Fluent, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Fluent provides data-driven digital marketing and customer-acquisition services; AdParlor is its non-core social-media marketing business. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $66.2 | $89.0 | $225.6 | $276.5 |
| Gross profit, excluding D&A | $16.1; 24% of revenue | $23.8; 27% | $57.7; 26% | $73.6; 27% |
| Media margin (non-GAAP) | $19.3; 29.2% of revenue | $28.1; 31.5% | $67.2; 29.8% | $86.3; 31.2% |
| Operating income (loss) | $(33.9) | $0.6 | $(58.3) | $(52.4) |
| Net income (loss) | $(33.6); $(0.41) per share | $3.1; $0.04 per share | $(61.3); $(0.74) per share | $(55.8); $(0.69) per share |
| Adjusted EBITDA (non-GAAP) | $(1.7) | $5.9 | $4.3 | $20.1 |
- Q3 revenue fell 26% year over year; nine-month revenue fell 18%. Management cited lower U.S. Rewards client spending, reduced employment-marketplace revenue, and a major gaming client’s pullback in Q3. Nine-month declines were partly offset by influencer-platform growth and new initiatives.
- Q3 included a $29.7 million non-cash goodwill impairment. Nine-month impairment was $55.4 million, versus $55.4 million in the prior-year period. Goodwill declined to $1.3 million from $55.1 million at year-end 2022.
- Interest expense rose to $0.9 million in Q3 and $2.4 million for nine months, reflecting higher borrowing rates. The Credit Facility rate was 8.92% at September 30, versus an opening rate of 2.50%.
Cash, liquidity and debt
- Cash and cash equivalents were $20.5 million at September 30, down from $25.5 million at December 31, 2022. Current assets were $77.1 million and current liabilities $72.2 million.
- Nine-month operating cash flow was positive $9.7 million, compared with $7.1 million a year earlier. Investing cash outflow was $5.4 million and financing cash outflow $9.4 million. Cash decreased $5.0 million over the period.
- Credit Facility principal was $32.5 million; its $31.8 million carrying amount was classified as current because of covenant risk. The company paid a $5.0 million required prepayment in 2023; revolving-loan availability was reduced to $10.0 million, and draws were restricted under the amendments.
- Fluent breached its total-leverage covenant at September 30. A November 15, 2023 temporary waiver covers that breach only through the earlier of January 15, 2024 or another event of default. The company says it expects to breach certain covenants in some quarters over the following 12 months. Without an amendment, lenders may accelerate the debt.
- Management concluded that substantial doubt exists about Fluent’s ability to continue as a going concern for the year after issuance of the financial statements. The company says cash should support operations over the next 12 months only assuming debt maturities are not accelerated. It plans cost reductions and growth initiatives and expects to seek revised covenant terms, but success is not assured.
Material developments, outlook and risks
- The FTC consent order, entered by the court in August 2023, imposed a $2.5 million civil penalty and changes to employment-marketplace and programmatic-advertising practices, as well as broader compliance measures. Management said the changes negatively affected Q3 revenue and media margin. It expects increased industry scrutiny could eventually benefit compliant operators, but provides no quantified forecast.
- The company reported a $5.8 million insurance recovery recognized against general and administrative expense for certain legal costs, with a further $1.8 million current asset related to insurance. A Pennsylvania settlement required $0.25 million, paid by June 30, 2023. A TCPA class-action settlement is awaiting final approval, expected in mid-2024; Fluent’s $3.1 million contribution was accrued previously and is payable partly in cash and partly through a two-year interest-bearing note.
- Management cited economic uncertainty, inflation, higher interest rates, reduced consumer confidence, traffic-supply volatility, platform algorithm changes, and increased media competition as business risks. It paused or eliminated lower-priority projects and implemented workforce reductions; approximately 20 employees were terminated in Q1.
- Fourth-quarter seasonality may benefit Adflow and Medicare/ACA open-enrollment businesses. No specific revenue, earnings or cash-flow guidance is provided. Management expects a 2024 budget and lender-reviewed plan to inform a proposed credit-agreement amendment; it also intends to reduce costs and focus on growth opportunities.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2023 due to a material weakness in accounting for unusual or complex transactions. Remediation steps are underway but have not yet been tested sufficiently to conclude the weakness is resolved.
- Nasdaq granted an additional bid-price compliance period through April 29, 2024. Fluent may need a reverse stock split to regain compliance; delisting remains a risk.
Most important facts for investors to verify
- Whether Fluent obtains a credit-agreement amendment before the temporary waiver expires, and the revised covenants, pricing, restrictions and lender concessions.
- Whether operating performance, cash generation and liquidity can support obligations if covenant breaches recur or debt is accelerated.
- Whether revenue and media margin stabilize after advertiser pullbacks and FTC-related business changes, including the performance of newer growth initiatives.
- Final approval and payment terms for the Berman settlement, and any further legal, regulatory or insurance developments.
- Progress in remediating the material weakness and meeting Nasdaq’s bid-price requirement by April 29, 2024.