Fluent, Inc. quarterly report, Q2 FY2016

Business context and reporting period

IDI, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The filing describes a data and analytics business operating in Information Services and Performance Marketing; Fluent, LLC was acquired in December 2015, and Q Interactive, LLC was acquired on June 8, 2016. The filing is by IDI, Inc., not an entity identified as Fluent, Inc.

Financial performance and position

Cash and cash equivalents were $11.2 million at June 30, 2016, versus $13.5 million at year-end 2015. Current assets were $38.1 million and current liabilities $22.7 million. Balance-sheet debt comprised approximately $40.5 million of long-term debt, including its current portion, and $10.1 million of shareholder promissory notes. The term loan bears interest at LIBOR, subject to a 0.5% floor, plus 10.5%, with an additional 1% payable in cash or in kind; the shareholder notes bear 10% interest, capitalized monthly.

Changes versus prior comparable periods

Reported Q2 revenue rose from $1.0 million in 2015 to $41.0 million in 2016, and six-month revenue from $2.3 million to $80.5 million, primarily because Fluent was acquired and consolidated. Q Interactive contributed $3.1 million of revenue after its June 8 acquisition. Comparisons are not like-for-like: Fluent was not included in 2015 results, Q Interactive joined only late in Q2 2016, and the 2015 comparison includes discontinued Advertising Business losses.

Gross margin fell to 28% from 57% in both comparative periods, reflecting the acquired Performance Marketing business’s lower margin mix and increased data costs in Information Services. Management said it expected combined gross margin to rise over the next 12 months as Information Services revenue scaled and anticipated higher Information Services margins as data costs shifted toward flat-fee licensing. Q2 net loss narrowed from $45.5 million to $7.2 million, largely because the 2015 period included a $41.5 million loss on disposal of discontinued operations; continuing-operations losses increased year over year.

Outlook, risks and unusual items

• Management believed available cash and projected revenue and operating results would fund operations and expected capital expenditures for the next 12 months. It cautioned that additional equity or debt financing may be needed, potentially on unfavorable terms and with shareholder dilution.
• The term-loan agreement contains financial covenants, restrictions on additional debt and certain payments, and mandatory prepayments tied in part to excess cash flow. Covenant noncompliance could trigger default and acceleration. A $1.25 million revolving credit line and merchant-services facility was permitted under a June amendment.
• Non-cancellable data-licensing commitments totaled $15.6 million at June 30, 2016. Six-month investing cash outflow was $6.5 million, including $5.9 million of capitalized litigation and internally developed software costs.
• Q Interactive’s preliminary acquisition consideration was $21.2 million, including $10.0 million of contingent stock consideration; purchase accounting remained under review. Management considered the earn-out target extremely likely to be achieved. The Fluent purchase allocation also remained subject to measurement-period adjustments.
• Significant litigation included a dispute over ownership of purchased intellectual property and appeals concerning employee noncompetition injunctions. The company warned adverse rulings could have an immediate near-term effect on financial position, results and liquidity.
• Share-based compensation was substantial: $14.6 million for the first half, including amounts capitalized. The filing reported 13.9 million unvested RSUs at June 30 and $87.6 million of unrecognized RSU compensation cost.
• Management said the previously reported material weakness in controls over complex, non-routine transactions had been remediated by June 30, 2016; disclosure controls were assessed as effective at that date.
• No formal revenue or earnings guidance was provided. Management’s outlook statements are forward-looking and subject to risks, including execution, financing, debt covenants, acquisition integration and litigation.

Important facts for investors to verify

• Whether Information Services growth and the expected margin improvement materialize, and whether adjusted EBITDA converts into sustainable operating cash flow.
• Debt terms, covenant headroom, cash availability across subsidiaries, and the funding plan for the $15.6 million data commitments and other needs.
• Final Q Interactive and Fluent purchase-price allocations, earn-out settlement, and the performance of the acquired businesses.
• Potential outcomes and financial effects of the intellectual-property and employee-injunction litigation.
• Potential dilution from RSUs, warrants, acquisition consideration and future financing; the filing reported 50,657,244 common shares outstanding as of August 8, 2016.
• The stated non-GAAP adjusted EBITDA reconciliation and the substantial non-cash share-based compensation excluded from that measure.