Fluent, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Filed November 7, 2022. Fluent provides data-driven digital marketing, customer acquisition and lead-generation services.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $89.0m | $85.9m | $276.5m | $229.4m |
| Gross profit, excluding D&A | $23.8m (27% of revenue) | $22.1m (26%) | $73.6m (27%) | $58.0m (25%) |
| Media margin (non-GAAP) | $28.1m (31.5%) | $24.2m (28.1%) | $86.3m (31.2%) | $69.2m (30.2%) |
| Operating income (loss) | $0.6m | $(2.0)m | $(52.4)m | $(9.1)m |
| Net income (loss) | $3.1m; $0.04/share | $(2.5)m; $(0.03)/share | $(55.8)m; $(0.69)/share | $(13.9)m; $(0.17)/share |
| Adjusted EBITDA (non-GAAP) | $5.9m | $6.4m | $20.1m | $12.9m |
For Q3, pretax income was only $0.1m; a $3.0m income-tax benefit contributed to reported net income. For the nine-month period, the $55.4m non-cash goodwill impairment was the main driver of the larger GAAP loss. Adjusted net income was $5.0m ($0.06/share) in Q3 and $6.6m ($0.08/share) year to date; these are non-GAAP measures.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $33.1m, versus $34.5m at December 31, 2021. Current assets were $103.0m and current liabilities $51.2m.
- Nine-month operating cash flow was $7.1m, versus cash used of $6.9m in 2021. Investing activities used $4.3m and financing activities used $4.2m. Cash decreased $1.4m.
- Debt principal was $42.5m (carrying amount, net of financing costs, was $41.8m); $5.0m was current. The secured credit facility matures March 2026, amortizes $1.25m quarterly, and carried a 4.87% interest rate at quarter-end. The $15m revolving facility was undrawn. Fluent reported covenant compliance at September 30.
- Management stated it expects cash resources to cover operations and anticipated capital expenditures for the next 12 months and beyond. Noncancelable operating lease commitments were $7.2m.
Changes, outlook and material items
- Q3 revenue rose 4% year over year; year-to-date revenue rose 21%. Growth was driven primarily by Rewards, broader media reach and customer relationship management capabilities that helped re-engage users. Employment-marketplace revenue was pressured by a technology-platform migration and difficult comparisons.
- Management is shifting toward higher-quality traffic and greater monetization per user, including increased spending on major digital media platforms and investment in CRM, technology, analytics and app-based media. It cautioned that channel mix and profitability remain dynamic and that scaling new sources may reduce profitability.
- Year-to-date goodwill impairment was $55.4m, recorded in Q2 after the reporting unit’s estimated carrying value exceeded fair value by 27%. A Q3 test found estimated fair value exceeded carrying value by only about 4%; further operating weakness or stock-price declines could trigger additional impairment. Long-lived assets were not impaired at September 30.
- On October 18, 2022, the FTC sent a draft complaint and proposed consent order seeking injunctive relief and a civil penalty. Fluent said a loss was probable but could not reasonably estimate its amount; an adverse outcome could materially affect the company.
- On November 2, 2022, Pennsylvania filed a complaint seeking an injunction, civil penalties, disgorgement and other relief concerning consumer-protection and telemarketing laws. Fluent said it believes its practices comply and was evaluating the complaint; the outcome and potential impact were not predictable.
- The New York tax matter was settled for $1.7m and paid in April 2022. The company also disclosed unresolved DOJ and District of Columbia inquiries related to consumer information practices, with no recent communications reported.
- Inflation, rising interest rates, lower consumer confidence, seasonality, traffic-supply changes and legal or regulatory actions are identified risks. No specific revenue or earnings guidance is provided. Management noted that future media costs, sales and marketing spending and results may vary.
Investor facts to verify
- Progress and financial exposure from the FTC negotiations and Pennsylvania lawsuit, including any restrictions on marketing practices.
- Whether the narrow Q3 goodwill valuation cushion and management’s cash-flow assumptions remain supportable.
- Revenue quality and customer concentration: one international Fluent-segment customer represented $59.2m, or 21%, of nine-month consolidated revenue.
- Whether improved media margin and operating cash flow persist as traffic sources and acquisition costs change.
- Debt interest-rate exposure, covenant headroom and ability to maintain liquidity; also monitor the $28.4m of unbilled revenue included in receivables at quarter-end.