Fluent, Inc.

Good afternoon and welcome. Thank you for joining us to discuss our third quarter 2023 earnings results. With me today are Fluent CEO, Don Patrick, Interim CFO, Ryan Perfitt, and Chief Strategy Officer, Ryan Shulk. Our call today will begin with comments from Don and Ryan Perfitt, followed by a question and answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our investor relations page on our website, www.fluentco.company.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date hereof. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These statements may be identified by words such as expects, plans, projects, could, will, estimates, and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA, and adjusted net income. Management evaluates the financial performance of our business on a variety of indicators, including these non-GAAP metrics. The definition of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent's CEO, Don Patrick.

Good afternoon, and thank you all for joining our call today. I'm here together with Ryan Schuelke, our Chief Strategy Officer, Chairman of the Board and Company Founder, and Ryan Perfect, our Interim Chief Financial Officer. I'll make some brief comments about our third quarter results, which clearly reflect our post-FTC settlement transition, along with the immediate term impact on our business and financials. I will also share more regarding the strategic pivot we are making via our evolving growth strategies, which further support our confidence in and commitment to re-establishing Fluent as the industry leader in performance marketing. Our strategic direction is intended to strengthen and modestly grow our core, also expanding our margins, and in parallel, establishing Fluent credentials in new, high volume, high-growth marketplaces that we are already beginning to successfully enter. To be clear, we are excited about our strategic course, as we believe the road forward will have us clearly differentiate Fluent brands in exciting new markets where we intend to demonstrate our core capabilities and establish a strong competitive advantage. And as Fluent grows our new emerging businesses, we expect to, over time, drive enterprise value for all stakeholders. Our goal is to position Fluent at the forefront of our industry. And our recent FTC settlement fills a void by providing much needed clear industry compliance standards that others would be wise to follow to do business the Fluent way. Fluent's foundational commitment to enhance the quality of consumer engagement within our performance marketplace is an investment we believe is unequivocally worth making. And in the process, We have been consciously exiting businesses we no longer find strategically viable. In turn, we see the near-term financial implications where we will reestablish our base as an investment in the future and the return to a more profitable growth of our company. Bottom line, over the last two and a half years, we've consciously walked away from over 80 million in annual revenue in our core performance marketplaces. We did this because we feel certain revenue sources were no longer strategically compelling, perhaps more so in regulatory environment that is continually evolving. Sacrificing quality for immediate term revenue is somewhat mainstream for many in a dynamic marketplace and where we have consciously chosen not to do. I've referenced Fluent Strategic Pivot, so let me expound further as to why we are confident in our course. mindful of the near-term financial challenges we've chosen to manage and that I'll speak to shortly. Foundationally, our strategic pivot is based on rebuilding the base of our core performance marketplaces, our owned and operated digital properties, where Fluent is highly differentiated within the industry. A healthy performance marketplace is essential to our strategy and provides us a unique go-to-market capability while also generating the gross profit dollars that we'll invest in our growth initiatives. Specifically stated, we have built unparalleled fluent capabilities and competitive advantage vis-a-vis our core performance marketplaces, primarily our rewards, jobs, and content platforms. These owned and operated marketplaces allow consumers who are seeking high quality engagement to make meaningful connections to products and services that improve their lives. We are now leveraging that leading edge owned and operated marketplaces to springboard us into new, high growth, adjacent marketplaces, just as we're doing with Adflow, Call Solutions, and Influencer. More compelling, both strategically and financially, is that we enter these marketplaces with a proprietary technology platform that unleashes new capabilities that our clients are asking for. In our core performance marketplaces, we buy media for our own account to bring consumers to our owned and operated marketplaces and create meaningful experiences to connect them to world-class brands. Our technology platform expansion now enables us to create new marketplaces by bringing our brands to where valuable consumers exist, like post-transactional e-commerce for Adflow. That's our strategic pivot, leveraging our leading edge go-to-market capabilities of our core performance marketplaces, then leveraging our proprietary technology to extend it to new marketplaces where we connect our client with valuable consumers. Our strategy has us charting a course where we are winning with both consumers and world-class brands we partner with. That's a win-win in classic business terms. So you can see why we are bullish on our growth strategies. We're investing with confidence based on the caliber of iconic brands that are already seeking fluent partnerships, coupled with the enthusiasm they are exhibiting for our new emerging business initiatives. Our Q3 financial results are consistent with the more cautious near-term business roadmap we laid out in previous earnings releases. and were driven largely by the decline in our owned and operated rewards marketplace. As noted, this is due to businesses we are no longer focused against, coupled with immediate term pressure on margin, which limited our ability to scale media profitably. Our rewards marketplace margin pressure was driven by two headwinds. First, the impact of post-FTC settlement, which drove strategic and financial decisions to forego certain revenue streams that were no longer strategically compelling or we felt did not meet our evolving quality standards. Although this conscious decision will continue to negatively impact rewards growth over the next several quarters, our go-to-market model remains highly differentiated from the competitive set, allowing us to continue to leverage our rewards platform towards a higher quality consumer engagement unlike anyone else in our industry. This course is expected to drive our immediate growth in the medium term. This transition will re-establish our strategic base while setting the course for us to lean into our emerging business growth agenda on a sequential basis in fiscal year 2024, and where in the later part of the year, we expect to begin improving margins as we scale. Second, early in Q3, one of our largest clients shifted their consumer acquisition strategies from growth to clear prioritization of return on ad spend due to competitive pressures in their market. As discussed in previous earning releases, this is a trend we've seen some other clients throughout the year based on continued consumer volatility in the market. We began seeing other clients increase spending as an offset in late Q3, that we continued seeing into Q4, leading to our margin sequentially improving in Q4 to date. We were prepared for our clients' focus on return on ad spend in the immediate term, and we will continue to leverage Fluent's performance marketplace to respond to these shifts by managing media margin mix. Financial results were as follows. Revenue of 66.2 million represents a 19% decline sequentially compared to Q2. We are repositioning our highly profitable and more stable rewards business at the center of our growth strategy, as we'll play an essential role of fueling our new business unit growth. In concert, we continue to rebuild our performance marketplace in a post-FDC landscape, and we'll update you regarding our progress in future quarters. Our median margin of 19.3 million was a 25.6% sequential decrease over Q2. At 29.2% of revenue, we saw margin decline sequentially from softer pricing across our performance marketplace, primarily from one of our largest clients in the gaming sector, which was not immediately fully absorbed by other bidders due to levels of unpredictability within the entire digital advertising industry. Margin did improve later in Q3 and have continued in Q4 as we're seeing more existing brand partners leaning in along with the onboarding of major new brands. Adjusted EBITDA of a negative 1.7 million represents negative 2.6% of revenue. This reflects both our ongoing strategic investments in our growth agenda as well as the impact of the additional quality initiatives we proactively implemented during the last three quarters. Results also recognize the businesses we deem non-strategic in our longer-term growth agenda. Our focus is now sequentially rebuilding our base, aligned with the strategic pivots we are making into the exciting new business ventures that we have embarked upon. Most importantly, in Q3, And as we outlined in our last earnings release, we continue to make significant progress on our emerging businesses in the three strategic growth initiatives where we made our biggest bets. Call Solutions, Adflow, and Influencer. As we stated in the last earnings release, we see more than $150 million of revenue growth potential in the next two years in these three marketplaces. Adflow, our post-transaction e-commerce solution turned a positive gross profit in Q3 ahead of plan. Since July, Adflow closed new business wins that will drive an approximately 50% increase in annual run rate volume for Adflow going into 2024. Our foundational strategies in this dynamic marketplace have yielded excellent results. In concert, We have market validation that our technology solution drives value for our e-commerce partners, and they represent a new opportunity for world-class brands to reach high quality consumers at the optimal purchase moment. We are quite enthusiastic about our major strategic investment we're making in these exciting businesses based on the longer term return on investment and inherent impact on enterprise value. Progress is also, being made in our influencer business, where we continue to experience significant double-digit growth year over year. In media term, we'll focus on building and leveraging this media channel to support Fluent's owned and operated performance marketplaces. The larger and more compelling longer-term growth opportunity is tied to expanding our proprietary influencer marketplace to drive growth directly for world-class brands we partner with. And in Q3, our call solutions business launched a new extension in our health vertical focused on the Affordable Care Act ACA market. Our new platform capabilities allow us to connect consumers directly to health care insurance providers as new policyholders. This not only deepens our relationship with consumers by bringing them further down the marketing funnel to meet their definitive needs, but also builds stronger strategic relationships with world-class health care brands. This vertical market expansion will drive growth in Q4 during the ACA open enrollment period that started on November 1st. It is highly sequential growth opportunity where we believe Fluent can differentiate ourselves in the marketplace, also with margin potential that exceeds the Fluent core. Although early stage, the results of all three of these emerging businesses, Adflow, Influencer, and Call Solutions, continue to validate our strategic course. a commitment to higher quality consumer engagement that enhances Fluent's total value proposition for consumers and our clients. In Q4, we see a sequential growth over Q3 being driven by three important trends. First, from our modest decline in our owned and operated digital properties with margins improving through our focus on higher quality consumer engagement. As a result, more existing brand partners are leaning in and major new brands are coming on board. Second, we will continue to focus on the acceleration of our new strategic initiatives and the emerging business growth that they've outlined, as these businesses have opened up entirely new and vibrant marketplaces for Fluent and our brand partners. Last, we also anticipate traditional seasonality return in Q4. As I've stated, Fluent is fulfilled by the leadership role we played in establishing a best-in-class industry compliance standard. And we are excited by the prospect of a more level competitive playing field arriving in the later half of fiscal year 2024 that should have Fluent returning to growth at or above industry growth rates with sequential margin improvement as well. However, we must manage through the realities of the immediate term as we expect it will take a few quarters or more for our competitors to implement a parallel compliance standard. I know that's a lot to digest, so please allow me to summarize in straightforward terms. One, Fluent is the industry leader in performance marketing and our core performance marketplace remains a highly differentiated brand equity and competitive advantages within our owned and operated marketplaces. Two, Our core performance marketplace took the brunt of the impact of the FTC settlement and, over the last two and a half years, a reduction in over $80 million in annual revenue. We expect it will take a couple quarters to return to growth, albeit more modest growth than the entire enterprise. Fluent foundational commitment to enhance the quality consumer engagement within our performance marketplace is investments we believe is unequivocally worth making. And as we've seen the near-term financial implications as an investment in the future, profitable growth of our company. Three, we've recalibrated our growth strategy with performance marketplace businesses at the core and with a focus on growing strategically in the new marketplaces with business units that leverage our fluent assets. We are enthusiastic as we've already delivered proof of concept that the light of the brands we partner with and new world-class brands that we are adding to our roster of clients who recognize the unique value proposition. Four, as our new marketplaces continue to grow and Fluent establishes credentials in the markets in which we're playing, we expect to accelerate our growth while expanding our margins. And with that, I'll turn it to Ryan to provide more detail on our financial results.

Thank you, Don, and thanks to everyone for joining us today. I'll now provide some additional detail on our Q3 earnings, providing year-to-date comparisons where applicable. For the quarter, Fluent produced $66.2 million in revenue, down 26% from prior year and down 19% sequentially from Q2. Year-to-date, our total revenue stands at $225.6 million, reflecting an 18% decrease from the same period last year. The sequential decline was driven by the media and entertainment industry, specifically the gaming sector, driven by a pricing pullback from one of our largest clients. As Don mentioned, the pullback was an effect of our clients' shift from growth to ROAS and mirrors similar adjustments that we've seen across our client base over the last four quarters. Conversely, we were encouraged by sequential revenue growth in the streaming services sector and from other clients within the gaming sector that helped offset the decline. We expect moderate recovery in the gaming sector along with the growth of our other new business initiatives that Don mentioned to strengthen our marketplace and drive sequential revenue growth in Q4. That said, we do expect economic headwinds as reflected by our clients' consumer acquisition strategies coupled with our efforts to exemplify current regulatory standards to continue to cause quarter-over-same-quarter growth challenges into mid-2024. Media margin in Q3 of $19.3 million represents a 31 percent year-over-year decline and 29.2 percent of revenue. Year-to-date, our media margin of $67.2 million represents a 22 percent decline over the same period last year. and 29.8% of revenue. The declines versus prior year periods were largely a factor of the previously mentioned client spend challenges not being offset by lower cost of media. The sequential decline in media margin as a percentage of revenue from 31.5% can be attributed to the aforementioned marketplace pressure created by one of our largest clients. On a gap basis, Our aggregate operating expenses for Q3 were $17.8 million, a $2 million year-over-year decrease. For the nine months ended September 30th, our aggregate operating expenses were $52.5 million, a $7.9 million decrease from the same period last year. Of note, our G&A line in Q3 includes specific litigation and related expenses amounting to $153,000 and a $1.8 million benefit from insurance reimbursements related to the FTC settlement. For the nine months ended September 30th, GNA includes a $6 million net benefit from specific litigation and related expenses. The GNA line also includes accrued compensation expenses linked to the Winopoly and True North acquisitions of $517,000 and $1.7 million for the three and nine months ended September 30th, respectively. All of these costs and benefits fall outside the normal course of business and thus are excluded from our adjusted EBITDA calculation. As detailed in our 10Q filing, the company determined that the drop in our market cap from Q2, coupled with our performance during the quarter, represented a triggering event and an indication of impairment of goodwill. Based on an analysis, the company recorded a non-cash impairment charge to goodwill of $29.7 million associated with the acquisition of the Fluent Operating Business in 2015 and the acquisition of AdParler in 2019. The non-cash impairment charge is excluded from our adjusted EBITDA and has no impact on our operations or liquidity. Our Q3 adjusted EBITDA summed to negative $1.7 million, representing a negative 2.6% of revenue. This amounts to a year-over-year decrease of $7.6 million and was a consequence of the previously noted decline in revenue coupled with the decreased media margin as a percentage of revenue. For the nine months ended September 30th, 2023, Adjusted EBITDA of $4.3 million represents 1.9% of revenue and a $15.8 million decline from the same period last year. We expect sequential revenue growth in Q4 to drive a return to a positive adjusted EBITDA in Q4 and beyond. But over the next few quarters, we anticipate positive adjusted EBITDA as a percentage of revenue to remain in the low single digits as we continue to invest into growing our performance marketplace initiatives like Call Solutions, Influencer, and Adflow. The company cannot provide a reconciliation to expected net income or net loss in Q4 due to the unknown effect, timing, and potential significance of certain operating costs and expenses, share-based compensation expense, and the provision for or benefit from income tax. Interest expense in the third quarter increased over prior year by 419,000 to 936,000 as an effect of the increased interest rates. For the nine months ended September 30th, 2023, interest expense increased 1.1 million to 2.4 million, also an effect of increased rates. For the quarter, the provision for income taxes was a benefit of 1.2 million. For the year-to-date period, the provision is a $551,000 expense. For the third quarter, we reported net loss of $33.6 million and an adjusted net loss, a non-GAAP measure, of $4.1 million, equivalent to the loss of $0.05 per share. Year-to-date, our net loss sums to $61.3 million, with adjusted net loss of $6.8 million. equivalent to a loss of $0.08 per share. Now, looking to our balance sheet, we ended the quarter with $20.5 million in cash and cash equivalents, a $470,000 decline from June 30, 2023, and a $5 million decline from December 31, 2022. Total debt, as reflected on the balance sheet, as of September 30, 2023, was $32.5 million, representing an $8.8 million reduction as compared to the balance at December 31, 2022. For the three months ended September 30, 2023, the company was not in compliance with the total leverage ratio as defined in the existing credit agreement with Citizens Bank. As a result, the company entered into a temporary waiver with the bank in which the bank agrees to waive the rights arising from the breach through January 15, 2024. Prior to the end of the waiver term, it is management's intention to negotiate a fifth amendment to the credit agreement that modifies certain financial covenants for the five quarters ended December 31, 2024. As the company is not currently in compliance with financial covenants and has not yet amended the credit agreement to a revised covenant, The maturity dates under the credit agreement could be accelerated following the waiver period, and therefore, the Form 10-Q includes a disclosure indicating significant doubt to remain as a going concern for a one-year period following the filing date. The company and Citizens Bank have previously entered into amendments to the credit agreement, and management expects to be able to enter into a new amendment that would alleviate the going concern qualification for the upcoming Form 10-K. Working capital, as defined as current assets minus current liabilities, was $4.1 million at the end of the quarter, a decline from $34.9 million at Q2 quarter end, due to the required presentation of the entire $32.5 million debt balance as current, related to the status of the financial covenant compliance under our credit agreement. In Q3, we invested $1.7 million into capitalized product development and technology as compared to $1.1 million in Q3 of 2022. Year to date, the company has capitalized $4.1 million in product development and technology versus $3.3 million for the same period last year. As a management team, our focus is on fortifying the core owned and operated performance marketplace while growing the strategic extensions to the marketplace that provide our clients with enhanced growth opportunities. We're confident that our strategy will yield substantial and enduring financial benefits in 2024 and beyond.