Fluent, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unless noted, amounts are in millions. Fluent, formerly Cogint, changed its name in April 2018. On March 26, it spun off red violet, its risk-management business; results of that business are presented as discontinued operations. Fluent now reports one segment: Performance Marketing.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $56.9 | $51.0 | $112.9 | $100.2 |
| Income (loss) from continuing operations | $2.6 | ($8.3) | ($2.9) | ($18.1) |
| Net income (loss), including discontinued operations | $2.6 | ($20.4) | ($24.0) | ($33.1) |
| Adjusted EBITDA (non-GAAP) | $10.9 | $7.1 | $20.5 | $13.9 |
| Adjusted gross profit / margin (non-GAAP) | $23.0 / 40% | $16.3 / 32% | $43.4 / 38% | $31.6 / 32% |
| Operating cash flow, continuing operations | Not stated separately | Not stated separately | $10.4 | $6.6 |
| Total operating cash flow, including discontinued operations | Not stated separately | Not stated separately | $4.6 | $2.7 |
- Q2 diluted EPS from continuing operations was $0.03, versus a loss of $0.15 a year earlier. Six-month diluted loss per share from continuing operations was $0.04, versus $0.33.
- Q2 cost of revenue was $33.9 million, 60% of revenue versus 68% in Q2 2017. For the six months, it was $69.6 million, 62% of revenue versus 68%. Management attributed margin improvement to better audience segmentation, campaign targeting, and ad distribution.
- At June 30, cash and cash equivalents were $10.1 million, accounts receivable $38.0 million, current assets $49.9 million, and current liabilities $27.5 million. Cash declined from $16.6 million at year-end, primarily due to $19.7 million contributed to red violet in connection with the spin-off.
- Debt principal was $69.1 million; carrying value net of $5.6 million of unamortized issuance costs was $63.5 million, including $6.8 million classified as current. The refinanced term loan bears variable interest at LIBOR plus 7% or base rate plus 6%, and matures March 26, 2023. The company recorded a $3.3 million required excess-cash-flow prepayment for payment in Q3 and reported covenant compliance at June 30.
- Six-month investing cash outflow was $21.7 million, including the $19.7 million contribution to red violet. Financing cash flow was $10.6 million, including $13.4 million net proceeds from a registered direct offering and refinancing activity.
Material changes and unusual items
- Revenue grew 12% in Q2 and 13% for the six-month period, attributed to adoption of performance-based marketing products across advertiser verticals and channels. Q2 continuing operations returned to profit, supported by revenue growth, lower cost of revenue as a share of sales, and lower share-based compensation.
- Six-month continuing-operations loss included $7.7 million of spin-off transaction costs. Reported net loss also included $21.1 million of discontinued-operation losses, including a $19.0 million loss on disposal of red violet; $16.0 million of that disposal loss was non-cash.
- The company refinanced its prior term loans and shareholder promissory notes with a $70 million term loan in March. It also issued 2.7 million shares at $5 per share, receiving $13.4 million net, and issued warrants for 1.35 million shares at $6 per share.
- Share-based compensation remains significant: $25.4 million was recognized in the six months, including amounts associated with the spin-off. The filing also reports substantial restricted-stock vesting and dilution.
Outlook, risks, and controls
- Management said it expects cash resources to be sufficient for operations and expected capital expenditures over the next 12 months, based on projected revenue growth and operating results. No numerical revenue or earnings guidance was provided.
- Management cautioned that loan covenants, mandatory excess-cash-flow prepayments, and prepayment penalties may limit strategic flexibility and access to financing. Failure to comply with covenants could trigger default and acceleration. The loan is secured by substantially all company and subsidiary assets.
- The loan’s variable rate exposes results and cash flow to interest-rate changes; the filing estimates a 10% increase or decrease in rates would change interest expense over the next 12 months by $0.6 million.
- Fluent reported ineffective disclosure controls as of June 30 because a previously identified material weakness in accounting for non-employee restricted stock unit awards remained unremediated. Remediation measures had begun but had not yet been tested for effective operation.
- Newly highlighted risks include uncertainty over sales-tax obligations following the Wayfair decision and privacy regulation, including GDPR and California’s CCPA, which may increase compliance costs or affect data collection and marketing operations.
- The company reported a full valuation allowance against net deferred tax assets and a 0% effective tax rate. Management said sufficient evidence might emerge within 12 months to support releasing some or all of the allowance, but timing and amount are uncertain.
- No material legal proceeding was identified. The filing reports no off-balance-sheet arrangements and no material changes to previously disclosed risk factors other than those described.
Investor facts to verify
- Whether operating cash generation and the stated 12-month liquidity outlook are sufficient given $10.1 million of cash, debt service, and mandatory prepayments.
- Loan terms, covenant headroom, future excess-cash-flow payments, and sensitivity to variable interest rates.
- The sustainability of margin and adjusted EBITDA improvement; these are non-GAAP measures and should be considered alongside GAAP results and cash flow.
- The continuing-operations comparability of prior periods after red violet was classified as discontinued operations, and the size and cash impact of spin-off-related costs.
- Progress in remediating the material weakness and the potential effects of privacy and sales-tax rules on operations and costs.
- Share count and potential dilution: the filing reports 75,284,624 shares outstanding at June 30 and 75,289,624 as of August 3, 2018, as well as outstanding warrants and equity awards.