Fluent, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; it does not provide a clear standalone fourth-quarter income statement or results summary. Fluent provides data-driven digital marketing and customer acquisition services. On July 1, 2019, it acquired AdParlor, adding social media advertising services.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $281.7 million | $250.3 million |
| Operating income | $5.2 million | $11.4 million |
| Continuing-operations net income (loss) | $(1.7) million | $3.2 million |
| Basic and diluted EPS from continuing operations | $(0.02) | $0.04 |
| Media margin (non-GAAP) | $93.6 million; 33.2% of revenue | $92.2 million; 36.8% of revenue |
| Adjusted EBITDA (non-GAAP) | $34.7 million | $44.1 million |
| Adjusted net income (non-GAAP) | $13.8 million; $0.17 per share | $22.7 million; $0.30 per share |
| Cash from operating activities | $26.0 million | $23.5 million, including discontinued operations |
Revenue grew 13%, principally from stronger performance-marketing demand in Media & Entertainment and Financial Products & Services. Cost of revenue rose 20% to $194.4 million, outpacing revenue growth; media costs were 69.0% of revenue versus 64.6% in 2018. Operating margin declined to 1.9% from 4.5%. General and administrative expense increased 33% to $48.1 million, including higher share-based compensation, bad-debt provision, acquisition and restructuring costs. Net loss from discontinued operations was nil in 2019 versus $21.1 million in 2018, primarily reflecting the Red Violet spin-off disposal loss; consequently, total net loss improved to $1.7 million from $17.9 million.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $18.7 million and restricted cash was $1.5 million. The filing reports total cash, cash equivalents and restricted cash of $20.2 million.
- Debt principal was approximately $54.8 million, including the term loan and AdParlor seller note; balance-sheet debt, net of discounts, was $51.0 million ($6.9 million current and $44.1 million non-current). The term loan matures March 2023, bears interest at LIBOR plus 7% or base rate plus 6%, and is secured by substantially all company assets.
- Management stated it expected available cash to fund operations and expected capital expenditures for the next twelve months and beyond. Fluent reported covenant compliance at December 31, 2019; the credit agreement includes financial covenants, mandatory repayments and restrictions on additional debt and certain payments.
- Investing cash outflow was $12.0 million, including $7.3 million cash paid for AdParlor. Financing cash outflow was $13.2 million, including $8.0 million of debt repayments, $3.1 million in taxes on net share settlement and $1.8 million of share repurchases.
Material developments, outlook and risks
- AdParlor was acquired for $7.3 million cash and a seller note with a reported present value of $2.35 million. Its 2019 revenue contribution was $3.8 million; integration requires management resources.
- In the fourth quarter, Fluent conducted workforce reductions totaling approximately 46 employees and recorded $1.4 million of cash-settled restructuring costs. Management expected related salary and benefit savings.
- No numerical revenue, earnings or cash-flow guidance is provided. Management cited media supply availability and pricing as constraints on growth and margins, and seasonality as a factor in quarterly results. It stated it believed the COVID-19 outbreak would not materially affect operations, while acknowledging significant uncertainty and potential economic and operating impacts.
- A material weakness in controls over revenue recognition remained at year-end, involving segregation of duties, IT general controls and manual controls. Management said the weakness had not caused a financial-statement misstatement or restatement; remediation through implementation of NetSuite was ongoing. The auditor issued an adverse opinion on internal control, but an unqualified opinion on the financial statements.
- Regulatory and legal matters include NY Attorney General and DOJ subpoenas regarding consumer information submitted in an FCC proceeding; a January 2020 FTC demand involving rewards marketing, commercial texts, privacy and data security; and a New York sales-tax audit. For the tax matter, proposed adjustments totaled $8.2 million, while Fluent estimated a probable liability range of $0.7 million to $3.7 million and accrued the low end.
- Other key exposures include privacy and data-security regulation, TCPA and telemarketing claims, dependence on third-party media sources and platforms, customer payment and bad-debt risk, and potential goodwill impairment. The Fluent reporting unit’s estimated fair value exceeded carrying value by approximately 12% in its September 2019 interim test.
Important facts for investors to verify
- Whether the revenue-recognition material weakness is fully remediated and whether NetSuite controls operate effectively.
- The outcomes and potential financial exposure of the FTC inquiry, NY AG/DOJ matters and New York sales-tax audit.
- Whether revenue growth can translate into improved margins given rising media costs and operating expenses.
- Cash conversion, receivables collectability and the company’s ability to service debt and meet covenants.
- AdParlor’s integration and performance, and whether goodwill assumptions remain supportable.
Non-GAAP media margin, adjusted EBITDA and adjusted net income are company-defined supplemental measures, not substitutes for GAAP results or liquidity measures.