervisoryactivitywillhave a materialadverseeffecton our financialposition,such eventsare inherentlyuncertainand adverseoutcomescouldresultin significantmonetarydamages,penaltiesor injunctive reliefagainstus. Furthermore,we reviewlegalproceedingsand claimson an ongoing basisand follow appropriateaccountingguidance,includingASC450, when makingaccrualand disclosuredecisions.We establishaccrualsforthosecontingencieswhere theincurrenceof a lossisprobableand can be reasonably estimated,and we disclosetheamountaccruedand theamountof a reasonablypossiblelossin excessof the amountaccrued,ifsuch disclosureisnecessaryforour financialstatementsto not be misleading.To estimate whethera losscontingencyshouldbe accruedby a chargeto income,we evaluate,amongotherfactors,the degreeof probabilityof an unfavorableoutcomeand theabilityto makea reasonableestimateof theamountof theloss.We do not recordliabilitieswhen thelikelihoodthattheliabilityhas been incurredisprobable,but the amountcannotbe reasonablyestimated.
Our relationships with key customers may be materially diminished or terminated.
We have established relationships with a number of customers, many of whom could unilaterally terminate their relationship with us or materially reduce the amount of business they conduct with us at any time. Market competition, customer requirements, customer financial condition and customer consolidation through mergers or acquisitions also could adversely affect our ability to continue or expand these relationships. There is no guarantee that we will be able to retain or renew existing agreements, maintain relationships with any of our customers on acceptable terms or at all or collect amounts owed to us from insolvent customers. The loss of one or more of our major customers could adversely affect our business, financial condition and results of operations.
If we lose the services of key personnel, it could adversely affect our business.
Our future success depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued services of Michael Brauser, our Chairman, Derek Dubner, our Chief Executive Officer, Ole Poulsen, our Chief Science Officer, Ryan Schulke, CEO of Fluent, Matthew Conlin, President of Fluent, and other key employees in all areas of our organization, each of whom is important to the management of certain aspects of our business and operations and the development of our strategic direction, and each of whom may be difficult to replace. We carry “key man” life insurance policies on Mr. Dubner and Mr. Schulke in the amount of $10.0 million each, the beneficiary of which is HIG Whitehorse, the holder of our $60.0 million term loans pursuant to the Credit Agreement (“Credit Agreement”) dated December 8, 2015, as amended. The loss of the services of these key individuals and the process to replace these individuals would involve significant time and expense and could significantly delay or prevent the achievement of our business objectives.
Risks Relating to Our Information Services Segment
If we fail to respond to rapid technological changes in the big data and analytics sector, we may lose customers and/or our products and/or services may become obsolete.
The big data and analytics sector is characterized by rapidly changing technology, frequent product introductions, and continued evolution of new industry standards. As a result, our success depends upon our ability to develop and introduce in a timely manner new products and services and enhancements to existing products and services that meet changing customer requirements and evolving industry standards. The development of technologically advanced product solutions is a complex and uncertain process requiring high levels of innovation, rapid response and accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products and services successfully in a timely manner. Further, we or our competitors may introduce new products or services or product enhancements that shorten the life cycle of existing products or services or cause existing products or services to become obsolete.
Our revenue is concentrated in the U.S. market across a broad range of industries. When these industries or the broader financial markets experience a downturn, demand for our services and revenue may be adversely affected.
Our customers, and therefore our business and revenue, sometimes depend on favorable macroeconomic conditions and are impacted by the availability of credit, the level and volatility of interest rates, inflation, employment levels, consumer confidence and housing demand. In addition, a significant amount of our revenue is concentrated among certain industries. Our customer base suffers when financial markets experience volatility, illiquidity and disruption, which has occurred in the past and which could reoccur. Such market developments, and the potential for increased and continuing disruptions going forward, present considerable risks to our business and operations. Changes in the economy have resulted, and may continue to result, in fluctuations in volumes, pricing and operating margins for our services. For example, the banking and financial market downturn that began to affect U.S. businesses in 2008 caused a greater focus on expense reduction by customers of businesses similar to ours. If businesses in these industries experience economic hardship, we cannot assure you that we will be able to generate future revenue growth. These types of
disruptions could lead to a decline in the volumes of services we provide our customers and could negatively impact our revenue and results of operations.
We could lose our access to data sources which could prevent us from providing our services.
Our services and products depend extensively upon continued access to and receipt of data from external sources, including data received from customers, strategic partners and various government and public records repositories. In some cases, we compete with our data providers. Our data providers could stop providing data, provide untimely data or increase the costs for their data for a variety of reasons, including a perception that our systems are insecure as a result of a data security breach, budgetary constraints, a desire to generate additional revenue or for regulatory or competitive reasons. We could also become subject to increased legislative, regulatory or judicial restrictions or mandates on the collection, disclosure or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally use the data. If we were to lose access to this external data or if our access or use were restricted or were to become less economical or desirable, our ability to provide services could be negatively impacted, which would adversely affect our reputation, business, financial condition and results of operations. We cannot provide assurance that we will be successful in maintaining our relationships with these external data source providers or that we will be able to continue to obtain data from them on acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain data from alternative sources if our current sources become unavailable.
We face intense competition from both start-up and established companies that may have significant advantages over us and our products.
The market for our products and services is intensely competitive. There are numerous companies competing with us in various segments of the big data and analytics sector, and their products and services may have advantages over our products and services in areas such as conformity to existing and emerging industry standards, performance, price, ease of use, scalability, reliability, flexibility, product features and technical support.
Our principal competitors in the big data and analytics sector include Palantir, RELX Group (LexisNexis), TransUnion, Thomson Reuters, Acxiom, and Alliance Data. Current and potential competitors may have one or more of the following significant advantages:
greater financial, technical and marketing resources;
better name recognition;
more comprehensive solutions;
better or more extensive cooperative relationships; and
larger customer base.
We cannot assure you that we will be able to compete successfully with our existing or new competitors. Some of our competitors may have, in relation to us, one or more of the following: longer operating histories, longer-standing relationships with end-user customers and greater customer service, public relations and other resources. As a result, these competitors may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products and services. Additionally, it is likely that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share.
There may be further consolidation in our end-customer markets, which may adversely affect our revenue.
There has been, and we expect there will continue to be, merger, acquisition and consolidation activity in our customer markets. If our customers merge with, or are acquired by, other entities that are not our customers, or that use fewer of our services, our revenue may be adversely impacted. In addition, industry consolidation could affect the base of recurring transaction-based revenue if consolidated customers combine their operations under one contract, since many of our contracts provide for volume discounts. In addition, our existing customers might leave certain geographic markets, which would no longer require them to purchase certain products from us and, consequently, we would generate less revenue than we currently expect.
To the extent the availability of free or relatively inexpensive consumer and/or business information increases, the demand for some of our services may decrease.
Public and commercial sources of free or relatively inexpensive consumer and business information have become increasingly available and this trend is expected to continue. Public and commercial sources of free or relatively inexpensive consumer and/or business information may reduce demand for our services. To the extent that our customers choose not to obtain services from us and
instead rely on information obtained at little or no cost from these public and commercial sources, our business, financial condition and results of operations may be adversely affected.
If our newer products do not achieve market acceptance, revenue growth may suffer.
Our Information Services products have been in the market place for a limited period of time and may have longer sales cycles than competitive products. Accordingly, we may not achieve the meaningful revenue growth needed to sustain operations. We cannot provide any assurances that sales of our newer products will continue to grow or generate sufficient revenue to sustain our business. If we are unable to recognize revenue due to longer sales cycles or other problems, our results of operations could be adversely affected.
We have not yet received broad market acceptance for our newer products. We cannot assure you that our present or future products will achieve market acceptance on a sustained basis. In order to achieve market acceptance and achieve future revenue growth, we must introduce complementary products, incorporate new technologies into existing product lines and design, and develop and successfully commercialize higher performance products in a timely manner. We cannot assure you that we will be able to offer new or complementary products that gain market acceptance quickly enough to avoid decreased revenue during current or future product introductions or transitions.
Our products and services can have long sales and implementation cycles, which may result in substantial expenses before realizing any associated revenue.
The sale and implementation of our products and services to large companies and government entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources. This process is also subject to the risk of delays associated with customers’ internal budgeting and other procedures for approving capital expenditures, and testing and accepting new technologies that affect key operations. As a result, sales and implementation cycles for our products and services can be lengthy, and we may expend significant time and resources before we receive any revenue from a customer or potential customer. Our quarterly and annual operating results could be adversely affected if orders forecast for a specific customer and for a particular period are not realized.
Consolidation in the big data and analytics sector may limit market acceptance of our products and services.
Several of our competitors have acquired companies with complementary technologies in the past. We expect consolidation in the industries we serve to continue in the future. These acquisitions may permit our competitors to accelerate the development and commercialization of broader product lines and more comprehensive solutions than we currently offer. Acquisitions by our competitors of vendors or other companies with whom we have a strategic relationship may limit our access to commercially significant technologies. Further, business combinations are creating companies with larger market shares, customer bases, sales forces, product offerings and technology and marketing expertise, which may make it more difficult for us to compete.
We may incur substantial expenses defending the Company against claims of infringement.
There are numerous patents held by many companies relating to the design and manufacture of data and analytics solutions. Third parties may claim that our products and/or services infringe on their intellectual property rights. Any claim, with or without merit, could consume management’s time, result in costly litigation, cause delays in sales or implementation of products or services or require entry into royalty or licensing agreements. In this respect, patent and other intellectual property litigation is becoming increasingly more expensive in terms of legal fees, expert fees and other expenses. Royalty and licensing agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover, a successful claim of product infringement against us or our failure or inability to license the infringed or similar technology on commercially reasonable terms could seriously harm our business.
Risks Related to Our Performance Marketing Segment
We operate in an industry that is still developing and has a relatively new business model that is continually evolving, which makes it difficult to evaluate our business and prospects.
Our Performance Marketing segment derives nearly all of its revenue from the sale of online marketing and media services, which is still a developing industry that has undergone rapid and dramatic changes in its relatively short history and which is characterized by rapidly-changing internet media and advertising technology, evolving industry standards, regulatory uncertainty, and changing user and client demands. As a result, we face risks and uncertainties such as:
the still-developing industry and relatively new business model;
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its dependence on the availability and affordability of quality media from third-party publishers;
its dependence on internet search companies to attract internet visitors;
its ability to compete in its industry;
its ability to manage cyber security risks and costs associated with maintaining a robust security infrastructure;
its inability to monetize users accessing its sites on mobile devices at the same levels as was achieved from users accessing its sites from PCs;
its ability to develop new services, enhancements and features to meet new demands from its clients; and
its ability to comply with and avoid regulatory scrutiny in a rapidly evolving legal and regulatory environment.
If we are unable to address these risks, our business, results of operations, and prospects may be adversely affected.
An increasing percentage of our users are accessing our websites from their mobile devices. Our ability to remain competitive with the shift to mobile devices is critical to maintaining our revenue and margins.
A greater percentage of our users are accessing our websites from their mobile devices. We will need to ensure our websites continue to perform well as more consumers shift their online interactions from desktop computers to smartphones, tablets, wearables, and other next generation platforms and devices. While we design and build our websites “mobile first,” as more of our users access our websites from mobile devices, the monetization of our online marketing services and content on these mobile devices might not be as lucrative for us compared to those on desktop and laptop computers. If we fail to develop the monetization of the mobile versions of our websites effectively, our business and results of operations may be adversely affected.
We are dependent on third-party publishers for a significant portion of visitors to our websites. Any decline in the supply of media available through these websites or increase in the price of this media could cause our revenue to decline or increase the cost to acquire visitors to our websites.
A significant portion of our revenue is attributable to visitor traffic originating from third-party publishers. Third-party publishers can change the media inventory they make available to us at any time and place significant restrictions on our content offerings. These restrictions may limit the websites that we can promote or prohibit advertisements from specific clients or specific industries, or restrict the use of certain creative content or formats. If a third-party publisher decides not to make media inventory available to us, or decides to demand a higher revenue share or places significant restrictions on the use of such inventory, we may not be able to find media inventory from other websites that satisfy our requirements in a timely and cost-effective manner. In addition, the number of competing online marketing service providers and advertisers that acquire inventory from websites continues to increase. Consolidation of internet advertising networks and third-party publishers could eventually lead to a concentration of desirable inventory on websites or networks owned by a small number of persons, which could limit the supply or impact the pricing of inventory available to us. We cannot provide assurance that we will be able to acquire media inventory that meets our performance, price, and quality requirements, in which our business and results of operations may be adversely affected.
We also purchase media directly from ad networks, search engines and platforms that provide us the ability to access media (inventory) from a range of websites. Many of these publishers also have their own guidelines on acceptable content, advertisements and the types of advertisers and websites that can advertise on their properties. These guidelines change frequently and the changes are often unpublished. If we are restricted from buying media from these platforms, ad networks and/or search engines, our results could be adversely affected.
We depend on internet search providers for a portion of the visitors to our websites. Changes in search engine algorithms applicable to our websites’ placements in paid search result listings may cause the number of visitors to our websites to decrease, and as a result, cause our revenue to decline.
Our success depends on our ability to attract online visitors to our websites and monetize them in a cost-effective manner. We use paid search listings from search engine providers such as Google, Bing and Yahoo! by bidding on particular keywords and other strategies. The search engine operators use a quality score which is determined by the relevancy of the ad to the keyword bid on, the click-through rates of the ad, and the amount bid, to determine the placement of the ad in the search results listings. The search engine providers frequently change the algorithms and bidding rules and may exclude certain sites they deem unacceptable from bidding on
paid search listings. We may fail to optimally manage our paid listings or operate our websites in a manner that does not run afoul of the search engine requirements. In that case, our business and results of operations may be adversely affected.
Our operations have grown dramatically over the past years which may make it difficult to effectively manage any future growth and scale our products quickly enough to meet our clients’ needs while maintaining profitability.
We have historically experienced growth in our operations. This growth has placed, and any future growth will continue to place, significant demands on our management and our operational and financial infrastructure. Growth, if any, may make it more difficult for us to accomplish the following:
successfully scale our technology to accommodate a larger business and integrate acquisitions;
maintain our standing with key vendors, including internet search companies and third-party publishers;
maintain our client service standards;
develop and improve our operational, financial and management controls and maintaining adequate reporting systems and procedures; and
hire, train and manage additional staff needed to manage future growth.
Our future success depends in part on the efficient performance of our software and technology infrastructure. As the number of websites, internet users and the amount of data collected increases, our technology infrastructure may not be able to meet the increased demand. Unexpected constraints on our technology infrastructure could lead to slower website response times or system failures and adversely affect the availability of websites and the level of user responses received, which could result in the loss of clients or revenue or harm to our business and/or results of operations.
In addition, our systems, procedures, processes, and controls may be inadequate to support our future operations. The improvements required to manage growth may require us to make significant expenditures, and reallocate valuable management resources. We may spend substantial amounts to secure hosting and other technical services and data storage, upgrade our technology and network infrastructure to handle increased traffic on our owned-and-operated websites and roll out new products and services. This expansion could be expensive and complex and could result in inefficiencies or operational failures. If we do not implement this expansion successfully, or if we experience inefficiencies and/or operational failures during our implementation, the quality of our products and services and our users’ experience could decline. This could damage our reputation and cause us to lose current and potential users and clients. The costs associated with these adjustments to our architecture could harm our operating results. Accordingly, if we fail to effectively manage growth, our operating performance will suffer, and we may lose clients, key vendors and key personnel.
We will need to expand our workforce to meet the needs of our business. We operate in a specialized niche of the online advertising and data acquisition marketplace and finding experienced qualified applicants and training them can prove challenging. If we are unable to hire, train and effectively manage a sufficient number of new employees, we may not be able to capitalize on opportunities and/or may not be able to continue to grow our business at past levels.
Historically, our quarterly and annual results of operations have rapidly increased due to several favorable factors, some of which are beyond our control. Moreover, we are one of the larger players in our market segment. Because of these factors, we may not be able to increase our market share and/or sustain our recent rapid growth. Our inability to sustain our growth could cause our performance and outlook to be below the expectations of securities analysts and investors.
As a result of changes in our business model and the need for increased investments and expenditures for certain businesses, products, services, and technologies, we may fail to maintain our margins, attract new clients, or grow our revenue.
We have invested in new businesses, products, markets, services and technologies and plan to expand our work force to meet the needs of revenue growth. Based on our experience, new websites, products and services have lower margins than more established websites, products and services. If we are unsuccessful in our optimization efforts for new websites and products, we may fail to maintain our margins, attract new clients or grow our revenue.
If we fail to compete effectively against other online marketing and media companies and other competitors, we could lose clients and our revenue may decline.
The market for online marketing is intensely competitive, and we expect this competition to continue and to increase in the future, both from existing competitors and, given the relatively low barriers to entry into the market, from new competitors. We compete both
for clients and for limited high-quality media. We compete for clients on the basis of a number of factors, including return on investment of client’s marketing spending, price, and client service.
We compete with internet and traditional media companies for a share of clients’ overall marketing budgets, including:
offline and online advertising agencies;
major internet portals and search engine companies with advertising networks;
other online marketing service providers, including online affiliate advertising networks and industry-specific portals or email marketing companies;
third-party publishers with their own sales forces that sell their online marketing services directly to clients;
in-house marketing groups and activities at current or potential clients;
offline direct marketing agencies;
mobile and social media; and
television, radio, and print companies.
Competition for web traffic among websites and search engines, as well as competition with traditional media companies, has resulted and may continue to result in significant increases in media pricing, declining margins, reductions in revenue, and loss of market share. In addition, if we expand the scope of our services, we may compete with a greater number of websites, clients, and traditional media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition, and other areas. Major internet search companies such as Google, Yahoo! and Microsoft as well as social media platforms such as Facebook have significant numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic that provide a significant competitive advantage. The trend toward consolidation in online marketing may also affect pricing and availability of media inventory and web traffic. Many of our current and potential competitors also enjoy other competitive advantages over us, such as longer operating histories, greater brand recognition, larger client bases, greater access to advertising inventory on high-traffic websites, and greater financial, technical, and marketing resources. As a result, we may not be able to compete successfully. The online advertising marketplace is increasingly analytically driven and if the performance of our advertising services is not better than other marketing service providers’ offerings, we could lose clients and market share.
A reduction in online marketing spend by our clients, a loss of clients or lower advertising yields may seriously harm our business, financial condition, and results of operations. In addition, a substantial portion of our revenue is generated from a limited number of clients and, if we lose a major client, our revenue will decrease and our business and prospects may be harmed.
We rely on clients’ marketing spend on our owned-and-operated websites. We have historically derived, and expects to continue to derive, a significant portion of our revenue through the delivery of targeted advertisements, applications, installs and actions and the delivery of qualified customers. One component of our platform that we use to generate client interest is our system of monetization tools, which is designed to match users with client offerings in a manner that optimizes revenue yield and end-user experience. Clients will stop spending marketing funds on our owned-and-operated websites if their investments do not generate actions or qualified users cost effectively. If our yield-optimized monetization techniques to effectively target and match advertisements to our client offerings fail to increase revenue or return on investment for our clients, our clients could curtail their advertising spend with us or cease using our services altogether.
Furthermore, our top 40 advertisers account for a substantial portion of our revenue. Our advertising clients can generally terminate their agreements with us at any time on little or no prior notice. Clients may also fail to renew their agreements or reduce their level of business with us, leading to lower revenue.
Third-party publishers or vendors may engage in unauthorized or unlawful acts that could subject us to significant liability or cause us to lose clients.
We generate a significant portion of our web visitors from online media that we purchase from third-party publishers. While we actively monitor our publishers’ activities, we cannot police all such behavior. Any activity by third-party publishers that clients view as potentially damaging to their brands, whether or not permitted by our contracts with our clients, could harm our relationship with the client and cause the client to terminate its relationship with us, resulting in a loss of revenue. In addition, we may also face liability for any failure of our third-party publishers or vendors to comply with regulatory requirements. Users or customers may complain about the content of publisher ads which may expose us to lawsuits and regulatory scrutiny. The law is unsettled on the extent of
liability that an advertiser in our position has for the activities of third-party publishers or vendors. We could be subject to costly litigation and, if we are unsuccessful in defending, could incur damages for the unauthorized or unlawful acts of third-party publishers or vendors.
If we fail to continually enhance and adapt our products and services to keep pace with rapidly changing technologies and industry standards, we may not remain competitive and could lose clients or advertising inventory.
The online media and marketing industry is characterized by rapidly changing standards, changing technologies, frequent new product and service introductions, and changing user and client demands. The introduction of new technologies and services embodying new technologies and the emergence of new industry standards and practices could render our existing technologies and services obsolete and unmarketable or require unanticipated investments in technology. We continually make enhancements and other modifications to our proprietary technologies, and these changes may contain design or performance defects that are not readily apparent. If our proprietary technologies fail to achieve their intended purpose or are less effective than technologies used by our competitors, our business could be harmed.
Our future success will depend in part on our ability to successfully adapt to these rapidly changing online media formats and other technologies. If we fail to adapt successfully, we could lose clients or advertising inventory.
We are exposed to credit risk from and have payment disputes with our advertisers and agency clients and may not be able to collect on amounts owed to us.
Many of our advertising clients are thinly capitalized and pose credit risks. While we run credit checks on our clients, we may nevertheless have difficulty collecting on all amounts owed to it. Some of our clients may challenge the determination of amounts we believe they owe or may refuse to pay because of performance related claims. In these circumstances, we may have difficulty collecting on amounts we believe are owed.
A portion of our client business is sourced through advertising agencies. In many cases, agencies are not required to pay us unless and until they are paid by the underlying client. In addition, many agencies are thinly capitalized and have or may develop high-risk credit profiles. If an agency became insolvent, or if an underlying client does not pay the agency, we may be required to write off accounts receivable as bad debt.
Damage to our reputation could harm our business, financial condition and results of operations.
Our business is dependent on attracting a large number of visitors to our websites and providing subscribers, inquiries, clicks, calls, applications, and customers to our clients, which depends in part on our reputation within the industry and with our clients. Certain other companies within our industry regularly engage in activities that others may view as unlawful or inappropriate. These activities by third parties may be seen as indicative of participants in our industry and may therefore harm the reputation of all participants in our industry, including us.
Our ability to attract potential users and, thereby, clients, also depends in part on users receiving incentives, job listings, prizes, samples and other content as well as attractive offers from our clients. If our users are not satisfied with the content of our websites or our clients’ offerings, our reputation and therefore our ability to attract additional clients and users could be harmed.
In addition, from time to time, we may be subject to investigations, inquiries or litigation by various regulators, which may harm our reputation regardless of the outcome of any such action.
Any damage to our reputation, including from publicity from legal proceedings against us or companies that work within our industry, governmental proceedings, consumer class action litigation, or the disclosure of information security breaches or private information misuse, may adversely affect our business, financial condition and results of operations.
Our quarterly revenue and results of operations may fluctuate significantly from quarter to quarter due to fluctuations in advertising spending, including seasonal and cyclical effects.
In addition to other factors that cause our results of operations to fluctuate, results may also be subject to seasonal fluctuation. Furthermore, advertising spend on the internet, similar to traditional media, tends to be cyclical and discretionary as a result of factors beyond our control, including budgetary constraints and buying patterns of clients, as well as economic conditions affecting the internet and media industry. Poor macroeconomic conditions could decrease our clients’ advertising spending and thereby have a material adverse effect on our business, financial condition, and operating results.
Limitations on our ability to collect and use data derived from user activities, as well as new technologies that block our ability to deliver internet-based advertising, could significantly diminish the value of our services and have an adverse effect on our ability to generate revenue.
When a user visits our websites, we use technologies to collect information and use registration data provided by users and user response to our dynamically populated survey questions to collect additional user information to create a robust user profile which we use in our targeted ad serving and customer data acquisition services. The use of personal information is the subject of litigation, regulatory scrutiny and industry self-regulatory activities, including the discussion of “do-not-track” technologies and guidelines.
Technologies, tools, software and applications (including new and enhanced web browsers) have been developed, and are likely to continue to be developed, that can block or allow users to opt out of display, search, and internet-based advertising and content, or shift the location where advertising appears on pages so that our advertisements do not show up in the most monetizable places on its pages or are obscured. Recently, app developers have developed ad blocking apps for smartphones and other mobile devices which may hinder marketing activities to smartphone users. As a result, the adoption of such technologies, tools, software, and applications could reduce the number of display and search advertisements that we are able to deliver and/or our ability to deliver internet-based advertising and this, in turn, could reduce our results of operations.
Interruptions, failures or defects in our data collection systems, as well as privacy concerns and regulatory changes or enforcement actions affecting us or our data partners’ ability to collect user data, could also limit our ability to analyze data from, and thereby optimize, our clients’ marketing campaigns. If our access to data is limited in the future, we may be unable to provide effective technologies and services to clients and may lose clients and revenue.
As a creator and a distributor of internetdigital media content, we face potential liability and expenses for legal claims based on the nature and content of the materials that we create or distribute.distribute, including materials provided by third parties. If we are required to pay damages or expenses in connection with these legal claims, our business and results of operations and business may be harmed.
We display original content and third-party content on our websites and in our marketing messages. As a result, we have faced and will continue to face potential liability based on a variety of legal theories, including defamation, negligence, deceptive advertising and copyright or trademark infringement. We generally rely on the “fair use” exception for our use of third-party brand names and marks, but these third parties may disagree, and the laws governing the fair use of these third-party materials are imprecise and adjudicated on a case-by-case basis. We also create content we believe to be original for our websites. While we do not believe that this content infringes on any third-party copyrights or other intellectual property rights, owners of competitive websites that present similar content have taken and may take the position that our content infringes on their intellectual property rights. We are also exposed to risk that content provided by third parties is inaccurate or misleading, and for material posted to our websites by users and other third parties. These claims could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. The general liability and cyber/technology errors and omissions insurance we maintain may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance, or is in excess of insurance coverage, could materially adversely affect our business, financial condition, and results of operations.
Risks Related to Financial Matters
Covenants in our Credit Agreement impose restrictions that may limit our operating and financial flexibility.
The Credit Agreement contains a number of significant restrictions and negative and affirmative covenants that may limit our operating and financial flexibility. The Credit Agreement contains negative covenants that, among other things, limit our 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). The Credit Agreement 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. Each of these limitations are subject to various conditions.
In addition, the Credit Agreement contains financial covenants, which require us to maintain minimum total leverage ratios and fixed charge coverage ratios. The applicable interest rate on the facility may increase if our total leverage ratio increases to specified amounts which would result in our interest expenses going up. Subject to the terms and conditions set forth in the Credit Agreement, we becomeare required to make annual mandatory prepayments of 10% of the original principal amount of the facility and make other prepayments in certain circumstances prior to March 31, 2026, the Maturity Date of the facility.
These covenants could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand and pursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot provide any assurance that we will be able to comply with such covenants. These restrictions also limit our ability to obtain future financings or to withstand a future downturn in our business or the economy in general. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to these typessuch restrictions.
A breach of claims and are not successfulany covenant in our defense,the Credit Agreement or the agreements governing any other indebtedness that we may be forced to pay substantial damages.
We could lose clients if we fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our clients.
We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party publishers’ websites, which could lead our clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and related revenue. Click-through fraud occurs when an individual click on an ad displayed on a website, or an automated system is used to create such clicks, with the intent of generating the revenue share payment to the publisher rather than viewing the underlying content. Action fraud occurs when online lead forms are completed with false or fictitious information in an effort to increase a publisher’s compensable actions. From time to time, we have experienced fraudulent clicks or actions. We do not charge our clients for fraudulent clicks or actions when they are detected, and such fraudulent activities could negatively affect our profitability or harm our reputation. If fraudulent clicks or actions are not detected, the affected clients may experience a reduced return on their investment in our marketing programs, which could lead the clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and related revenue. Additionally, we have,outstanding from time to time hadwould result in a default under that agreement after any applicable grace periods. A default, if not waived, could result in an acceleration of the debt outstanding under the agreement and in a default with respect to, and an acceleration of, the debt outstanding under other debt agreements. If that occurs, we may not be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at such time, it may not be on terms that are acceptable to us or terms as favorable as our current agreements. If our debt is in default for any reason, our business, financial condition, and results of operations could be materially and adversely affected.
The Term Loan under our Credit Facility bears interest based on one of two variable rates: the Federal Funds Rate or a Term Secured Overnight Financing Rate (“SOFR”) plus in either case an applicable margin. Either of these interest rates may increase which could increase the cost of servicing our Term Loan and have an adverse effect on our results of operations, cash flows and stock price.In addition, our experience with SOFR based loans is limited.
The term loan under our Credit Facility is at our option either Alternative Base Rate Loans that bear interest at a base rate which is based on the Federal Funds Rate plus a prescribed margin, or Term SOFR Loans that bear interest at rates selected by us (based on loans of one-, three- or six- month duration) based on SOFR published by the CME Group plus prescribed margins. We bear the risk that the rates we are charged by our lenders will increase faster than the earnings and cash flow of our business, which could reduce profitability, adversely affect our ability to service our debt, or cause us to breach covenants contained in our credit agreement or leases, which could materially adversely affect our business, financial condition, and results of operations.
The use of SOFR based rates is intended to replace rates based on the London Interbank Offered Rate or LIBOR and reflects the discontinuation of the use of LIBOR in the financial markets. The use of SOFR based rates may result in interest rates and/or payments that are higher or lower than the rates and payments that we experienced previously for the term loan under our Credit Facility, where interest rates were based on LIBOR. Also, the use of SOFR based rates is relatively new, and there could be unanticipated difficulties or disruptions with the calculation and publication of SOFR based rates. In particular, if the agent under the Credit Facility determines that the Term SOFR rates cannot be determined or the agent or the lenders determine that Term SOFR based rates do not adequately reflect the cost of funding the SOFR Loans, outstanding SOFR Loans will be deemed to have been converted into Alternate Base Rate Loans by the Company. This could result in increased borrowing costs for the Company.
We may require additional capital in the future in order to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances. If capital is not available to us, our business, financial condition, and results of operations may be harmed.
We intend to continue to make investments to support our growth and may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances. While the Credit Agreement includes an undrawn revolving credit facility of up to $15 million and swingline loans of up to $5 million that we can use subject to certain conditions, this additional credit is not currently available as a result of the FTC and PAAG regulatory actions. If we require additional capital, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Disruptions in the global equity and credit markets may also limit our ability to access capital.
To the extent that we raise additional funds by issuing equity securities, our shareholders would experience dilution, which may be significant and could cause the market price of our common stock to decline. Any debt financing, if available, may restrict our operations. If we are unable to raise additional capital when required or on acceptable terms, we may have to terminate relationships with publishers who we believesignificantly delay, scale back or discontinue certain operations. Any of these events could significantly harm our business and results of operations.
We may be required to have engaged in fraud. Termination of such relationships entailsrecord a loss of revenue associated with the legitimate actionssignificant charge to earnings if our goodwill or clicks generated by such publishers.intangible assets become impaired.
Risks Related to the Spin-off
We have incurreda substantial amount of goodwill and purchased intangible assets on our consolidated balance sheet as a result of acquisitions. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of intangible assets with identifiable useful lives are amortized based on their economic lives. Goodwill that is expected to contribute indefinitely to our cash flows is not amortized but must be evaluated for impairment at least annually and when events or changes in circumstances indicate the carrying value may not be recoverable. If necessary, a quantitative test is performed to compare the carrying value of the asset to its estimated fair value, as determined based on a discounted cash flow approach, or when available and appropriate, to comparable market values. If the carrying value of the asset exceeds its current fair value, the asset is considered impaired and its carrying value is reduced to fair value through a non-cash charge to earnings. Events and conditions that could result in impairment of our goodwill and intangible assets include a reduced market capitalization, adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term growth or profitability.
Goodwill impairment analysis and measurement is a process that requires significant transactionjudgment. Our stock price and transaction-related costsany estimated control premium are factors affecting the assessment of the fair value of our underlying reporting units for purposes of performing any goodwill impairment assessment. We perform an impairment analysis of our goodwill annually and to date, no impairment of goodwill has been found as a result of these annual impairment tests however we were required to perform an interim impairment analysis. In both the second quarter of 2022 and fourth quarter of 2022, we recognized a goodwill impairment of $55.4 million and $55.7 million, respectively, in connection withthose quarters. Additionally, in the Spin-off.first quarter of 2021 and the third quarter of 2022, a decline in our stock price and market capitalization resulted in a triggering event and we conducted an interim impairment test.
We have incurred significant costs in connection with the previously announcedwill continue to conduct impairment analyses of our goodwill on an annual basis, unless indicators of possible impairment arise that would cause a triggering event, and terminated Business Combination Transactionwe would be required to do an interim impairment analysis and the Spin-off, including legal, accounting, consulting, financial advisory, and related fees. We may incurpossibly take additional costs in effecting the separation and spin-off. Although we expect the Spin-off to benefit both us and Red Violet as independent public companies. We cannot assure you these benefits will be achievedimpairment charges in the near term, or at all.
The Spin-off could give risefuture. Further impairment charges to disputes or other unfavorable effects, whichour goodwill could have a material adverse effect on our business, financial positioncondition, and results of operations.
Disputes with third parties could arise out of the distribution, and we could experience unfavorable reactions to the distribution from employees, investors, or other interested parties. These disputes and reactions of third parties could have a material adverse effect on our business, financial position, and results of operations. In addition, following the Spin-off, disputes between us and Red Violet could arise in connection with any of the Separation Agreement, the Tax Matters Agreement, the Employee Matters Agreement or other agreements between the parties.
Under the Separation Agreement, we will indemnify Red Violet for certain liabilities.
Under the Separation Agreement, cogint will agree to indemnify Red Violet for certain liabilities. Although no such liabilities are currently anticipated, if we have to indemnify Red Violet for unanticipated liabilities, the cost of such indemnification obligations may have a material and adverse effect on our financial performance.
A court could deem the Spin-off to be a fraudulent conveyance and void the transaction or impose substantial liabilities upon us.
If the transaction is challenged by a third party, a court could deem the distribution by Red Violet of our common stock or certain internal restructuring transactions undertaken in connection with the Spin-off to be a fraudulent conveyance or transfer. Fraudulent conveyances or transfers are defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor was insolvent, or that rendered the debtor insolvent, inadequately capitalized or unable to pay its debts as they become due. In such circumstances, a court could void the transactions or impose substantial liabilities upon us, which could adversely affect our financial condition and our results of operations. Among other things, the court could require our stockholders to return to us some or all of the shares of Red Violet common stock issued in the Spin-off or require us to fund liabilities of other companies involved in the restructuring transactions for the benefit of creditors.
Risks Related to Our Common Stock and the Securities Markets
Our stock price has been volatile and may be volatile in the future, and as a result, investors in our common stock could incur substantial losses.
Our stock price has been volatile and may continue to be volatile in the future. We may incur rapid and the value of an investmentsubstantial increases or decreases in our common stock may decline.
The trading price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in responsethe foreseeable future attributable to various factors including those discussed in these “Risk Factors” and may be unrelated to our operating performance or prospects and some of which are beyond our control. These factors could include:
additions or departuresAs a result of key personnel;
changes in governmental regulations or in the status of our regulatory approvals;
changes in earnings estimates or recommendations by securities analysts;
any major changethis volatility, investors may experience losses on their investment in our board or management;
general economic conditions and slow or negative growth ofcommon stock. The price for our markets; and
political instability, natural disasters, war and/or events of terrorism.
From time to time, we estimatecommon stock may be influenced by many factors, including the timing of the accomplishment of various commercial and other product development goals or milestones. Also, from time to time, we expect that we will publicly announce the anticipated timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in some cases for reasons beyond our control. If we do not meet these milestones as publicly announced, our stock price may decline.following:
In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of publicly traded companies. Broad
• | investor reaction to our business strategy; |
• | the success of our services, products, or technologies; |
• | our continued compliance with the listing standards of Nasdaq; | |
• | regulatory or legal developments, especially changes in laws or regulations applicable to our business; | |
• | variations in our financial results or those of companies that are perceived to be similar to us; | |
• | changes in earnings estimates or recommendations by securities analysts; | |
• | relatively low trading volume of our common stock, which tends to magnify volatility even in the absence of factors related to our business performance; | |
• | the emergence of new competitors or new technologies; |
• | any major change in our board or management; |
• | commencement of, or involvement in, regulatory investigations or litigation; |
• | general economic conditions and slow or negative growth of our markets; and |
• | other events or factors, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, public health issues including health epidemics or pandemics, and natural disasters such as fire, hurricanes, earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt our operations or result in political or economic instability. |
These broad market and industry factors may seriously affect the marketharm our stock price, of companies’ stock, including ours, regardless of actualour operating performance. These fluctuationsperformance, financial condition, or other indicators of value. Since our stock price may continue to be volatile and may be even more pronouncedvolatile in the trading market forfuture, investors in our stock.common stock could incur substantial losses. In addition, in the past, following periods of volatility in the overall market, and the market price of a particular company’s securities securities class actionclass-action litigation has often been instituted against these companies. ThisSuch litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects. There can be no guarantee that our stock price will remain at current prices or that future sales of our common stock will not be at prices lower than those sold to investors.
If we fail to meet the continued listing requirements of Nasdaq it could result in a delisting of our common stock.
Our common stock is currently listed for trading on Nasdaq, and the continued listing of our common stock on Nasdaq is subject to our compliance with a number of listing standards. These listing standards include the requirement for avoiding sustained losses, maintaining a minimum level of stockholders’ equity, and maintaining a minimum stock price. The failure to meet any listing standard would subject us to potential loss of listing.
If our common stock were no longer listed on Nasdaq, investors might only be able to trade on one of the over-the-counter markets, including the OTC Bulletin Board ® or in the Pink Sheets ® (a quotation medium operated by Pink Sheets LLC). This would impair the liquidity of our common stock not only in the number of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and reduction in media coverage. In addition, we could face significant material adverse consequences, including:
● | a limited availability of market quotations for our securities; | |
● | a limited amount of news and analyst coverage for us; and | |
● | a decreased ability to issue additional securities or obtain additional financing in the future. |
We continue to meet the required listing standards of Nasdaq, however if the closing bid price for our common stock falls below $1.00 per share for 30 consecutive business days, we would not comply with the $1.00 minimum bid price requirement for continued listing on Nasdaq under Rule 5550(a)(2) of the Nasdaq Listing Rules. We can provide no assurance that the trading price of our common stock will not fall below $1.00 per share for a period of 30 consecutive trading days or that if it does, we will be able to regain compliance with the minimum bid price requirement, even if we maintain compliance with the other listing requirements.
In the event of a future delisting, we would take actions to restore our compliance with Nasdaq's listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in connectionthe secondary market.
If our common stock were removed from listing with acquisitionsNasdaq, it may be subject to the so-called “penny stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange, which is the exception on which we currently rely. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or pursuant to our stock incentive plans could have a dilutive effect on your investment.
During 2015, 2016, 2017 and through the date hereof, we issued 54,884,418 sharesdispose of our common stock in connection with acquisitions, vesting of awards made under our 2008 Share Incentive Plan and our 2015 Stock Incentive Plan (the "Plans" collectively), or for other business purposes. Also, an additional 15,048,890 shares underlying awards made underon the Plans and other compensatory arrangements might vest and be delivered through 2021. The benefits derived by us from an acquisition might not exceed the dilutive effect of the acquisition. Pursuant to the Plans, our board of directors may grant stock options, restricted stock units (“RSUs”), or other equity awards to our directors and employees. When these awards vest or are exercised, the issuance of shares of common stock underlying these awards may have a dilutive effect on our common stock.secondary market.
In addition,common stock. Additionally, the Companyconcentration of stock ownership may also serve to limit the trading volume of our common stock and lead to greater volatility in our stock price. Our largest shareholder, Frost Gamma Investments Trust, owns, directly and indirectly, approxima
We expect that we may need additional capital in the future; however, such capital may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock in connection with acquisitions or other securities that may be convertible into, or exercisable or exchangeable for,pursuant to our common stock our existing stockholders would experience further dilution.incentive plans could have a dilutive effect on your investment in us.
Although
We do not intend to pay cash dividends for the foreseeable future.
We have never declared or paid cash dividends on our common stock and we do not expect to declare or pay any cash dividends in the foreseeable future. Additionally, our Credit Agreement prohibits us from paying cash dividends on our common stock and contains limitations on our ability to redeem or repurchase shares of our common stock. As a result, shareholders may only receive a return on your investment in our common stock if the trading price of your shares increases.
We area smaller reporting company and a non-accelerated filer and we benefit from certain reduced governance and disclosure requirements, including that our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting. We cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies and non-accelerated filers will make our common stock less attractive to investors.
Currently, we are a “smaller reporting company,” meaning that our outstanding common stock held by nonaffiliates had a value of less than $250 million at the end of our most recently completed second fiscal quarter. We are also a non-accelerated filer because we had a public float of less than $75 million as of the last business day of our most recently completed second quarter. As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of Section 404 of theSarbanes-Oxley Act, meaning our auditors are not required to attest to the effectiveness of our internal control over financial reporting. As a result, investors and others may be less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in internal controls go undetected may increase. In addition, as a smaller reporting company, we take advantage of our ability to provide certain other less comprehensive disclosures in our SEC filings, including, among other things, providing onlytwo years of audited financial statements in annual reports and simplified executive compensation disclosures. Consequently, it may be more challenging for investors to analyze our results of operations and financial prospects, as the information we provide to investors is less robust than the disclosure investors receive from public companies that are not a smaller reporting company.
Item 1B. Unresolved Staff Comments.
None.
cogint’s
Our headquarters are located at 2650 North Military Trail, Suite 300 Boca Raton, Florida 33431, where it leases 21,020 rentable square feet of office space in accordance with a 91-month lease entered into in December 2014, and the subsequent first amendment, effective in January 2017, to the lease agreement. Our Seattle office is located at 1111 Third Avenue, Seattle, WA, where it leases 6,003 rentable square feet of office space in accordance with a 90-month lease entered into in April 2017. Our Fluent offices are located at 33 WhitehallVesey Street, 9th Floor, New York, New York 10004NY 10282, where we lease 25,82542,685 rentable square feet of office space under an 84-month lease, effective November 2018. The AdParlor business operates out of a shared co-working space located at 200 Bay Street, North Tower Suite 1200, Toronto, Ontario M5J 2J2, Canada under a 13-month lease, which expires oneffective July 1, 2022.
As of December 31, 2018.2022, we have not terminated any significant lease arrangements. We believe our present facilities are suitable and adequate for our current operating needs.
On July 22, 2017, the Company entered into a settlement agreement with TransUnion and TransUnion Risk and Alternative Data Solutions, Inc. (“TRADS”), settling all litigation with TransUnion and TRADS. Company subsidiary, IDI Holdings, LLC (“IDI Holdings”), will pay $7.0 million to TRADS over the course of one year to settle all these matters (the “TRADS Litigation Settlement”). The terms of the settlement agreement are confidential. The Company recorded the expense of $7.0 million in general and administrative expenses during the second quarter of 2017. For a description of the legal proceedings settled in the TRADS
Litigation Settlement, see Part I, Item 3 of the Company’s 2016 Form 10-K and Part II, Item 1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.
Following the TRADS Litigation Settlement,Other than as disclosed below under "Certain Legal Matters," the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on theour business, financial condition, results of operations or cash flows. Legal fees associated with such legal proceedings are expensed as incurred. We review legal proceedings and claims on an ongoing basis and follow appropriate accounting guidance, including FASB Accounting Standards Codification 450 ("ASC 450,450"), Contingencies, when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of thesuch loss. We do not recordaccrue liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.
In addition, to the foregoing, we may be involved in litigation from time to time in the ordinary course of business. We do not believe that the ultimate resolution of any such matters currently pending will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty, and we cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on our business, financial condition, results of operations and cash flows.
Certain Legal Matters
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 $3.7 million 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 $1.7 million 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 can be no assurance this will occur. The Company accrued $5.0 million 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 $9.75 million and injunctive provisions. The Company will contribute $3.1 million towards the settlement, $1.1 million following the District Court’s entry of the Final Approval Order and Judgment, anticipated to occur in about a year, and $2.0 million pursuant to an interest-bearing note in favor of Freedom Financial which is payable over two years following entry of the order.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on The NASDAQNasdaq Global Market (“NASDAQ”Nasdaq”) under the symbol “COGT.“FLNT.” Before SeptemberPrior to March 26, 2016,2018, our common stock was listed on the NYSE MKTNasdaq under the symbol “IDI.“COGT.” OnAs of March 19, 2015, we effected a one-for-five reverse split of our issued and outstanding common stock (“Reverse Stock Split”). Trading13, 2023, there were 223 record holders of our common stock on a post-Reverse Stock Split adjusted basis began at the opening of business on the morning of March 20, 2015. All historic share and per share information, including earnings per share, in this 2017 Form 10-K have been adjusted to reflect the Reverse Stock Split. The table below sets forth, for the respective periods indicated, the high and low prices for our common stock as reported on NASDAQ and NYSE MKT, as applicable.stock.
|
| Bid Prices |
| |||||
|
| High |
|
| Low |
| ||
2017 |
|
|
|
|
|
|
|
|
First Quarter |
| $ | 4.85 |
|
| $ | 3.15 |
|
Second Quarter |
| $ | 6.10 |
|
| $ | 4.00 |
|
Third Quarter |
| $ | 6.30 |
|
| $ | 4.20 |
|
Fourth Quarter |
| $ | 5.30 |
|
| $ | 3.55 |
|
2016 |
|
|
|
|
|
|
|
|
First Quarter |
| $ | 7.34 |
|
| $ | 3.78 |
|
Second Quarter |
| $ | 5.92 |
|
| $ | 4.23 |
|
Third Quarter |
| $ | 6.22 |
|
| $ | 4.50 |
|
Fourth Quarter |
| $ | 5.25 |
|
| $ | 2.90 |
|
WeDuring our fiscal years ended December 31, 2022 and 2021, we paid no dividends orand made anyno other distributions in respect of our common stock during our fiscal years ended December 31, 2017 and 2016, and westock. We have no plans to pay any cash dividends or make any other cash distributions in the foreseeable future. Our Credit Agreement prohibits us from paying dividends on our equity securities, other than dividends on common stock which accrue (but are not paid in cash) or are paid in kind, or dividends on preferred stock which accrue (but are not paid in cash) or are paid in kind.
On March 13, 2018,
Issuer Purchase of Equity Securities
The table below sets forth the closing priceinformation with respect to purchases made by or on behalf of ourthe Company of its common stock was $3.00 per share as reported on NASDAQ. Asduring the fourth quarter of March 13, 2018, there were 72,060,119 shares of our common stock issued and outstanding. As of March 13, 2018, there were 104 record holders of our common stock.
Performance Graph
The following graph and table match our cumulative 5-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Computer & Data Processing index. The graph and table track the performance of a $100.00 investment in our common stock and in each index (with the reinvestment of all dividends) for the five years ended December 31, 2017. The information reflected in the graph and table is not intended to forecast future performance of our common stock and may not be indicative of future performance.
|
| 12/12 |
|
| 12/13 |
|
| 12/14 |
|
| 12/15 |
|
| 12/16 |
|
| 12/17 |
| ||||||
Cogint, Inc. |
|
| 100.00 |
|
|
| 127.02 |
|
|
| 68.98 |
|
|
| 123.49 |
|
|
| 58.04 |
|
|
| 74.02 |
|
NASDAQ Composite |
|
| 100.00 |
|
|
| 141.63 |
|
|
| 162.09 |
|
|
| 173.33 |
|
|
| 187.19 |
|
|
| 242.29 |
|
NASDAQ Computer & Data Processing |
|
| 100.00 |
|
|
| 151.54 |
|
|
| 173.50 |
|
|
| 208.25 |
|
|
| 224.83 |
|
|
| 315.58 |
|
Recent Sale of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes compensation plans under which our equity securities are authorized for issuance as of December 31, 2017.
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
October 1-31, 2022 | — | — | — | — | ||||||||||||
November 1-30, 2022 | — | — | — | — | ||||||||||||
December 1-31, 2022 | — | — | — | — | ||||||||||||
Total | — | — | — | — |
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|
|
|
|
|
|
|
|
| Number of securities |
| |
|
|
|
|
|
|
|
|
|
| remaining available |
| |
|
|
|
|
|
|
|
|
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| for future issuance |
| |
|
| Number of securities to |
|
| Weighted-average |
|
| under equity |
| |||
|
| be issued upon exercise |
|
| exercise price of |
|
| compensation plans |
| |||
|
| of outstanding options, |
|
| outstanding options, |
|
| (excluding securities |
| |||
|
| warrants and rights |
|
| warrants and rights |
|
| reflected in column (a)) |
| |||
Plan category |
| (a) |
|
| (b) |
|
| (c) |
| |||
Equity compensation plans approved by security holders (1) |
|
| 6,298,890 |
| (2) | $ | 12.59 |
| (3) |
| 4,694,808 |
|
Equity compensation plans not approved by security holders |
|
| - |
|
|
| - |
|
|
| - |
|
Total |
|
| 6,298,890 |
|
| $ | 12.59 |
|
|
| 4,694,808 |
|
(1) |
|
|
|
|
|
Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this 2017 Form 10-K. The fiscal year financial information included in the table below is derived from our audited consolidated financial statements. Historical results are not necessarily indicative of future results.[Reserved].
|
| Year Ended December 31, |
| |||||||||
(In thousands, except share and per share data) |
| 2017 |
|
| 2016 |
|
| 2015 (1) |
| |||
Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 220,268 |
|
| $ | 186,836 |
|
| $ | 14,091 |
|
Loss from operations |
| $ | (42,518 | ) |
| $ | (34,038 | ) |
| $ | (44,400 | ) |
Net loss from continuing operations |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (42,585 | ) |
Net loss from discontinued operations attributable to cogint |
| $ | - |
|
| $ | - |
|
| $ | (41,950 | ) |
Net loss attributable to cogint |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (84,535 | ) |
Basic and diluted loss per share (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | (0.96 | ) |
| $ | (0.65 | ) |
| $ | (3.27 | ) |
Discontinued operations |
|
| - |
|
|
| - |
|
|
| (3.22 | ) |
|
| $ | (0.96 | ) |
| $ | (0.65 | ) |
| $ | (6.48 | ) |
Weighted average shares used in computation of loss per share - Basic and diluted |
|
| 55,648,235 |
|
|
| 44,536,906 |
|
|
| 13,036,082 |
|
Statements of Cash Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
| 2,352 |
|
|
| 2,099 |
|
|
| (10,673 | ) |
|
|
|
|
|
| December 31, |
| |||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Balance sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 316,999 |
|
| $ | 311,911 |
|
| $ | 289,192 |
|
Long-term debt, net, including promissory notes payable to certain shareholders, net |
| $ | 60,213 |
|
| $ | 45,878 |
|
| $ | 48,668 |
|
Total shareholders' equity |
| $ | 224,007 |
|
| $ | 229,649 |
|
| $ | 205,895 |
|
|
| Year Ended December 31, |
| |||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Adjusted EBITDA (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 24,233 |
|
| $ | 14,973 |
|
| $ | (6,648 | ) |
|
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report on Form 10-K (“20172022 Form 10-K”). This 20172022 Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject toinvolve risks and uncertainties that could cause ouruncertainties. Our actual results tocould differ materially from any future results expressed or implied by thesuch forward-looking statements. Many factorsFactors that could cause our actual activities or resultscontribute to differ materially fromthose differences include, but are not limited to, those discussed in the activitiessection titled "Cautionary Note Regarding Forward-Looking Statements" and results anticipated in forward-looking statements. These factors include those contained in Part I, “Item 1A. Risk Factors” of this 20172022 Form 10-K. We do not undertake any obligation to update forward-looking statements, except as required by law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Overview
Cogint,
Fluent, Inc. (“("we,” “us,” “our,” “cogint,”" "us," "our," "Fluent," or the “Company”"Company"), a Delaware corporation, is aan industry leader in data-driven digital marketing services. We primarily perform customer acquisition services by operating highly scalable digital marketing campaigns, through which we connect our advertiser clients with consumers they are seeking to reach. We deliver data and analytics company providing cloud-based mission-criticalperformance-based marketing executions to our clients, which in 2022 included over 500 consumer brands, direct marketers and agencies across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer, and Staffing & Recruitment.
We attract consumers at scale to our owned digital media properties primarily through promotional offerings where they are rewarded for completing activities within the platforms. To register on our sites, consumers provide their names, contact information and performance marketing solutionsopt-in permission to enterprises in a varietypresent them with relevant offers on behalf of industries. cogint’s mission isour clients. Approximately 90% of these users engage with our media on their mobile devices or tablets. Our always-on, real-time capabilities enable users to transform data into intelligence utilizingaccess our media whenever and wherever they choose.
Once users have registered with our sites, we integrate our proprietary technology platformsdirect marketing technologies and analytics to solve complex problems forengage them with surveys, polls, and other experiences, through which we learn about their lifestyles, preferences and purchasing histories. Based on these insights, we serve targeted, relevant offers to them on behalf of our clients. HarnessingAs new users register and engage with our sites and existing registrants re-engage, we believe the powerenrichment of our database expands our addressable client base and improves the effectiveness of our performance-based campaigns.
Since our inception, we have amassed a large, proprietary database of first-party, self-declared user information and preferences. We have permission to contact the majority of users in our database through multiple channels, such as email, home address, telephone, push notifications and SMS text messaging. We leverage this data fusionin our performance offerings primarily to serve advertisements that we believe will be relevant to users based on the information they provide when they engage with our sites, and powerful analytics, we transformin our data into intelligence, in a fast and efficient manner,offerings to provide our clients with users' contact information so that our clients can spend their time on what matters most, running their organizationsmay communicate with confidence. Throughthem directly. We may also leverage our intelligent platforms, CORETM and Agile Audience EngineTM, we uncover the relevance of disparate data points to deliver end-to-end, ROI-driven results for our customers. Our analytical capabilities enable us to build comprehensive datasets in real-time and provide insightful views of people, businesses, assets and their interrelationships. We empower clients across markets and industries to better execute all aspects of their business, from managing risk, identifying fraud and abuse, ensuring legislative compliance, and debt recovery, to identifying and acquiringexisting database into new customers. With the goal of reducing the cost of doing business and enhancing the consumer experience, our solutions enable our clients to optimize overall decision-making and to have a holistic view of their customers.
We provide unique and compelling solutions essential to the daily workflow of organizations within both the public and private sectors. Our cloud-based data fusion and customer acquisition technology platforms, combined with our massive database consisting of public-record, proprietary and publicly-available data, as well as a unique repository of self-reported information on millions of consumers, enables the delivery of differentiated products and solutions used for a variety of essential functions. These essential functions include identification and authentication, investigation and validation, and customer acquisition and retention.
The Company operates through two reportable segments: (i) Information Services and (ii) Performance Marketing. For additional information relating to our segments, see Note 15, “Segment Information,” in our Notes to Consolidated Financial Statements.
Information Services—Leveraging leading-edge technology, proprietary algorithms, and massive datasets, and through intuitive and powerful analytical applications, we provide solutions to organizations within the risk management and consumer marketing industries. CORE is our next generation data fusion platform, providing mission-critical information about individuals, businesses and assets to a variety of markets and industries. Through machine learning and advanced analytics, our Information Services segment uses the power of data fusion to ingest and analyze data at a massive scale. The derived information from the data fusion process ultimately serves to generate unique solutions for banking and financial services companies, insurance companies, healthcare companies, law enforcement and government, the collection industry, law firms, retail, telecommunications companies, corporate security and investigative firms. In addition, our data acquisition solutions enable clients to rapidly grow their customer databases by using self-declared consumer insights to identify, connect with, and acquire first-party consumer data and multi-channel marketing consent at massive scale.
Built in a secure Payment Card Industry (PCI) compliant environment, our cloud-based next generation technology delivers greater than four 9s of service uptime. By leveraging our proprietary infrastructure design within the cloud, we currently operate in six datacenters spread geographically across the U.S. and are able to dynamically and seamlessly scale as needed. Using our intelligent framework and leveraging a micro services architecture where appropriate, we reduce operational cost and complexity, thus delivering superior performance at greatly reduced costs compared to traditional datacenter architectures. Since the release of our CORE platform in May 2016, we have added billions of data records and continue to add approximately over a billion records per month on average. Our average query response time for a comprehensive profile is less than 250 milliseconds versus competitive platforms that measure comprehensive profile response times in seconds.
Performance Marketing—Our Agile Audience Engine drives our Performance Marketing segment, which provides solutions to help brands, advertisers and marketers find the right customers in every major business-to-consumer (B2C) vertical,revenue streams, including internet and telecommunications, financial services, health and wellness, consumer packaged goods, career and education, and retail and entertainment. We deterministically target consumers across various marketing channels and devices, through the user- supplied acquisition of personally identifiable information on behalf of our clients,utilization-based models, such as email addresses, other identifying informationprogrammatic advertising and responses to dynamically-populated survey questions. Additionally, 80% of our consumer interaction comes from mobile, a highly-differentiated characteristic compared to our competitors whose platforms are not mobile-first.
We own hundreds of media properties, through which we engage millions of consumers everyday with interactive content, such as job postings, cost savings, surveys, promotions and sweepstakes that generate on average over 850,000 consumer registrations and over 8.8 million compiled survey responses daily, with a recent record high of over 1.0 million registrations and over 10.3 million compiled survey responses in a single day. Our owned media properties alone have created a database of approximately 130 million U.S. adults with detailed profiles, including 224 million unique email addresses, across over 75 million households. With meaningful, people-based interaction that focuses on consumer behavior and declared first-party data, leveraged on a mobile-centric platform that provides seamless omni-channel capabilities, we have the ability to target and develop comprehensive consumer profiles that redefine the way advertisers view their most valuable customers.
Previously, we provided advertising services in the out-of-home advertising industry in China under the name Tiger Media, Inc. (“Tiger Media”). On March 21, 2015, Tiger Media completed the acquisition of The Best One, Inc. (“TBO”). In the transaction, TBO became a wholly owned subsidiary of Tiger Media, with TBO changing its name to IDI Holdings, LLC (“IDI Holdings”) and Tiger Media changing its name to IDI, Inc, now known as Cogint, Inc. TBO was a holding company engaged in the acquisition of operating businesses and the acquisition and development of technology assets across various industries. On October 2, 2014, TBO acquired 100% of the membership interests of Interactive Data, LLC (“Interactive Data”). Historically, Interactive Data provided data solutions and services to the Accounts Receivable Management industry, consisting primarily of collection agencies, collection law firms, and debt buyers, for location and identity verification, legislative compliance and debt recovery. Interactive Data now serves the entirety of the risk management industry. Through leading-edge, proprietary technology, advanced systems architecture, and a massive data repository, Interactive Data addresses the rapidly growing need for actionable intelligence.
On December 9, 2015, we completed the acquisition of Fluent, LLC (“Fluent”) with certain transactions effective December 8, 2015 (the “Fluent Acquisition”). Fluent, founded in 2010, is a leader in people-based digital marketing and customer acquisition, serving over 500 leading consumer brands and direct marketers. Fluent’s proprietary audience data and robust ad-serving technology enables marketers to acquire their best customers, with precision, at a massive scale. Leveraging compelling content, unique first-party data assets, and real-time survey interaction with customers, Fluent has helped marketers acquire millions of new prospective customers since its inception.
On June 8, 2016, we acquired Q Interactive (“Q Interactive”) (the “Q Interactive Acquisition”), a subsidiary of Selling Source, LLC. Q Interactive was founded in 1994 as Interactive Coupon Marketing Group and provides performance based digital marketing solutions for advertisers and publishers. We believe the acquisition of Q Interactive is in line with our strategy to bolster our market leadership in performance marketing by adding client relationships as well as technology capabilities. During the first quarter of 2017, Q Interactive’s business was merged and fully integrated into Fluent (the “Q Interactive Integration”), and Q Interactive became a wholly-owned subsidiary of Fluent.
In order for the Company to continue to develop new products, grow its existing business and expand into additional markets, we must generate and sustain sufficient operating profits and cash flow in future periods. This will require us to generate additional sales from current products and new products currently under development. We continue to build out our sales organization to drive current products and to introduce new products into the market place. We will incur increased compensation expenses for our sales and marketing, executive and administrative, and infrastructure related persons as we increase headcount in the next 12 months.
Industry Trends and Uncertainties
Operating results are affected by the following factors that impact the big data and analytics sector in the United States:
The macroeconomic conditions, including the availability of affordable credit and capital, interest rates, inflation, employment levels and consumer confidence, influences our revenue. Macroeconomic conditions also have a direct impact on overall technology, marketing and advertising expenditures in the U.S. As marketing budgets are often more discretionary in nature, they are easier to reduce in the short term as compared to other corporate expenses. Future widespread economic slowdowns in any of the industries or markets our clients serve could reduce the technology and marketing expenditures of our clients and prospective customers.
Our revenue is also significantly influenced by industry trends, including the demand for business analytics services in the industries we serve. Companies are increasingly relying on business analytics and big-data technologies to help process data in a cost-efficient manner. As customers have gained the ability to rapidly aggregate data generated by their own activities, they are increasingly expecting access to real-time data and analytics from their service providers as well as solutions that fully integrate into their workflows. The increasing number and complexity of regulations centered around data and provision of information services makes operations for businesses in the big data and analytic sector more challenging.
The enactment of new or amended legislation or industry regulations pertaining to consumer or private sector privacy issues could have a material adverse impact on information and marketing services. Legislation or industry regulations regarding consumer or private sector privacy issues could place restrictions upon the collection, sharing and use of information that is currently legally available, which could materially increase our cost of collecting and maintaining some data. These types of legislation or industry regulations could also prohibit us from collecting or disseminating certain types of data, which could adversely affect our ability to meet our clients’ requirements and our profitability and cash flow targets.
Company Specific Trends and Uncertainties
Our operating results are also directly affected by company-specific factors, including the following:
Some of our competitors have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base. Even if we introduce advanced products that meet evolving customer requirements in a timely manner, there can be no assurance that our new products will gain market acceptance.
Certain companies in the big data and analytics sector have expanded their product lines or technologies in recent years as a result of acquisitions. Further, more companies have developed products which conform to existing and emerging industry standards and have sought to compete on the basis of price. We anticipate increased competition from large data and analytics vendors. Increased competition in the big data and analytics sector could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully in the future with current or new competitors.
Spin-off of Red Violet and Business Combination Agreement
On September 6, 2017, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with BlueFocus International Limited (“BlueFocus”), a private company limited by shares registered in Hong Kong. Under the terms of the Business Combination Agreement, the Company would issue to BlueFocus shares of the Company’s common stock, representing 63% of the Company’s common stock on a fully diluted, post-transaction basis (the “Purchased Shares”), in consideration of the contribution of the equity interests of certain entities and $100.0 million in cash by BlueFocus (the “Business Combination Transaction”). BlueFocus would also repay, assume, or refinance indebtedness of the Company. Before closing of the Business Combination Transaction, cogint would contribute its data and analytics operations and assets into its wholly-owned subsidiary, Red Violet, Inc. (“Red Violet”), and the shares of Red Violet would be distributed as a stock dividend to cogint stockholders of record as of the record date (the “Record Date”) and to certain warrant holders (the “Spin-off”).
As a condition to closing of the Business Combination Transaction, BlueFocus and the Company sought regulatory approval by the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS has indicated its unwillingness to approve the transaction, therefore, on February 20, 2018, the parties withdrew their application with CFIUS and terminated the Business Combination Agreement in accordance with its terms.
On February 12, 2018, the Company’s Board of Directors approved the plan to accelerate the Spin-off. Despite the termination of the Business Combination Agreement, the Company will continue with the accelerated Spin-off of Red Violet, which is now governed by a Separation and Distribution Agreement (the “Separation Agreement”) as well as other related agreements between cogint and Red Violet, each entered into on February 27, 2018 (collectively, the “Spin-off Agreements”). The Company will contribute $20.0 million
in cash to Red Violet upon completion of the Spin-off. Red Violet has filed with the SEC a Registration Statement on Form 10, registering under the Exchange Act, the shares of Red Violet to be distributed in the Spin-off. As a result, upon completion of the Spin-off, cogint stockholders will hold shares of two public companies, cogint and Red Violet. cogint common stock will continue trading on The NASDAQ Stock Market (“NASDAQ”).
On March 7, 2018, the Company announced that the Board of Directors established March 19, 2018 as the Record Date and March 26, 2018 as the distribution date (the “Distribution Date”) for the Spin-off. On March 9, 2018, in order to meet NASDAQ initial listing requirement of a minimum $4.00 bid price, the Company adjusted the Spin-off ratio so that on the Distribution Date, stockholders of the Company will receive, by way of a dividend, one share of Red Violet common stock for each 7.5 shares of cogint common stock held as of the Record Date. On March 13, 2018, NASDAQ approved Red Violet’s application to list its common stock on NASDAQ under the symbol “RDVT.”call centers.
On March 8, 2018,We generate revenue by delivering measurable online marketing results to our clients. We differentiate ourselves from other marketing alternatives by our abilities to provide clients with a cost-effective and measurable return on advertising spend ("ROAS") (a measure of profitability of sales compared to the Compensation Committeemoney spent on ads), to manage highly targeted and highly fragmented online media sources and to provide access to our owned digital media properties and technology platforms. We are predominantly paid on a negotiated or market-driven “per click,” “per lead,” or other “per action” basis that aligns with the customer acquisition cost targets of our clients. We bear the Boardcosts of Directors of cogint approved the acceleration of an aggregate of 5,222,561 shares of stock options, RSUs and restricted stock held by certain employees, consultants, and directors, including only those employees who will continue with Red Violet upon completion of the Spin-off, subject to such employees still being employedsourcing traffic from publishers for our owned digital media properties that ultimately generate qualified clicks, leads, calls, app downloads or providing services on the acceleration date. The acceleration date was subsequently determined to be March 12, 2018. The share-based compensation expense of $15.3 million resulting from the above-mentioned acceleration is expected to be recognized in discontinued operations during the first quarter of 2018.customers for our clients.
Pro formaThrough AdParlor Holdings, Inc. (“AdParlor”), we conduct our non-core business which offers clients various social media strategies through the planning and buying of cogint reflecting the Spin-off of Red Violet (unaudited)media on different platforms.
The following table includes the unaudited condensed consolidated pro forma statements of operations of cogint for
For the years ended December 31, 20172022 and 2016 as if the Spin-off2021, we recorded revenue of Red Violet had been completed as$361.1 million and $329.3 million, net loss of the beginning($123.3) million and ($10.1) million, and adjusted EBITDA of the periods being presented.
|
| Pro Forma |
| |||||
|
| Year Ended December 31, |
| |||||
(In thousands) |
| 2017 |
|
| 2016 |
| ||
Revenue |
| $ | 211,690 |
|
| $ | 182,251 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization) |
|
| 140,341 |
|
|
| 129,492 |
|
Sales and marketing expenses |
|
| 16,176 |
|
|
| 13,501 |
|
General and administrative expenses |
|
| 29,895 |
|
|
| 22,163 |
|
Depreciation and amortization |
|
| 13,055 |
|
|
| 12,024 |
|
Write-off of long-lived assets |
|
| 3,626 |
|
|
| - |
|
Total costs and expenses |
|
| 203,093 |
|
|
| 177,180 |
|
Income from operations |
|
| 8,597 |
|
|
| 5,071 |
|
Interest expense, net |
|
| (5,653 | ) |
|
| (4,587 | ) |
Income before income taxes |
|
| 2,944 |
|
|
| 484 |
|
Income taxes |
|
| 1,122 |
|
|
| 184 |
|
Net income |
| $ | 1,822 |
|
| $ | 300 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.03 |
|
| $ | 0.01 |
|
Diluted |
| $ | 0.02 |
|
| $ | - |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
| 72,369,185 |
|
|
| 57,322,752 |
|
Diluted |
|
| 75,491,094 |
|
|
| 60,255,704 |
|
The unaudited pro forma disclosure gives effect to the following transactions$22.7 million and events as if they occurred at the beginning of the periods presented:
Pursuant to the Spin-off Agreements mentioned above, cogint will spin-off Red Violet by distributing 100% of Red Violet’s common stock to holdersof cogint’scommonstockandcertain warrants, as a stock dividend on the Record Date of the Spin-off. Upon the Spin-off, cogint will continue to trade on NASDAQ, with Fluent being its wholly-owned subsidiary.
|
cogint will refinance its debt upon the Spin-off of Red Violet. In preparation of the pro forma, we used the assumption of a five-year long-term debt in the aggregate amount of $70.0$23.2 million, with an estimated annual interest rate of 8.5%.
On March 12, 2018, cogint accelerated the outstanding shares of stock options, RSUs and restricted stock held by certain employees, consultants, and directors, including only those employees who will continue with Red Violet upon completion of the Spin-off, subject to such employees still being employed or providing services on the acceleration date. The related compensation expense will be recorded fully in the discontinued operations prior to the Spin-off.
Income taxes are based on an expected effective income tax rate of 38.1%. As a result of the tax reform legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “Act”), enacted on December 22, 2017, we expect the effective income tax rate to be lowered going forward.
We will continue to evaluate the financial performance of cogint after the Spin-off on a variety of key indicators, including adjusted EBITDA.respectively. Adjusted EBITDA is a non-GAAP financial measure equal to net income (loss), the most directly comparable financial measure based on US GAAP, adding back interest expense, income taxtaxes, interest expense, depreciation and amortization, share-based compensation expense, write-off of long-lived assets and other adjustments, as notedadjustments. See our audited consolidated financial statements and accompanying notes thereto appearing elsewhere in the table below. Alsothis 2022 Form 10-K, and for further discussion and analysis of our results of operations. For further discussion of adjusted EBITDA, including a reconciliation from net income (loss), see “Use“Definitions, Use and Reconciliation of Non-GAAP Financial Measures” belowbelow.
Trends Affecting our Business
Development, Acquisition and Retention of High-Quality Targeted Media Traffic
Our business depends on identifying and accessing media sources that are of high quality and on our ability to attract targeted users to our media properties. As our business has grown, we have attracted larger and more sophisticated clients to our platform. To further increase our value proposition to clients and to fortify our leadership position in the evolving regulatory landscape of our industry, we implemented a Traffic Quality Initiative or TQI in 2020. That focus on high quality traffic continued through 2022 and will remain a focus moving forward, as it is now part of a broader initiative to improve the consumer experience.
During 2022, we further increased our spend with major digital media platforms, revised our bidding strategies for details.affiliate traffic, and developed partnerships to expand traffic from social media platforms, including the growing influencer segment. We have also been pursuing strategic initiatives that enable us to grow revenue with existing user traffic volume, while attracting new users to our media properties via email and SMS messages. We focus on improved monetization of consumer traffic through improved customer relationship management and internal capabilities that allow us to re-engage consumers who have registered on our owned media properties. Through these initiatives, our business has become less dependent on the volume of users to generate revenue growth.
We believe that significant value has been and will continue to be created by improving the quality of traffic sourced to our media properties, through increased user participation rates on our sites, leading to higher conversion rates, resulting in increased monetization, and ultimately increasing revenue and media margin. Media margin, a non-GAAP measure, is the portion of gross profit (exclusive of depreciation and amortization) reflecting variable costs paid for media and related expenses and excluding non-media cost of revenue.
Volatility of affiliate supply sources, changes in search engine algorithms, email and text message blocking algorithms, and increased competition for available media made the process of growing our traffic volume under our evolving quality standards challenging during 2022 and we expect them to continue to be factors in 2023. In an effort to offset these challenges, we are investing in internal efforts to secure additional traffic from the influencer segment and will continue to strategically grow our e-commerce post sales solution. As a direct reflection of the challenging macro-economic environment, we have reviewed our strategic investments for 2023 and paused or eliminated lower priority projects while also streamlining our organization through targeted workforce reductions. See “Results of Operations -- Year ended December 31, 2022 compared to year ended December 31, 2021 --General and administrative” below. The mix and profitability of our media channels, strategies, and partners is likely to continue to be dynamic and reflect evolving market trends.
|
| Pro Forma |
| |||||
|
| Year Ended December 31, |
| |||||
(In thousands) |
| 2017 |
|
| 2016 |
| ||
Net income |
| $ | 1,822 |
|
| $ | 300 |
|
Interest expense, net |
|
| 5,653 |
|
|
| 4,587 |
|
Income tax expense |
|
| 1,122 |
|
|
| 184 |
|
Depreciation and amortization |
|
| 13,055 |
|
|
| 12,024 |
|
Share-based compensation expense |
|
| 7,608 |
|
|
| 5,897 |
|
Write-off of long-lived assets |
|
| 3,626 |
|
|
| - |
|
Litigation costs |
|
| 204 |
|
|
| 106 |
|
Acquisition and restructuring costs |
|
| 890 |
|
|
| 488 |
|
Adjusted EBITDA |
| $ | 33,980 |
|
| $ | 23,586 |
|
Advertiser Trends & Seasonality
We deliver data and performance-based marketing executions to our clients across a wide range of industries, including Media & Entertainment, Financial Products & Services, Health & Wellness, Retail & Consumer, and Staffing & Recruitment. In 2022, both data and performance-based spend was challenged by a slowing economy and general economic uncertainty. The unaudited pro formaStaffing & Recruitment sector was particularly slow for us based on reduced recruiting budgets in warehousing and the gig economy.
In an effort to offset these challenges, we worked with a select group of advertisers in the Media & Entertainment sector to define high performing consumer segments and strategically price paid conversions to help clients drive higher Return on Ad Spend (“ROAS”) for our clients. That initiative drove additional budgets from the sector, and more specifically, the gaming segment, which became a large component of our revenue mix in 2022.
Additionally, our results are subject to fluctuation as a result of seasonality and cyclicality in our and our clients’ businesses. For example, our fourth fiscal quarter ending December 31 is typically characterized by higher advertiser budgets, which can be somewhat offset by seasonal challenges of lower availability and/or higher pricing for some forms of media. In years prior to 2022, advertisers that had unused budgets coming into the fourth quarter would often spend those budgets during the fourth quarter. We did not see this occur in 2022, which we believe was due to economic uncertainty and other factors outside of our control. This advertiser behavior seen in the fourth quarter of 2022 has continued into the first quarter of 2023.
Further, as reflected in historical data from the Interactive Advertising Bureau ("IAB"), industry spending on internet advertising has generally declined sequentially in the first quarter of the calendar year from the fourth quarter. Similar to the industry overall, some of our clients have historically had lower advertising budgets during our first fiscal quarter ending March 31; however, we believe that the breadth of industries in which our clients operate provides us with some insulation from these fluctuations.
We believe 2023 will continue to be characterized by slowing economic conditions and uncertainty. To confront these headwinds, we will continue to diversify our client base and intend to further develop our “ROAS program” across additional segments of advertisers in an effort to gain additional budget allocations and further improve our user monetization.
Current Economic Conditions
We are subject to risks and uncertainties caused by events with significant macroeconomic impacts. Inflation, rising interest rates and reduced consumer confidence may cause our customers and/or clients to be cautious in their spending. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain.
On March 13, 2020, in response to the COVID-19 pandemic, we implemented a company-wide work-from-home policy. Beginning in September 2022, we modified the policy to now require minimum in office attendance for employees. Many employees moved away from our New York City headquarters during the pandemic and are current hiring is not limited to the New York Metro area. Having fewer employees in our offices increases the likelihood of disruption to our business, including diminishment of our regular business operations, technological capacity, and cybersecurity capabilities, as well as operational inefficiencies and reputational harm.
On March 10, 2023, the Federal Deposit Insurance Corporation (the “FDIC”) took control of Silicon Valley Bank and created the National Bank of Santa Clara to hold the deposits of SVB after SVB was unable to continue its operations. SVB’s deposits are insured by the FDIC in an amount up to $250,000 for any depositor. On March 12, 2023, the U.S. Department of the Treasury, the Federal Reserve and the FDIC announced that the FDIC will complete its resolution of SVB in a manner that fully protects all depositors, including those with deposits over $250,000, and that all funds on deposit would be available to depositors on March 13, 2023. As of March 13, 2023, the Company no longer maintains deposits with National Bank of Santa Clara, the successor to SVB, but we do maintain deposits with Citizens Bank. Continued uncertainty in the banking industry may therefore present liquidity risk to our Company.
Please see "Results of Operations" and “Liquidity and Capital Resources” (as to our credit agreement in which Silicon Valley Bank participates as a lender) below, and "Item 1A. Risk Factors — Unfavorable global economic conditions, including as a result of health and safety concerns around the ongoing COVID-19 pandemic, could adversely affect our business, financial condition, and results of operations," and "We are exposed to credit risk from and occasionally have payment disputes with our clients, and we may not be able to collect on amounts owed to us.” for further discussion of current economic conditions.
Definitions, Use and Reconciliation of Non-US GAAP Financial Measures
We report the following non-US GAAP measures:
Media margin is defined as that portion of gross profit (exclusive of depreciation and amortization) reflecting variable costs paid for media and related expenses and excluding non-media cost of revenue. Gross profit (exclusive of depreciation and amortization) represents revenue minus cost of revenue (exclusive of depreciation and amortization). Media margin is also presented as percentage of revenue.
Adjusted EBITDA is defined as net income (loss), excluding (1) income taxes, (2) interest expense, net, (3) depreciation and amortization, (4) share-based compensation expense, (5) loss on early extinguishment of debt, (6) accrued compensation expense for Put/Call Consideration, (7) goodwill impairment, (8) write-off of intangible assets, (9) loss on disposal of property and equipment, (10) acquisition-related costs, (11) restructuring and other severance costs, and (12) certain litigation and other related costs.
Adjusted net income is defined as net income (loss) excluding (1) Share-based compensation expense, (2) loss on early extinguishment of debt, (3) accrued compensation expense for Put/Call Consideration, (4) goodwill impairment, (5) write-off of intangible assets, (6) loss on disposal of property and equipment, (7) acquisition-related costs, (8) restructuring and other severance costs, and (9) certain litigation and other related costs. Adjusted net income is also presented on a per share (basic and diluted) basis.
Below is a reconciliation of media margin from gross profit (exclusive of depreciation and amortization), which we believe is the most directly comparable US GAAP measure:
Year Ended December 31, | ||||||||
2022 | 2021 | |||||||
Revenue | $ | 361,134 | $ | 329,250 | ||||
Less: Cost of revenue (exclusive of depreciation and amortization) | 267,487 | 243,716 | ||||||
Gross Profit (exclusive of depreciation and amortization) | $ | 93,647 | $ | 85,534 | ||||
Gross Profit (exclusive of depreciation and amortization) % of revenue | 26 | % | 26 | % | ||||
Non-media cost of revenue (1) | 16,392 | 14,843 | ||||||
Media margin | $ | 110,039 | $ | 100,377 | ||||
Media margin % of revenue | 30.5 | % | 30.5 | % |
(1) Represents the portion of cost of revenue (exclusive of depreciation and amortization) not attributable to variable costs paid for media and related expenses.
Below is a reconciliation of adjusted EBITDA from net income (loss), which we believe is the most directly comparable US GAAP measure:
Year Ended December 31, | ||||||||
2022 | 2021 | |||||||
Net loss | $ | (123,332 | ) | $ | (10,059 | ) | ||
Income tax expense | 1,776 | 246 | ||||||
Interest expense, net | 1,965 | 2,184 | ||||||
Depreciation and amortization | 13,214 | 13,170 | ||||||
Share-based compensation expense | 4,092 | 4,761 | ||||||
Loss on early extinguishment of debt | — | 2,964 | ||||||
Accrued compensation expense for Put/Call Consideration | — | 3,213 | ||||||
Goodwill impairment | 111,069 | — | ||||||
Write-off of intangible assets | 186 | 354 | ||||||
Loss on disposal of property and equipment | 19 | — | ||||||
Acquisition-related costs (1)(2)(3) | 2,247 | 4,297 | ||||||
Restructuring and certain severance costs | 414 | 230 | ||||||
Certain litigation and other related costs | 11,079 | 1,808 | ||||||
Adjusted EBITDA | $ | 22,729 | $ | 23,168 |
(1) Balance includes compensation expense related to non-competition agreements entered into as a result of an acquisition.
(2) Balance includes earn-out expense of $121 and ($85) for the years ended December 31, 2022 and 2021, respectively, as a result of an acquisition.
(3) Included in year ended December 31, 2021 is a net expense of $3,201 related to the Full Winopoly Acquisition.
Below is a reconciliation of adjusted net income and adjusted net income per share from net income (loss), which we believe is the most directly comparable US GAAP measure:
Year Ended December 31, | ||||||||
(In thousands, except share data) | 2022 | 2021 | ||||||
Net loss | $ | (123,332 | ) | $ | (10,059 | ) | ||
Share-based compensation expense | 4,092 | 4,761 | ||||||
Loss on early extinguishment of debt | — | 2,964 | ||||||
Accrued compensation expense for Put/Call Consideration | — | 3,213 | ||||||
Goodwill impairment | 111,069 | — | ||||||
Write-off of intangible assets | 186 | 354 | ||||||
Loss on disposal of property and equipment | 19 | — | ||||||
Acquisition-related costs (1)(2)(3) | 2,247 | 4,297 | ||||||
Restructuring and certain severance costs | 414 | 230 | ||||||
Certain litigation and other related costs | 11,079 | 1,808 | ||||||
Adjusted net income | $ | 5,774 | $ | 7,568 | ||||
Adjusted net income per share: | ||||||||
Basic | $ | 0.07 | $ | 0.09 | ||||
Diluted | $ | 0.07 | $ | 0.09 | ||||
Adjusted weighted average number of shares outstanding: | ||||||||
Basic | 81,412,595 | 79,977,313 | ||||||
Diluted | 81,565,372 | 80,852,095 |
(1) Balance includes compensation expense related to non-competition agreements entered into as a result of an acquisition.
(2) Balance includes earn-out expense of $121 and ($85) for the years ended December 31, 2022 and 2021, respectively, as a result of an acquisition.
(3) Included in year ended December 31, 2021 is a net expense of $3,201 related to the Full Winopoly Acquisition.
We present media margin, media margin as a percentage of revenue, adjusted EBITDA, adjusted net income, and adjusted net income per share as supplemental measures of our financial and operating performance because we believe they provide useful information to investors. More specifically:
Media margin, as defined above, is a measure of the efficiency of the Company’s operating model. We use media margin and the related measure of media margin as a percentage of revenue as primary metrics to measure the financial return on our media and related costs, specifically to measure the degree by which the revenue generated from our digital marketing services exceeds the cost to attract the consumers to whom offers are made through our services. Media margin is used extensively by our management to manage our operating performance, including evaluating operational performance against budgeted media margin and understanding the efficiency of our media and related expenditures. We also use media margin for performance evaluations and compensation decisions regarding certain personnel.
Adjusted EBITDA, as defined above, is another primary metric by which we evaluate the operating performance of our business, on which certain operating expenditures and internal budgets are based and by which, in addition to media margin and other factors, our senior management is compensated. The first three adjustments represent the conventional definition of EBITDA, and the remaining adjustments are items recognized and recorded under US GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. These adjustments include litigation and other related costs associated with legal matters outside the ordinary course of business, including costs and accruals related to matters described above under Part III — Legal Proceedings. We consider items one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. There were no adjustments for one-time items in the periods presented.
Adjusted net income, as defined above, and the related measure of adjusted net income per share exclude certain items that are recognized and recorded under US GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the US GAAP measure of net income (loss).
Media margin, adjusted EBITDA, adjusted net income, and adjusted net income per share are non-GAAP financial measures with certain limitations regarding their usefulness. They do not reflect our financial results in accordance with GAAP, as they do not include the impact of certain expenses that are reflected in our condensed consolidated statements of operations. Accordingly, these metrics are not indicative of our overall results or indicators of past or future financial performance. Further, they are not financial measures of profitability and are neither intended to be used as a proxy for the profitability of our business nor to imply profitability. The way we measure media margin, adjusted EBITDA and adjusted net income may not be comparable to similarly titled measures presented for informational purposes only,by other companies and may not necessarily reflectbe identical to corresponding measures used in our futurevarious agreements.
Results of Operations
Summary
Year ended December 31, 2022 compared to year ended December 31, 2021:
• | Revenue increased 10% to $361.1 million, from $329.3 million. |
• | Net loss was $123.3 million, or $1.51 per share, compared to net loss of $10.1 million, or $0.13 per share. |
• | Gross profit (exclusive of depreciation and amortization) of $93.6 million, an increase of 9% over December 31, 2021, and representing 26% of revenue. |
• | Media margin increased 10% to $110.0 million, representing 30.5% of revenue, from $100.4 million. |
• | Adjusted EBITDA decreased 2% to $22.7 million, based on a net loss of $123.3 million, from $23.2 million, based on net loss of $10.1 million. |
• | Adjusted net income decreased $1.8 million to $5.8 million, or $ 0.07 per share, from $7.6 million, or $ 0.09 per share. |
The following tables show our results of operations for the periods presented and express the relationship of certain line items as a percentage of revenue for those respective periods:
Year Ended December 31, | ||||||||||||||||
(in thousands) | 2022 | 2021 | ||||||||||||||
Revenue | $ | 361,134 | 100 | % | $ | 329,250 | 100 | % | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of revenue (exclusive of depreciation and amortization) | 267,487 | 74.1 | 243,716 | 74.0 | ||||||||||||
Sales and marketing | 17,121 | 4.7 | 12,681 | 3.9 | ||||||||||||
Product development | 18,159 | 5.0 | 15,789 | 4.8 | ||||||||||||
General and administrative | 53,470 | 14.8 | 48,205 | 14.6 | ||||||||||||
Depreciation and amortization | 13,214 | 3.7 | 13,170 | 4.0 | ||||||||||||
Goodwill impairment and write-off of intangible assets | 111,255 | 30.8 | 354 | 0.1 | ||||||||||||
Loss on disposal of property and equipment | 19 | 0.0 | — | — | ||||||||||||
Total costs and expenses | 480,725 | 133.1 | 333,915 | 101.4 | ||||||||||||
Loss from operations | (119,591 | ) | (33.1 | ) | (4,665 | ) | (1.4 | ) | ||||||||
Interest expense, net | (1,965 | ) | (0.5 | ) | (2,184 | ) | (0.7 | ) | ||||||||
Loss on early extinguishment of debt | — | — | (2,964 | ) | (0.9 | ) | ||||||||||
Loss before income taxes | (121,556 | ) | (33.7 | ) | (9,813 | ) | (3.0 | ) | ||||||||
Income tax expense | (1,776 | ) | (0.5 | ) | (246 | ) | (0.1 | ) | ||||||||
Net loss | $ | (123,332 | ) | (34.2 | ) | $ | (10,059 | ) | (3.1 | ) |
Year ended December 31, 2022 compared to year ended December 31, 2021
Revenue. For the year ended December 31, 2022, revenue increased by $31.8 million, or what10%, to $361.1 million, from $329.3 million for the year ended December 31, 2021. The change was primarily attributable to the following:
• | Growth in our Rewards business, through sourcing higher quality traffic and, in effect, higher monetization of users registering on and returning to our media properties. |
• | Expanded CRM capabilities, specifically the use of our internally-developed email capability and SMS messaging to re-engage consumers who have already registered on our owned media properties. |
• | Offset by a decline in our employment opportunities marketplace as a result of our technology platform migration and the industry difficulties due to current economic factors |
Other than as noted, the foregoing factors served to increase monetization of consumer traffic, which has offset the reductions in traffic volume, stemming from TQI. Because of the effects of TQI, our business has become less dependent on traffic volume to generate revenue growth. Moving forward, we continue to assess the strategic relevance of these various initiatives and make adjustments as needed.
Cost of revenue (exclusive of depreciation and amortization). For the year ended December 31, 2022, our cost of revenue increased $23.8 million, or 10%, to $267.5 million, compared to $243.7 million for the year ended December 31, 2021. Our cost of revenue primarily consists of media and related costs associated with acquiring traffic from third-party publishers and digital media platforms for our owned and operated websites. The costs also include enablement costs associated with our call centers and tracking costs related to our consumer data. In addition, there are indirect costs which include fulfillment costs related to rewards earned by consumers who complete the requisite number of advertiser offers, along with call center software and hosting costs.
For the year ended December 31, 2022, cost of revenue as a percentage of revenue increased slightly to 74.1%, compared to 74.0% for the year ended December 31, 2021. In the normal course of executing paid media campaigns to source consumer traffic, we regularly test new channels, strategies and partners, in an effort to identify actionable opportunities which can then be optimized over time. Traffic acquisition costs incurred with the major digital media platforms from which we sourced increased traffic volumes have historically been higher than affiliate traffic sources. This remained true in 2022, with digital media spend driven by strategic test and learn initiatives that began in the second quarter of 2022. The mix and profitability of our media channels, strategies and partners is likely to be dynamic and reflect evolving market dynamics. As we evaluate and scale new media channels, strategies and partners, we may determine that certain sources initially able to provide us profitable quality traffic may not be able to maintain our quality standards over time, and we may need to discontinue, or direct a modification of the practices of, such sources, which could reduce profitability. The improved traffic quality being sourced is providing the foundation to support sustainable long-term growth and positioning us as an industry leader. Past levels of cost of revenue (exclusive of depreciation and amortization) may therefore not be indicative of future costs, which may increase or decrease as these uncertainties in our business play out.
Sales and marketing.For the year ended December 31, 2022, sales and marketing expenses increased $4.4 million, or 35%, to $17.1 million, compared to $12.7 million for the year ended December 31, 2021. For the years ended December 31, 2022 and 2021, respectively, the amounts consisted of employee salaries and benefits of $14.4 million and $10.9 million, advertising costs of $1.1 million and $0.7 million, non-cash share-based compensation expense of $0.6 million and $0.8 million, and travel and entertainment expenses of $0.4 million and $0.1 million. As business travel and in-person meetings and events are resuming to their pre-pandemic levels, our sales and marketing expenditures may increase in future periods, but past levels may not be indicative of future expenditures, which may increase or decrease as these uncertainties in our business play out.
Product development.For the year ended December 31, 2022, product development expenses increased $2.4 million, or 15%, to $18.2 million, compared to $15.8 million for the year ended December 31, 2021. For the years ended December 31, 2022 and 2021, respectively, the amounts consisted primarily of employee salaries and benefits of $13.0 million and $11.0 million, professional fees of $2.4 million and $1.6 million, software license and maintenance costs of $1.6 million and $1.1 million, non-cash share-based compensation expense of $0.6 million and $0.9 million, and acquisition related costs of $0.0 million and $0.6 million, respectively. The increase in product development expenses reflects investments in our technology and analytics platform, as well as the development and improvement of app-based media properties, expanding beyond our traditional focus on web-based media properties. These increases were partly offset by a decline in the acquisition related costs which related to the Full Winopoly Acquisition in 2021.
General and administrative.For the year ended December 31, 2022, general and administrative expenses increased $5.3 million, or 11%, to $53.5 million, compared to $48.2 million for the year ended December 31, 2021. For the years ended December 31, 2022 and 2021, respectively, the amounts consisted mainly of employee salaries and benefits of $21.0 million and $19.5 million, certain litigation and related costs of $11.1 million and $1.8 million, professional fees of $6.0 million and $5.5 million, office overhead of $4.5 million and $4.4 million, non-cash share-based compensation expense of $2.9 million and $3.1 million, software license and maintenance costs of $2.4 million and $4.6 million, acquisition-related costs of $2.2 million and $3.7 million (see Note 13, Business acquisition, in the Notes to Consolidated Financial Statements), and accrued compensation expense related to the Put/Call Consideration from the Initial Winopoly Acquisition of $0.0 million and $3.2 million. The increase was mainly the result of litigation and related costs due to the New York State Tax Department settlement in 2022, the Berman settlement and other pending investigations (see Note 16, Contingencies, in the Notes to Consolidated Financial Statements), partly offset by the termination of the Winopoly Put/Call Consideration in 2021, the acquisition-related costs in connection with the True North Acquisition and the Full Winopoly Acquisition, and a decrease in IT related costs.
During the fourth quarter of 2022, the Company implemented reductions in the workforce that resulted in the termination of approximately twenty-one employees. These reductions in workforce were implemented following management’s determination to reduce headcount and decrease the Company's costs to more effectively align resources to the core business operations. In connection with these reductions in workforce, the Company incurred $0.4 million in exit-related restructuring costs, consisting primarily of one-time termination benefits and associated costs, to be fully settled in cash by March 31, 2023. Subsequently, the Company implemented an additional reduction in workforce in the first quarter of 2023, this resulted in the additional termination of approximately twenty employees. The expected exit-related restructuring costs are expected to be approximately $0.4 million. Apart from these exit-related restructuring costs, these reductions in workforce are expected to result in corresponding reductions in future salary and benefit expenses primarily in product development and general and administrative expense.
Depreciation and amortization.Depreciationand amortization expenses increased $0.0 million, or 0%, to $13.2 million, compared to $13.2 million for year ended December 31, 2021.
Goodwill impairment.During the second quarter of 2022, we recognized $55.4 million of goodwill impairment related to the Fluent reporting unit and then an additional $55.7 of goodwill impairment related to both the Fluent and All Other reporting unit in the fourth quarter, with no corresponding impairment charge in 2021.
Write-off of long-lived assets. During the years ended December 31, 2022 and 2021, we wrote-off $0.2 million and $0.4 million, respectively, of assets related to software-developed for internal use.
Interest expense, net. For the year ended December 31, 2022, interest expense, net, decreased $0.2 million, or 10%, to $2.0 million, compared to $2.2 million for the year ended December 31, 2021. The decrease was attributable to a lower average interest rate on the Credit Facility Term Loan as compared to the prior loan that was in place during the first quarter of 2021.
Loss on early extinguishment of debt. For the year ended December 31, 2021, we recognized $3.0 million of loss due to the early extinguishment of debt, described below under "Liquidity and Capital Resources,". There was no corresponding charge for the year-ended December 31, 2022.
Net loss before income taxes. For the year ended December 31, 2022, net loss before income taxes was $121.6 million, compared to net loss before income taxes of $9.8 million for the year ended December 31, 2021. The increase in net loss was primarily due to an increase of goodwill impairment and write-off of intangibles of $110.9 million, partially offset by an increase in revenue of $31.8 million.
Income tax expense. For the years ended December 31, 2022 and 2021, the provision for income taxes was $1.8 million and $0.2 million, respectively, with an effective tax rate of (1.5)% and (2.5)%, respectively.
As of December 31, 2022 and 2021, the Company recorded full valuation allowances against its net deferred tax assets. The Company intends to maintain full valuation allowances against the net deferred tax assets until there is sufficient evidence to support the release of all or some portion of such 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.
Net loss. For the years ended December 31, 2022 and 2021, net loss was $123.3 million and $10.1 million, respectively, as a result of the foregoing.
Effect of Inflation
The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and the competitive environment within our industry.
Liquidity and Capital Resources
Cash flows provided by operating activities. For the years ended December 31, 2022 and 2021, net cash provided by operating activities was $2.0 million and $12.4 million, respectively. Net loss in 2022 of $123.3 million represents an increase of $113.3 million, as compared with net loss of $10.1 million in 2021. Adjustments to reconcile net loss to net cash provided by operating activities of $129.1 million in 2022 increased by $105.3 million, as compared with $23.8 million in 2021, primarily due to a goodwill impairment in 2022, partially offset by non-cash loss on early extinguishment of debt and an accrual for Winopoly Put/Call Consideration that occurred in 2021. Changes in assets and liabilities consumed cash of $3.8 million in 2022, as compared with consumed cash of $1.3 million in 2021, primarily due to ordinary-course changes in working capital, largely involving the timing of receipt of amounts owing from clients and disbursements of amounts payable to vendors.
Cash flows used in investing activities. For the years ended December 31, 2022 and 2021, net cash used in investing activities was $5.4 million and $3.0 million, respectively.The increase was mainly due to the True North Acquisition that occurred in 2022 along with continued investment in internally developed software.
Cash flows (used in) provided by financing activities. For the years ended December 31, 2022 and 2021, net cash used in financing activities was $5.4 million and net cash provided by financing activities was $2.5 million, respectively. The change of $7.9 million in cash used by financing activities in 2022 wasmainly due to the decrease in the repayment of long-term debt of $41.7 million, along with net proceeds from issuance of long-term debt, net of financing costs, of $49.6 million that occurred in 2021, the decrease in exercise of stock options by a former key executive of $0.9 million, and the prepayment penalty on debt extinguishment of $0.8 million that occurred solely during 2021.
As of December 31, 2022, we had noncancelable operating lease commitments of $6.6 million and long-term debt which had a $41.3 million principal balance. For the year ended December 31, 2022, we funded our operations using available cash.
As of December 31, 2022, we had cash, cash equivalents and restricted cash of approximately $25.5 million, a decrease of $9.0 million from $34.5 million as of December 31, 2021. We believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months and beyond.
Our material cash requirements from known contractual and other obligations consist of our term loan and obligations under operating leases for office space. For more information regarding our term loan, refer to Note 8 of the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K. For more information regarding our lease obligations, refer to Note 4 of the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our future capital requirements will depend on many factors, including employee-related expenditures from expansion of our headcount, costs to support the growth in our client accounts and continued client expansion, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced solutions, features, and functionality, and litigation. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, and intellectual property rights. We may be required to draw upon our revolving credit facility in order to meet these future capital requirements. In the event that we do not meet the conditions to draw, or additional financing is not accessible from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would have been hadbe adversely affected.
We may explore the possible acquisition of businesses, products and/or technologies that are complementary to our existing business. We continue to identify and prioritize additional technologies which we completedmay wish to develop internally or through licensing or acquisition from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the Spin-offcase of Red Violet as of the beginning of the periods presented.
equity financings, may result in dilution to shareholders. On January 2018 Registered Direct Offering
Pursuant to1, 2022 we acquired a definitive securities purchase agreement on January 10, 2018 with certain qualified institutional buyers, the Company issued an aggregate of 2,700,000 shares of common stock100% membership interest in a registered direct offering for gross proceeds of $13.5 millionTrue North Loyalty, LLC. (the “January 2018 Registered Direct Offering”"True North Acquisition"), withfor a deemed purchase price of $5.00 per share, which was received$2.3 million, comprised of $1.0 million of cash at closing, $0.9 million of deferred payments due at each of the first and second anniversaries of the closing adjusted for net-working capital, and contingent consideration of with a fair value of $0.3 million payable in January 2018. Simultaneously,common stock based upon achievement of specified revenue targets over the five-year period following the completion of the acquisition. We also issued 100,000 shares of fully-vested stock under the Fluent, Inc. 2018 Stock Incentive Plan (the "Prior Plan") to the sellers valued at $0.2 million. See Note 13, Business acquisitions, in the Notes to Consolidated Financial Statements.
During the first quarter of 2021, Fluent, LLC redeemed $38.3 million aggregate principal amount of our Refinanced Term Loan due March 26, 2023, prior to maturity, resulting in a loss of $3.0 million as a cost of early extinguishment of debt.
On March 31, 2021, Fluent, LLC entered into a credit agreement (the “Credit Agreement”) by and among, Fluent, LLC, certain subsidiaries of Fluent, LLC as guarantors, Citizens Bank, N.A., as administrative agent, lead arranger and bookrunner, and BankUnited, N.A. and Silicon Valley Bank ("SVB"). The Credit Agreement provides for a term loan in the aggregate principal amount of $50.0 million funded on the Closing Date (the “Term Loan”), along with an undrawn revolving credit facility of up to $15.0 million (the "Revolving Loans," and together with the Term Loan, the "Credit Facility"). On December 20, 2022, the Company issued such institutional buyers, for noentered 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 consideration, warrantssubsidiaries of Borrower as guarantors of the loan facilities (the “Credit Facilities”) provided under the Credit Agreement. As of December 31, 2022, the Credit Agreement has an outstanding principal balance of $41.3 million and matures on March 31, 2026. Principal amortization of the Credit Agreement is $1.3 million per quarter, which commenced with the fiscal quarter ended June 30, 2021.
Borrowings under the Credit Agreement bear interest at a rate per annum equal to purchase an aggregate of 1,350,000 shares of common stock. The warrants have an exercise price of $6.00 per share and are exercisable from the date of issuance and expirebenchmark selected by the Borrower, which may be based on the earlierAlternative Base Rate, LIBOR rate (subject to a floor of 0.25%) prior to the election on January 3, 2023 or Term SOFR (Secured Overnight Financing Rate) (subject to a floor of 0.00%) subsequent to the election on January 3, 2023, 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 closeCredit Facility was 2.50% (LIBOR + 2.25%), which increased to 6.17% (Term SOFR + 0.1% + 1.75%) as of businessDecember 31, 2022.
The Credit Agreement contains restrictive covenants which impose limitations on the two-year anniversaryway we conduct our business, including limitations on the amount of (i) the date the registration statement registering the resaleadditional debt we are able to incur and our ability to make certain investments and other restricted payments. The restrictive covenants may limit our strategic and financing options and our ability to return capital to our shareholders through dividends or stock buybacks. The Credit Agreement is guaranteed by us and our direct and indirect subsidiaries and is secured by substantially all of our assets and those of our direct and indirect subsidiaries, including Fluent, LLC, in each case, on an equal and ratable basis.
The Credit Agreement requires us to maintain and comply with certain financial and other covenants, which we were in compliance as of December 31, 2022,
As of December 31, 2022, one of the underlying sharescustomary conditions, including representation and warranties, related to the extension of credit is declared effectivecurrently not true and correct as a result of certain legal matters involving the FTC and the PPAG, as described in FN 16, Contingencies, in the Notes to Consolidated Financial Statements. These matters do not represent events of default under the Credit Agreement, but the Company is currently unable to draw on the Revolving Loans due the representation and warranty requirement for an extension of credit. On March 10, 2023, the Federal Deposit Insurance Corporation (the “FDIC”) took control of SVB and created the National Bank of Santa Clara to hold the deposits of SVB after SVB was unable to continue its operations. SVB’s deposits are insured by the SEC or (ii)FDIC in an amount up to $250,000 for any depositor. On March 12, 2023, the commencement dateU.S. Department of the Treasury, the Federal Reserve and the FDIC announced that the FDIC will complete its resolution of SVB in a manner that fully protects all depositors, including those with deposits over $250,000, and that all funds on deposit would be available to depositors on March 13, 2023. As of March 13, 2023, the Company no longer maintains deposits with National Bank of Santa Clara, the successor to SVB, but does maintain deposits with Citizens Bank. As noted above, SVB is a lender under the Credit Agreement, which has now been assumed by the newly created Silicon Valley Bridge Bank, N.A. under the FDIC. We currently owe SVB approximately $11.1 million under the Term Loan, which is an obligation we believe is unaffected by the closure of SVB. SVB has committed to approximately $4.0 million of the $15.0 million in Revolving Loan capacity, and at such warrants maytime as we are eligible to draw upon the Revolver, it is uncertain whether it will be exercisedaffected by meansthe closure of SVB. While the Company continues to monitor the circumstances surrounding SVB, the Company does not expect the closure to have a “cashless exercise.”material adverse effect on its liquidity.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon cogint’sFluent's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“US
GAAP”). GAAP. The preparation of these consolidated financial statements requires cogintFluent to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, cogintFluent evaluates its estimates, including those related to revenue recognition, allowance for doubtful receivables, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation, and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. All amounts below are presented in thousands.
We believe the following critical accounting policies govern our more significant judgments and estimates used in the preparation of our consolidated financial statements. Further details of the Company's accounting policies are available in Item 8, Financial Statements and Supplementary Data, Note 2, Summary of significant accounting policies, in the Notes to Consolidated Financial Statements.
Revenue recognition
Revenue recognition
We provide information services and performance marketing services, and generally recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or a service has been rendered, the price is fixed or determinable and collection is reasonably assured.
Information services revenue is generated from the risk management industry and consumer marketing industry. Information services revenue generated from the risk management industry is generally recognized on (a) a transactional basis determined by the customers’ usage, (b) a monthly fee or (c) a combination of both. Revenue pursuant to transactions determined by the customers’ usage is recognized when control of goods or services is transferred to customers, in amounts that reflect the transactionconsideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is complete, and either party may terminate the transactional agreement at any time. Revenue pursuanttypically to contracts containing a monthly fee is recognized ratably over the contract period, which is generally 12 months, and the contract shall automatically renew for additional, successive 12-month terms unless written notice of intent not to renew is provided by one party to the other at least 30 days or 60 days prior to the expiration of the then current term.
Information services revenue generated from the consumer marketing industry is generally recognized when related services are delivered, in accordance with terms detailed in the agreements. These terms typically call for a specific transactional unit price per record delivered(a) deliver data records, based on predefined qualifying characteristics specified by the customer. These records are tracked in real time by the Company’s systems, reported, recorded, and regularly reconciled against advertiser data either in real timecustomer or at various contractually defined periods, whereupon the number of qualified records during such specified period are finalized and adjustments, if any, to revenue are made. Additional revenue is generated through revenue-sharing agreements with marketers who target offers to users provided by the Company from the Company’s owned and operated sites. Either party may terminate the transactional agreement at any time.
Performance marketing revenue is recognized when the(b) generate conversions, are generated based on predefined user actions (for example, a click, a registration, or the installation of an app install or a coupon print)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, as the Company satisfies its performance obligations. Furthermore, the Company elected the "right to invoice" practical expedient available within ASC 606-10-55-18 as the measure of progress, since the Company has a right to payment from a customer in an amount that corresponds directly with the value of the performance completed to date. The Company's revenue arrangements do not contain significant financing components. The Company has further concluded that revenue does not require disaggregation.
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 so 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.
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. 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.
Business combinations
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. If actual results are materially lower than originally estimated, it could result in a material impact on our consolidated financial statements in future periods.
Goodwill
Since July 1, 2019, due to the AdParlor Acquisition, the Company determined that it has two reporting units; “Fluent” which represents our core business and “All Other” which represents AdParlor.
During the three months ended March 31, 2021, the Company determined that the lower-than-expected operating results of the Fluent reporting unit, along with a decline in the market value of its publicly-traded stock, collectively constituted a triggering event. As such, the Company conducted an interim test of the fair value of its goodwill for potential impairment as of March 31, 2021. 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, the Company concluded its goodwill of $160,922 was not impaired since the results of the interim test indicated that the estimated fair value exceeded its carrying value by approximately 17%.
During the three months ended June 30, 2022, the Company determined that 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 June 30, 2022. Based on the results of this interim impairment test, which considered a combination of the income and market approaches to determine the fair value of the Fluent reporting unit, the test indicated, based upon the determination of the market-based approach, that the estimated carrying value exceeded its fair value by 27%. The Company therefore concluded its goodwill of $162,014 was impaired and recorded a non-cash impairment charge of $55,400 in the second quarter of 2022.
During the three months ended September 30, 2022, the Company determined that the continued 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 September 30, 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, the Company concluded its goodwill of $106,614 was not impaired since the results of the interim test indicated that the estimated fair value exceeded its carrying value by approximately 4.0%. 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 it is more likely than not that the fair value was less that the carrying value for the Company.
As of October 1, 2022, the Company performed its annual goodwill impairment test of 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.
The Company believes that the assumptions utilized in its interim impairment testing, including the determination of an appropriate discount rate of 20.0%, implied control premium, long-term profitability growth projections, and estimated future cash flows, are reasonable.
Intangible assets other than goodwill
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 future cash flows. 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 to 20 years.
In accordance with ASC 350-40, Software - Internal-Use Software, we capitalize eligible costs, including applicable salaries and benefits, share-based compensation expense, travel expenses and other direct costs of developing internal-use software that are incurred in the application development stage, when developing or obtaining software for internal use. 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 terms detailed in advertiser agreements and/ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. In evaluating intangible assets for recoverability, we use the attendant insertion orders. These terms typically call for a specific transactional unit price per conversion generated. These conversions are tracked in real time bybest estimate of future cash flows expected to result from the Company’s systems, reported, recorded, and regularly reconciled against advertiser data either in real time or at various contractually defined periods, whereupon the number of qualified conversions during such specified period are finalized and adjustments, if any, to revenue are made. Either party may terminate the transactional agreement at any time.
Customer payments received in excessuse of the amountasset and eventual disposition, using assumptions of revenue growth rates, operating expenses, and terminal growth rates. These matters are highly uncertain, and different assumptions can result in a materially different estimate of future cash flow. To the extent that estimated future undiscounted cash inflows attributable to the asset, less estimated future undiscounted cash outflows, is 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 recorded as deferred revenuesupported by their undiscounted future cash flows. We use a third-party valuation firm to assist us in evaluating asset recoverability.
During the three months ended March 31, 2021, the Company determined that the reduction in operating results of the Fluent reporting unit, along with a decline in the consolidated balance sheets, and are recognizedmarket value of its publicly-traded stock, collectively constituted a triggering event. As such, we conducted an interim test of recoverability of its long-lived assets as revenue whenof March 31, 2021. Based on the services are rendered.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 March 31, 2021, its long-lived assets were not impaired. As of December 31, 2017, deferred revenue totaled $0.3 million, all of which is expected to be realized in 2018.
Generally, customers are invoiced monthly. The Company sells its products or provides services to customers with normal payment terms ranging from due upon receipt to 60 days. Rarely does2021, the Company extend payment terms beyond their normal terms.assessed whether there were any triggering events that would indicate a potential impairment of its long-lived intangible assets and did not identify any such triggering events or impairment indicators.
Allowances for doubtful accounts
During the three months ended June 30, 2022 and September 30, 2022, the Company determined that the decline in the market value of its publicly-traded stock constituted a triggering event. For 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 recoverability of its long-lived assets as of June 30, 2022, September 30, 2022, and December 31, 2022. 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, 2022, September 30, 2022, and December 31, 2022, its long-lived assets were not impaired.
Share-based Compensation
The Company maintains allowance for doubtful accounts for estimated losses resulting fromshare-based compensation in accordance with ASC 718, Compensation - Stock Compensation. Under ASC 718, for awards with time-based conditions, we measure the inabilitycost of its customers to make required payments. Management determines whether an allowance needs to be providedservices received in exchange for an amount due from a customer dependingaward of equity instruments based on the aginggrant-date fair value of the individual balances receivable, recent payment history, contractual termsaward and other qualitative factorsrecognize such as statuscosts on a straight-line basis over the period the recipient is required to provide service in exchange for the award, which is the vesting period. For awards with market conditions, the Company recognizes costs on a straight-line basis, regardless of business relationshipwhether the market conditions are achieved and the awards ultimately vest. For awards with performance conditions, the customer. Historically, the Company’s estimates for doubtful accounts have not differed materially from actual results. The amountCompany begins recording share-based compensation when achievement of the allowance for doubtful accounts was $1.9 million and $0.8 millionperformance criteria is deemed probable. The Company recognizes forfeitures as of December 31, 2017 and 2016, respectively.they occur.
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. UnderDeferred tax assets and liabilities are recorded for the assetestimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liability method,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 are computed based upon the difference between the financial statement andof a change in tax rates or laws is recognized in income tax basis of assets and liabilities using the enacted tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the assetperiod that the change in tax rates or liability each period. If available evidence suggests thatlaws is enacted. Valuation allowances are 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, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Asbased on management's review of December 31, 2017, the Company has a valuation allowance of $10.9 million. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.historical results and forecasts.
On December 22, 2017, the Act was enacted, resulting in significant modifications to existing law, including lowering the U.S. corporate statutory income tax rate to 21%, among other changes. As a full valuation allowance was provided as of December 31, 2017, the Act does not have any material net impact on our consolidated financial statements, however, certain income tax disclosures, including the re-measurement of deferred tax assets and liabilities and related valuation allowance, and the effective income tax rate reconciliation, are affected. The Company follows the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of ASC 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date. Due to certain ambiguities in the Act, the Company is still evaluating the impact of changes to Code Section 162(m) on our consolidated financial statements. It is the intention of the Company to complete the necessary analysis within the measurement period, upon receiving further clarifying guidance from U.S. Department of the Treasury, no later than December 31, 2018.
ASC 740 clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizesrecognize in the consolidatedits 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’soccurs and we consult with external tax counsel as appropriate. Our 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.
Goodwill
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. A quantitative step one assessment involves determining the fair value of each reporting unit using market participant assumptions. If we believe that the carrying value of a reporting unit with goodwill exceeds its estimated fair value, we will perform a quantitative step two assessment. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”), “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. Contingencies
The Company early adopted ASU 2017-04 in the fourth quarter of 2017.
On October 1, 2017 and 2016, we performed a quantitative step one assessment. The results of our step one assessment proved that the estimated fair value of each reporting unit exceeds the carrying value. We concluded that goodwill was not impaired as of December 31, 2017 and 2016.
For purposes of reviewing impairment and the recoverability of goodwill, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the reporting unit, including market multiples, discount rates, etc.
Impairment of long-lived assets
Finite-lived intangible assets are amortized over their respective useful lives and, along with other long-lived assets, are evaluatedaccounts for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverablecontingencies in accordance with ASC 360-10-15, “Impairment or Disposal450, Contingencies, by accruing a loss contingency if it is probable that a liability has been incurred and the amount of Long-Lived Assets.”the loss can be reasonably estimated. In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment,determining whether a loss should be accrued, the Company uses its bestevaluates, among other factors, the degree of probability and the ability to reasonably estimate the amount of future cash flows expected to result fromany such loss. In the useordinary course of the asset and eventual disposition in accordance with ASC 360-10-15. To the extent that estimated
future undiscounted cash inflows attributable to the asset, less estimated future undiscounted cash outflows, 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. 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.
Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying value of assets can be supported by the undiscounted future cash flows. In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates. In September 2016,business, the Company wrote offis subject to loss contingencies that cover a range of matters.
Recently Issued Accounting Standards
See Note 2, Summary of significant accounting policies, under the remaining balance of the intellectual property purchased by TBO from Ole Poulsen (the “Purchased IP”), pursuant to a purchase agreement dated October 14, 2014,caption "(r)Recently issued and capitalized litigation costs of $4.1 million, adopted accounting standards"in total, as a result of an unfavorable ruling in relation to a litigation matter, which was settled pursuant to a settlement agreement on July 22, 2017. See Item 3, “Legal Proceedings,” included in this 2017 Form 10-K, and Note 17(d), “Contingency,” to the Notes to Consolidated Financial Statements for additional information. In the first quarter of 2017, the Company wrote off the remaining balance of long-lived assets of $3.6 million, relating primarily to the acquired proprietary technology and trade names acquired in the Q Interactive Acquisition, into the total costs and expenses as a write-off of long-lived assets, as a result of the Q Interactive Integration.
We concluded there was no impairment as of December 31, 2017 and 2016.
Share-based compensation
The Company accounts for share-based compensation to employees in accordance with ASC 718, “Compensation—Stock Compensation.” Under ASC 718, the Company measures the cost of employee services received in exchange for an award of equity instruments basedfurther information on the grant-date fair value of the award and generally recognizes the costs on a straight-line basis over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. For awards with performance conditions, we begin recording share-based compensation when achieving the performance criteria is probable.
The fair value of RSUs and restricted stock is determined based on the number of shares granted and the quoted price of our common stock and fair value of share options is estimated on the date of grant using a Black-Scholes model. We estimate the volatility of our shares on the date of grant utilizing the historical volatility of our publicly-traded shares. We estimate the risk-free interest rate based on rates in effect for United States government bonds with terms similar to the expected terms of the stock options, at the time of grant. We estimate the expected terms by taking into account the contractual terms and historical exercise patterns. The estimated number of stock awardscertain accounting standards that will ultimately vest requires judgment, and to the extent actual resultshave been adopted during 2022 or updated estimates differ from our current estimates, such amount will be recorded as a cumulative adjustment in the period estimates are revised. Changes in our estimates and assumptions may cause us to realize material changes in share-based compensation expense in the future. During the first quarter of 2017, we adopted ASU No. 2016-09 (“ASU 2016-09”), “Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting,” which simplifies the accounting for share-based payment transactions, and the Company elected the option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, on a retrospective basis.
We have issued share-based awards with performance-based vesting criteria. Achievement of the milestones must be probable before we begin recording share-based compensation expense. At each reporting date, we review the likelihood that these awards will vest and if the vesting is deemed probable, we begin to recognize compensation expense at that time. In the period that achievement of the performance-based criteria is deemed probable, US GAAP requires the immediate recognition of all previously unrecognized compensation since the original grant date. As a result, compensation expense recorded in the period that achievement is deemed probable could include a substantial amount of previously unrecorded compensation expense related to the prior periods. If ultimately performance goals are not met, for any share-based awards where vesting was previously deemed probable, previously recognized compensation cost will be reversed.
The Company accounts for share-based compensation to non-employees in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees.” Under ASC 505-50, share-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. In the event that the fair value of the equity instruments issued in a share-based payment transaction with non-employees is more reliably measurable than the fair value of the consideration received, the transaction shall be measured based on the fair value of the equity instruments issued by the Company. Fair value of the consideration is updated each reporting period until the performance required to receive the award is complete. We recognize the fair value as expense on a straight-line basis over the expected service period.
Recently Issued Accounting Standards
See Item 8 of Part II, “Financial Statements and Supplementary Data – Note 2. Summary of significant accounting policies - (t) Recently issued accounting standards.”
Fourth Quarter Financial Results
Three months ended December 31, 2017 compared to three months ended December 31, 2016:
Total revenue increased 9% to $59.2 million from $54.2 million.
Information Service revenue increased 27% to $20.5 million from $16.2 million.
Performance Marketing revenue increased 2% to $38.7 million from $38.0 million.
Net loss was $6.0 million (inclusive of income tax benefit of $0 and non-cash items totaling $11.0 million) compared to $5.4 million (inclusive of income tax benefit of $2.5 million and non-cash items totaling $10.8 million).
Adjusted EBITDA grew 36% to $8.6 million from $6.3 million.
Full Year Financial Results
Year ended December 31, 2017 compared to year ended December 31, 2016:
Total revenue increased 18% to $220.3 million from $186.8 million.
Information Service revenue increased 41% to $78.4 million from $55.4 million.
Performance Marketing revenue increased 8% to $141.9 million from $131.4 million.
Net loss was $53.2 million (inclusive of income tax benefit of $0 and non-cash items totaling $52.8 million) compared to $29.1 million (inclusive of income tax benefit of $14.0 million and non-cash items totaling $47.2 million).
Adjusted EBITDA grew 62% to $24.2 million from $15.0 million.
Use and Reconciliation of Non-GAAP Financial Measures
Management evaluates the financial performance of our business on a variety of key indicators, including adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure equal to net loss, the most directly comparable financial measure based on US GAAP, adding back net loss from discontinued operations, interest expense, income tax benefit, depreciation and amortization, share-based compensation expense, litigation costs, acquisition and restructuring costs, write-off of long-lived assets, and other adjustments, as noted in the tables below.
|
| Year Ended December 31, |
| |||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Net loss attributable to cogint |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (84,535 | ) |
Net loss from discontinued operations attributable to cogint |
|
| - |
|
|
| - |
|
|
| 41,950 |
|
Interest expense, net |
|
| 9,683 |
|
|
| 7,593 |
|
|
| 468 |
|
Income tax benefit |
|
| - |
|
|
| (14,042 | ) |
|
| (16,583 | ) |
Depreciation and amortization |
|
| 14,193 |
|
|
| 12,631 |
|
|
| 841 |
|
Share-based compensation expense |
|
| 33,996 |
|
|
| 29,249 |
|
|
| 34,160 |
|
Litigation costs |
|
| 9,395 |
|
|
| 2,588 |
|
|
| 1,483 |
|
Acquisition and restructuring costs |
|
| 5,541 |
|
|
| 488 |
|
|
| 1,268 |
|
Write-off of long-lived assets |
|
| 3,626 |
|
|
| 4,055 |
|
|
| - |
|
Non-cash loss on amendments of warrants |
|
| 1,005 |
|
|
| 1,273 |
|
|
| - |
|
Contingent earn-out costs |
|
| - |
|
|
| - |
|
|
| 14,300 |
|
Non-recurring fund-raising costs |
|
| - |
|
|
| 224 |
|
|
| - |
|
Adjusted EBITDA |
| $ | 24,233 |
|
| $ | 14,973 |
|
| $ | (6,648 | ) |
| Three Months Ended |
| ||||||
(In thousands) |
| December 31, 2017 |
|
| December 31, 2016 |
| ||
Net loss attributable to cogint |
| $ | (5,977 | ) |
| $ | (5,386 | ) |
Interest expense, net |
|
| 2,585 |
|
|
| 2,032 |
|
Income tax benefit |
|
| - |
|
|
| (2,523 | ) |
Depreciation and amortization |
|
| 3,733 |
|
|
| 3,519 |
|
Share-based compensation expense |
|
| 6,294 |
|
|
| 7,308 |
|
Non-cash loss on amendments of warrants |
|
| 1,005 |
|
|
| - |
|
Acquisition-related costs |
|
| 749 |
|
|
| 57 |
|
Non-recurring legal and litigation costs |
|
| 225 |
|
|
| 1,095 |
|
Non-recurring fund-raising costs |
|
| - |
|
|
| 224 |
|
Adjusted EBITDA |
| $ | 8,614 |
|
| $ | 6,326 |
|
We present adjusted EBITDA as a supplemental measure of our operating performance because we believe it provides useful information to our investors as it eliminates the impact of certain items that we do not consider indicative of our cash operations and ongoing operating performance. In addition, we use it as an integral part of our internal reporting to measure the performance of our reportable segments, evaluate the performance of our senior management and measure the operating strength of our business.
Adjusted EBITDA is a measure frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and is an indicator of the operational strength of our business. Adjusted EBITDA eliminates the uneven effect across all reportable segments of considerable amounts of non-cash depreciation and amortization, share-based compensation expense and write-off of long-lived assets.
Adjusted EBITDA is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either operating income or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. The way we measure adjusted EBITDA may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.
Results of Operations
Year ended December 31, 2017 compared to year ended December 31, 2016
Revenue. Total revenue increased $33.5 million or 18% to $220.3 million for the year ended December 31, 2017, from $186.8 million for the year ended December 31, 2016. This increase was driven by strong growth in our Information Services segment, which was mainly due to the growth in volume, as a result of the continued staged release of our product suite and Fluent’s increased focus on the Information Services segment. Revenue generated from our Information Services segment and Performance Marketing segment was $78.4 million and $141.9 million, respectively, for the year ended December 31, 2017, versus $55.4 million and $131.4 million, respectively, for the year ended December 31, 2016.
Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased $13.6 million or 10% to $147.4 million for the year ended December 31, 2017, from $133.8 million for the year ended December 31, 2016. Our cost of revenue primarily includes data acquisition costs, media costs and other cost of revenue. Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements. Media costs consist primarily of the cost to acquire traffic through the purchase of impressions or clicks from publishers or third-party intermediaries, such as advertising exchanges, and is used primarily to power solutions in our Performance Marketing segment. Other cost of revenue includes expenses related to third-party infrastructure fees.
The total cost of revenue as a percentage of revenue was 67% and 72% for the years ended December 31, 2017 and 2016, respectively. The decrease in cost of revenue as a percentage of revenue was mainly attributed to scaling of our Information Services segment, producing lower cost of revenue as a percentage of revenue relative to the consolidated business.
In the Information Services segment, cost of revenue as a percentage of revenue is impacted by several factors, including changes in transactional-based data costs, timing and entry into flat-fee data licensing agreements, the mix of those data costs, changes in channels of distribution, sales volume, pricing strategies, and fluctuations in sales of integrated third-party products. As the construct of our data costs is a flat-fee, unlimited usage model, we expect that our cost of revenue as a percentage of revenue will continue to decrease in our Information Services segment over the coming years as we increase our revenue. We saw this trend for the year ended December 31, 2017, compared to 2016, mainly a result of our consumer marketing business leveraging greater optimization of our consumer traffic through data rich media buying, reducing our costs to acquire the data relative to revenue.
Historically, our total cost of revenue will trend between 67% and 74% as a percentage of revenue, based on the relative mix of revenue derived from our Information Services and Performance Marketing segments. At scale, the industry business model’s cost of revenue in the Information Services segment will trend between 15% and 30% as a percentage of revenue. As a result of our continued focus on scaling the Information Services segment and the construct of our data costs in a flat-fee, unlimited usage model, we expect that our consolidated cost of revenue as a percentage of revenue will continue to decrease over the next twelve months.
Sales and marketing expenses. Sales and marketing expenses increased $4.3 million or 26% to $20.6 million for the year ended December 31, 2017, from $16.3 million for the year ended December 31, 2016. The increase was mainly due to the increased salaries and benefits resulting from the increased headcount as we continue to invest in the expansion of our sales organization and increased commission following the increase in revenue, and the increased bad debt expenses. Sales and marketing expenses consist of advertising and marketing, salaries and benefits, traveling expenses incurred by our sales team, share-based compensation expense, provision for bad debts, and fulfillment costs. Included in sales and marketing expenses was non-cash share-based compensation expense of $2.9 million and $2.3 million for the years ended December 31, 2017 and 2016, respectively.
General and administrative expenses. General and administrative expenses increased $22.9 million or 42% to $77.0 million for the year ended December 31, 2017, from $54.1 million for the year ended December 31, 2016. The increase was mainly the result of increased non-cash share-based compensation expense, employee salaries and benefits, litigation costs, and acquisition and restructuring costs, and other professional fees. For the years ended December 31, 2017 and 2016, the amounts consisted mainly of non-cash share-based compensation expense of $31.1 million and $26.9 million, litigation costs of $9.4 million and $2.6 million, including an accrual in connection with the TRADS Litigation Settlement of $7.0 million and $0, acquisition and restructuring costs of $5.5 million and $0.5 million, other professional fees of $3.3 million and $5.6 million, and employee salaries and benefits of $16.5 million and $12.0 million, respectively. The Company expects a significant reduction in litigation costs going forward.
Depreciation and amortization. Depreciation and amortization expenses increased $1.6 million or 12% to $14.2 million for the year ended December 31, 2017, from $12.6 million for the year ended December 31, 2016. The increase in depreciation and amortization was mainly due to the amortization of intangible assets resulting from the Q Interactive Acquisition effective on June 8, 2016 and the launch of software developed for internal use since the second quarter of 2016.
Write-off of long-lived assets. During the year ended December 31, 2017, as a result of the Q Interactive Integration, we wrote off $3.6 million, primarily relating to the remaining balance of the acquired proprietary technology and trade names acquired in the Q Interactive Acquisition. We included it in the costs and expenses as a write-off of long-lived assets. During the year ended December 31, 2016, the write-off of long-lived assets of $4.1 million represented the write-off of the remaining balance of the Purchased IP and capitalized litigation costs as a result of an unfavorable ruling in relation to the Purchased IP litigation.
Interest expense, net. Interest expense, net, represented the interest expense and amortization of debt issuance costs associated with (i) the term loan in the amount of $45.0 million (“Term Loan”) pursuant to a credit agreement entered in December 2015 (“Credit Agreement”), (ii) promissory notes payable to certain stockholders in the amount of $10.0 million (“Promissory Notes”) pursuant to agreements with certain stockholders in December 2015, and (iii) the incremental term loan in the amount of $15.0 million (“Incremental Term Loan”, together with Term Loan, collectively, “Term Loans”), pursuant to the amendment No. 3 to the Credit Agreement effective in January 2017 (the “Amendment No. 3”). Interest expense, net, increased $2.1 million or 28% to $9.7 million for the year ended December 31, 2017, from $7.6 million for the year ended December 31, 2016. The increase was mainly attributable to the addition of the Incremental Term Loan in January 2017. The long-term debt balance, including the current portion of long-term debt and PIK interest accrued to the principal balance, and net of unamortized debt issuance costs, was $63.0 million as of December 31, 2017.
Other expenses, net. Other expenses of $1.0 million and $1.5 million for the years ended December 31, 2017 and 2016, respectively, mainly represented non-cash loss on amendments of warrants previously issued to certain warrant holders of the Company.
Loss before income taxes. For the years ended December 31, 2017 and 2016, we had a loss before income taxes of $53.2 million and $43.1 million, including non-cash share-based compensation expense of $34.0 million and $29.2 million, depreciation and amortization of $14.2 million and $12.6 million, litigation costs of $9.4 million and $2.6 million, acquisition and restructuring costs of $5.5 million and $0.5 million, one-time write-off of long-lived assets of $3.6 million and $4.1 million, and non-cash loss on exchange of warrants of $1.0 million and $1.3 million, respectively.
Income taxes. Income tax benefit of $0 and $14.0 million was recognized for the years ended December 31, 2017 and 2016, respectively. A full valuation allowance on the net deferred tax assets was recognized as of December 31, 2017 and 2016. On December 22, 2017, the Act was enacted, with the U.S. corporate statutory income tax rate lowered to 21%, among other changes. As a full valuation allowance was provided as of December 31, 2017, the Act does not have any material net impact on our consolidated financial statements, however, certain income tax disclosures, including the re-measurement of deferred tax assets and liabilities and related valuation allowance, and the effective income tax rate reconciliation, are affected. See Note 12, “Income Taxes,” included in Notes to Consolidated Financial Statements, for details.
Net loss attributable to cogint. A net loss of $53.2 million and $29.1 million was recognized for the years ended December 31, 2017 and 2016, respectively, as a result of the foregoing.
Year ended December 31, 2016 compared to year ended December 31, 2015
For accounting purposes, IDI Holdings was the accounting acquirer, and acquired Tiger Media on March 21, 2015. As such, only results of operations during the period after March 22, 2015 of Tiger Media are included into the consolidated financial statements of cogint for the year ended December 31, 2015. The Company disposed of all assets and liabilities related to its Chinese and British Virgin Islands based subsidiaries (collectively, the “Advertising Business”) in 2015, and the operating results of the Advertising Business for the year ended December 31, 2015 were reflected as discontinued operations.
On December 8, 2015, the Company completed the “Fluent Acquisition. The results of operations of Fluent are included in the Company’s consolidated financial statements for the year ended December 31, 2016, while only the period subsequent to the acquisition were included for the year ended December 31, 2015. On June 8, 2016, the Company completed the Q Interactive Acquisition. The results of operations of Q Interactive beginning on June 8, 2016 are included in the Company’s consolidated financial statements for the year ended December 31, 2016.
Revenue. Total revenue increased $172.7 million to $186.8 million for the year ended December 31, 2016, from $14.1 million for the year ended December 31, 2015. The increase was mainly attributable to the Fluent Acquisition effective on December 8, 2015 and the Q Interactive Acquisition effective on June 8, 2016. Revenue generated from our Information Services segment and Performance Marketing segment were $55.4 million and $131.4 million, respectively, for the year ended December 31, 2016, versus $6.4 million and $7.7 million, respectively, for the year ended December 31, 2015.
Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased $123.5 million to $133.8 million for the year ended December 31, 2016, from $10.3 million for the year ended December 31, 2015. Our cost of revenue primarily includes data acquisition costs, media costs and other cost of revenue. Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements. Media costs consist primarily of the cost to acquire traffic through the purchase of impressions or clicks from publishers or third-party intermediaries, such as advertising exchanges, and is used primarily to power solutions in our Performance Marketing segment. Other cost of revenue includes expenses related to third-party infrastructure fees.
The cost of revenue as a percentage of revenue was 72% and 73% for the years ended December 31, 2016 and 2015, respectively. The decrease was attributable to lower data costs relative to revenue, mainly a result of the following:
In the Information Services segment, cost of revenue as a percentage of revenue is impacted by several factors, including changes in transactional-based data costs, timing and entry into flat-fee data licensing agreements, the mix of those data costs, changes in channels of distribution, sales volume, pricing strategies, and fluctuations in sales of integrated third-party products. As the construct of our data costs is a flat-fee, unlimited usage model, we expect that our cost of revenue as a percentage of revenue will continue to decrease in our Information Services segment over the coming years as we increase our revenue. We saw the beginning of this for the year ended December 31, 2016, compared to 2015, mainly a result of our consumer marketing business leveraging greater optimization of our consumer traffic through data rich media buying, reducing our costs to acquire the data relative to revenue.
In our Performance Marketing segment, cost of revenue as a percentage of revenue is impacted by several factors, including the cost to acquire traffic primarily from the purchase of impressions from publishers or third-party intermediaries, such as advertising exchanges, the competitive landscape associated with purchasing that inventory, and our ability to manage the quality and liquidity of the inventory. We generated a constant cost of revenue as a percentage of revenue for the year ended December 31, 2016, as compared to 2015.
Historically, our total cost of revenue will trend between 68% and 74% as a percentage of revenue, based on the relative mix of revenue derived from our Information Services and Performance Marketing segments. At scale, the business model’s cost of revenue
in the Information Services segment will trend between 15% and 30% as a percentage of revenue. As a result, we expect our consolidated cost of revenue as a percentage of revenue to decrease over the next twelve months as our Information Services revenue begins to scale.
Sales and marketing expenses. Sales and marketing expenses increased $13.4 million to $16.3 million for the year ended December 31, 2016, from $2.9 million for the year ended December 31, 2015. The increase was mainly a result of the Fluent Acquisition and the expansion of our sales organization. Sales and marketing expenses consist of marketing and promotion, salaries and benefits, traveling expenses, share-based compensation expense, and transportation and other expenses, incurred by our sales team, which are expected to increase in the future following the growth of revenue and the Company’s continuous efforts to expand its sales organization. Included in sales and marketing expenses was non-cash share-based compensation expense of $2.3 million for the year ended December 31, 2016, versus $0.3 million for the year ended December 31, 2015.
General and administrative expenses. General and administrative expenses increased $9.6 million to $54.1 million for the year ended December 31, 2016, from $44.5 million for the year ended December 31, 2015. The increase in general and administrative expenses was mainly attributable to the Fluent Acquisition effective on December 8, 2015. The amounts mainly consisted of non-cash share-based compensation expense of $26.9 million and $33.9 million, professional fees of $8.1 million and $4.2 million, acquisition and restructuring costs of $0.5 million and $1.3 million, and employee salaries and benefits of $12.0 million and $2.0 million, for the years ended December 31, 2016 and 2015, respectively.
Depreciation and amortization. Depreciation and amortization expenses increased $11.8 million to $12.6 million for the year ended December 31, 2016, from $0.8 million for the year ended December 31, 2015. The increase in depreciation and amortization in 2016 was mainly attributable to the amortization of intangible assets resulting from the Fluent Acquisition and the Q Interactive Acquisition.
Write-off of long-lived assets. The write-off of long-lived assets of $4.1 million for the year ended December 31, 2016 represented the write-off of the remaining balance of Purchased IP and capitalized litigation costs as a result of an unfavorable ruling in relation to the Purchased IP litigation. There was no write-off of long-lived assets recognized in continuing operations for the year ended December 31, 2015.
Interest expense, net. Interest expense, net, of $7.6 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively, represented the interest expense and amortization of debt issuance costs associated with the Term Loan in the amount of $45.0 million and Promissory Notes in the amount of $10 million, pursuant to agreements entered in December 2015 in connection with the Fluent Acquisition, with an aggregate long-term debt balance, including the current portion of long-term debt, of $50.0 million as of December 31, 2016.
Contingent earn-out costs. Contingent earn-out costs of $14.3 million for the year ended December 31, 2015 represented one-time non-cash costs related to the earn-out shares issued to certain investors, as discussed in Note 4, “Acquisitions,” included in Notes to Consolidated Financial Statements, pursuant to amendments to TBO Merger Agreement.
Other expenses, net. Other expenses of $1.5 million for the year ended December 31, 2016 mainly represented non-cash loss on exchange of warrants previously issued to certain stockholders of the Company.
Loss before income taxes. For the years ended December 31, 2016 and 2015, we had a loss before income taxes of $43.1 million and $59.2 million, including non-cash share-based compensation expense of $29.2 million and $34.2 million, depreciation and amortization of $12.6 million and $0.8 million, one-time write-off of long-lived assets of $4.1 million and $0, contingent earn-out costs of $0 and $14.3 million, and non-cash loss on amendments of warrants of $1.3 million and $0, respectively. As a result of the foregoing, loss before income taxes decreased $12.0 million in 2016 as compared to 2015.
Income taxes. Income tax benefit of $14.0 million and $16.6 million was recognized for the years ended December 31, 2016 and 2015, respectively, which was mainly attributable to the deferred tax recognized as a result of the federal and state net operating loss and temporary differences. In addition, a valuation allowance on the deferred tax assets of $1.9 million was recognized for the year ended December 31, 2016.
Net loss from continuing operations. Net loss from continuing operations decreased $13.5 million to $29.1 million for the year ended December 31, 2016, from $42.6 million for the year ended December 31, 2015, as a result of the foregoing.
Net loss from discontinued operations attributable to cogint. As a result of the plan to discontinue the Advertising Business in 2015, a net loss from discontinued operations attributable to cogint of $42.0 million was recognized for the year ended December 31, 2015. There were no discontinued operations for the year ended December 31, 2016.
Net loss attributable to cogint. A net loss of $29.1 million and $84.5 million was recognized for the years ended December 31, 2016 and 2015, respectively, as a result of the foregoing.
Effect of Inflation
The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.
Liquidity and Capital Resources
Cash flows provided by (used in) operating activities. For the years ended December 31, 2017 and 2016, net cash provided by operating activities was $2.4 million and $2.1 million, respectively, which was mainly the result of the net loss of $53.2 million and $29.1 million, adjusted for certain non-cash items, such as depreciation and amortization, share-based compensation expense, write-off of long-lived assets and deferred income tax benefit, of $57.9 million and $36.4 million, respectively. In addition, for the years ended December 31, 2017 and 2016, the net working capital increased $2.3 million and $5.2 million, respectively. For the year ended December 31, 2015, net cash used in operating activities of $10.7 million was mainly attributable to net loss incurred from continuing operations.
Cash flows used in investing activities. Net cash used in investing activities for the year ended December 31, 2017 was $8.1 million, which was mainly due to an aggregate of $6.9 million of capitalized costs included in software developed for internal use. Net cash used in investing activities for the year ended December 31, 2016 was $12.0 million, which was mainly due to an aggregate of $10.2 million of capitalized costs included in software developed for internal use and capitalized litigation costs. Net cash used in investing activities for the year ended December 31, 2015 of $93.8 million was mainly due to the cash paid for the Fluent Acquisition of $93.3 million and an aggregate of $3.1 million of capitalized costs included in software developed for internal use and capitalized litigation costs, which were offset by the cash proceeds of $3.6 million as a result of the reverse acquisition of Tiger Media on March 21, 2015.
Cash flows provided by financing activities. Net cash provided by financing activities for the year ended December 31, 2017 was $12.3 million, which was mainly the result of net proceeds from the Incremental Term Loan of $14.0 million in February 2017 and exercise of warrants by certain warrant holders of $3.5 million in the fourth quarter of 2017, partially offset by repayments of long-term debt of $4.3 million. Net cash provided by financing activities for the year ended December 31, 2016 was $6.6 million, which was mainly due to the net proceeds from the registered direct offerings of $10.1 million, which was offset by the repayments of long-term debt of $2.3 million. Net cash provided by financing activities for the year ended December 31, 2015 of $111.9 million was the result of the following financing arrangements: (1) a registered direct offering of $10.0 million to an institutional investor in July 2015; (2) sales of Series B preferred stock and warrants to certain investors, including Frost Gamma Investment Trust, for an aggregate of $50.0 million in November 2015; (3) the Term Loan of $45.0 million from three financial institutions pursuant to the Credit Agreement on December 8, 2015; and (4) an aggregate of $10.0 million Promissory Notes from certain investors in December 2015.
As of December 31, 2017, the Company had non-cancellable operating lease commitments of $6.1 million, and material commitments under certain data licensing agreements of $23.2 million. In addition, the Company will contribute $20.0 million in cash to Red Violet upon completion of the Spin-off. The Company anticipates funding its operations through the use of available cash, cash flow generated from operations, and proceeds from the January 2018 Registered Direct Offering for the next twelve months.
The Company reported net loss of $53.2 million for the year ended December 31, 2017, as compared to $29.1 million for the year ended December 31, 2016. As of December 31, 2017, the Company had an accumulated deficit of $167.4 million.
As of December 31, 2017, the Company had cash and cash equivalents of approximately $16.6 million, of which, $15.1 million was held by Fluent, an increase of $6.5 million from $10.1 million as of December 31, 2016. A portion of this cash held by Fluent may be used by Fluent only for general operating purposes. In addition, the Company will contribute $20.0 million in cash to Red Violet upon completion of the Spin-off. Based on projections of growth in revenue and operating results in the coming year, and $13.5 million from the January 2018 Registered Direct Offering, the Company believes that it will have sufficient cash resources to finance its operations and expected capital expenditures for the next twelve months. Subject to revenue growth, the Company may have to continue to raise capital through the issuance of additional equity and/or debt, which, if the Company is able to obtain, could have the effect of diluting stockholders. Any equity or debt financings, if available at all, may be on terms which are not favorable to the Company. If the Company’s operations do not generate positive cash flow in the upcoming year, or if it is not able to meet the debt covenants specified in the Credit Agreement, as amended, or if it is not able to obtain additional equity or debt financing on terms and conditions acceptable to it, if at all, it may be unable to implement its business plan, or even continue its operations.
The Company may explore the possible acquisition of businesses, products and/or technologies that are complementary to its existing business. The Company is continuing to identify and prioritize additional technologies, which it may wish to develop internally or through licensing or acquisition from third parties. While the Company may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that the Company will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to stockholders.
As of December 31, 2017, we had financed an aggregate of $70.0 million, for the cash portion of the purchase price of the Fluent Acquisition and other general operating purposes, with the proceeds from the Term Loans and Promissory Notes described herein. The Term Loans have an outstanding principal balance, plus paid-in-kind (“PIK”) interest, of $55.6 million, and the Promissory Notes have an outstanding principal balance, plus PIK interest, of $11.1 million. All obligations under the Term Loans mature on December 8, 2020 and our Promissory Notes are due six months after payment in full of our Term Loans. The Credit Agreement governing the Term Loans contains restrictive covenants which impose limitations on the way we conduct our business, including limitations on the amount of additional debt we are able to incur and restricts our ability to make certain investments and other restricted payments, including certain intercompany payments of cash and other property. The restrictive covenants in the Credit Agreement, as amended, may limit our strategic and financing options and our ability to return capital to our stockholders through dividends or stock buybacks. Furthermore, we still may need to incur additional debt to meet future financing needs.
The Term Loans are guaranteed by the Company and the other direct and indirect subsidiaries of the Company, and are secured by substantially all of the assets of the Company and its direct and indirect subsidiaries, including Fluent, in each case, on an equal and ratable basis. The Term Loans accrue interest at the rate of: (a) either, at Fluent's option, LIBOR (subject to a floor of 0.50%) plus 10.5% per annum, or base rate plus 9.5% per annum, payable in cash, plus (b) 1% per annum, payable, at Fluent's option, in either cash or in-kind. Principal amortization of the Term Loans is $0.7 million per quarter, payable at the end of each calendar quarter, which commenced on March 31, 2017. The Term Loans mature on December 8, 2020.
The Credit Agreement, as amended, requires us to maintain and comply with certain financial and other covenants. We cannot assure you that we will be able to maintain compliance with such financial or other covenants. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would materially adversely affect our financial health if we are unable to access sufficient funds to repay all the outstanding amounts. Moreover, if we are unable to meet our debt obligations as they come due, we could be forced to restructure or refinance such obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms, or at all. In addition, the Credit Agreement includes certain mandatory prepayment provisions, including annual prepayments of the Term Loans with a portion of our excess cash flow. As long as the Term Loans remain outstanding, the restrictive covenants and mandatory prepayment provisions could impair our ability to expand or pursue our business strategies or obtain additional funding. On August 7, 2017, the Company and its subsidiaries entered into Amendment No. 4 to the Credit Agreement (“Amendment No. 4”). Amendment No. 4 provides that there shall be no requirement that the Company and its subsidiaries meet any minimum EBITDA threshold for the twelve-month period ended June 30, 2017. The requirement that Fluent and its subsidiaries meet the required minimum EBITDA threshold for the twelve-month period ended June 30, 2017 was not impacted by Amendment No. 4. On November 3, 2017, the Company and its subsidiaries entered into Amendment No. 5 to the Credit Agreement (“Amendment No. 5”). Amendment No. 5 provides for certain amendments to the definition of EBITDA by adding back acquisition and restructuring costs resulting from the Business Combination Transaction, and costs relating to litigation with TRADS that we settled on July 22, 2017. Amendment No. 5 also amends the minimum EBITDA threshold for the Company and its subsidiaries beginning with the quarter ended September 30, 2017. In addition, Amendment No. 5 allows for additional transfer of cash from Fluent to the Company, provided that Fluent maintains a minimum cash balance. As of December 31, 2017, the Company was in compliance with the covenants under the Credit Agreement.
Contractual Obligations
As of December 31, 2017, the Company has the following future contractual obligation:
(In thousands) |
| 2018 |
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 and thereafter |
|
| Total |
| |||||||
Lease agreements |
| $ | 1,895 |
|
| $ | 686 |
|
| $ | 705 |
|
| $ | 724 |
|
| $ | 743 |
|
| $ | 1,384 |
|
| $ | 6,137 |
|
Data licensing agreements |
|
| 4,990 |
|
|
| 5,930 |
|
|
| 6,250 |
|
|
| 4,775 |
|
|
| 1,302 |
|
|
| - |
|
|
| 23,247 |
|
Debt |
|
| 8,955 |
|
|
| 9,597 |
|
|
| 55,667 |
|
|
| 15,782 |
|
|
| - |
|
|
| - |
|
|
| 90,001 |
|
Litigation settlement |
|
| 4,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,000 |
|
Employment agreements |
|
| 48,925 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 48,925 |
|
Total |
| $ | 68,765 |
|
| $ | 16,213 |
|
| $ | 62,622 |
|
| $ | 21,281 |
|
| $ | 2,045 |
|
| $ | 1,384 |
|
| $ | 172,310 |
|
The lease agreements represent future minimum rental payments under non-cancellable operating leases having initial or remaining lease terms of more than one year. The data license agreements of $23.2 million represent material data purchase commitments under certain data licensing agreements. Debt of $90.0 million represent the payments of principal and interest on the Term Loans and Promissory Notes. Litigation settlement represents payments in connection with the TRADS Litigation Settlement. Employment agreements represent related agreements reached with certain executives, including our Chief Executive Officer, President and Chief Financial Officer, etc., which provide for compensation and certain other benefits and for severance payments under certain circumstances.
Off-Balance Sheet Arrangements
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. In addition, we do not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financials partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
FORWARD-LOOKING STATEMENTS
This 2017 Form 10-K contains certain “forward-looking statements” within the meaning of the PSLRA, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subjectbeen required to risksbe implemented and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements.
Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include the following:
We have a history of losses and negative cash flow from operations which makes our future results uncertain.
Our products and services are highly technical and if they contain undetected errors, our business could be adversely affected and we may have to defend lawsuits or pay damages in connection with any alleged or actual failure of our products and services.
Because our networks and information technology systems are critical to our success, if unauthorized persons hack into our systems or our systems otherwise cease to function properly, our operations could be adversely affected and we could lose revenue or proprietary information, all of which could materially adversely affect our business.
We must adequately protect our intellectual property in order to prevent loss of valuable proprietary information.
We depend, in part, on strategic alliances, joint ventures and acquisitions to grow our business. If we are unable to make strategic acquisitions and develop and maintain these strategic alliances and joint ventures, our growth may be adversely affected.
If we consummate any future acquisitions, we will be subject to the risks inherent in identifying, acquiring and operating a newly acquired business.
Our business is subject to various governmental regulations, laws and orders, compliance with which may cause us to incur significant expenses or reduce the availability or effectiveness of our solutions, and the failure to comply with which could subject us to civil or criminal penalties or other liabilities.
The outcome of litigation, inquiries, investigations, examinations or other legal proceedings in which we are involved, in which we may become involved, or in which our customers or competitors are involved could subject us to significant monetary damages or restrictions on our ability to do business.
Our relationships with key customers may be materially diminished or terminated.
If we lose the services of key personnel, it could adversely affect our business.
If we fail to respond to rapid technological changes in the big data and analytics sector, we may lose customers and/or our products and/or services may become obsolete.
We could lose our access to data sources which could prevent us from providing our services.
We face intense competition from both start-up and established companies that may have significant advantages over us and our products.
There may be further consolidation in our end-customer markets, which may adversely affect our revenue.
To the extent the availability of free or relatively inexpensive consumer and/or business information increases, the demand for some of our services may decrease.
If our newer products do not achieve market acceptance, revenue growth may suffer.
Our products and services can have long sales and implementation cycles, which may result in substantial expenses before realizing any associated revenue.
Consolidation in the big data and analytics sector may limit market acceptance of our products and services.
We may incur substantial expenses defending against claims of infringement.
We operate in an industry that is still developing and has a relatively new business model that is continually evolving, which makes it difficult to evaluate our business and prospects.
An increasing percentage of our users are accessing our websites from their mobile devices. Our ability to remain competitive with the shift to mobile devices is critical to maintaining our revenue and margins.
We are dependent on third-party publishers for a significant portion of visitors to our websites. Any decline in the supply of media available through these websites or increase in the price of this media could cause our revenue to decline or increase the cost to acquire visitors to our websites.
We depend on internet search providers for a portion of the visitors to our websites. Changes in search engine algorithms applicable to our websites’ placements in paid search result listings may cause the numberfuture operations.
Our operations have grown dramatically over the past years which may make it difficult to effectively manage any future growth and scale our products quickly enough to meet our clients’ needs while maintaining profitability.
As a result of changes in our business model and the need for increased investments and expenditures for certain businesses, products, services, and technologies, we may fail to maintain our margins, attract new clients, or grow our revenue.
If we fail to compete effectively against other online marketing and media companies and other competitors, we could lose clients and our revenue may decline.
A reduction in online marketing spend by our clients, a loss of clients or lower advertising yields may seriously harm our business, financial condition, and results of operations. In addition, a substantial portion of our revenue is generated from a limited number of clients and, if we lose a major client, our revenue will decrease and our business and prospects may be harmed.
Third-party publishers or vendors may engage in unauthorized or unlawful acts that could subject us to significant liability or cause us to lose clients.
If we fail to continually enhance and adapt our products and services to keep pace with rapidly changing technologies and industry standards, we may not remain competitive and could lose clients or advertising inventory.
We are exposed to credit risk from and have payments disputes with our advertisers and agency clients and may not be able to collect on amounts owed to us.
Damage to our reputation could harm our business, financial condition and results of operations.
Our quarterly revenue and results of operations may fluctuate significantly from quarter to quarter due to fluctuations in advertising spending, including seasonal and cyclical effects.
Limitations on our ability to collect and use data derived from user activities, as well as new technologies that block our ability to deliver internet-based advertising, could significantly diminish the value of our services and have an adverse effect on our ability to generate revenue.
We could lose clients if we fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our clients.
We have incurred significant transaction and transaction-related costs in connection with the Spin-off.
The Spin-off could give rise to disputes or other unfavorable effects, which could have a material adverse effect on our business, financial position and results of operations.
Under the Separation Agreement, we will indemnify Red Violet for certain liabilities.
A court could deem the Spin-off to be a fraudulent conveyance and void the transaction or impose substantial liabilities upon us.
Our stock price has been and may continue to be volatile, and the value of an investment in our common stock may decline.
Future issuances of shares of our common stock in connection with acquisitions or pursuant to our stock incentive plan could have a dilutive effect on your investment.
The concentration of our stock ownership may limit individual stockholder ability to influence corporate matters.
We expect that we may need additional capital in the future; however, such capital may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing stockholders would experience further dilution.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk for the effect of interest rate changes. Information relating to quantitative and qualitative disclosures about market risk is set forth below and in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes.
Interest Rate RiskNot applicable.
We are exposed to market risk related to changes in interest rates. Our investments are considered cash equivalents and primarily consist of money market mutual funds. As of December 31, 2017, we had cash and cash equivalents of $16.6 million. The carrying amount of our cash and cash equivalents reasonably approximates fair value, due to the fact that we can redeem such investment freely. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
As of December 31, 2017, we have the principal amount of long-term debt, plus PIK interest, in the aggregate of $66.7 million, including current portion of long-term debt. Our Term Loans accrue interest at LIBOR (with a floor of 0.5%) plus 10.5% per annum, payable in cash, plus an additional 1.0% per annum payable, at Fluent’s election, in-kind or in cash. Interest under the Term Loans is payable monthly, including monthly compounding of PIK interest. Our Promissory Notes have a rate of interest of 10% per annum, which interest is capitalized monthly by adding to the outstanding principal amount of such Promissory Notes. The fair value of our debt will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest.
A hypothetical 10% increase in interest rates relative to our current interest rates would not have a material impact on the fair value of our outstanding long-term debt, net. Changes in interest rates would, however, affect operating results and cash flows, because of the variable rate nature of the Term Loans. A hypothetical 10% increase or decrease in overall interest rates as of December 31, 2017 would result in an impact to interest expense for the next twelve months by $0.8 million.
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements and the Notes thereto, together with the report thereon of our independent registered public accounting firm, are filed as part of this report, beginning on page F-1.
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure.
None.
On March 14, 2023, our board of directors approved indemnity agreements to be entered into between the Company and each of its directors and directors and executive officers. The indemnity agreement is intended to replace indemnification agreements previously entered into with certain directors and executive officers.
Each indemnity agreement provides for indemnification and advancements by the Company of certain expenses and costs relating to claims, suits or proceedings arising from each director or executive officer’s service to the Company, or, at the Company’s request, service to other entities, as officers or directors to the maximum extent permitted by applicable law.
The foregoing description of the indemnification agreements does not purport to be complete and is qualified in its entirety by the terms and conditions of the indemnification agreements, a form of which is attached hereto as Exhibit 10.1 and is incorporated herein by reference.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d–15(e)) as of the end of the period covered by this 20172022 Form 10-K. Based upon that evaluation, the Company’s Chief Executive Officer and Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this annual report as a result of a material weakness in our internal control over financial reporting, which is discussed further below.report.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision of and with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control-Integrated Framework (2013).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such Based on that there is a reasonable possibilityassessment, our Chief Executive Officer and Interim Chief Financial Officer concluded that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s evaluation of the effectiveness of our internal control over financial reporting described above, management has identified a material weaknesswas effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in ouraccordance with the U.S generally accepted accounting principles as of the end of the period covered by this annual report.
This Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting as of December 31, 2017, as described below:
We didreporting. Management’s report was not adequately design and implement controls relatedsubject to the recording of non-cash stock-based compensation specifically related to the measurement and recording of restricted stock unit (“RSU”) issuances to non-employees.
Because of the material weakness, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2017, based on criteria in Internal Control-Integrated Framework (2013) issuedattestation by the COSO.
Grant Thornton LLP, an independentCompany’s registered public accounting firm auditedpursuant to the Company’s consolidated financial statements included in this 2017 Form 10-K. A copy of theirSEC’s “non-accelerated filer” rules that permit the Company to provide only management’s assessment report is included in Item 8, “Financial Statements and Supplementary Data,” of this 2017 Form 10-K. Grant Thornton LLP has issued their attestation report on management’s internal control over financial reporting, which is also included in Item 8, “Financial Statements and Supplementary Data,” of this 2017 Form 10-K.
Remediation Efforts to Address Material Weaknessfor the year ended December 31, 2022.
We have evaluated the internal controls related to the measurement and recording of non-cash equity-based compensation and intend to incorporate the following changes into the processes, procedures and internal controls currentlyChanges in place to:Internal Control Over Financial Reporting
Ensure all stock-based compensation issuances to non-employees are reviewed quarterly and ensure any changeThere were no changes in status of each non-employee who had received an RSU issuance is identified timely and that the accounting impact is evaluated and properly recorded in accordance with generally accepted accounting principles.
Update the stock-based compensation accounting policies for non-employee RSU issuances and ensure that each non-employee stock-based compensation issuance has been specifically evaluated in accordance with the Company’s policy.
As part of our ongoing monitoring effort of the Company’s internal control over financial reporting wethat occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Inherent Limitations of Internal Controls
Our management, including our Chief Executive Officer and Interim Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will report progressprevent all error and statusall fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the above remediation effortscontrol system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to the Audit Committee on a periodic basis throughout the year.error or fraud may occur and not be detected.
None.
On March 14, 2023, our board of directors approved indemnity agreements to be entered into between the Company and each of its directors and directors and executive officers. The indemnity agreement are intended to replace indemnification agreements previously entered into with certain directors and executive officers.
Each indemnity agreement provides for indemnification and advancements by the Company of certain expenses and costs relating to claims, suits or proceedings arising from each director or executive officer’s service to the Company, or, at the Company’s request, service to other entities, as officers or directors to the maximum extent permitted by applicable law.
The foregoing description of the indemnification agreements does not purport to be complete and is qualified in its entirety by the terms and conditions of the indemnification agreements, a form of which is attached hereto as Exhibit 10.1 and is incorporated herein by reference.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to the definitive proxy statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2017.2022.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the definitive proxy statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2017.2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to the definitive proxy statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2017.2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to the definitive proxy statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2017.2022.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to the definitive proxy statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2017.2022.
Item 15. Exhibits, Financial Statement Schedules.
(a) List of documents filed as part of this report:
1. Financial Statements: The information required by this item is contained in Item 8 of this Form 10-K.
2. Financial Statement Schedules: The information required by this item is included in the consolidated financial statements contained in Item 8 of this Form 10-K.
3. Exhibits: The following exhibits are filed as part of, or incorporated by reference into, this Form 10-K.
Exhibit No. |
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10.7 | Amendment No. 2 to its Credit Agreement, effective as of December 20, 2022, by and among Fluent, Inc., Fluent, LLC, as Borrower, certain subsidiaries of the Company party thereto, the lenders party thereto, and Citizens Bank, N.A., as Administrative Agent | |
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10.14 | Fluent, Inc. 2022 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed | |
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14.1 |
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101.INS |
| Inline XBRL Instance |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document* |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document* |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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| Management contract or compensatory plan or arrangement |
* | Filed herewith | |
** |
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Registrants may voluntarily include a summaryNot applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March |
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By:
/s/ Daniel MacLachlan
Daniel MacLachlan
Chief Financial Officer
By:
/s/ Jacky Wang
Jacky Wang
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
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/s/ Donald Patrick | Chief Executive Officer | March 15, 2023 | ||
Donald Patrick | (Principal Executive Officer) | |||
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/s/ | Interim Chief Financial Officer | March 15, 2023 | ||
Ryan Perfit | (Principal Financial Officer and Principal Accounting Officer) |
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/s/ Ryan Schulke | Chairman and Chief Strategy Officer | March | ||
Ryan Schulke | ||||
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/s/ Matthew Conlin | Chief Customer Officer and Director | March 15, 2023 | ||
Matthew Conlin |
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/s/ Donald Mathis | Lead Director | March | ||
Donald Mathis |
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/s/ Carla S. Newell | Director | March 15, 2023 | ||
Carla S. Newell | ||||
/s/ Barbara Shattuck Kohn | Director | March 15, 2023 | ||
Barbara Shattuck Kohn | ||||
/s/ David A. Graff | Director | March 15, 2023 | ||
David A/ Graff | ||||
/s/ Richard C. Pfenniger, Jr. | Director | March 15, 2023 | ||
Richard C. Pfenniger, Jr. |
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
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• | We obtained understanding of the design of key controls over the Company’s revenue recognition process. |
• | For a sample of revenue transactions, we performed detailed transaction testing by (1) agreeing the amount recognized to source documentation; (2) comparing the amount of revenue recognized to third party customer confirmations obtained by the Company; (3) comparing the amount of revenue recognized to subsequent cash remittance advice or obtaining direct third party confirmations. |
Recoverability of the carrying value of goodwill of the Fluent reporting unit
As described in Notes 2 and 7 to the financial statements, goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. After incurring cumulative impairment charges of $110.4 million during the current fiscal year, goodwill for the Fluent reporting unit as of December 31, 2022 is $51.6 million. The Company estimates the fair value of its reporting units using a weighting of fair values derived from the income and market approaches. We identified management’s evaluation of the recoverability of the carrying value of the Fluent reporting unit goodwill as a critical audit matter.
The principal consideration for our determination that management’s evaluation of the recoverability of the carrying value of goodwill of the Fluent reporting unit is a critical audit matter is that the estimate of the fair value requires significant estimates and judgments made by management related to assumptions such as forecasted revenue growth, profitability, discount rate, and the identification of comparable publicly traded companies and market multiples.
Our audit procedures related to the evaluation of the recoverability of the carrying value of goodwill for the Fluent reporting unit included the following, among others:
• | We obtained understanding of the design of key internal controls over identification of triggering events and performance of goodwill impairment test over the Fluent reporting unit. |
• | We assessed the Company’s ability to forecast revenue and operating income by comparing: (1) historical revenue and operating income projections to actual results; and (2) comparing current forecasted projections to historical trends, industry data and underlying business strategies. |
• | With the assistance of valuation professionals with specialized skills and knowledge: (1) we reviewed the valuation methodology; (2) tested the weighted average cost of capital; and (3) we reviewed the reconciliation of the fair value of the Fluent and All Other reporting units to the market capitalization of the Company, including assessing reasonableness of the implied control premium. |
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2015.
Fort Lauderdale, FloridaNew York, New York
March 14, 201815, 2023
Board of Directors and ShareholdersFLUENT, INC.
Cogint, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Cogint, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
The material weakness resulted from the lack of appropriate controls over the accounting for stock-based compensation specifically related to the measurement and recording of restricted stock unit issuances to non-employees and has been identified and included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A of the Company’s December 31, 2017 annual report on Form 10-K.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report dated March 14, 2018 which expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Fort Lauderdale, Florida
March 14, 2018
(Amounts in thousands, except share data)
|
| December 31, 2017 |
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| December 31, 2016 |
| December 31, 2022 | December 31, 2021 | ||||||||
ASSETS: |
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Current assets: |
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Cash and cash equivalents |
| $ | 16,629 |
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| $ | 10,089 |
| $ | 25,547 | $ | 34,467 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,852 and $790 at December 31, 2017 and 2016, respectively |
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| 37,928 |
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| 30,958 |
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Accounts receivable, net of allowance for doubtful accounts of $544 and $313, respectively | 63,164 | 70,228 | ||||||||||||||
Prepaid expenses and other current assets |
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| 2,424 |
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| 2,053 |
| 3,506 | 2,505 | ||||||
Total current assets |
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| 56,981 |
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| 43,100 |
| 92,217 | 107,200 | ||||||
Property and equipment, net |
|
| 1,778 |
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|
| 1,350 |
| 964 | 1,457 | ||||||
Operating lease right-of-use assets | 5,202 | 6,805 | ||||||||||||||
Intangible assets, net |
|
| 89,707 |
|
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| 98,531 |
| 28,745 | 35,747 | ||||||
Goodwill |
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| 166,256 |
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| 166,256 |
| 55,111 | 165,088 | ||||||
Other non-current assets |
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| 2,277 |
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| 2,674 |
| 1,730 | 1,885 | ||||||
Total assets |
| $ | 316,999 |
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| $ | 311,911 |
| $ | 183,969 | $ | 318,182 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: |
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Current liabilities: |
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Trade accounts payable |
| $ | 11,585 |
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| $ | 14,725 |
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Accounts payable | $ | 6,190 | $ | 16,130 | ||||||||||||
Accrued expenses and other current liabilities |
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| 18,146 |
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| 6,981 |
| 35,626 | 33,932 | ||||||
Deferred revenue |
|
| 298 |
|
|
| 318 |
| 1,014 | 651 | ||||||
Current portion of long-term debt |
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| 2,750 |
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| 4,135 |
| 5,000 | 5,000 | ||||||
Current portion of operating lease liability | 2,389 | 2,227 | ||||||||||||||
Total current liabilities |
|
| 32,779 |
|
|
| 26,159 |
| 50,219 | 57,940 | ||||||
Promissory notes payable to certain shareholders, net |
|
| 10,837 |
|
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| 10,748 |
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Long-term debt, net |
|
| 49,376 |
|
|
| 35,130 |
| 35,594 | 40,329 | ||||||
Acquisition consideration payable in stock |
|
| - |
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| 10,225 |
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Operating lease liability, net | 3,743 | 5,692 | ||||||||||||||
Other non-current liabilities | 458 | 811 | ||||||||||||||
Total liabilities |
|
| 92,992 |
|
|
| 82,262 |
| 90,014 | 104,772 | ||||||
Contingencies (Note 16) | ||||||||||||||||
Shareholders' equity: |
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Preferred stock—$0.0001 par value, 10,000,000 shares authorized; 0 share issued and outstanding at December 31, 2017 and 2016 |
|
| - |
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| - |
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Common stock—$0.0005 par value, 200,000,000 shares authorized; 61,631,573 and 53,717,996 shares issued at December 31, 2017 and 2016, respectively; and 61,279,050 and 53,557,761 shares outstanding at December 31, 2017 and 2016, respectively |
|
| 31 |
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| 27 |
| ||||||||
Treasury stock, at cost, 352,523 and 160,235 shares at December 31, 2017 and 2016, respectively |
|
| (1,274 | ) |
|
| (531 | ) | ||||||||
Preferred stock — $0.0001 par value, 10,000,000 Shares authorized; Shares outstanding — 0 shares for both periods | — | — | ||||||||||||||
Common stock — $0.0005 par value, 200,000,000 Shares authorized; Shares issued — 84,385,458 and 83,057,083, respectively; and Shares outstanding — 80,085,306 and 78,965,260, respectively | 42 | 42 | ||||||||||||||
Treasury stock, at cost — 4,300,152 and 4,091,823 shares, respectively | (11,171 | ) | (10,723 | ) | ||||||||||||
Additional paid-in capital |
|
| 392,687 |
|
|
| 344,384 |
| 423,384 | 419,059 | ||||||
Accumulated deficit |
|
| (167,437 | ) |
|
| (114,231 | ) | (318,300 | ) | (194,968 | ) | ||||
Total shareholders’ equity |
|
| 224,007 |
|
|
| 229,649 |
| 93,955 | 213,410 | ||||||
Total liabilities and shareholders’ equity |
| $ | 316,999 |
|
| $ | 311,911 |
| $ | 183,969 | $ | 318,182 |
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Amounts in thousands, except share data)
|
| Year Ended December 31, |
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| 2017 |
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| 2016 |
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| 2015 |
| |||
Revenue |
| $ | 220,268 |
|
| $ | 186,836 |
|
| $ | 14,091 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization) |
|
| 147,407 |
|
|
| 133,798 |
|
|
| 10,253 |
|
Sales and marketing expenses |
|
| 20,570 |
|
|
| 16,296 |
|
|
| 2,925 |
|
General and administrative expenses |
|
| 76,990 |
|
|
| 54,094 |
|
|
| 44,472 |
|
Depreciation and amortization |
|
| 14,193 |
|
|
| 12,631 |
|
|
| 841 |
|
Write-off of long-lived assets |
|
| 3,626 |
|
|
| 4,055 |
|
|
| - |
|
Total costs and expenses |
|
| 262,786 |
|
|
| 220,874 |
|
|
| 58,491 |
|
Loss from operations |
|
| (42,518 | ) |
|
| (34,038 | ) |
|
| (44,400 | ) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (9,683 | ) |
|
| (7,593 | ) |
|
| (468 | ) |
Contingent earn-out costs |
|
| - |
|
|
| - |
|
|
| (14,300 | ) |
Other expenses, net |
|
| (1,005 | ) |
|
| (1,497 | ) |
|
| - |
|
Total other expense |
|
| (10,688 | ) |
|
| (9,090 | ) |
|
| (14,768 | ) |
Loss before income taxes |
|
| (53,206 | ) |
|
| (43,128 | ) |
|
| (59,168 | ) |
Income taxes |
|
| - |
|
|
| (14,042 | ) |
|
| (16,583 | ) |
Net loss from continuing operations |
|
| (53,206 | ) |
|
| (29,086 | ) |
|
| (42,585 | ) |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss from operations of discontinued operations |
|
| - |
|
|
| - |
|
|
| (1,236 | ) |
Pretax loss on disposal of discontinued operations |
|
| - |
|
|
| - |
|
|
| (41,095 | ) |
Income taxes |
|
| - |
|
|
| - |
|
|
| 127 |
|
Net loss from discontinued operations |
|
| - |
|
|
| - |
|
|
| (42,458 | ) |
Less: Non-controlling interests |
|
| - |
|
|
| - |
|
|
| (508 | ) |
Net loss from discontinued operations attributable to cogint |
|
| - |
|
|
| - |
|
|
| (41,950 | ) |
Net loss attributable to cogint |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (84,535 | ) |
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | (0.96 | ) |
| $ | (0.65 | ) |
| $ | (3.27 | ) |
Discontinued operations |
|
| - |
|
|
| - |
|
|
| (3.22 | ) |
Basic and diluted |
| $ | (0.96 | ) |
| $ | (0.65 | ) |
| $ | (6.48 | ) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 55,648,235 |
|
|
| 44,536,906 |
|
|
| 13,036,082 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to cogint |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (84,535 | ) |
Foreign currency translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
| - |
|
|
| - |
|
|
| (130 | ) |
Realized upon the disposal of discontinued operations |
|
| - |
|
|
| - |
|
|
| 130 |
|
Net comprehensive loss attributable to cogint |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (84,535 | ) |
Year Ended December 31, | ||||||||
2022 | 2021 | |||||||
Revenue | $ | 361,134 | $ | 329,250 | ||||
Costs and expenses: | ||||||||
Cost of revenue (exclusive of depreciation and amortization) | 267,487 | 243,716 | ||||||
Sales and marketing | 17,121 | 12,681 | ||||||
Product development | 18,159 | 15,789 | ||||||
General and administrative | 53,470 | 48,205 | ||||||
Depreciation and amortization | 13,214 | 13,170 | ||||||
Goodwill impairment and write-off of intangible assets | 111,255 | 354 | ||||||
Loss on disposal of property and equipment | 19 | — | ||||||
Total costs and expenses | 480,725 | 333,915 | ||||||
Loss from operations | (119,591 | ) | (4,665 | ) | ||||
Interest expense, net | (1,965 | ) | (2,184 | ) | ||||
Loss on early extinguishment of debt | — | (2,964 | ) | |||||
Loss before income taxes | (121,556 | ) | (9,813 | ) | ||||
Income tax expense | (1,776 | ) | (246 | ) | ||||
Net loss | $ | (123,332 | ) | $ | (10,059 | ) | ||
Basic and diluted income (loss) per share: | ||||||||
Basic | $ | (1.51 | ) | $ | (0.13 | ) | ||
Diluted | $ | (1.51 | ) | $ | (0.13 | ) | ||
Weighted average number of shares outstanding: | ||||||||
Basic | 81,412,595 | 79,977,313 | ||||||
Diluted | 81,412,595 | 79,977,313 |
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands, except share data)
|
| Convertible Series A preferred stock |
|
| Convertible Series B preferred stock |
|
| Common stock |
|
| Treasury stock |
|
| Additional paid-in |
|
| Accumulated other comprehensive |
|
| Accumulated |
|
| Non-controlling |
|
| Total Shareholders' |
| |||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| loss |
|
| deficit |
|
| interests |
|
| equity |
| |||||||||||||
Balance as at December 31, 2014 |
|
| 4,965,302 |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
| 6,597,155 |
|
| $ | 3 |
|
|
| - |
|
| $ | - |
|
| $ | 12,714 |
|
| $ | - |
|
| $ | (610 | ) |
| $ | - |
|
| $ | 12,107 |
|
Issuance of common shares as a result of the reverse acquisition |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,291,299 |
|
|
| 4 |
|
|
| - |
|
|
| - |
|
|
| 44,108 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 44,112 |
|
Additions as a result of the reverse acquisition |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 425 |
|
|
| 425 |
|
Vesting of restricted stock units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 382,300 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Issuance of common shares upon cashless exercise of warrants |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 20,122 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Issuance of common shares upon a direct offering to an institutional investor, net of issuance costs of $600 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,280,410 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 9,399 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 9,400 |
|
Issuance of Series B Preferred upon sales of securities to certain investors, net of issuance costs of $220 |
|
| - |
|
|
| - |
|
|
| 149,925 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 49,780 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 49,780 |
|
Issuance of Series B Preferred related to promissory notes |
|
| - |
|
|
| - |
|
|
| 1,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 413 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 413 |
|
Issuance of Series B Preferred in relation to Fluent acquisition |
|
| - |
|
|
| - |
|
|
| 300,037 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 123,766 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 123,766 |
|
Conversion of Series A Preferred shares into common shares |
|
| (93,500 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 93,500 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Issuance of common shares to vendors for services rendered |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 45,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 433 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 433 |
|
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 34,533 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 34,533 |
|
Contingent earn-out costs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14,300 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14,300 |
|
Net loss attributable to cogint |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (84,535 | ) |
|
| - |
|
|
| (84,535 | ) |
Net loss attributable to non-controlling interests |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (508 | ) |
|
| (508 | ) |
Foreign currency translation adjustment |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (130 | ) |
|
| - |
|
|
| - |
|
|
| (130 | ) |
Changes as a result of the disposal of discontinued operations |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 130 |
|
|
| - |
|
|
| 83 |
|
|
| 213 |
|
Issuance of warrants in relation to term loan |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,586 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,586 |
|
Balance as at December 31, 2015 |
|
| 4,871,802 |
|
| $ | - |
|
|
| 450,962 |
|
| $ | - |
|
|
| 15,709,786 |
|
| $ | 8 |
|
| $ | - |
|
| $ | - |
|
| $ | 291,032 |
|
| $ | - |
|
| $ | (85,145 | ) |
| $ | - |
|
| $ | 205,895 |
|
Issuance of contingent earn-out shares |
|
| 1,800,220 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 900,108 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Conversion of Series A preferred stock into common stock |
|
| (6,672,022 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6,672,022 |
|
|
| 3 |
|
|
| - |
|
|
| - |
|
|
| (3 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Conversion of Series B preferred stock into common stock |
|
| - |
|
|
| - |
|
|
| (450,962 | ) |
|
| - |
|
|
| 22,548,100 |
|
|
| 11 |
|
|
| - |
|
|
| - |
|
|
| (11 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Issuance of common stock to vendors for services rendered |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14,500 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 146 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 146 |
|
Common stock issued in exchange for warrants previously issued to certain shareholders |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,069,728 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 1,272 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,273 |
|
Additional | Total | |||||||||||||||||||||||||||
Common stock | Treasury stock | paid-in | Accumulated | Shareholders' | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | deficit | equity | ||||||||||||||||||||||
Balance at December 31, 2020 | 80,295,141 | $ | 40 | 3,945,867 | $ | (9,999 | ) | $ | 411,753 | $ | (184,909 | ) | $ | 216,885 | ||||||||||||||
Vesting of restricted stock units and issuance of stock under incentive plans | 2,563,942 | 2 | — | — | 1,494 | — | 1,496 | |||||||||||||||||||||
Increase in treasury stock resulting from shares withheld to cover statutory taxes | — | — | 145,956 | (724 | ) | — | — | (724 | ) | |||||||||||||||||||
Exercise of stock options | 198,000 | — | — | — | 934 | — | 934 | |||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 4,878 | — | 4,878 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (10,059 | ) | (10,059 | ) | |||||||||||||||||||
Balance at December 31, 2021 | 83,057,083 | $ | 42 | 4,091,823 | $ | (10,723 | ) | $ | 419,059 | $ | (194,968 | ) | $ | 213,410 | ||||||||||||||
Vesting of restricted stock units and issuance of stock under incentive plans | 1,328,375 | — | — | — | 211 | — | 211 | |||||||||||||||||||||
Increase in treasury stock resulting from shares withheld to cover statutory taxes | — | — | 208,329 | (448 | ) | — | — | (448 | ) | |||||||||||||||||||
Share-based compensation expense | — | — | — | — | 4,114 | — | 4,114 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (123,332 | ) | (123,332 | ) | |||||||||||||||||||
Balance at December 31, 2022 | 84,385,458 | $ | 42 | 4,300,152 | $ | (11,171 | ) | $ | 423,384 | $ | (318,300 | ) | $ | 93,955 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,434,562 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| (1 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| |
Increase in treasury stock resulting from shares withheld to pay statutory taxes in connection with the vesting of restricted stock units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 360,235 |
|
|
| (1,193 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,193 | ) |
Sales of treasury stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (200,000 | ) |
|
| 662 |
|
|
| (62 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 600 |
|
Issuance of common stock upon a direct offering to certain investors, net of issuance costs of $923 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,000,000 |
|
|
| 2 |
|
|
| - |
|
|
| - |
|
|
| 10,077 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 10,079 |
|
Issuance of common stock in connection with Q Interactive acquisition |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,369,190 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 11,205 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 11,206 |
|
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 30,237 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 30,237 |
|
Warrants issued in relation to term loan |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 492 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 492 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (29,086 | ) |
|
| - |
|
|
| (29,086 | ) |
Balance as at December 31, 2016 |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
| 53,717,996 |
|
| $ | 27 |
|
|
| 160,235 |
|
| $ | (531 | ) |
| $ | 344,384 |
|
| $ | - |
|
| $ | (114,231 | ) |
| $ | - |
|
| $ | 229,649 |
|
Vesting of restricted stock units and issuance of restricted stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,001,808 |
|
|
| 2 |
|
|
| - |
|
|
| - |
|
|
| (2 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Increase in treasury stock resulting from shares withheld to pay statutory taxes in connection with the vesting of restricted stock units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 192,288 |
|
|
| (743 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (743 | ) |
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 35,292 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 35,292 |
|
Exercise of warrants by certain warrant holders |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,161,769 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 3,484 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,485 |
|
Amendments of warrants issued previously to certain warrants holders |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 655 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 655 |
|
Issuance of common stock to settle acquisition consideration payable in connection with Q Interactive acquisition |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,750,000 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 10,224 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 10,225 |
|
Classification of puttable common stock that may require cash settlement as liabilities |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,350 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,350 | ) |
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (53,206 | ) |
|
| - |
|
|
| (53,206 | ) |
Balance as at December 31, 2017 |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
| 61,631,573 |
|
| $ | 31 |
|
|
| 352,523 |
|
| $ | (1,274 | ) |
| $ | 392,687 |
|
| $ | - |
|
| $ | (167,437 | ) |
| $ | - |
|
| $ | 224,007 |
|
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to cogint |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (84,535 | ) |
Less: Loss from discontinued operations, net of tax |
|
| - |
|
|
| - |
|
|
| (41,950 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 14,193 |
|
|
| 12,631 |
|
|
| 841 |
|
Non-cash interest expenses and related amortization |
|
| 3,027 |
|
|
| 2,519 |
|
|
| 151 |
|
Share-based compensation expense |
|
| 33,996 |
|
|
| 29,249 |
|
|
| 34,160 |
|
Non-cash contingent earn-out costs |
|
| - |
|
|
| - |
|
|
| 14,300 |
|
Non-cash loss on amendments of warrants |
|
| 1,005 |
|
|
| 1,273 |
|
|
| - |
|
Write-off of long-lived assets |
|
| 3,626 |
|
|
| 4,055 |
|
|
| - |
|
Provision for bad debts |
|
| 2,020 |
|
|
| 772 |
|
|
| 213 |
|
Deferred income tax benefit |
|
| - |
|
|
| (14,129 | ) |
|
| (16,460 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (8,990 | ) |
|
| (5,833 | ) |
|
| (893 | ) |
Prepaid expenses and other current assets |
|
| (371 | ) |
|
| 2,095 |
|
|
| (1,574 | ) |
Other non-current assets |
|
| 397 |
|
|
| (1,359 | ) |
|
| (513 | ) |
Trade accounts payable |
|
| (3,140 | ) |
|
| 3,565 |
|
|
| 142 |
|
Accrued expenses and other current liabilities |
|
| 9,815 |
|
|
| (3,136 | ) |
|
| 1,642 |
|
Amounts due to related parties |
|
| - |
|
|
| - |
|
|
| (66 | ) |
Deferred revenue |
|
| (20 | ) |
|
| (517 | ) |
|
| 306 |
|
Net cash provided by (used in) operating activities from continuing operations |
|
| 2,352 |
|
|
| 2,099 |
|
|
| (10,336 | ) |
Net cash used in operating activities from discontinued operations |
|
| - |
|
|
| - |
|
|
| (337 | ) |
Net cash provided by (used in) operating activities |
|
| 2,352 |
|
|
| 2,099 |
|
|
| (10,673 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (1,247 | ) |
|
| (762 | ) |
|
| (662 | ) |
Purchase of intangible assets |
|
| - |
|
|
| - |
|
|
| (250 | ) |
Capitalized costs included in intangible assets |
|
| (6,880 | ) |
|
| (10,164 | ) |
|
| (3,065 | ) |
Proceeds from reverse acquisition |
|
| - |
|
|
| - |
|
|
| 3,569 |
|
Acquisition, net of cash acquired |
|
| - |
|
|
| (50 | ) |
|
| (93,276 | ) |
Deposits as collateral |
|
| - |
|
|
| (1,050 | ) |
|
| - |
|
Net cash used in investing activities from continuing operations |
|
| (8,127 | ) |
|
| (12,026 | ) |
|
| (93,684 | ) |
Net cash used in investing activities from discontinued operations |
|
| - |
|
|
| - |
|
|
| (121 | ) |
Net cash used in investing activities |
|
| (8,127 | ) |
|
| (12,026 | ) |
|
| (93,805 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares, net of issuance costs |
|
| - |
|
|
| 10,079 |
|
|
| 59,180 |
|
Proceeds from exercise of warrants by certain warrant holders |
|
| 3,485 |
|
|
| - |
|
|
| - |
|
Proceeds from debt obligations, net of debt costs |
|
| 13,883 |
|
|
| (682 | ) |
|
| 52,764 |
|
Repayments of long-term debt |
|
| (4,310 | ) |
|
| (2,250 | ) |
|
| - |
|
Taxes paid related to net share settlement of vesting of restricted stock units |
|
| (743 | ) |
|
| (1,193 | ) |
|
| - |
|
Sale of treasury stock |
|
| - |
|
|
| 600 |
|
|
| - |
|
Net cash provided by financing activities |
|
| 12,315 |
|
|
| 6,554 |
|
|
| 111,944 |
|
Net increase (decrease) in cash and cash equivalents |
| $ | 6,540 |
|
| $ | (3,373 | ) |
| $ | 7,466 |
|
Cash and cash equivalents at beginning of period |
|
| 10,089 |
|
|
| 13,462 |
|
|
| 5,996 |
|
Cash and cash equivalents at end of period |
| $ | 16,629 |
|
| $ | 10,089 |
|
| $ | 13,462 |
|
SUPPLEMENTAL DISCLOSURE INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 6,706 |
|
| $ | 3,795 |
|
| $ | 3 |
|
Cash paid (refunded) for income taxes |
| $ | - |
|
| $ | 87 |
|
| $ | (123 | ) |
Year Ended December 31, | ||||||||
2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (123,332 | ) | $ | (10,059 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 13,214 | 13,170 | ||||||
Non-cash loan amortization expense | 265 | 432 | ||||||
Share-based compensation expense | 4,092 | 4,761 | ||||||
Non-cash loss on early extinguishment of debt | — | 2,198 | ||||||
Non-cash accrued compensation expense for Put/Call Consideration | — | 3,213 | ||||||
Non-cash termination Put/Call Consideration | — | (629 | ) | |||||
Goodwill impairment | 111,069 | — | ||||||
Write-off of intangible assets | 186 | 354 | ||||||
Loss on disposal of property and equipment | 19 | — | ||||||
Provision for bad debts | 450 | 91 | ||||||
Deferred income taxes | (225 | ) | 198 | |||||
Changes in assets and liabilities, net of business acquisition: | ||||||||
Accounts receivable | 6,617 | (7,650 | ) | |||||
Prepaid expenses and other current assets | (917 | ) | (70 | ) | ||||
Other non-current assets | 162 | (326 | ) | |||||
Operating lease assets and liabilities, net | (184 | ) | (183 | ) | ||||
Accounts payable | (9,940 | ) | 8,438 | |||||
Accrued expenses and other current liabilities | 477 | (636 | ) | |||||
Deferred revenue | 139 | (722 | ) | |||||
Other | (128 | ) | (156 | ) | ||||
Net cash provided by operating activities | 1,964 | 12,424 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Business acquisition, net of cash acquired | (1,036 | ) | — | |||||
Capitalized costs included in intangible assets | (4,383 | ) | (2,957 | ) | ||||
Acquisition of property and equipment | (17 | ) | (36 | ) | ||||
Net cash used in investing activities | (5,436 | ) | (2,993 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of long-term debt, net of debt financing costs | — | 49,624 | ||||||
Repayments of long-term debt | (5,000 | ) | (46,735 | ) | ||||
Exercise of stock options | — | 934 | ||||||
Prepayment penalty on debt extinguishment | — | (766 | ) | |||||
Taxes paid related to net share settlement of vesting of restricted stock units | (448 | ) | (724 | ) | ||||
Proceeds from the issuance of stock | — | 136 | ||||||
Net cash provided by (used in) financing activities | (5,448 | ) | 2,469 | |||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (8,920 | ) | 11,900 | |||||
Cash, cash equivalents and restricted cash at beginning of period | 34,467 | 22,567 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 25,547 | $ | 34,467 | ||||
SUPPLEMENTAL DISCLOSURE INFORMATION | ||||||||
Cash paid for interest | $ | 1,758 | $ | 1,722 | ||||
Cash paid for income taxes | $ | 1,014 | $ | 356 | ||||
Share-based compensation capitalized in intangible assets | $ | 97 | $ | 117 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
Liability incurred for deferred payment in connection with True North acquisition | $ | 860 | $ | — | ||||
Contingent consideration in connection with True North acquisition | $ | 250 | $ | — | ||||
Equity issued in connection with True North acquisition | $ | 211 | $ | — |
| $ | 1,296 |
|
| $ | 1,154 |
|
| $ | 363 |
| |
Issuance of common stock to a vendor for services rendered |
| $ | - |
|
| $ | 146 |
|
| $ | - |
|
Issuance of common stock to settle acquisition consideration payable in connection with Q Interactive acquisition |
| $ | 10,225 |
|
| $ | - |
|
| $ | - |
|
Debt issuance costs - amendment of warrants in connection with the term loans |
| $ | (350 | ) |
| $ | - |
|
| $ | - |
|
Classification of puttable common stock that may require cash settlement as liabilities |
| $ | 1,350 |
|
| $ | - |
|
| $ | - |
|
Fair value of acquisition consideration |
|
|
|
|
|
|
|
|
|
|
|
|
- the reverse acquisition with Tiger Media |
| $ | - |
|
| $ | - |
|
| $ | 44,112 |
|
- Fluent acquisition |
| $ | - |
|
| $ | - |
|
| $ | 123,766 |
|
- Q Interactive acquisition |
| $ | - |
|
| $ | 21,431 |
|
| $ | - |
|
Warrants issued in relation to the term loans |
| $ | - |
|
| $ | 492 |
|
| $ | 1,586 |
|
Series B Preferred issued in relation to the promissory notes |
| $ | - |
|
| $ | - |
|
| $ | 413 |
|
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
1. Principal activities and organization
(a)
Principal activities
Cogint,
Fluent, Inc. (“we,” “us,” “our,” “cogint,Fluent,” or the “Company”), a Delaware corporation, is aan 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 analytics company providing cloud-based mission-critical informationperformance-based marketing executions to its clients, which in 2022 included over 500 consumer brands, direct marketers and performance marketing solutionsagencies 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 enterprisestime, the Company may enter into relationships or investments with other entities, and, in certain instances, the entity in which the Company has a varietyrelationship 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 industries. Our missionthe VIE. The primary beneficiary is to transform data into intelligence utilizing our proprietary technology platforms to solve complex problems for our clients. Harnessingthe party that has the power to direct activities that most significantly impact the operations of data fusionthe VIE and powerful analytics, we transform data into intelligence, in a fast and efficient manner, sohas the obligation to absorb losses or the right to benefits from the VIE that our clients can spend their time on what matters most, running their organizations with confidence. Through our intelligent platforms, CORE™ and Agile Audience Engine™, we uncover the relevance of disparate data points to deliver end-to-end, ROI-driven results for our customers. Our analytical capabilities enable us to build comprehensive datasets in real-time and provide insightful views of people, businesses, assets and their interrelationships. We empower clients across markets and industries to better execute all aspects of their business, from managing risk, identifying fraud and abuse, ensuring legislative compliance, and debt recovery, to identifying and acquiring new customers. With the goal of reducing the cost of doing business and enhancing the consumer experience, our solutions enable our clients to optimize overall decision-making and to have a holistic view of their customers.
We provide unique and compelling solutions essentialcould potentially be significant to the daily workflow of organizations within both VIE. From April 1, 2020 through August 31, 2021, the public and private sectors. Our cloud-based data fusion and customer acquisition technology platforms, combined with our massive database consisting of public-record, proprietary and publicly- available data, as wellCompany had included Winopoly, LLC ("Winopoly") in its consolidated financial statements as a unique repository of self-reported information on millions of consumers, enables the delivery of differentiated productsVIE (see Note 13,Business acquisitions and solutions used for a variety of essential functions. These essential functions include identification and authentication, investigation and validation, and customer acquisition and retention. The Company operates through two reportable segments: (i) Information Services and (ii) Performance Marketing.
(b) Organization
Tiger Media
Previously, we provided advertising services in the out-of-home advertising industry in China under the name Tiger Media, Inc. (“Tiger Media”), a Cayman Islands exempted company. On June 30, 2015, the Company’s Board of Directors approved the plan to discontinue its Advertising Business (defined below). In 2015, the Company disposed of all assets and liabilities related to its Advertising Business.
TBO
The Best One, Inc. (“TBO”), now known as IDI Holdings (defined below), is a holding company incorporated on September 22, 2014 in the State of Florida, which was formed to be engaged in the acquisition of operating businesses and the acquisition and development of valuable and proprietary technology assets across various industries. On October 2, 2014, TBO acquired 100% of the membership interests of Interactive Data, LLC (“Interactive Data”), a Georgia limited liability company and Interactive Data became a wholly-owned subsidiary of TBO (“Interactive Data Acquisition”Note 14,Variable interest entity). Interactive Data is a data solutions provider, historically delivering data products and services to the Accounts Receivable Management industry for location and identity verification, legislative compliance and debt recovery.
TBO Merger with Tiger Media
On March 21, 2015 (the “Effective Date of TBO Merger”), Tiger Media and TBO Acquisition, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Tiger Media (“TBO Merger Sub”), completed a merger (the “TBO Merger”) with TBO, pursuant to the terms and conditions of the Merger Agreement and Plan of Reorganization, as amended (the “TBO Merger Agreement”) dated as of December 14, 2014.
Before the TBO Merger, on March 19, 2015, Tiger Media effected a one-for-five reverse stock split (the “Reverse Split”). The principal effect of the Reverse Split was to decrease the number of outstanding shares of each of Tiger Media’s ordinary shares. Except for de minimus adjustments for the treatment of fractional shares, the Reverse Split did not have any dilutive effect on Tiger Media shareholders and the relative voting and other rights that accompany the shares were not affected by the Reverse Split. In addition, the proportion of shares owned by shareholders relative to the number of shares authorized for issuance remained the same because the authorized number of shares was decreased in proportion to the Reverse Split from 1,000,000,000 shares to 200,000,000
shares. The authorized number of preferred shares was not affected by the Reverse Split and remained at 10,000,000. Also before the TBO Merger, on March 20, 2015, Tiger Media completed its domestication from the Cayman Islands to Delaware as a Delaware corporation (the “Domestication”). Following the Domestication and the Reverse Split, on March 21, 2015, TBO merged into TBO Merger Sub, with TBO Merger Sub continuing as the surviving company and a wholly-owned subsidiary of Tiger Media. On April 8, 2015, TBO Merger Sub’s entity name was changed to IDI Holdings, LLC (“IDI Holdings”), which isBeginning September 1, 2021, Winopoly became a wholly owned subsidiary of the Company.
For accounting purposes, the Company recognized the TBO Merger in accordance with Accounting Standards Codification (“ASC”) Topic 805-40, “Reverse Acquisitions.” Accordingly, the Company has been recognized as the accounting acquiree in the TBO Merger, with IDI Holdings being the accounting acquirer, and the Company’s consolidated financial statements for the reporting periods from January 1, 2015 through March 21, 2015 being those of IDI Holdings, rather than those of the Company. The Company’s consolidated financial statements for the periods since March 22, 2015, the day after which the TBO Merger was consummated, recognize Tiger Media and IDI Holdings as a consolidated group for accounting and reporting purposes, albeit with a carryover capital structure inherited from Tiger Media (attributable to the legal structure of the transaction).
On April 30, 2015, Tiger Media changed its name to IDI, Inc., and on September 26, 2016, IDI, Inc changed its name to Cogint, Inc.
Disposal of Advertising Business
As a result of the TBO Merger, and although it was the Company’s intention to continue to operate and further develop its Advertising Business (as defined below) both in China and the United States as of the Effective Date of TBO Merger, on June 30, 2015, in connection with the continuing shift in the Company’s focus towards the data fusion industry via its consolidated subsidiaries, the Company’s Board of Directors approved a plan under which the Company discontinued the operations of its Chinese and British Virgin Islands based subsidiaries (collectively, the “Advertising Business”). The purpose of the plan was to focus the Company’s resources on the data fusion industry, where the Company believes the opportunities for future growth are substantially greater. Additionally, due to the continuing negative cash flow from operations of the Advertising Business, the Company elected not to invest further in this business. As of December 31, 2015, the Company had disposed of all assets and liabilities related to its Advertising Business.
Fluent Acquisition
On December 8, 2015 (the “Effective Date of Fluent Acquisition”), the Company completed the acquisition of Fluent Inc (the “Fluent Acquisition”), pursuant to an Agreement and Plan of Merger (the “Fluent Merger Agreement”) entered into on November 16, 2015. On December 9, 2015, Fluent Acquisition II, LLC, the surviving entity during the Fluent Acquisition, changed its name to Fluent, LLC (“Fluent”). The Company is the legal and accounting acquirer of the Fluent Acquisition. Fluent is a leader in people-based digital marketing and customer acquisition.
Q Interactive Acquisition
On June 8, 2016 (the “Effective Date of Q Interactive Acquisition”), the Company completed the acquisition of Q Interactive, LLC (“Q Interactive”) (the “Q Interactive Acquisition”), pursuant to aMembership Interest Purchase Agreement with Selling Source, LLC (“Selling Source”), the seller, pursuant to which the Company acquired all of the issued and outstanding membership interests in Q Interactive. Q Interactive, a Delaware limited liability company, provides performance based digital marketing solutions for advertisers and publishers.
During the first quarter of 2017, Q Interactive’s business was merged and fully integrated into Fluent, as a result of the Q Interactive Integration, as defined in Note 4, “Acquisitions.” Q Interactive became a wholly-owned subsidiary of Fluent.
Refer to Note 4, “Acquisitions,” and Note 5, “Discontinued Operations,” to the consolidated financial statements for the details of the acquisitions and disposal of Advertising Business, respectively.
All share data have been retroactively restated to reflect cogint’s one-for-five Reverse Split, which was effective on March 19, 2015, as discussed above.
2. Summary of significant accounting policies
(a) Basis of preparation and liquidity
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
The Company reported a net loss of $53,206, $29,086 and $42,585 from continuing operations, and a net loss of $0, $0 and $41,950 from discontinued operations, for the years ended December 31, 2017, 2016 and 2015, respectively. Net cash provided by operating activities was $2,352 and $2,099 for the years ended December 31, 2017 and 2016, respectively, while net cash used in operating activities was $10,673 for the year ended December 31, 2015. As of December 31, 2017, the Company had an accumulated deficit of $167,437.
As of December 31, 2017, the Company had available cash of $16,629, an increase of $6,540 from $10,089 as of December 31, 2016. Based on this available cash, and the projections of growth in revenue and operating results in the coming year, and the January 2018 Registered Direct Offering of $13,500, as defined in Note 20, “Subsequent events,” the Company believes that it will have sufficient cash resources to finance its operations and expected capital expenditures for the next twelve months. The Company will contribute $20.0 million in cash to Red Violet upon completion of the Spin-off (as defined in Note 18, “Spin-off of Red Violet and Business Combination Agreement”).
Reclassifications
The Company has reclassified the cost of revenue (exclusive of depreciation and amortization) amounts from the gross profit section to the costs and expenses section of the consolidated statements of operations for each period presented and the gross profit subtotal has been removed. As a result, total costs and expenses have increased from $87,076 and $48,238 to $220,874 and $58,491 for the years ended December 31, 2016 and 2015, respectively.
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) 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, and 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 amountamounts 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, and 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 bank deposits wererestricted cash are held in major financial institutions located in the United States, which management believes have high credit ratings. The cash and bank deposits held in the United States, denominated in USD, amounted to $16,629 and $10,089 asAs of December 31, 2017 2022 and 2016, respectively. As of December 31, 2017, among the total2021, cash and cash equivalents $15,134 was held by Fluentwere available for use in servicing the Company's debt obligations and a portion of this cash may be used by Fluent only for 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 well-knownhighly rated financial institutions within the United States, and, at times, may maintain balances in United States bankssuch institutions in excess of the $250$250 thousand dollar USU.S. Federal Deposit Insurance Corporation insurance limit. The Company monitors the credit ratings of theits financial institutions to mitigate this risk.
(d) Accounts receivable and allowance for doubtful accounts
Accounts receivablereceivables are due from customers, andwhich are generally unsecured, whichand 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 thethis allowance based on reviews of customer-specific facts and economic conditions.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 any off-balance-sheetoff-balance sheet credit exposure related to its customers. The amount
Movements within the allowance for doubtful accounts was $1,852 and $790 asconsist of December 31, 2017 and 2016, respectively.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 thea 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 |
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Furniture, fixtures and office equipment |
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Leasehold improvements |
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When items of property and equipment are retired or otherwise disposed of, loss/income is charged or credited for the difference between the net book value and proceeds received thereon.
(f) Business combination
The Company records acquisitions pursuant to ASC 805 – Business Combinations. We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. 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 especially 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 we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
(g) Intangible assets other than goodwill
The Company’s intangible assets are initially recorded at the capitalized actual costs incurred, their acquisition cost, or fair value if acquired as part of a business combination, and amortized on a straight-line basis over their respective estimated useful lives, which are the periods over which the 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 and capitalized litigation costs, software developed for internal use, acquired proprietary technology, customer relationships, trade names, domain names, databases and non-competition agreements, including those resulting from the acquisitions. Intangible assets have estimated useful lives of 2-20 years.
We capitalize related legal and other costs incurred and paid in defending our claims to the intellectual property when a successful outcome in the litigation case is probable, and additionally, we believe the value of the intellectual property involved in the lawsuit is greater than the costs associated with this lawsuit as a result of a successful outcome. The recovery of costs upon a successful outcome will reduce the capitalized litigation costs carrying value. If the Company is ultimately unsuccessful, the costs would be charged to expense. In 2016, the Company wrote off the remaining balance of Purchased IP, as defined in Note 8, “Intangible assets, net,” and capitalized litigation costs of $4,055, which is reflected in costs and expenses as write-off of long-lived assets in the consolidated statement of operations for the year ended December 31, 2016, as a result of an unfavorable ruling in relation to the litigation.
In accordance with ASC 350-40, “Software — internal use software,” the Company capitalizes eligible costs, including salaries and staff benefits, share-based compensation expense, travel expenses incurred by relevant employees, and other relevant costs of
developing internal-use software that are incurred in the application development stage when developing or obtaining software for internal use. Once the software developed for internal use is ready for its intended use, it is amortized on a straight-line basis over its useful life.
(h) Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired when accounted for by the acquisition method of accounting. As of December 31, 2017 and 2016, the goodwill balance relates to the October 2, 2014 acquisition of Interactive Data by IDI Holdings, the Fluent Acquisition effective on December 8, 2015, and the Q Interactive Acquisition effective on June 8, 2016.
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. A quantitative step one assessment involves determining the fair value of each reporting unit using market participant assumptions. If we believe that the carrying value of a reporting unit with goodwill exceeds its estimated fair value, we will perform a quantitative step two assessment. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. On October 1, 2017, the Company early adopted ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit.
On October 1, 2017 and 2016, we performed a quantitative step one assessment on both of our reporting units. The results of our step one assessment proved that the estimated fair value of the reporting units exceed their carrying value. We concluded that goodwill was not impaired as of December 31, 2017 and 2016.
For purposes of reviewing impairment and the recoverability of goodwill, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values, including market multiples, discount rates, etc.
(i) Impairment of long-lived assets
Finite-lived intangible assets are amortized over their respective useful lives and, along with other long-lived assets, are evaluated for impairment periodically 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 long-lived assets for recoverability, including finite-lived intangibles and property and equipment, 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 cash inflows attributable to the asset, less estimated future undiscounted cash outflows, 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. 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. DueWhen 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 continued losses,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 its long-livedfor 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 determined noeventual 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 was necessary.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 valuevalues of assets can beare supported by thetheir undiscounted future cash flows. In calculating theestimating future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentagesoperating expenses, and terminal growth rates.
In September 2016,
For the year ended December 31, 2022, the Company wrote offdetermined the remaining balancevalue of Purchased IPintangible assets was recoverable except for certain internally developed software costs, as discussed in Note 6, Intangible assets, net. As of December 31,2022 and capitalized litigation costs of $4,055, as a result of an unfavorable ruling in relation to a litigation matter. In the first quarter of 2017,2021, the Company wrote offreviewed the remainingindicators 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 of long-lived assets of $3,626, relating primarilyrelates to the acquired proprietary technology and trade names acquired inacquisition of Fluent LLC Acquisition, the Q Interactive Acquisition, into the total costsAdParlor Acquisition, the Winopoly Acquisition, and expenses asthe 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 write-offquantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. For purposes of long-lived assets, as a resultreviewing 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 Q Interactive Integration.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.
We concluded there was no impairment as of December 31, 2017 and 2016.
(j)
(i) Fair value of financial instruments
ASC 820, “FairFair Value Measurements and Disclosures,” establishes a three-tierthree-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levelsvalue based on the extent to which inputs used in measuring fair value are observable in the market.
Level 1 – defined as observable inputs such as quoted prices in active markets;
• | 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. |
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 in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The fair value of the Company’s cash, and cash equivalents, restricted cash, accounts receivable, accounts payable and receivables and payablesaccrued liabilities approximate their carrying amountvalues because of the short-term nature of these instruments. We regard
As of December 31, 2022, the Company regards the fair value of theits long-term debt to approximate theirits carrying amounts as of December 31, 2017 based on the facts that the Term Loans have a variable interest rate, and interest rates have been relatively stable.value. This fair value assessment represents a Level 2 measurements. As of December 31, 2016, the net balance of acquisition consideration payable in stock of $10,225 was recognized in relation to the Fluent Acquisition. We used the probability-weighted method to determine the measurement. See Note 8, Long-term debt, net.
The fair value of the acquisition consideration payablecertain long-lived non-financial assets and liabilities may be required to be measured on a nonrecurring basis in stock, and thiscertain circumstances, including when there is evidence of impairment. As of December 31, 2022, certain non-financial assets have been measured at fair value assessment represents Level 3 measurements. It was classified as a non-current liability in the December 31, 2016 consolidated balance sheet because this liability will be settled with the Company’s common stock. On November 3, 2017, the Company issued a total of 2,750,000 shares of common stocksubsequent to settle the acquisition consideration payable in stock.
(k) Revenue recognition
their initial recognition. The Company provides information services and performance marketing services, and generally recognizes revenue when persuasive evidencedetermined 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 an arrangement exists, delivery has occurred or a service has been rendered, the price is fixed or determinable and collection is reasonably assured.impairment charge.
Information services revenue is generated from the risk management industry and consumer marketing industry. Information service revenue generated from the risk management industry is generally recognized on (a) a transactional basis determined by the customers’ usage, (b) a monthly fee or (c) a combination of both.
(j) Revenue pursuant to contracts containing a monthly fee is recognized ratably over the contract period, which is generally 1 year. recognition
Revenue pursuant to transactions determined by the customers’ usage is recognized when control of goods or services is transferred to customers, in amounts that reflect the transactionconsideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is complete. Information service revenue generated from consumer marketing industry is generally recognized when related services are delivered, in accordance with terms detailed in the agreements. These terms typically call for a transactional unit price per record deliveredto (a) deliver data records, based on predefined qualifying characteristics specified by the customer. These records are tracked in real time by the Company’s systems, reported, recorded, and regularly reconciled against advertiser data either in real timecustomer or at various contractually defined periods, whereupon the number of qualified records during such specified period are finalized and adjustments, if any, to revenue are made. Additional revenue is generated through revenue-sharing agreements with marketers who target offers to users provided by the Company from its owned and operated sites.
Performance marketing revenue is recognized when the(b) generate conversions, are generated based on predefined user actions (for example, a click, a registration, or the installation of an app install or a coupon print)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 accordancean amount that corresponds directly with terms detailedthe 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 advertiser agreements and/a contract with a customer, the Company assesses whether it or the attendant insertion orders. These terms typically call for a specific transactional unit price per conversion generated. These conversions are tracked in real time bythird-party supplier is the Company’s systems, reported, recorded, and regularly reconciled against advertiser data either in real timeprincipal or at various contractually defined periods, whereupon the number of qualified conversions during such specified period are finalized and adjustments, if any, to revenue are made.
Costs associated with separately priced customer service contracts are expensed as incurred.
Customer payments received in excessagent. 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 recognizedrevenue. 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 balance sheets,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 are(ii) contracts for which revenue is recognized as revenue whenat the amount to which the Company has the right to invoice for services are rendered. As of December 31, 2017 and 2016, deferred revenue totaled $298 and $318, respectively, all of which is expected to be realized in the following year.performed.
(l)
(k) Cost of revenue (exclusive of depreciation and amortization)
Our cost
Cost of revenue primarily includes data acquisitionmedia and related costs, and media costs. Data acquisition costswhich consist primarily of the cost to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements, and is used primarily to power solutions in our Information Services segment. Media costs consist primarily of the cost to acquire traffic through the purchase of impressions, clicks or clicksactions from publishers or third-partythird-party intermediaries, such as advertising exchanges, and istechnology 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 power solutions in our Performance Marketing segment. Other costdrive user traffic to the Company's and its clients' media properties. Cost of revenue includes expenses related to third-party infrastructure fees. 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 and promotion costs
Advertising and promotion costs are charged to operations as incurred. Advertising For the years ended December 31, 2022 and promotion2021, advertising costs, included in sales and marketing expenses, amounted to $2,818, $4,027were $1,067 and $388 for the years ended December 31, 2017, 2016 and 2015,$661, respectively.
(n)
(m) Share-based compensation
The Company accounts for share-based compensation to employees in accordance with ASC 718, “Compensation—Compensation - Stock Compensation.” Compensation ("ASC 718"). Under ASC 718, for awards with time-based conditions, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and generally recognizes thesuch costs on a straight-line basis over the period the employeerecipient 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, we beginthe Company begins recording share-based compensation when achievingachievement of the performance criteria is probable.
The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amount will be recorded as a cumulative adjustment in the period estimates are revised. Changes in our estimates and assumptions may cause us to realize material changes in share-based compensation expense in the future. During the first quarter of 2017, we adopted ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting,” which simplifies the accounting for share-based payment transactions, including the income tax consequences, and the Company elected the option to recognize gross share-based compensation expense with actualrecognizes forfeitures recognized as they occur, on a retrospective basis.occur.
The Company accounts for share-based compensation to non-employees in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees.” Under ASC 505-50, share-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. In the event that the fair value of the equity instruments issued in a share-based payment transaction with non-employees is more reliably measurable than the fair value of the consideration received, the transaction shall be measured based on the fair value of the equity instruments issued by the Company. Fair value of the consideration is updated each reporting period until the performance required to receive the award is complete. We recognize the fair value as expense on a straight-line basis over the expected service period.
(o)
(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.realized based on management's review of historical results and forecasts.
On December 22, 2017, the tax reform legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted, resulting in significant modifications to existing law, including lowering the U.S. corporate statutory income tax rate to 21%, among other changes. As a full valuation allowance was recognized in the current period, the Act does not have any material net impact on our consolidated financial statements, however, certain income tax disclosures, including the re-measurement of deferred tax assets and liabilities and related valuation allowance, and the effective income tax rate reconciliation, are affected. The Company follows the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of
ASC 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date. Due to certain ambiguities in the Act, the Company is still evaluating the impact of changes to Code Section 162(m) on our consolidated financial statements. It is the intention of the Company to complete the necessary analysis within the measurement period, upon receiving further clarifying guidance from U.S. Department of the Treasury, no later than December 31, 2018.
ASC 740 clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in the consolidatedits 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.
(p) Loss
(o) Income (loss) per share
Basic lossincome (loss) per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods.periods, in addition to restricted stock units ("RSUs") and restricted common stock that are vested not delivered. Diluted lossincome (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 the loss periods, as their effects would be anti-dilutive.
On March 19, 2015,
(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 effected the Reverse Split. The principal effect of the Reverse Split was to decrease the number of outstanding shares of the Company’s common shares. All per share amounts and shares outstanding up to the date of the Reverse Split have been adjusted to reflect the Reverse Split.excluding “All Other.”
(q) Contingencies
In the ordinary course of business, the Company is subject to loss contingencies that cover a wide 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 make a reasonablereasonably estimate of the amount of any such loss.
(r) Segment reporting
The Company has two operating segments, Information Services and Performance Marketing, as defined by ASC 280, “Segment Reporting.” As of December 31, 2015, the Company has disposed of all assets and liabilities related to its Advertising Business, and the related results of operations were recorded as discontinued operations.
(s) Significant concentrations and risks
Concentration of Credit Risk
Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents, and accounts receivable. As of December 31, 2017 and 2016, all of the Company’s cash and cash equivalents were deposited in financial institutions located in the United States, which management believes are of high credit quality. Accounts receivable are typically unsecured and are derived from revenue earned from customers. The risk with respect to accounts receivable is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process of outstanding balances.
Concentration of Customers
For the year ended December 31, 2017, there was no individual customer that accounted for more than 10% of the total revenue. For the years ended December 31, 2016 and 2015, the Company recognized revenue from one major customer, accounting for 12% and 14% of the total consolidated revenue, respectively. Such customer, however, manages the ad platforms of leading search engines and represents a consortium of advertisers, which limits overall concentration risk.
As of December 31, 2017 and 2016, there was no individual customer that accounted for more than 10% of the Company’s accounts receivable, net.
Concentration of Suppliers
There was no individual supplier that accounted for more than 10% of the total cost of revenue (exclusive of depreciation and amortization) for the year ended December 31, 2017. One media supplier accounted for 15% and 11% of the total cost of revenue for the years ended December 31, 2016 and 2015, respectively.
As of December 31, 2017, there was one media supplier that accounted for 11% of the Company’s total trade accounts payable. As of December 31, 2016, there was no individual vendor that accounted for more than 10% of the of the Company’s total trade accounts payable.
(t)(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 May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606).” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, January 2016, FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral2016-13,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 Effective Date,” which delays the effective date of ASU 2014-09 by one year. FASB also agreedamount expected to allow entities to choose to adopt the standard as of the original effective date. In March 2016, FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in evaluating whether it controls the good or the service before it is transferred to the customer.be collected. The new revenue recognition standard will beguidance is effective for public entities for annual reportingand interim periods beginning after December 15, 2017, and interim periods therein, that is, the first quarter of 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We plan to adopt ASU 2014-09 for the first quarter of 2018, and we anticipate adopting the standard using the modified retrospective method. Based on our assessment, we concluded that the guidance will not have any material impact on our consolidated financial statements and related disclosures.
In February 2016, FASB issued ASU No. 2016-02 (“ASU 2016-02”), “Leases (Topic 842),” which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for public entities in the first quarter of 2019, on a modified retrospective basis and early adoption is permitted. We do not plan to early adopt ASU 2016-02. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In August 2016, FASB issued ASU No. 2016-15 (“ASU 2016-15”), “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance for certain cash flow issues, including contingent consideration payments made after a business combination and debt prepayment or debt extinguishment costs, etc. The guidance will be effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. We plan to adopt ASU 2016-15 for the first quarter of 2018 and we do not expect ASU 2016-15 will have any material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”), “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance will be effective for us in the first quarter of 2020 on a prospective basis, 2022, and early adoption is permitted. The Company early adopted ASU 2017-04 on October 1, 2017,completed its assessment of the new guidance and the standard does not have adetermined it had no material impact on ourits consolidated financial statements.
3. Loss per shareIn March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic848): 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.
The information related to
3. Income (loss) per share
For the years ended December 31, 2022 and 2021 basic and diluted lossincome (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, 2017, 2016 2022 and 2015 is as follows: 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, |
| |||||||||
(In thousands, except share data) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (42,585 | ) |
Net loss from discontinued operations attributable to cogint |
|
| - |
|
|
| - |
|
|
| (41,950 | ) |
Net loss attributable to cogint |
| $ | (53,206 | ) |
| $ | (29,086 | ) |
| $ | (84,535 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted |
|
| 55,648,235 |
|
|
| 44,536,906 |
|
|
| 13,036,082 |
|
Loss per share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | (0.96 | ) |
| $ | (0.65 | ) |
| $ | (3.27 | ) |
Discontinued operations |
|
| - |
|
|
| - |
|
|
| (3.22 | ) |
Basic and diluted: |
| $ | (0.96 | ) |
| $ | (0.65 | ) |
| $ | (6.48 | ) |
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. Acquisitions Lease commitments
Q Interactive Acquisition
To expand and strengthenAt the Company’s business in the consumer marketing industry, on June 8, 2016,inception of a contract, the Company entered into determines whether the contract is or contains and c lease based onsummated the transactions contemplated by aMembership Interest Purchase Agreement the facts and circumstances present. Operating leases with Selling Source, pursuant to which the Company acquired all of the membership interests in Q Interactive.
As consideration for the Membership Interests, after preliminary adjustment for Q Interactive’s net working capital at closing, the Company issued to Selling Source 2,369,190 shares of the Company’s common stock, par value $0.0005 per share. Selling Source may receive additional consideration for the Membership Interests if 2016 gross revenue of Q Interactive equals or exceeds $25,000 (the “Q Interactive Earn-out Target”). Such additional consideration, if earned, would be paid in either of the following ways, at the seller’s option, no earlierterms greater than the one-year anniversary of the closing date (the “Q Interactive Earn-out Shares”): (i) 1,200,000 shares of common stock (subject to adjustment for certain capital events) or (ii) that number of shares of common stock equal to $10,000, in the aggregate, as determined by the volume weighted average price of the common stock for the ten trading days immediately preceding Selling Source’s receipt of a statement prepared by the Company stating the Q Interactive Earn-out Target has been achieved. As of December 31, 2016, after certain measurement period adjustments, the net balance of acquisition consideration payable in stock of $10,225 was recognized. We used the probability-weighted method to determine the fair value of the acquisition consideration payable in stock, and this fair value assessment represents Level 3 measurements. It was classified as a non-current liability inone year are recognized on the consolidated balance sheetsheets as Operating lease right-of-use assets, Current portion of December 31, 2016 because thisoperating lease liability, would be settledand Operating lease liability, net. Financing leases with terms greater than one year are recognized on the Company’s common stock. It was concluded thatconsolidated 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 Q Interactive Earn-out Target had been met duringconsolidated balance sheets.
Lease obligations and their corresponding assets are recorded based on the first quarterpresent value of 2017. On November 3, 2017,lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company issuedutilizes an appropriate incremental borrowing rate, which is the rate incurred to borrow an amount equal to the applicable lease payments on a totalcollateralized 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 2,750,000 shares of common stocka lease are split into three categories: lease components, non-lease components and non-components; however, the Company has elected to settlecombine lease and non-lease components into a single component. Rent expense associated with operating leases is recognized over the acquisition consideration payable in stock.
The following table summarizes the purchase price allocation and the fair valueexpected term on a straight-line basis. In connection with financing leases, depreciation of the net assets acquired and liabilities assumed (marked to market), andunderlying asset is recognized over the resulting amount of goodwill in the Q Interactive Acquisition (the legal and accounting acquiree) at the Effective Date of the Q Interactive Acquisition.
(In thousands) |
|
|
|
|
Assets acquired: |
|
|
|
|
Accounts receivable |
| $ | 4,673 |
|
Prepaid expenses and other current assets |
|
| 213 |
|
Property and equipment |
|
| 73 |
|
Intangible assets: |
|
|
|
|
Customer relationships |
|
| 4,900 |
|
Trade names |
|
| 1,700 |
|
Acquired proprietary technology |
|
| 2,150 |
|
Databases |
|
| 4,800 |
|
Non-competition agreements |
|
| 1,040 |
|
Total intangible assets |
|
| 14,590 |
|
Total assets acquired |
|
| 19,549 |
|
Liabilities assumed: |
|
|
|
|
Trade accounts payable |
|
| 2,297 |
|
Accrued expenses and other current liabilities |
|
| 1,153 |
|
Deferred revenue |
|
| 52 |
|
Total liabilities assumed |
|
| 3,502 |
|
Goodwill |
|
| 5,384 |
|
Total consideration |
| $ | 21,431 |
|
The intangible assets acquired in the Q Interactive Acquisition are amortizedexpected term on a straight-line basis overand 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 estimated useful lives.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 useful livesCompany'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 customer relationships, trade names, proprietary technology, databasesapproximately 42,685 square feet of office space in New York City. In connection with this lease agreement, the Company was required to establish and non-competition agreementsmaintain 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 10 years, 20 years, 5 years, 5 years 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 2 years, respectively, and2021, the weighted average useful life for these acquired intangible assets with definite useful lives is 8 years.lease-term and discount rate of the Company's leases are as follows:
Goodwill from
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 Q Interactive Acquisition principally relates to intangible assets that do not qualify for separate recognition, including the assembled workforce and synergies. Goodwill is tax deductible for income tax purposes and was assigned to the Information Services and Performance Marketing reporting segments in the amount of $1,765 and $3,619, respectively.
Q Interactive IntegrationCompany's lease liabilities are as follows:
On January 18, 2017, the Company’s management and Board of Directors approved a plan to merge and fully integrate Q Interactive’s business into Fluent (the “Q Interactive Integration”). As a result, Q Interactive became a wholly-owned subsidiary of Fluent.
(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 |
DuringFor the year ended December 31, 2017, an aggregate of $780 in restructuring costs associated with the Q Interactive Integration was recognized in general 2022 and administrative expenses, with $237 and $543 assigned2021, supplemental cash flow information related to the Information Services and Performance Marketing segments, respectively. Also, we wrote off the remaining balance of certain long-lived assets of $3,626, primarily relating to trade names and acquired proprietary technology acquired in the Q Interactive Acquisition, in the first quarter of 2017, and recognized it in costs and expensesleases is as a write-off of long-lived assets.
Fluent Acquisition
To accelerate the Company’s strategy to apply its next generation data fusion technology to not only the risk management industry, but also as an advanced data analytics platform to the consumer marketing industry, on December 8, 2015, the Company completed the Fluent Acquisition, pursuant to the Fluent Merger Agreement.
Cogint, Inc. is the legal and accounting acquirer in the Fluent Acquisition.
Pursuant to the Fluent Merger Agreement, the Company acquired 100% of the outstanding stock of Fluent from the sellers for the following consideration: (i) 15,001,850 shares of the Company’s common stock, as converted, par value $0.0005, with the fair value of $123.8 million, determined by multiplying the Company’s market stock price by the total shares of common stock, and (ii) approximately $99.3 million in cash. The following table summarizes the purchase price allocation and the fair value of the net assets acquired and liabilities assumed (marked to market), and the resulting amount of goodwill in the Fluent Acquisition at the Effective Date of Fluent Acquisition.follows:
(In thousands) |
|
|
|
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
| $ | 6,013 |
|
Accounts receivable |
|
| 20,250 |
|
Prepaid expenses and other current assets |
|
| 691 |
|
Property and equipment |
|
| 242 |
|
Intangible assets: |
|
|
|
|
Customer relationships |
|
| 30,086 |
|
Trade names |
|
| 16,357 |
|
Domain names |
|
| 191 |
|
Proprietary technology |
|
| 11,382 |
|
Databases |
|
| 26,492 |
|
Non-competition agreements |
|
| 728 |
|
Total intangible assets |
|
| 85,236 |
|
Other non-current assets |
|
| 763 |
|
|
|
| 113,195 |
|
Liabilities assumed: |
|
|
|
|
Accounts payable and accrued expenses |
|
| 10,653 |
|
Liability for employee incentive-based compensation plan |
|
| 4,000 |
|
Deferred revenue |
|
| 314 |
|
Deferred tax liabilities |
|
| 30,800 |
|
|
|
| 45,767 |
|
Goodwill |
|
| 155,645 |
|
Total consideration |
| $ | 223,073 |
|
Including: |
|
|
|
|
Cash consideration |
| $ | 99,266 |
|
Fair value of common stock, as converted, issued |
|
| 123,807 |
|
Total consideration |
| $ | 223,073 |
|
The intangible assets acquired in the Fluent Acquisition are amortized on a straight-line basis over the estimated useful lives. The useful lives for customer relationships, trade names, domain names, proprietary technology, databases and non-competition agreements are 7 years, 20 years, 20 years, 5 years, 10 years, and 5 years, respectively, and the weighted average useful life for these acquired intangible assets is 10 years.
Goodwill from the Fluent Acquisition principally relates to intangible assets that do not qualify for separate recognition, including the assembled workforce and synergies. Goodwill is not tax deductible for income tax purposes and was assigned to the Information Services and Performance Marketing reporting segments of $37,185 and $118,461, respectively.
TBO Merger with Tiger Media
To expand Tiger Media’s business into data and analytics industry, on March 21, 2015, the Effective Date of TBO Merger, Tiger Media and TBO Merger Sub, completed the merger with TBO, pursuant to the terms and conditions of the TBO Merger Agreement, as specified in Note 1(b), “Organization.”
For accounting purposes, the Company recognized the TBO Merger in accordance with ASC 805-40, “Reverse Acquisitions.”
Under the acquisition method of accounting, the assets (including identifiable intangible assets) and liabilities of Tiger Media prior to the TBO Merger as of the Effective Date were recorded at their respective fair values and added to those of IDI Holdings. Any excess of purchase price over the fair value of the net assets were recorded as goodwill. Financial statements of the Company issued after the TBO Merger would reflect these fair values and would not be restated retroactively to reflect the historical financial position or results of operations of Tiger Media.
Under the reverse acquisition, the accounting acquiree, the Company, issued equity shares to the owners of the accounting acquirer, IDI Holdings. The consideration transferred by IDI Holdings for its interest in the Company is based on the number of equity interests IDI Holdings would have had to issue to give the owners of the Company the same percentage equity interest in the combined entity that results from the reverse acquisition. The fair value of the number of equity interests calculated in that way can be used as the fair value of consideration transferred in exchange for the Company. Certain shareholders of IDI Holdings also have the right to receive additional Earn-out Shares subject to an earn-out (as defined in Note 13 below). The earn-out conditions were deemed probable upon the Effective Date of the Fluent Acquisition. As the measurement period had closed, the Company recorded a non-cash charge of $14,300 in other expense as contingent earn-out shares, during the year ended December 31, 2015.
The following table summarizes the purchase price allocation and the fair value of the net assets acquired and liabilities assumed (marked to market), and the resulting amount of goodwill in the acquisition of Tiger Media (the accounting acquiree) at the Effective Date of TBO Merger.
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 |
(In thousands) |
|
|
|
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
| $ | 3,569 |
|
Accounts receivable |
|
| 1,808 |
|
Other current assets |
|
| 326 |
|
Property and equipment |
|
| 1,419 |
|
Intangible assets, net |
|
| 4,280 |
|
Long-term deferred expenses |
|
| 586 |
|
|
|
| 11,988 |
|
Liabilities assumed: |
|
|
|
|
Accounts payable |
|
| 1,519 |
|
Accrued expenses and other payables |
|
| 736 |
|
Acquisition consideration payable |
|
| 464 |
|
Amounts due to related parties |
|
| 124 |
|
Deferred revenue |
|
| 80 |
|
|
|
| 2,923 |
|
Non-controlling interests |
|
| 425 |
|
Goodwill |
|
| 35,472 |
|
Total consideration |
| $ | 44,112 |
|
Goodwill from the acquisition principally relates to the assembled workforce and the synergy effects.
As all assets and liabilities related to the Advertising Business have been disposed as of December 31, 2015 for $0, all goodwill was written off in 2015.
5. Discontinued operations
As discussed in Note 1(b), “Organization,” on June 30, 2015, the Company’s Board of Directors approved the plan to discontinue the Advertising Business. The Company recognized the transactions in accordance with ASC 205-20, “Discontinued Operations.” The Company has disposed of all assets and liabilities related to its Advertising Business, by the disposal of its equity interests in the Advertising Business to an independent third party in 2015 for $0.
The following financial information presents the results of operations of the Advertising Business for the year ended December 31, 2015.
|
| Year Ended |
| |
(In thousands) |
| December 31, 2015 |
| |
Revenue |
| $ | 218 |
|
Pretax loss from operations of discontinued operations |
| $ | (1,236 | ) |
Pretax loss on disposal of discontinued operations |
|
| (41,095 | ) |
Income tax expense |
|
| 127 |
|
Less: Non-controlling interests |
|
| (508 | ) |
Net loss from discontinued operations attributable to cogint |
| $ | (41,950 | ) |
Included in the net loss from discontinued operations, the Company recorded a loss on disposal of the Advertising Business of $41,095 for the year ended December 31, 2015, the majority of which are non-cash charges, pursuant to the following:
|
| Year Ended |
| |
(In thousands) |
| December 31, 2015 |
| |
Write-off of goodwill |
| $ | (35,472 | ) |
Write-off of intangible assets |
|
| (4,080 | ) |
Write-off of long-term deferred assets |
|
| (517 | ) |
Lease agreements early termination compensation expenses |
|
| (1,211 | ) |
Employee severance compensation expenses |
|
| (191 | ) |
Gain on write-off of acquisition consideration payable |
|
| 463 |
|
Loss on disposal of equity interests |
|
| (87 | ) |
Loss on disposal of discontinued operations |
| $ | (41,095 | ) |
6. Accounts receivable, net
Accounts receivable, net consist of the following:
(In thousands) |
| December 31, 2017 |
|
| December 31, 2016 |
| ||
Accounts receivable |
| $ | 39,780 |
|
| $ | 31,748 |
|
Less: Allowance for doubtful accounts |
|
| (1,852 | ) |
|
| (790 | ) |
Total accounts receivable, net |
| $ | 37,928 |
|
| $ | 30,958 |
|
The movement of allowance for doubtful accounts is shown below:
|
| Year Ended December 31, |
| |||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Beginning balance |
|
| 790 |
|
|
| 318 |
|
|
| 105 |
|
Charges to expenses |
|
| 2,020 |
|
|
| 772 |
|
|
| 213 |
|
Write-offs |
|
| (958 | ) |
|
| (300 | ) |
|
| - |
|
Ending balance |
| $ | 1,852 |
|
| $ | 790 |
|
| $ | 318 |
|
Provision for bad debts of $2,020, $772 and $213 was provided for the years ended December 31, 2017, 2016 and 2015, respectively.
7. Property and equipment, net
Property and equipment, net consistconsists of the following:
(In thousands) |
| December 31, 2017 |
|
| December 31, 2016 |
| December 31, 2022 | December 31, 2021 | ||||||||
Computer and network equipment |
| $ | 1,035 |
|
| $ | 918 |
| $ | 592 | $ | 572 | ||||
Furniture, fixtures and office equipment |
|
| 1,046 |
|
|
| 624 |
| ||||||||
Furniture, fixtures, and office equipment | 888 | 966 | ||||||||||||||
Leased furniture, fixtures, and office equipment | 875 | 875 | ||||||||||||||
Leasehold improvements |
|
| 1,075 |
|
|
| 510 |
| 1,260 | 1,290 | ||||||
Total cost of property and equipment |
|
| 3,156 |
|
|
| 2,052 |
| 3,615 | 3,703 | ||||||
Less: accumulated depreciation and amortization |
|
| (1,378 | ) |
|
| (702 | ) | (2,651 | ) | (2,246 | ) | ||||
Property and equipment, net |
| $ | 1,778 |
|
| $ | 1,350 |
| $ | 964 | $ | 1,457 |
DepreciationFor the years ended December 31, 2022 and 2021, depreciation of property and equipment of $753, $547 and $143 was recorded for the years ended December 31, 2017, 2016 and 2015,$491 and $780, respectively.
8.6. Intangible assets, net
Intangible assets, net, other than goodwill, consist of the following:
(In thousands) |
| Amortization period |
| December 31, 2017 |
| December 31, 2016 |
| ||
Gross amount: |
|
|
|
|
|
|
|
|
|
Software developed for internal use |
| 3-10 years |
|
| 19,614 |
|
| 11,438 |
|
Acquired proprietary technology |
| 5 years |
|
| 11,382 |
|
| 13,532 |
|
Customer relationships |
| 7-10 years |
|
| 34,986 |
|
| 34,986 |
|
Trade names |
| 20 years |
|
| 16,357 |
|
| 18,057 |
|
Domain names |
| 20 years |
|
| 191 |
|
| 191 |
|
Databases |
| 5-10 years |
|
| 31,292 |
|
| 31,292 |
|
Non-competition agreements |
| 2-5 years |
|
| 1,768 |
|
| 1,768 |
|
|
|
|
|
| 115,590 |
|
| 111,264 |
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
Software developed for internal use |
|
|
|
| (1,779 | ) |
| (505 | ) |
Acquired proprietary technology |
|
|
|
| (4,693 | ) |
| (2,660 | ) |
Customer relationships |
|
|
|
| (9,628 | ) |
| (4,840 | ) |
Trade names |
|
|
|
| (1,686 | ) |
| (916 | ) |
Domain names |
|
|
|
| (20 | ) |
| (10 | ) |
Databases |
|
|
|
| (6,964 | ) |
| (3,354 | ) |
Non-competition agreements |
|
|
|
| (1,113 | ) |
| (448 | ) |
|
|
|
|
| (25,883 | ) |
| (12,733 | ) |
Net intangible assets: |
|
|
|
|
|
|
|
|
|
Software developed for internal use |
|
|
|
| 17,835 |
|
| 10,933 |
|
Acquired proprietary technology |
|
|
|
| 6,689 |
|
| 10,872 |
|
Customer relationships |
|
|
|
| 25,358 |
|
| 30,146 |
|
Trade names |
|
|
|
| 14,671 |
|
| 17,141 |
|
Domain names |
|
|
|
| 171 |
|
| 181 |
|
Databases |
|
|
|
| 24,328 |
|
| 27,938 |
|
Non-competition agreements |
|
|
|
| 655 |
|
| 1,320 |
|
|
|
|
| $ | 89,707 |
| $ | 98,531 |
|
The Company recorded the intellectual property purchased by the Company’s subsidiary, TBO, from Ole Poulsen (“Purchased IP”), pursuant to the Intellectual Property Purchase Agreement dated October 14, 2014, and related legal and other costs incurred and paid in defending the Company’s claims to the Purchased IP against TransUnion Risk and Alternative Data Solutions, Inc. (“TRADS”), in intangible assets as Purchased IP and capitalized litigation costs. In 2016, the Company wrote off the remaining balance of Purchased IP and capitalized litigation costs of $4,055, which is reflected in costs and expenses as write-off of long-lived assets in the consolidated statements of operations for the year ended December 31, 2016, as a result of an unfavorable ruling in relation to the litigation.
As a result of the Q Interactive Integration approved on January 18, 2017, the remaining balance of long-lived assets of $3,626, relating primarily to the acquired proprietary technology and trade names acquired in the Q Interactive Acquisition, was written off to costs and expenses as a write-off of long-lived assets during the first quarter of 2017.
(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 amountamounts associated with software developed for internal use mainly representsprimarily 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 allprimarily represent the fair values of intangible assets acquired as a result of the acquisition of Fluent, AcquisitionLLC, 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 Q Interactive Acquisition.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.
Amortization
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 of $13,440, $12,084related to intangible assets, and $698 were included in depreciation and amortization expenses forin the Company's consolidated statements of operations, were $12,723 and $12,390, respectively.
For the years ended December 31, 2017, 2016 2022 and 2015, respectively. As of December 31, 2017, intangible assets of $3,869, included in2021, the gross amounts of software developed for internal use, have not started amortization, as they are not ready for their intended use.
The Company capitalized $8,176$4,480 and $11,318 during the years ended December 31, 2017 and 2016, with $8,176 and $8,867$3,074, respectively, most of which was related to internally developed software, and $0wrote off $186 and $2,451 related$354, respectively, due to purchased intellectual property litigation costs, respectively.abandonment of certain internally developed software whose net carrying values were not recoverable.
As of December 31, 2017,2022, estimated amortization expenses related to the Company’s intangible assets for 20182023 through 20232028 and thereafter are as follows:
(In thousands) |
|
|
|
|
Year |
| December 31, 2017 |
| |
2018 |
| $ | 14,236 |
|
2019 |
|
| 14,307 |
|
2020 |
|
| 13,664 |
|
2021 |
|
| 10,500 |
|
2022 |
|
| 9,661 |
|
2023 and thereafter |
|
| 27,339 |
|
Total |
| $ | 89,707 |
|
(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 |
9.7. Goodwill
Goodwill represents the costdifference 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 excessconnection 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 net assets acquired inFluent reporting unit's goodwill for potential impairment as of June 30, 2022. The Company considered a business combination. Ascombination of December 31, 2017income and 2016,market approaches to determine the balance of goodwill includes $5,227 as a result of the acquisition of Interactive Data effective on October 2, 2014, $155,645 as a resultfair value of the Fluent Acquisition effective on December 8, 2015,reporting unit. The Company determined that a market-based approach, which considered the Company’s implied market multiple applied to management’s forecast and $5,384 asfurther adjusted for a resultcontrol premium, provided the best indication of fair value of the Q Interactive Acquisition effective on 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 8, 2016.30, 2022.
In accordance with ASC 350, “Intangibles - GoodwillDuring 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 Other,” goodwill is tested at least annually for impairment, or when events or changes in circumstances indicateconcluded 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 amountvalue by approximately 4%. Based on the results from the interim test as of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whetherSeptember 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 itsthe fair value exceedswas less than the carrying value. Wevalue 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 October 1, 2017the results of this annual test, which resulted in no impairmentused a combination of goodwill.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%.
As of
During the three months ended December 31, 20172022, the Company determined that the lower-than-expected operating results of the Company and 2016, there are no events or changesthe decline in circumstancesthe 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 indicatedetermine 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 is impaired.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.
10. Accrued expenses and other current liabilities8. Long-term debt, net
Accrued expenses and other current liabilities consist
Long-term debt, net, related to the New Credit Facility (as defined below) consisted of the following:
(In thousands) |
| December 31, 2017 |
|
| December 31, 2016 |
| ||
Employee compensation expenses |
| $ | 4,429 |
|
| $ | 2,530 |
|
Litigation settlement payable (1) |
|
| 4,000 |
|
|
| - |
|
Professional fee payable |
|
| 4,575 |
|
|
| 2,954 |
|
Business credit card payable |
|
| 2,070 |
|
|
| 117 |
|
Puttable common stock that may require cash settlement (2) |
|
| 1,350 |
|
|
| - |
|
Accrued interest expense |
|
| 94 |
|
|
| 231 |
|
Insurance payable |
|
| 138 |
|
|
| 227 |
|
Advertising and marketing expenses payable |
|
| 293 |
|
|
| 174 |
|
Deferred rent |
|
| 318 |
|
|
| 113 |
|
Miscellaneous expenses payable |
|
| 879 |
|
|
| 635 |
|
Total |
| $ | 18,146 |
|
| $ | 6,981 |
|
(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 |
|
|
|
|
11. Long-term debt, net
Long-term debt, net, including promissory notes payable to certain shareholders, net, as of December 31, 2017, consist of the following:Refinanced Term Loan
|
| 12% term loan, |
|
| 12% incremental term loan, |
|
| 10% promissory notes, |
|
|
|
|
| |||
(In thousands) |
| due 2020 |
|
| due 2020 |
|
| due 2021 |
|
| Total |
| ||||
Principal amount |
| $ | 40,688 |
|
| $ | 14,312 |
|
| $ | 10,000 |
|
| $ | 65,000 |
|
Less: unamortized debt issuance costs |
|
| (2,753 | ) |
|
| (672 | ) |
|
| (312 | ) |
|
| (3,737 | ) |
Add: PIK interest accrued to the principal balance |
|
| 542 |
|
|
| 9 |
|
|
| 1,149 |
|
|
| 1,700 |
|
Long-term debt, net |
|
| 38,477 |
|
|
| 13,649 |
|
|
| 10,837 |
|
|
| 62,963 |
|
Less: Current portion of long-term debt |
|
| (2,062 | ) |
|
| (688 | ) |
|
| - |
|
|
| (2,750 | ) |
Long-term debt, net (non-current) |
| $ | 36,415 |
|
| $ | 12,961 |
|
| $ | 10,837 |
|
| $ | 60,213 |
|
Long-term debt, net, including promissory notes payable to certain shareholders, net, asOn March 31, 2021, Fluent, LLC redeemed in full $38,318 aggregate principal amount of December 31, 2016, consist of the following:
|
| 12% term loan, |
|
| 10% promissory notes, |
|
|
|
|
| ||
(In thousands) |
| due 2020 |
|
| due 2021 |
|
| Total |
| |||
Principal amount |
| $ | 42,750 |
|
|
| 10,000 |
|
| $ | 52,750 |
|
Less: unamortized debt issuance costs |
|
| (3,964 | ) |
|
| (384 | ) |
|
| (4,348 | ) |
Add: PIK interest accrued to the principal balance |
|
| 479 |
|
|
| 1,132 |
|
|
| 1,611 |
|
Long-term debt, net |
|
| 39,265 |
|
|
| 10,748 |
|
|
| 50,013 |
|
Less: Current portion of long-term debt |
|
| (4,135 | ) |
|
| - |
|
|
| (4,135 | ) |
Long-term debt, net (non-current) |
| $ | 35,130 |
|
| $ | 10,748 |
|
| $ | 45,878 |
|
Term Loan
On 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 ana credit agreement (“Credit(the “Credit Agreement”) with certain financial institutionssubsidiaries of Fluent, LLC as guarantors, and theCitizens Bank, N.A. as administrative agent, (collectively, “Whitehorse”),lead arranger and bookrunner. The Credit Agreement provides for a term loan in the aggregate principal amount of $45.0 million (“Term$50,000 funded on the closing date (the “Term Loan”). Fluent’s obligations in respect, along with an undrawn revolving credit facility of up to $15,000 (the "Revolving Loans," and together with the Term Loan, are guaranteed by the " Credit Facility"). On December 20, 2022, the Company and substantially all of the other direct and indirect subsidiaries of the Company. The obligations of Fluent and the obligations of the guarantors are secured by substantially all of such entities’ assets. The Credit Agreement has a five-year term.
Prior to the Amendment No. 3 to Credit Agreement entered into on January 19, 2017 (the “Amendment No. 3”), payments of principal in the amount of $563 each are due on the last day of each quarter during the term ofsecond amendment to the Credit Agreement, commencing March 31, 2016. Additionally, 50% of excess cash flow of Fluent and its subsidiaries forwhich amended certain provisions to: (i) reflect the immediately preceding fiscal year is required, in Whitehorse’s sole discretion, to be paid towards the Term Loan obligations, commencing with the fiscal year ending December 31, 2016. As a resultreplacement of the excess cash flow forcurrent 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 year ended December 31, 2016, we reclassified a total amount of $1,885 into current portion of long-term debt inloan facilities (the “Credit Facilities”) provided under the consolidated balance sheet as of December 31, 2016. Whitehorse subsequently refusedCredit Agreement.
Borrowings under the prepayment and we reclassified the $1,885 back to non-current portion of long-term debt in the first quarter of 2017. Whitehorse also refused the prepayment of $4,608 resulting from the excess cash flow for the year ended December 31, 2017. The Credit Agreement provides for certain other customary mandatory prepayments upon certain events, and also provides for certain prepayment premiums during the first four years of the Term Loan, provided that the prepayment premiums are not applicable to scheduled payments of principal, the required excess cash flow payments and certain other required prepayments.
Incremental Term Loan
On January 19, 2017, Fluent entered into Amendment No. 3, amending Fluent's Term Loan facility dated December 8, 2015. The Amendment No. 3, among other things, provides forbear interest at a new term loan in the principal amount of $15,000 ("Incremental Term Loan"), subjectrate per annum equal to the terms and conditions of the Amendment No. 3, and modifies certain other Credit Agreement provisions, including certain financial covenants and related definitions. The entire Incremental Term Loan of $14,039, net of debt issuance costs of $961, was received on February 1, 2017.
The Term Loan and Incremental Term Loan (collectively, the "Term Loans") are guaranteedbenchmark selected by the Company andBorrower, which may be based on the other direct and indirect subsidiaries of the Company, and are secured by substantially all of the assets of the Company and its direct and indirect subsidiaries, including Fluent, in each case, on an equal and ratable basis. The Term Loans accrue interest at theAlternative Base Rate, LIBOR rate of: (a) either, at Fluent's option, LIBOR (subject to a floor of 0.50%0.25%) plus 10.5% per annum, or base rate plus 9.5% per annum, payable in cash, plus (b) 1% per annum, payable, at Fluent's option, in either cash or in-kind. Payments of principal of the Term Loans are $688 per quarter, replacing the original $563 for the Term Loan, payable at the end of each calendar quarter, commencing on March 31, 2017. The Term Loans mature on December 8, 2020.
Whitehorse Warrants
In connection with the Term Loan, on December 8, 2015, the Company issued warrants to purchase, in aggregate, 200,000 shares of common stock, to Whitehorse. Such warrants are exercisable at any time (i) following the date of approval for listing of the common stock issuable upon exercise of such warrants on the NYSE MKT and (ii) prior to the 10-year anniversaryelection 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 dateCredit Facility was 2.50% (LIBOR + 2.25%), which increased to 6.17% (Term SOFR + 0.1% + 1.75%) as of issuance of such warrants at $8.00 per share. Pursuant to a Limited Consent and Amendment No. 2 to Credit Agreement entered into on September 30, 2016 (the “Amendment No. 2”), the exercise price of the above-mentioned warrants was amended to $5.08 from $8.00, and the Company also issued additional new warrants to purchase 100,000 shares of common stock, with an exercise price of $5.08 per share and an expiration date of September 30, 2026. As a result of the amended and newly issued warrants, an aggregate of $492 was recognized as debt issuance costs and additional paid-in capital.
On November 3, 2017, the Company entered into warrant amendments (the "Whitehorse Warrant Amendments") with Whitehorse, regarding the warrants to purchase an aggregate of 300,000 shares of common stock (collectively, the “Whitehorse Warrants”), at an exercise price of $5.08 per share. The Company agreed to reduce the exercise price to $3.00 per share. Whitehorse exercised all the Whitehorse Warrants for 300,000 shares of common stock (the “Whitehorse Shares”) and gross proceeds of an aggregate of $900 were received in November 2017. Pursuant to the terms of the Whitehorse Warrant Amendments, Whitehorse is prohibited from engaging or otherwise agreeing to any sale, pledge, or other transfer of the Whitehorse Shares for a period of 120 days (the “Whitehorse Lock-Up Period”) following the exercise of such warrants in full. Following the Whitehorse Lock-Up Period, (i) Whitehorse may only sell such number of shares underlying the warrants representing up to 5% of the Company’s daily trading volume on the immediately prior trading day prior to a sale and (ii) Whitehorse may not transfer any of the Whitehorse Shares for less than $4.50 per share, provided that Whitehorse may not transfer any Whitehorse Shares unless the Company has an effective registration statement permitting the resale of the Whitehorse Shares. Upon either the Record Date or the termination of the Business Combination Agreement, Whitehorse can require the Company to purchase from them all the Whitehorse Shares at a price of $4.50 per share. As of December 31, 2017, a liability of $1,350 in relation to the Whitehorse Shares with put rights was classified into current liabilities.
The fair value of warrants issued to Whitehorse (collectively, the “Whitehorse Warrants”) of $492 and $1,586 were recognized as debt costs for the years ended December 31, 2016 and 2015, respectively. A gain of $350, as a result of the Whitehorse Warrant Amendments, was capitalized as a deduction to the balance of debt costs during the year ended December 31, 2017. As of December 31, 2017 and 2016, the debt costs balance was $897 and $1,679, respectively. We estimate the fair value of such warrants on the date of grant or amendment using a Black-Scholes pricing model, applying the following assumptions, and amortize the fair value to interest expense over the term of the Term Loans using the interest method:2022.
|
| Year Ended December 31, | ||||
|
| 2017 |
| 2016 |
| 2015 |
Expected term (in years) |
| 0.08 - 9 |
| 10 |
| 10 |
Risk-free interest rate |
| 1.02% - 2.35% |
| 1.56% |
| 2.24% |
Expected volatility |
| 82.50% |
| 90.47% |
| 114.33% |
Expected dividend yield |
| 0.00% |
| 0.00% |
| 0.00% |
Credit Agreement
The Credit Agreement as amended, contains customary representationsmatures on March 31,2026 and warranties, covenants (including certain financial covenants), and eventsinterest is payable monthly. Scheduled principal amortization of default, upon the occurrence ofTerm Loan is $1,250 per quarter, which Whitehorse may acceleratecommenced with the obligations under the Credit Agreement. Certain restrictive covenants impose limitations on the way we conduct our business, including limitations on the amount of additional debt we can incur and restricts our ability to make certain investments and other restricted payments, including certain intercompany payments of cash and other property. The financial covenants include the requirement that the Company and its subsidiaries attain, on a quarterly basis, certain minimum EBITDA thresholds for the immediately preceding twelve-month period, Fluent and its subsidiaries attain, on a quarterly basis, certain minimum EBITDA thresholds for the immediately preceding twelve-month period, Fluent and its subsidiaries meet certain leverage ratios on a quarterly basis, Fluent and its subsidiaries meet certain fixed charge coverage ratios on a quarterly basis, and Fluent and its subsidiaries maintain at all times cash and cash equivalent balances of at least $2.0 million (or such lesser amount agreed to by Whitehorse), in the aggregate. On August 7, 2017, the Company and its subsidiaries entered into Amendment No. 4 to the Credit Agreement (“Amendment No. 4”). Amendment No. 4 provides that there shall be no requirement that the Company and its subsidiaries meet any minimum EBITDA threshold for the twelve-month periodfiscal quarter ended June 30, 2017. The requirement that Fluent and its subsidiaries meet the required minimum EBITDA threshold for the twelve-month period ended June 30, 2017 was not impacted by Amendment No. 4. On November 3, 2017, the Company and its subsidiaries entered into Amendment No. 5 to the Credit Agreement (“Amendment No. 5”). Amendment No. 5 provides for certain amendments to the definition of EBITDA by adding back acquisition and restructuring costs resulting from the Business Combination Transaction (as defined below), and costs relating to litigation with TRADS that we settled on July 22, 2017. Amendment No. 5 also amends the minimum EBITDA threshold for the Company and its subsidiaries beginning with the quarter ended September 30, 2017. In addition, Amendment No. 5 allows for additional transfer of cash from Fluent to the Company, provided that Fluent maintains a minimum cash balance. As of 2021. At December 31, 2017, 2022, the Company was in compliance with all of the financial and other covenants under the Credit Agreement.
Promissory Notes
On December 8, 2015, the Company entered into and consummated the promissory notes financing (the “Promissory Notes”) with each of Frost Gamma Investment Trust (“Frost Gamma”), an affiliate of Phillip Frost, M.D., the Vice ChairmanThe proceeds of the Company’s BoardTerm 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 Directors, Michael Brauser,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 Executive ChairmanExisting 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 Boardmatters pending involving the Federal Trade Commission and the Pennsylvania Office of Directors then, and another investor (the “Promissory Note Investors”), pursuant to which the Company issued Promissory Notes of $5.0 million to Frost Gamma, $4.0 million to Michael Brauser, and $1.0 million to another investor, for an aggregate financingAttorney General described in the amountCompany’s Form 10-Q filed with the SEC on November 7, 2022. These matters do not represent events of $10.0 million. The Promissory Note Investors received (i) a promissory note in the principal amount equal to the amount of their respective promissory notes, with a rate of interest of 10% per annum, which interest shall be capitalized monthly by adding to the outstanding principal amount of such Promissory Notes, and (ii) a grant of 100 shares of the Company’s Series B Non-voting Convertible Preferred Stock, par value $0.0001 per share (“Series B Preferred”) for each $1.0 million increment of their respective Promissory Notes, with a total of 1,000 shares of Series B Preferred granted (“Promissory Note Shares”), pursuant to fee letter agreements. Each share of Series B Preferred automatically converted into 50 shares of common stock in February 2016.
Under the terms of the Promissory Notes, the Company is required to repay the principal and all accrued interest six months after the repayment of all amounts duedefault under the Credit Agreement, exceptbut 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 Company may repaynext twelve months and beyond regardless of access to the Promissory Notes earlier from the proceedsRevolving Credit Facility.
Maturities
As of a round of public equity financing. During the year ended December 31, 2017, the Company repaid accrued paid-in-kind (“PIK”) interest of $533, $426, and $107 to Frost Gamma, Michael Brauser and another investor, respectively.
The fair value of Promissory Note Shares of $413 was calculated by multiplying the closing common stock market price of the Company on December 8, 2015 of $8.45, with the total shares granted, as converted, which was recognized as debt costs, and the unamortized balance as at December 31, 2017 and 2016 was $284 and $350, respectively.
In connection with the Promissory Notes, on December 8, 2015, the Company, each lender under the Promissory Notes, and Whitehorse entered into a Subordination Agreement (the “Subordination Agreement”)2022, pursuant to which the debt under the Promissory Notes was made expressly subordinate to the debt under the Credit Agreement. In addition, the Subordination Agreement restricts certain terms of the Promissory Notes. The terms of the Subordination Agreement shall remain in effect until such time that all obligations under the Credit Agreement are paid in full.
The net balance of Promissory Notes was presented as promissory notes payable to certain shareholders, net, in the consolidated balance sheets.
Maturities
Excluding potential additional principal payments due on the Term Loans based on excess cash flows for the immediately preceding fiscal year, as mentioned above, scheduled future maturities of total debts asthe Credit Agreement, including the required principal prepayment based on a portion of December 31, 2017 werethe Company's quarterly excess cash flow and excluding potential future additional principal prepayments, are as follows:
(In thousands) |
|
|
|
|
Year |
|
|
|
|
2018 |
| $ | 2,750 |
|
2019 |
|
| 2,750 |
|
2020 |
|
| 49,500 |
|
2021 |
|
| 10,000 |
|
Total maturities |
|
| 65,000 |
|
Add: Accrued PIK interest, added to the principal |
|
| 1,700 |
|
Less: Unamortized debts issuance costs |
|
| (3,737 | ) |
Total |
| $ | 62,963 |
|
(In thousands) | ||||
Year | ||||
2023 | $ | 5,000 | ||
2024 | 5,000 | |||
2025 | 5,000 | |||
2026 | 26,250 | |||
Total maturities | $ | 41,250 |
Fair value
As mentioned above,of December 31, 2022, the Company’sfair value of long-term debt outstanding as of December 31, 2017 represented 1) the Term Loans with interest at (a) either, at Fluent's option, LIBOR (subject to a floor of 0.50%) plus 10.5% per annum, or base rate plus 9.5% per annum, payable in cash, plus (b) 1% per annum, payable, at Fluent's option, in either cash or in-kind, and 2) the Promissory Notes pursuant to the agreements effective December 8, 2015, with a rate of interest of 10% per annum. Considering the Term Loans have a variable interest rate, and interest rates have been relatively stable, we regard the fair values of the long-term debtis considered to approximate theirits carrying amount as of December 31, 2017. Thisvalue. The fair value assessment represents a Level 2 measurements. measurement.
12.9. Income taxes
The Company is subject to federal and state income taxes in the United States. The benefitFor the years ended December 31, 2022 and 2021, the provision for income taxes on lossincome (loss) from continuing operations consisted of the following:
|
| Year Ended December 31, |
| Year Ended December 31 | ||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| 2022 | 2021 | |||||||||
Current |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current: | ||||||||||||||||||||
Federal |
| $ | - |
|
| $ | - |
|
| $ | (123 | ) | $ | 1,392 | $ | — | ||||
State |
|
| - |
|
|
| 87 |
|
|
| - |
| 606 | (108 | ) | |||||
|
|
| - |
|
|
| 87 |
|
|
| (123 | ) | ||||||||
Deferred |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign | 3 | 156 | ||||||||||||||||||
Total current | 2,001 | 48 | ||||||||||||||||||
Deferred: | ||||||||||||||||||||
Federal |
|
| (7,117 | ) |
|
| (14,278 | ) |
|
| (15,771 | ) | (3,730 | ) | (3,494 | ) | ||||
State |
|
| (1,855 | ) |
|
| (1,732 | ) |
|
| (689 | ) | (537 | ) | (813 | ) | ||||
Valuation allowance |
|
| 8,972 |
|
|
| 1,881 |
|
|
| - |
| ||||||||
|
|
| - |
|
|
| (14,129 | ) |
|
| (16,460 | ) | ||||||||
Income tax benefit |
| $ | - |
|
| $ | (14,042 | ) |
| $ | (16,583 | ) | ||||||||
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 | )% |
On December 22, 2017,Under the Tax Cuts and Jobs Act was enacted, resulting in significant modificationsof 2017, research and development costs are no longer fully deductible and are required to existing law, including loweringbe capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases the U.S. corporate statutoryCompany'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 rate to 21%, among other changes.purposes. As a full valuation allowance was provided as of December 31, 2017,2022 and 2021, the Act does not have any material net impact on our consolidated financial statements, however, certain income tax disclosures, including the re-measurementsignificant components of deferred tax assets and liabilities and related valuation allowance, and the effective income tax rate reconciliation, are affected. The Company follows the guidance in SAB 118, which provides additional clarification regarding the application of ASC 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date. Due to certain ambiguities in the Act, the Company is still evaluating the impact of changes to Code Section 162(m) on our consolidated financial statements. It is the intention of the Company to complete the necessary analysis within the measurement period, upon receiving further clarifying guidance from U.S. Department of the Treasury, no later than December 31, 2018.
The Company’s effective income tax benefit differed from the U.S. corporate statutory income tax rate of 34% for the years ended December 31, 2017, 2016 and 2015. For the years ended December 31, 2017, this difference is mainly the result of the valuation allowance applied against the Company’s deferred tax assets, share-based compensation tax deficiencies, deferred remeasurement for tax rate change resulting from the Act, and state income taxes. For the years ended December 31, 2016, this difference is mainly the result of the valuation allowance applied against the Company’s deferred tax assets and state income taxes. For the year ended December 31, 2015, this difference is primarily due to state income taxes and one-time contingent earn-out costs related to shares issued pursuant to the TBO Merger Agreement. A reconciliation is as follows:
|
| Year Ended December 31, |
| |||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||||||||||||
Tax on continuing operating loss before income taxes |
| $ | (18,090 | ) |
|
| 34.0 | % |
| $ | (14,663 | ) |
|
| 34.0 | % |
| $ | (20,117 | ) |
|
| 34.0 | % |
Effect of state taxes (net of federal tax benefit) |
|
| (1,515 | ) |
|
| 2.8 | % |
|
| (1,645 | ) |
|
| 3.8 | % |
|
| (1,800 | ) |
|
| 3.0 | % |
Share-based compensation tax deficiencies |
|
| 5,133 |
|
|
| -9.6 | % |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Loss on amendments of warrants |
|
| 342 |
|
|
| -0.6 | % |
|
| 433 |
|
|
| -1.0 | % |
|
| - |
|
|
| - |
|
Contingent earn-out costs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,862 |
|
|
| -8.2 | % |
Others |
|
| 41 |
|
|
| -0.1 | % |
|
| (48 | ) |
|
| 0.1 | % |
|
| 472 |
|
|
| -0.8 | % |
Deferred remeasurement for tax rate change |
|
| 5,117 |
|
|
| -9.6 | % |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Valuation allowance |
|
| 8,972 |
|
|
| -16.9 | % |
|
| 1,881 |
|
|
| -4.4 | % |
|
| - |
|
|
| - |
|
Income tax benefit |
| $ | - |
|
|
| - |
|
| $ | (14,042 | ) |
|
| 32.5 | % |
| $ | (16,583 | ) |
|
| 28.0 | % |
Components of deferred tax assets and liabilities(liabilities) consist of the following:
(In thousands) |
| December 31, 2017 |
|
| December 31, 2016 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
| $ | 7,555 |
|
| $ | 8,041 |
|
Share-based compensation |
|
| 16,321 |
|
|
| 21,503 |
|
Accounts receivable |
|
| 480 |
|
|
| 392 |
|
Accrued expenses and other current liabilities (1) |
|
| 1,128 |
|
|
| 43 |
|
Others |
|
| 22 |
|
|
| 11 |
|
|
|
| 25,506 |
|
|
| 29,990 |
|
Valuation allowance |
|
| (10,853 | ) |
|
| (1,881 | ) |
|
|
| 14,653 |
|
|
| 28,109 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
| $ | 14,505 |
|
| $ | 27,962 |
|
Property and equipment |
|
| 148 |
|
|
| 117 |
|
Internal Revenue Code Sec. 481 adjustment |
|
| - |
|
|
| 30 |
|
|
|
| 14,653 |
|
|
| 28,109 |
|
Net deferred tax liability |
| $ | - |
|
| $ | - |
|
|
|
As of December 31, 2017,2022, the Company had federal andhas state net operating loss carryforwards of $29,274 and $24,046, respectively,$17,585, which begin to expire in 2034. The Company’s net operating losses may be subject to annual Section 382 limitations due to ownership changes that could impact2030.
As of December 31, 2022 and 2021, the future realization. The Company uses ASC 740 ordering when determining when excess tax benefits have been realized.
ASC 740 requiresrecorded a full valuation allowance to reduce theagainst its net deferred tax assets reported if, based onof $11,171 and $7,130, respectively, which is driven by the weightmovement 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 it is more likely than not thatto 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 will not and an increase in deferred tax benefit for any period in which such a release may be realized. On a periodic basis, management evaluatesrecorded, however, the exact timing and determines the amount of any valuation allowance requiredrelease are subject to change, depending upon the level of profitability that the Company is able to achieve and adjusts such valuation allowance accordingly. Primarily due to cumulative pre-tax losses, management determined a valuation allowance of $10,853 and $1,881 was necessary as of December 31, 2017 and 2016, respectively, to reduce the net deferred tax assets to the amount that is more likely than not to be realized.available.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. 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.
The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. AllThe 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 the Company’s incomenet operating losses in subsequent periods with open statutes, tax filings since inceptionyears 2015 and forward remain open forto examination by Federal taxing authorities until the statute is closed on the tax examinations.year in which the net operating loss was utilized.
AFor the years ended December 31, 2022 and 2021, reconciliation of the gross amounts of unrecognized tax benefits, excluding accrued interest and penalties, forconsists of the years ended December 31, 2017 and 2016 (no such items for the year ended December 31, 2015), is as follows:following:
|
| Year Ended December 31, |
| |||||
(In thousands) |
| 2017 |
|
| 2016 |
| ||
Unrecognized tax benefits, opening |
| $ | 1,668 |
|
| $ | - |
|
Gross increase - tax position in prior period |
|
| - |
|
|
| 1,668 |
|
Decrease as a result of the Act |
|
| (534 | ) |
|
| - |
|
Unrecognized tax benefits, ending balance |
| $ | 1,134 |
|
| $ | 1,668 |
|
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 |
In our tax return filed for the year ended December 31, 2015, a loss of $4,375, resulted from the disposal of Advertising Business, was included. This uncertain tax position of $1,668 is reflected as a reduction in deferred tax assets, which was adjusted to $1,134 as a result of the Act as of December 31, 2017. Based on management’s assessment, no tax benefit has been recognized for the loss mentioned above. This unrecognized tax benefit, if recognized, would favorably affect
If the Company’s annual effective tax rate before applicationpositions are ultimately sustained, the Company’s liability would be reduced by $1,480, all of any valuation allowance. The Company has not accrued any interest or penalties as of December 31, 2017 with respect to its uncertainwhich would impact the Company’s tax positions.provision.
The Company does not anticipate a significant increase or reduction in unrecognized tax benefits within the next twelve months.
13.
10. Common shares, preferred sharesstock, treasury stock and warrants
Common stock
As of December 31, 20172022, 2021 and 2016,2020, the number of issued shares of common stock was 61,631,57384,385,458, 83,057,083 and 53,717,996,80,295,141, respectively, which included shares of treasury stock of 352,5234,300,152, 4,091,823 and 160,235,3,945,867, respectively.
TheFor the year ended December 31, 2022, the change in the number of issued shares of common stock during the year ended December 31, 2017 was a result ofcomprised the following issuances:
An aggregate of 4,001,808 shares of common stock were issued as a result of the vesting of restricted stock units (“RSUs”) and the issuance of restricted stock, including 192,288 shares of common stock withheld to pay withholding taxes upon such vesting, which are reflected in treasury stock.