Fluent, Inc. — Q1 2019 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2019. Fluent provides data-driven digital marketing and customer-acquisition services. The 2018 comparison includes Red Violet results through its March 26, 2018 spin-off, classified as discontinued operations; Q1 2019 reflects the continuing business.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $66.6 million | $56.0 million |
| Cost of revenue | $44.8 million | $37.6 million |
| Income (loss) from operations | $2.8 million | ($3.2 million) |
| Net income (loss) from continuing operations | $1.0 million; $0.01 per diluted share | ($5.6 million); ($0.08) per share |
| Net income (loss), including discontinued operations | $1.0 million | ($26.7 million) |
| Media margin (non-GAAP) | $23.1 million; 34.7% of revenue | $19.3 million; 34.5% of revenue |
| Adjusted EBITDA (non-GAAP) | $9.1 million | $9.6 million |
| Adjusted net income (non-GAAP) | $4.1 million; $0.05 per share | $3.9 million; $0.05 per share |
| Net cash from operating activities | $5.2 million | ($3.0 million), including discontinued operations |
- Revenue grew 19%, attributed by management to demand from existing and new clients, access to incremental media supply, and expanded lifecycle marketing.
- Cost of revenue rose 19%, keeping it at approximately 67% of revenue. Product development increased to $2.2 million from $0.7 million, and general and administrative expense rose 51% to $10.0 million. Management cited investment in workforce, product development, professional fees, and office overhead.
- Cash and cash equivalents were $18.7 million at quarter-end; restricted cash was $1.5 million. Total cash, cash equivalents and restricted cash were $20.2 million, up $0.9 million from year-end. Current assets were $65.3 million and current liabilities $28.5 million.
- Long-term debt had $59.4 million principal outstanding, including $4.8 million classified as current; it matures March 26, 2023. The variable-rate loan bears interest at LIBOR plus 7.00% (subject to a 0.50% floor) or the base rate plus 6.0%. Fluent reported compliance with debt covenants at March 31.
- Operating lease liabilities were $11.2 million; undiscounted operating-lease commitments were $13.3 million. Adoption of the lease accounting standard in January 2019 added right-of-use assets and lease liabilities to the balance sheet.
Changes, outlook, and risks
- The prior-year comparison includes $7.7 million of spin-off transaction costs in continuing operations and a $21.1 million discontinued-operations loss, including a $19.0 million disposal loss. These items materially affect the year-over-year change in GAAP earnings. Adjusted EBITDA declined 5% despite revenue growth; media margin percentage was broadly stable.
- Management said available cash should be sufficient to fund operations and expected capital expenditures for the next 12 months. No quantified revenue or earnings guidance is provided. The company may pursue acquisitions or develop/license technology; additional financing could be needed, and equity financing could dilute shareholders.
- Debt covenants, mandatory excess-cash-flow prepayments, and potential prepayment penalties may constrain financing and strategic flexibility. Management warned that covenant noncompliance could trigger acceleration of debt.
- Disclosure controls and procedures were deemed not effective as of March 31, 2019. Management is remediating a previously identified material weakness in revenue-recognition controls, involving segregation of duties, IT general controls, and manual controls. Remediation had not yet been tested as effective.
- Fluent is cooperating with subpoenas from the New York Attorney General and U.S. Department of Justice concerning information submitted to the FCC in connection with its “Restoring Internet Freedom” proceeding. The duration and outcome are uncertain, and the company could not estimate a possible loss.
- A full valuation allowance remained against net deferred tax assets. Management said a significant release may become supportable within 12 months, depending on sustained profitability; timing and amount are uncertain.
Important facts for investors to verify
- Whether revenue growth and media-margin performance continue, and whether higher product-development and administrative spending produces returns.
- Adjusted EBITDA fell year over year; review the non-GAAP reconciliations and adjustments alongside GAAP results.
- Progress and independent testing of remediation for the revenue-recognition material weakness.
- Developments in the NY AG and DOJ investigations, for which no loss estimate is currently available.
- Debt covenant headroom, variable-rate interest exposure, scheduled and excess-cash-flow repayments, and liquidity needs.
- Whether profitability supports a deferred-tax-asset valuation-allowance release; the filing provides no definite timing or amount.