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. [Operator Instructions] 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 remain resilient and steadfast and 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 on predictability 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…

Thanks, Ryan. Good afternoon. We are pleased after the second quarter, we met our prior business outlook for revenue of 1% year-over-year to $71.5 million, and exceeded on media margin, 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's 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, and the amount between them represented by expenses included and adjusted EBITDA, but not media margin that 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…

[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 seen 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 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. And 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 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 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. And 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. So 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 readdress 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-à-vis Fluent who owns 50% of the business. And as we work 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 but 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 where the put call could be exercised. And 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 represent a noncash expense. And 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 helpful?

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 has 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 the 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 of an accuracy with a spear as opposed to a machine gun, if you will. And be able to go out drive at 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 the - 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 is that most important metric driving the business. So we might have some ebbs and flows on revenue, but if we're preserving and building on media margin, we know that we're efficient really 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 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-answer-session session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.