flnt20240331

flnt20240331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-37893

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.)

300 Vesey Street, 9th Floor

New York, New York

10282

(Address of principal executive offices)

(Zip Code)

(646) 669-7272

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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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 NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all 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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

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.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of May 13, 2024, the registrant had 13,660,598 shares of common stock, $0.0005 par value per share, outstanding.

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FLUENT, INC.

TABLE OF CONTENTS FOR FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023	2
	Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023	3
	Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2024 and 2023	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		37

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PART I - FINANCIAL INFORMATION

Unless otherwise indicated or required by the context, all references in this Quarterly Report on Form 10-Q to "we," "us," "our," "Fluent," or the "Company," refer to Fluent, Inc. and its consolidated subsidiaries.

ITEM 1. FINANCIAL STATEMENTS.

FLUENT, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

(unaudited)

	*March 31, 2024*			*December 31, 2023*
ASSETS:
Cash and cash equivalents	$	11,658		$	15,804
Accounts receivable, net of allowance for doubtful accounts of $247 and $231, respectively		53,421			56,531
Prepaid expenses and other current assets		6,337			6,071
Total current assets		71,416			78,406
Property and equipment, net		502			591
Operating lease right-of-use assets		2,952			3,395
Intangible assets, net		26,141			26,809
Goodwill		1,261			1,261
Other non-current assets		1,305			1,405
Total assets	$	103,577		$	111,867
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable	$	8,829		$	10,954
Accrued expenses and other current liabilities		30,878			30,534
Deferred revenue		561			430
Current portion of long-term debt		30,981			5,000
Current portion of operating lease liability		2,279			2,296
Total current liabilities		73,528			49,214
Long-term debt, net		—			25,488
Operating lease liability, net		1,188			1,699
Other non-current liabilities		115			1,062
Total liabilities		74,831			77,463
Contingencies (Note 10)
Shareholders' equity:
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 — 14,429,193 and 14,384,936, respectively; and Shares outstanding — 13,660,598 and 13,616,341, respectively (Note 7)		43			43
Treasury stock, at cost — 768,595 and 768,595 Shares, respectively (Note 7)		(11,407	)		(11,407	)
Additional paid-in capital		427,904			427,286
Accumulated deficit		(387,794	)		(381,518	)
Total shareholders' equity		28,746			34,404
Total liabilities and shareholders' equity	$	103,577		$	111,867

See notes to consolidated financial statements

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FLUENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

(unaudited)

	*Three Months Ended March 31,*
	*2024*			*2023*
Revenue	$	65,983		$	77,254
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization)		47,348			58,272
Sales and marketing		4,812			4,813
Product development		4,840			4,938
General and administrative		10,365			12,325
Depreciation and amortization		2,571			2,359
Goodwill impairment and write-off of intangible assets		—			25,700
Total costs and expenses		69,936			108,407
Loss from operations		(3,953	)		(31,153	)
Interest expense, net		(1,415	)		(689	)
Loss before income taxes		(5,368	)		(31,842	)
Income tax expense		(908	)		(101	)
Net loss		(6,276	)		(31,943	)

Basic and diluted loss per share:
Basic	$	(0.45	)	$	(2.34	)
Diluted	$	(0.45	)	$	(2.34	)

Weighted average number of shares outstanding:
Basic		13,902,165			13,651,152
Diluted		13,902,165			13,651,152

See notes to consolidated financial statements

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FLUENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Amounts in thousands, except share and per share data)

(unaudited)

	*Common stock*				*Treasury stock*					*Additional paid-in*		*Accumulated*			*Total shareholders'*
	*Shares*		*Amount*		*Shares*		*Amount*			*capital*		*deficit*			*equity*
Balance at December 31, 2023		14,384,936	$	43		768,595	$	(11,407	)	$	427,286	$	(381,518	)	$	34,404
Vesting of restricted stock units and issuance of stock under incentive plans		44,257		—		—		—			—		—			—
Share-based compensation		—		—		—		—			618		—			618
Net loss		—		—		—		—			—		(6,276	)		(6,276	)
Balance at March 31, 2024		14,429,193	$	43		768,595	$	(11,407	)	$	427,904	$	(387,794	)	$	28,746

	*Common stock*				*Treasury stock*					*Additional paid-in*			*Accumulated*			*Total shareholders'*
	*Shares*		*Amount*		*Shares*		*Amount*			*capital*			*deficit*			*equity*
Balance at December 31, 2022		14,129,530	$	42		716,692	$	(11,171	)	$	423,384		$	(318,300	)	$	93,955
Vesting of restricted stock units and issuance of stock under incentive plans		193,323		1		—		—			(1	)		—			—
Increase in treasury stock resulting from shares withheld to cover statutory taxes		—		—		51,903		(236	)		—			—			(236	)
Share-based compensation		—		—		—		—			1,148			—			1,148
Net loss		—		—		—		—			—			(31,943	)		(31,943	)
Balance at March 31, 2023		14,322,853	$	43		768,595	$	(11,407	)	$	424,531		$	(350,243	)	$	62,924

See notes to consolidated financial statements

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FLUENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

	*Three Months Ended March 31,*
	*2024*			*2023*
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,276	)	$	(31,943	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		2,571			2,359
Non-cash loan amortization expense		711			61
Share-based compensation expense		600			1,061
Goodwill impairment		—			25,700
Allowance for credit losses		82			(55	)
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable		3,028			6,460
Prepaid expenses and other current assets		(266	)		(2,082	)
Other non-current assets		100			82
Operating lease assets and liabilities, net		(85	)		(82	)
Accounts payable		(2,125	)		6,739
Accrued expenses and other current liabilities		2,344			(3,362	)
Deferred revenue		131			(9	)
Other		(947	)		(39	)
Net cash (used in) provided by operating activities		(132	)		4,890
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized costs included in intangible assets		(1,796	)		(1,134	)
Business acquisitions, net of cash acquired		—			(1,250	)
Net cash used in investing activities		(1,796	)		(2,384	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt		(1,250	)		(1,250	)
Debt financing costs		(968	)		—
Taxes paid related to net share settlement of vesting of restricted stock units		—			(236	)
Net cash used in financing activities		(2,218	)		(1,486	)
Net increase (decrease) in cash and cash equivalents		(4,146	)		1,020
Cash and cash equivalents at beginning of period		15,804			25,547
Cash and cash equivalents at end of period	$	11,658		$	26,567
SUPPLEMENTAL DISCLOSURE INFORMATION
Cash paid for interest	$	759			664
Cash paid for income taxes	$	31			55
Share-based compensation capitalized in intangible assets	$	18			27
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Contingent payments in connection with TAPP consolidation	$	—		$	2,693
Long-term debt issuance	$	2,000		$	—

See notes to consolidated financial statements

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FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

(unaudited)

1. Summary of significant accounting policies

(a) Basis of preparation

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" or "U.S. 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 March 31, 2024 and 2023, 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, 2024.

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, 2023 ("2023 Form 10-K") filed with the SEC on April 2, 2024. The consolidated balance sheet as of December 31, 2023 included herein was derived from the audited financial statements as of that date and included in the 2023 Form 10-K.

Going concern

In accordance with Accounting Standards Codification (“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 consolidated 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 impact of the imposed regulatory requirements on its owned and operated digital media properties (see Note 10, Contingencies). As a result, the Company had pre-emptively received a waiver for not being in compliance with the total leverage and fixed charge ratio covenants under the Citizens Credit Agreement as of March 31, 2024 (as defined in Note 5) (see Note 5, Long-term debt, net) and such event of default continued until that debt was extinguished with proceeds from the SLR Credit Agreement (as defined in Note 5) entered into on April 2, 2024. The SLR Credit Agreement requires the Company to maintain and comply with certain financial covenants. Moreover, the borrowings under the SLR Revolver (as defined in Note 5) under the SLR Credit Agreement are limited to a borrowing base described in Note 5. The borrowing base fluctuates as regularly as weekly based on our eligible accounts receivable. As a result of a decline in financial performance of the Company's owned and operated digital media properties in April 2024, the Company's accounts receivable were expected to be insufficient to support the borrowing base needed to fund operations through the end of the second quarter of 2024. The Company therefore raised equity capital in the private placement described below and updated its projections to reflect the continued decline in its operating results. The revised projections indicate that the Company will not be in compliance with all financial covenants under the SLR Credit Agreement for each of the quarters in the twelve months following the issuance date of this Quarterly Report on Form 10-Q. Such non-compliance, in turn, would constitute an event of default that would give SLR (as defined in Note 5) the right to accelerate maturities under the SLR Credit Agreement. Furthermore, the decline in operating results could lead to declines in the borrowing base, which could lead to the Company's inability to draw on the SLR Revolver Facility in order to fund its operations as well as, potentially, require repayment of a portion of its current borrowings under the SLR Credit Facility. While the Company had cash and cash equivalents of $11,658 as of March 31, 2024 and raised an additional $10,000 in gross proceeds from the private placement on May 13, 2024 (as described in Note 12, Subsequent Events), management does not expect the Company’s cash resources will be adequate to meet its obligations as they become due within the one-year period after the issuance date if maturities under the SLR Credit Agreement are accelerated or the SLR Revolver cannot be drawn on due to a decline in the borrowing base if the Company did not meet is projections. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.

On May 15, 2024, the Company and SLR entered into the first amendment to the SLR Credit Agreement pursuant to which, among other things, SLR waived any required prepayments on the SLR Revolver from the proceeds from the Private Placement (see Note 5, Long-term debt, net). Additionally, the Company has initiated discussions with SLR about remedies if the Company is unable to meet its covenants in the next twelve months.

Given the continued challenges the Company has faced achieving its financial targets, the Company plans to consider further cost reduction measures and focus resources on opportunities that will enable the Company to meet its projected budget and cash flow requirements. These initial plans include divesting a business unit (see Note 12, Subsequent Events) and reviewing divesting other business units to determine the impact of potential divestments.

While management believes the proceeds from the Private Placement and the other steps noted above will be adequate to cover a decline in the borrowing base under the SLR Revolver and fund its current operations, there is no guarantee that the Company's plans will be successfully executed or have the expected benefits. Furthermore, if an event of default under the SLR Credit Agreement were to occur and the maturity date accelerated, the Company likely would not have sufficient funds to repay the Term Loan (as defined in Note 5) and the SLR Revolver. While management believes the Company will be able to work through its plans to mitigate any event of default with SLR, obtaining a waiver of an event of default or entering into an amendment to mitigate an event of default is not entirely within the Company’s control. 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.

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) Reverse stock split

On April 11, 2024, the Company effected a 1-for-6 reverse split of the issued shares (the "Reverse Stock Split") of the Company’s common stock. All historical share amounts disclosed in this Quarterly Report on Form 10-Q have been retroactively restated to reflect the Reverse Stock Split. No fractional shares were issued as a result of the Reverse Stock Split, as fractional shares of Common Stock were rounded up to the nearest whole share. See Note 7, Common stock and treasury stock for additional information.

(c) 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 the Company's consolidated financial statements.

In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiatives, which incorporates updates to the Codification to align with SEC disclosure requirements in response to the August 2018 SEC Release No. 33-10532. The amendment updates and simplifies certain SEC disclosure requirements that were duplicative, overlapping, or outdated due to changes in other SEC requirements and in U.S. GAAP, International Financial Reporting Standards (“IFRS”), or the overall financial reporting environment. The new guidance is effective for each amendment only if the SEC removes the related disclosure of presentation requirements from its existing regulations by June 30, 2027. The guidance is to be applied prospectively, with early adoption prohibited. The Company is currently evaluating the impact of adopting the ASU on its consolidated financial statements and disclosures.

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FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share and per share data)

(unaudited)

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires a public entity to disclose significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and an explanation of any additional measures the CODM uses in deciding how to allocate resources. The new guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, and early adoption is permitted. The guidance is to be applied on a retrospective basis, with such disclosures to be made in regard to all prior periods presented in the financial statements. The Company is currently completing its assessment and expects this update to have no material impact on its consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 470): Improvements to Income Tax Disclosures, which are designed to increase the transparency and decision-usefulness of income tax disclosures for financial statement users. The ASU follows investors' indication and request for enhanced tax disclosures in order to better assess an entity’s operations, related tax risks, jurisdictional tax exposures, and increase transparency regarding tax information through improvements to tax disclosures, specifically rate reconciliation, income taxes paid, and unrecognized tax benefits and certain temporary differences. The new guidance is effective for fiscal years beginning after December 15, 2024 and interim periods within fiscal years beginning after December 15, 2025, and early adoption is permitted. The guidance is to be applied on a prospective basis, but retrospective application is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures.

(d) Revenue recognition

Data and performance-based marketing

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 ("AdParlor"), a wholly-owned subsidiary of the Company.

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 for revenue to be recognized, as it corresponds directly with the amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. 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, and has inventory risk and discretion in establishing pricing, Fluent is considered to have acted as the principal. For performance obligations in which Fluent 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 in which Fluent 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 March 31, 2024 and December 31, 2023, the balance of deferred revenue was $561 and $430, respectively. The majority of the deferred revenue balance as of December 31, 2023 was recognized as revenue during the first quarter of 2024.

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FLUENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands, except share and per share data)

(unaudited)

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 March 31, 2024 and December 31, 2023, unbilled revenue included in accounts receivable was $18,623 and $21,488, 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 differed materially from actual invoiced revenue.

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.

Commission revenue

The Company, acting as the agent, recognizes commission revenue that it expects to receive from the insurance provider from the sale of certain of its health insurance policies, which includes the assumed automatic renewals of such policies once its performance obligation is satisfied. The Company considers its performance obligation related to commissions for both the initial policy sale and future renewals of the policy to be satisfied upon submission by the Company of the initial policy application.

The Company applies the practical expedient to estimate the commission revenue for each insurance policy by applying the use of the portfolio approach to policies grouped together by product type and period submitted for effectuation.

The commission revenue is variable based on a policy's estimated lifetime value ("LTV"), which is based on the time the Company expects the policy will remain effective due to past trends, industry data, expectations as to future retention rates, and commission rates. Further, the Company considers the application of constraints to the LTV and only recognizes the amount of variable consideration believed probable to be received that will not be subject to a significant revenue reversal in the future. Based on this, the commission revenue is recorded upon satisfaction of the performance obligation, which is typically paid monthly by the insurance provider as the consumer renews and pays the insurance provider for the policy over the duration the consumer remains on the policy.

The Company reassesses the estimated LTV for the health insurance policies on a quarterly or as-needed basis. Adjustments to the LTV may result in an increase or decrease in revenue and the corresponding asset in the period the change is made.

(e) Use of estimates

The preparation of consolidated financial statements in accordance with U.S. 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 credit losses, 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, the variable commission revenue based on the estimated LTV, purchase accounting, 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.

(f) Fair value

Fair value is defined as the exchange price that would be received for a