The accompanying unaudited consolidated financial statements have been prepared by Fluent, Inc., a Delaware corporation (the "Company" or "Fluent"), in accordance with accounting principles generally accepted in the United States ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods ended September 30, 2023 and 2022, respectively, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2023.

From time to time, the Company may enter into relationships or investments with other entities, and, in certain instances, the entity in which the Company has a relationship or investment may qualify as a variable interest entity ("VIE"). The Company consolidates a VIE in its financial statements if the Company is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has the power to direct activities that most significantly impact the operations of the VIE and has the obligation to absorb losses or the right to benefits from the VIE that could potentially be significant to the VIE.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Form 10-K") filed with the SEC on March 15, 2023. The consolidated balance sheet as of December 31, 2022 included herein was derived from the audited financial statements as of that date and included in the 2022 Form 10-K.

In accordance with ASC 205-40, Presentation of Financial Statements – Going Concern, management must evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date these accompanying unaudited financial statements are issued (the “issuance date”). As part of this evaluation, management may consider the potential mitigating impact of its plans that have not been fully implemented as of the issuance date if (a) it is probable that management’s plans will be effectively implemented on a timely basis, and (b) it is probable that the plans, when implemented, will alleviate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date.

The Company has experienced a decline in its operating results, driven primarily by the continued economic slowdown and uncertainty, as well as the impacts of the recently imposed regulatory requirements (see Note 10, Contingencies). As a result, as of September 30, 2023, the Company was not in compliance with the total leverage ratio covenant under its Credit Agreement (see Note 5, Long-term debt, net) and such event of default continued until the Waiver (defined below) became effective. The Company has also projected a continued decline in its operating results, driven primarily by the same factors described above. Therefore, the Company does not expect to be in compliance with certain financial covenants under the Credit Agreement during certain quarters in the twelve months following the issuance date. If the Company is not in compliance with its covenants, under the Credit Agreement, it will be an event of default that would give lenders the right to accelerate maturities under the Credit Agreement. While the Company had cash and cash equivalents of $20.5 million as of September 30, 2023 and had positive cash flow from operations in the prior two fiscal years and for the nine months ended September 30, 2023, management does not expect the Company’s cash resources would be adequate to meet its obligations as they become due within the one-year period after the issuance date if maturities under the Credit Agreement were accelerated. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.

As discussed in Note 5, Long-term debt, net, on November 15, 2023, Fluent, LLC (the “Borrower”) entered into a Temporary Waiver Under Credit Agreement (the “Waiver”) to the Credit Agreement that is effective through the earlier of January 15, 2024 or an occurrence of any other event of default (the “Termination date”). In addition to temporarily waiving the event of default resulting from the breach of the total leverage ratio covenant during the three months ended September 30, 2023, the Waiver imposed new financial reporting obligations on the Borrower, including the delivery of the Company’s 2024 budget by November 22, 2023 for review by the business consultant retained by counsel to Citizens Bank. The Company intends for that budget to inform modified financial covenant levels and other provisions, as appropriate, for the quarters ending December 31, 2023 through December 31, 2024, which would be accomplished with an amendment to the Credit Agreement. The Borrower and Citizens Bank have previously entered into amendments to the Credit Agreement as needed, and management expects to be able to enter into a new amendment prior to the Termination date.

In light of the recent challenges the Company has faced in achieving its financial targets, the Company plans to implement cost reductions and focus resources on new growth opportunities that will enable the Company to meet its projected budget.

While management believes its plans to enter into a new amendment to the Credit Agreement with financial covenant levels that the Company can satisfy will alleviate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern, successfully entering into it is not entirely within the Company’s control. In addition, there is no guarantee that the planned cost reductions or growth opportunities will be successfully executed or have the expected benefits. As there can be no assurance that the Company will be able to effectively implement its plans within one year after the issuance date, based on the factors above, management concluded that there is substantial doubt about the Company's ability to continue as a going concern through such one-year period.

The accompanying unaudited financial statements do not include any adjustments relating to the possible future effects on the recoverability and classification of recorded assets and classification of liabilities that might result should the Company be unable to continue as a going concern.

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.

Accounting pronouncements not listed below were assessed and determined to be not applicable or are expected to have minimal impact on the Company's consolidated financial statements.

In January 2016, the Financial Accounting Standards Board issued Accounting Standards Updates No. 2016-13, Financial Instruments—Credit Losses and additional changes, modifications, clarifications, or interpretations thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available-for-sale debt securities at the amounts expected to be collected. The new guidance was effective for annual and interim periods beginning after December 15, 2022, and early adoption was permitted. The Company completed its assessment of the new guidance and determined it had no material impact on its consolidated financial statements.

Revenue is generated when control of goods or services is transferred to customers, in the amounts that reflect the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is typically to (a) deliver data records based on predefined qualifying characteristics specified by the customer, (b) generate conversions based on predefined user actions (for example, a click, a registration or the installation of an app) and subject to certain qualifying characteristics specified by the customer, (c) verify user interest or transfer calls to advertiser clients as a part of the contact center operation, or (d) deliver media spend as a part of the business of AdParlor, LLC, a wholly-owned subsidiary of the Company.

Revenue is recognized upon satisfaction of the associated performance obligation. The Company elected the "right to invoice" practical expedient under Accounting Standards Codification ("ASC") 606-10-55-18 as a measure for revenue to be recognized, as it corresponds directly with the amounts that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

If a customer pays consideration before the Company's performance obligations are satisfied, such amounts are classified as deferred revenue on the consolidated balance sheets. As of September 30, 2023 and December 31, 2022, the balance of deferred revenue was $492 and $1,014, respectively. The majority of the deferred revenue balance as of December 31, 2022 was recognized as revenue during the first quarter of 2023.

When there is a delay between the period in which revenue is recognized and when a customer invoice is issued, revenue is earned, and the related amounts are recorded as unbilled revenue within accounts receivable on the consolidated balance sheets. As of September 30, 2023 and December 31, 2022, unbilled revenue included in accounts receivable was $23,374 and $26,878, 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.

The preparation of consolidated financial statements in accordance with GAAP requires the Company’s management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, useful lives of intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, the portion of revenue subject to estimates for variances between internally-tracked conversions and those confirmed by the customer, purchase accounting, valuation of variable interest entity, accruals for contingencies, and income tax provisions. 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.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Accounting standards describe a fair value hierarchy based on the following three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

The fair value of the Company’s cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values because of the short-term nature of these instruments.

As of September 30, 2023, the Company regards the fair value of its long-term debt to approximate its carrying value. The fair value assessment represents a Level 2 measurement. See Note 5, Long-term debt, net.

The fair value of certain long-lived non-financial assets and liabilities may be required to be measured on a nonrecurring basis in certain circumstances, including when there is evidence of impairment. As of September 30, 2023, certain non-financial assets have been measured at fair value subsequent to their initial recognition. The Company determined the estimated fair value to be a Level 3 measurement, as certain inputs used to determine fair value are unobservable. See Note 4, Goodwill, for further discussion of impairment charges.