Fluent, Inc. — Q1 2023 Form 10-Q Summary
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Fluent provides data-driven digital marketing and customer acquisition services. Unless noted otherwise, financial amounts below are in millions.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $77.3 | $89.1 | Down 13% |
| Gross profit, before depreciation and amortization | $19.0 | $21.5 | Down 12%; 25% of revenue versus 24% |
| Media margin (non-GAAP) | $22.0 | $26.0 | Down 15%; 28.4% of revenue versus 29.1% |
| Operating loss | $(31.2) | $(1.6) | Includes $25.7 goodwill impairment |
| Net loss / diluted loss per share | $(31.9) / $(0.39) | $(2.0) / $(0.02) | GAAP loss increased substantially |
| Adjusted EBITDA (non-GAAP) | $0.4 | $4.8 | 0.6% of revenue in Q1 2023 |
| Adjusted net loss (non-GAAP) | $(2.7), or $(0.03) per share | Adjusted net income of $1.1, or $0.01 per share | Turned to a loss |
| Operating cash flow | $4.9 | $(1.8) | Improved, aided by working-capital movements and noncash impairment add-back |
Cash and cash equivalents were $26.6 at March 31, 2023, versus $25.5 at year-end 2022. Net cash increased $1.0 during the quarter; investing activities used $2.4 and financing activities used $1.5. Current assets were $88.9 and current liabilities $54.5.
Outstanding debt principal was $40.0, including $5.0 current and $35.0 long-term before unamortized debt costs. The term loan matures March 31, 2026, with scheduled quarterly principal payments of $1.25. Its interest rate was 7.16% at March 31, up from an opening rate of 2.50%. Fluent reported compliance with its loan covenants at quarter-end, but could not draw on its $15.0 revolver because litigation-related representations required for an advance were not satisfied. Management said it expected cash resources to fund operations and capital expenditures for the next 12 months and beyond without revolver access.
Material changes and management commentary
- Revenue fell mainly due to reduced client spending in the U.S. Rewards business and employment opportunities marketplace, challenging labor-market conditions, and changes to business practices amid greater regulatory scrutiny. Growth in call solutions and international Rewards partly offset the declines.
- Fluent recorded a $25.7 noncash goodwill impairment after a decline in its stock market value triggered an interim test. The Fluent reporting unit’s carrying value exceeded estimated fair value by 20%. Goodwill fell to $33.4 from $55.1 at year-end.
- Cost of revenue declined 14% to $58.3, broadly in line with lower revenue; as a share of revenue it improved to 75% from 76%. Sales and marketing rose 25% to $4.8, product development rose 8% to $4.9, and general and administrative expense rose 9% to $12.3.
- Management cited macroeconomic uncertainty, inflation, rising rates, and client-spending caution. It continued efforts to improve traffic quality and monetize existing users, diversify advertisers, and grow influencer and e-commerce post-sales channels. Some advertiser verticals slowed, while gaming budgets grew. The company paused or eliminated lower-priority projects and reduced its workforce by about 20 employees; it recorded $0.5 in restructuring costs.
- No specific revenue, earnings, or cash-flow guidance is provided. Management’s liquidity statement is its expectation that cash will be sufficient for operations and expected capital expenditures for at least the next 12 months.
Risks, contingencies, and unusual items
- Credit agreement amendment: On May 15, 2023, after quarter-end, Fluent amended its credit agreement. Changes for the remaining 2023 quarters include added pricing and liquidity provisions, tighter covenant and borrowing conditions, monthly reporting, and added limits on certain investments, acquisitions, and distributions. The amendment also set additional unrestricted-cash conditions for dividends and share repurchases.
- FTC matter: The company is negotiating a consent order involving alleged telemarketing-related issues. It maintained a $5.0 accrual recorded in 2022; the final penalty could be higher or lower, and injunctive terms remain unresolved.
- Pennsylvania matter: On May 8, 2023, the company reported a settlement in principle with the Pennsylvania Attorney General for $0.25, of which $0.20 was accrued at March 31; final documentation remained in process.
- TCPA class action: Fluent’s expected contribution to a broader $9.75 settlement is $3.1, accrued in 2022. The contribution is payable after final court approval, expected approximately a year later; $1.1 is cash and $2.0 is covered by a two-year interest-bearing note from a co-defendant.
- Concentration and operating risks: One international customer represented $19.1, or 25%, of consolidated Q1 revenue. Management also cited volatile affiliate traffic supply, platform and messaging algorithms, competition for media, seasonality, and changing channel profitability.
- Non-GAAP measures such as adjusted EBITDA and media margin exclude specified costs and are not substitutes for GAAP results or measures of profitability.
Key facts for investors to verify
- Whether revenue and media-margin trends stabilize, particularly in U.S. Rewards and employment opportunities, and whether growth in call solutions and international Rewards persists.
- Cash generation, working-capital movements, and the assumptions behind management’s liquidity outlook, especially while the revolver is unavailable.
- The revised credit agreement’s pricing, minimum-cash covenant, testing requirements, and any effect on borrowing capacity or strategic flexibility.
- Final FTC and Pennsylvania resolutions, related cash payments and injunctions, and the timing and approval of the TCPA settlement.
- The goodwill valuation assumptions and any further impairment indicators, alongside the company’s exposure to its largest customer and changing traffic sources.