Good day, and welcome to the Fluent Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ryan McCarthy. Please, go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our second quarter 2020 earnings results. Joining me on today's call are Fluent's CEO, Ryan Schulke; and CFO, Alex Mandel. Our call will begin with comments from Ryan Schulke and Alex Mandel, 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.com. Before we begin, I would like to advise listeners that certain information discussed by management during the 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, may, anticipates, believes, should, intends, 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 media margin, adjusted EBITDA and adjusted net income. The definitions 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, Ryan Schulke.

Good afternoon and thanks to everyone for joining us today. As we continue to navigate this challenging and uncertain environment, I want to thank our entire colleagues' base for their exceptional work under the most difficult circumstances. During these unprecedented times, Fluent remains resilient and steadfast in striving to support our colleagues, clients, consumers, and communities. The second quarter's performance once again demonstrated the strength and diversification of our platform and macro benefits Performance Marketing. In spite of uncertainty in the marketplace, we delivered a solid Q2 with revenue up 1% and media margin up 8%, ahead of our prior business outlook for results in line with the previous year. Adjusted EBITDA is up 3% versus last year's Q2, which reflects an investment into our owned and operated media properties, as well as the overhead impact of AdParlor, whose business we acquired in Q3 of last year. On today's call, I'd like to first speak about the Q2 operating environment along with our results and then provide broader context relative to our strategic growth pillars. Regarding the operating environment, our core focus remains on access to cost-effective media at scale, while leveling out volatility across our advertiser base. Concurrently, we're enhancing our owned and operated media properties, which enable consumers to earn, win, or save with Fluent and our partners. While media remained accessible at relatively favorable pricing for most of the quarter, we did see a bit more unpredictability on a channel-by-channel basis, and our team did an excellent job of right-sizing our pricing against volume. On the advertiser side of our business, the diverse nature of our client base helped to offset any verticals that lacked in demand as a result of COVID. From a vertical standpoint, the quarter was again a standout for our media and entertainment clients, particularly in the streaming services and gaming app categories, where we continue to fortify strategic relationships with top-tier global brands. A key strategy we remain enthusiastic about is our international expansion. In particular, the UK business more than doubled its top line year-over-year, while expanding its media margin profitability. In fact, revenue from non-U.S. markets exceeded 5% of total revenue in the quarter for the first time. Now, I will turn to an update on Fluent's three strategic growth pillars. First, our Performance Marketplace. This refers to the demand or interactions between our advertising clients and consumers on our platform. Fluent's advertiser solutions enable our clients to bid on outcomes, not impressions, at predictable pricing and scale. As part of our ongoing effort to expand our performance solution offering, in April, we acquired a 50% interest in Winopoly, a contact center that further extends our ability to engage consumers in order to connect them with our advertisers, products, and services across multiple industries. Winopoly is specifically geared operationally to service Fluent's consumers, affording us the opportunity to provide high-quality experiences while yielding incremental monetization. Today, Winopoly is achieving its plan and continuing to scale. Strategically, we view this as a critical capability and further extending the life cycle of Fluent's relationship with its consumers. Second, our Media Footprint. This pillar represents our portfolio of media properties, which enable us to entice and engage consumers, learn about their interests and preferences, and match them with brands and offers within our performance marketplace. A key path to extending our equity and expanding our media footprint has been via deployment beyond the U.S. Our European launch now includes two large markets, the U.K. and Germany, and in North America, we're in the early stages of testing in Canada. Our growth in the U.K. in Q2, which I touched on, was enabled by operational enhancements that increased our monetization or LTV profile, thereby further enabling us to drive additional traffic. We will continue to focus on non-U.S. markets and anticipate continued growth over the next few years. Third, our platform represents the technology, analytics, and product innovation that wires the first two pillars together. I earlier referenced investments being made into our media properties, as we continually seek to better align our value proposition with consumer expectations. While some of these enhancements increase certain operating expenses, we believe they create a foundation for future revenue centers and strategic growth for the business. In addition to these front-end platform upgrades, we also made meaningful improvements to our back-end technology, which seek to help us onboard advertisers with greater efficiency and test new media channels at a more rapid pace. We're excited about how these new capabilities and features should help us move faster in the back half of 2020 into 2021. In closing, given the current operating environment, we are pleased with our second-quarter results. Our business remains solid, benefiting from the strength and diversification of our platform, and our unique and advantageous positioning within the industry. Looking ahead to Q3, we'll continue to adjust to the dynamic realities of the marketplace during COVID. And we'll remain focused on driving our business forward on behalf of Fluent and our clients towards further innovation, such as media format expansion, deeper insights around conversion behavior, and exploring new channels to engage consumers cost-effectively. We see this operating environment as further validation regarding the benefits of performance marketing to our clients. We're bringing consumers further down the path to purchase or giving our clients clarity on their ROI, creating predictability that minimizes their marketing budget risks. We see this as a fundamental alignment with our client's needs and objectives. As a result, we believe the dollars available to us are more predictable in times like this than with other marketing channels, which don't provide the same benefits and financial return. Thank you for your support. Now, as always, let me turn the discussion to Alex to review the numbers more specifically, and I will return for Q&A afterward.

Thanks, Ryan. Good afternoon. We are pleased after the second quarter, we met our prior business outlook for revenue of a 1% year-over-year increase to $71.5 million, and exceeded on media margin, which was up 8% year-over-year to $24.8 million. Ryan spoke about media trends during the quarter. To elaborate, we capitalized on a market opportunity to acquire substantial lines of traffic, potentially owing to consumer spending more time with their devices, and economic uncertainty among other buyers of traffic amidst the pandemic. Fluent stepped up and took on that volume opportunity while achieving favorable media pricing due to our strong and always-on presence in the market. We were confident in doing so, as demand from our client base was sufficient to absorb the volume and at favorable margins to Fluent. Our clients include large global brands, innovative disruptors, and ambitious entrepreneurs, who leverage Fluent's performance marketing platform to build or scale their businesses. The interaction of strong volume and favorable pricing with ongoing client demand from robust counterparties underpinned our profitability in the quarter. Media margin dollars grew 8% year-over-year to $24.8 million, representing 34.7% of revenue. Based on Q3 performance to date, we see the quarter returning to the seasonal patterns experienced in 2016 through 2018, as it relates to media margin dollars, without a recurrence of the factors which affected Q3 results last year. Our operating expenses on a GAAP basis, comprising sales and marketing, product development, and G&A, grew in aggregate by $400,000, or 2.6% year-over-year. If we think about Fluent's non-GAAP metrics of media margin and adjusted EBITDA, the amount between them represented by expenses included in adjusted EBITDA but not media margin also grew year-over-year. This was primarily attributable to the inclusion of the AdParlor business, as well as increased reward redemptions by consumers on our media properties. During the quarter, we tested certain changes to our reward redemption flows, which elevated these expenses. As we optimize relative to our learnings, we anticipate this cost to moderate going forward. Accordingly, adjusted EBITDA of $9.4 million in the quarter represented a decline of 3% year-over-year, and a margin of 13.1%. While a reduction of 60 basis points year-over-year, this margin reflects an improvement of 170 basis points quarter-over-quarter. Interest expense declined by $400,000 year-over-year, as we reduced our debt principal outstanding by $6.3 million and benefited from a lower effective interest rate environment. In Q2, we continued to be a noncash taxpayer due to the availability of net operating losses. We reported GAAP net income of $452,000 in the quarter, or $0.01 per share, and adjusted net income, a non-GAAP measure, of $4.2 million, or $0.05 per share. Adjusted net income reflects the add-back of $2.6 million of noncash expenses, and $1.1 million of certain legal and related costs. Our non-GAAP metrics are reconciled in today's earnings release in our 10-Q and 10-K filings. Turning to the balance sheet; we ended the quarter with $21.7 million of cash and restricted cash. Working capital, defined as current assets minus current liabilities, ended the quarter at $30.5 million. Total debt is reflected on the balance sheet and ended the quarter at $47.8 million, while including amortized discount yields a closing balance of $50.9 million. At the beginning of the quarter, we completed the acquisition of a 50% stake in Winopoly, a contact center that sources consumer leads exclusively from Fluent. Taking this competency in-house provides several benefits. It enables us to directly control the experiences consumers have with the operators contacting them, create better connections, more value for clients, and capture incremental economics for Fluent. During the quarter, we funded the initial purchase price and the first milestone payment totaling approximately $1.75 million. The results of Winopoly are consolidated in our income statement. The structure of the transaction involves a put/call feature. In relation to this option structure, our non-cash quarterly expense of $530,000 is being accrued as compensation to the sellers and runs through G&A on our GAAP income statement. This amount is added back in the reconciliation of non-GAAP metrics. Based on current performance of the business versus plan, we anticipate this will be a consistent and recurring amount each quarter until exercise, which is at least four years from the acquisition date. Our team continues to operate seamlessly in a fully remote environment. While risks and uncertainties remain, to date, the pandemic has not had any material adverse effect on our business. Meantime, the ongoing shift towards performance-based digital solutions for markets and brands who seek measurable outcomes and greater accountability from their spending plays squarely into Fluent's long-term market opportunity. We're glad to field questions at this time.

[Operator Instructions] Your first question today comes from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. I had a group of questions and the first one; you've referenced the return to normal seasonality. And am I seeing that correctly that's a pretty meaningful increase in revenues in Q3 versus Q2?

Hey, Bill. Good to hear from you. Go ahead, Alex, please.

Thanks. Likewise, good to be with you, Bill. We were referring in that context to media margin dollars as it related to the seasonal patterns that we've experienced. We didn't comment specifically on revenue.

All right. So I have gone back and looked at revenue and other than last year and a couple other years. It's actually been a pretty decent increase sequentially. Is there something different about the business then, either younger, more faster-growing? Or something different now that would skew what I was looking at historically?

Bill, as you're familiar, our business is one that involves a volume of consumers that come to our platform; the monetization that we achieve with our advertisers, and the cost of traffic and bringing investors to our platform. So there may be dynamics among the different levers and metrics at different points in time. And hence, at this point, we're not making a specific reference to that metric. And we're focused on the media margin, which is ultimately the dollars that can help us pay the bills.

All right, thank you. Let's jump to the U.K. What do you see driving that success there? Is it the same streaming and gaming companies, or is there something different that is driving that success? And I suppose also your success in Germany.

Yes. I'll field that one, Bill. It's really the international market launches, we've sort of taken a phased approach. Phase 1 being heavily reliant on a lot of those global brands we referenced within the media and entertainment sector, as well as a couple other verticals that we play in, where our clients have international demand. So largely based on one of these launches has been on the back of those domestic relationships that we have a very strong reputational relationship within the U.S., and expanding it overseas. Actually partnering with local advertisers in those markets is more of our Phase 2. As we've announced further expansion, we do expect that to help us continue driving forward.

That Phase 2 expansion. Ryan, what's the timeframe when you're expecting to hit full stride with that?

We're already knee-deep in it in terms of having several people overseas at this point, and actively recruiting for additional roles that will help us just move the ball that much faster. So we're moving it right along, and it's something that will be a focus back half of this year into 2021.

Great, thank you. And then two additional income statement questions; the goodwill impairment and would you please discuss that and then secondarily, the expense for the put call consideration, would you talk to kind of what that is? I have to apologize in advance. I just simply do not know what you're referring to there?

Sure. Thanks Bill; this is Alex speaking. As it relates to the goodwill impairment, in the quarter we deemed there to be a triggering event as it related to one of our business segments, which is primarily the AdParlor business that we acquired last year in July. The triggering events, and this is disclosed in our upcoming document, speak to the macro conditions that were playing out relative to the COVID backdrop, as well as some of the social unrest that took place in the United States during the course of the quarter. Some of those factors, we deemed to have caused us to adjust our near-term forecast for the business, and our other elements of our outlook for the business. While we don't see any material impact to the business on a long-term basis, in fact, we were actually quite pleased, interestingly, that during Facebook's earnings call just a week or two ago, Sheryl Sandberg actually referenced a campaign for one of their advertisers who happens to be a client of AdParlor's for some of their innovative work during the quarter. We were very pleased with that. But as a result of just the near-term financial aspects that are relevant to the business, we readjusted the carrying value of the goodwill in our balance sheet.

Fascinating. And then put call?

Put call; the structure of the Winopoly transaction involves a put/call as between the counterparty who owns 50% of the business vis-a-vis Fluent, which also owns 50% of the business. As we worked through the purchase accounting for the transaction in the course of the quarter and worked on the ongoing accounting for the business as it goes into the future, we determined that the structure of the put call indicated that there was a deemed compensation expense, and accrued compensation expense that is not paid out currently along the way, but essentially relates to some estimate to a point in the future of the value of the business at a time when the put call could be exercised. In relation to that value, that ultimate value was deemed to be a compensation expense and therefore there's an accrual between now and that future point of such expense on a ratable basis going forward. And so that amount is going to continue to run through our income statement but represents a noncash expense. We've added it back to our non-GAAP metrics that are provided in the reconciliation with today's press release and will be in our quarterly report as well. Does that help?

And your next question today comes from Jim Goss with Barrington Research. Please go ahead.

Hi. I've got a couple of them. First in the media and entertainment area. A couple of big sectors are streaming services and mobile gaming. I'm wondering have these prices down on an exclusive basis? Or does it depend on what the demand is, and whether you're able to have multiple clients at non-exclusive pricing versus exclusive paying more? And then maybe start with that.

Yes, Jim, good to hear from you. And I'll speak directly to that. The nature of our model is more of a marketplace model, where we're willing to work with our clients to drive those further down funnel actions on in streaming services, whether that is somebody who actually pulls their credit card out for a free trial, or somebody that even goes from free to paid at a larger premium. It's really that action that they're looking to go out and have us drive for them that informs all the pricing. And we don't really entertain exclusive arrangements because of the performance nature of our work. It really doesn't work as well with our model. So really what you see in the way of pricing is more reflective of us being able to hunt with a bit more accuracy with a spear instead of a machine gun, if you will, and be able to go out drive with precision, drive that quality, and that's where we see premium pricing.

Okay, and thank you. And then the one other thing, Ryan, the seasonal pattern for 2016 to 2018 you referenced. Could you talk about what type of pattern you're talking to? Is it that - and what are the factors that were driving that seasonality? Whether there were higher costs in certain areas or higher revenues in certain time frames?

Yes, and Alex referenced that. We really think about media margin as that most important metric driving the business. We might have some ebbs and flows on revenue, but if we're preserving and building on media margin, we know that we're efficiently growing the business. So the reference there was if you recall, Q3 of 2019 was really a low point for the company. Had a couple of stumbles there, and we're really referencing that. We don't expect to see that type of aberration this coming quarter.

Thank you, ladies and gentlemen. This concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. Have a wonderful day.