Fluent, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; the filing text does not provide a clear set of Q4-only financial results.
Business context
Fluent provides data-driven digital marketing and customer-acquisition services, primarily through performance-based campaigns and consumer data offerings. It reported more than 500 clients in 2018. On March 26, 2018, it spun off its risk-management business as Red Violet; results of that business are presented as discontinued operations. Fluent thereafter reported one segment, Performance Marketing.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $250.3 million | $211.7 million |
| Operating income (loss) | $11.4 million | $(21.0) million |
| Continuing-operations net income (loss) | $3.2 million | $(31.7) million |
| Discontinued-operations net loss | $(21.1) million | $(21.5) million |
| Net loss | $(17.9) million | $(53.2) million |
| Continuing-operations diluted EPS | $0.04 | $(0.52) |
| Adjusted EBITDA (non-GAAP) | $44.1 million | $32.5 million |
| Media margin (non-GAAP) | $92.2 million; 36.8% of revenue | $68.9 million; 32.5% of revenue |
Revenue grew 18%, primarily from stronger demand from existing clients, new clients, additional media supply and lifecycle marketing. Cost of revenue rose 10%, slower than revenue growth, and fell to 64.6% of revenue from 69.1%. Management attributed improved unit economics in part to lifecycle marketing and machine-learning-enabled ad targeting. General and administrative expense declined to $36.0 million from $55.1 million, largely reflecting lower share-based compensation and acquisition/restructuring costs. Product development expense increased to $5.3 million from $2.6 million.
Adjusted EBITDA and media margin are non-GAAP measures and should not be viewed as substitutes for GAAP earnings or liquidity measures. Total-company net loss remained despite the return to positive net income from continuing operations, principally because of discontinued-operation losses associated with the Red Violet spin-off.
Cash flow, balance sheet and debt
- Cash provided by operating activities was $23.5 million, versus $2.5 million in 2017. Continuing operations generated $29.3 million; discontinued operations used $5.8 million.
- Investing activities used $22.6 million, including a $19.7 million cash contribution to Red Violet. Financing activities provided $1.8 million.
- Cash, cash equivalents and restricted cash totaled $19.2 million at year-end, including $1.5 million of restricted lease collateral; cash and cash equivalents alone were $17.8 million.
- Year-end total assets were $293.3 million, total liabilities $86.1 million, and shareholders’ equity $207.2 million. Long-term debt had a $60.3 million principal balance; reported long-term debt, net, including the current portion, was $55.5 million.
- The term loan matures in March 2023, bears interest at LIBOR plus 7.0% or base rate plus 6.0%, and is secured by substantially all company and subsidiary assets. Quarterly scheduled principal amortization is $0.875 million. The company reported covenant compliance at year-end and said it expected to have sufficient cash for operations and anticipated capital expenditures over the next 12 months.
- Noncancelable operating lease commitments were $15.1 million. Fluent expected adoption of lease accounting in 2019 to materially increase balance-sheet assets and liabilities, without an expected material impact on earnings or cash flows.
Material changes and unusual items
- The Red Violet spin-off generated $7.7 million of continuing-operations transaction costs and a $19.0 million loss on disposal in discontinued operations. The latter included $16.0 million of non-cash charges.
- In Q4 2018, Fluent recorded a $1.5 million impairment of internally developed software not yet placed in service.
- Share-based compensation expense was $30.4 million in 2018, including $5.4 million recorded in spin-off transaction costs; discontinued operations also included substantial accelerated-award expense.
- Fluent issued 2.7 million shares in a January 2018 registered direct offering for $13.4 million net proceeds and issued warrants for 1.35 million shares at a $6.00 exercise price. Outstanding shares increased materially during 2018, including through vesting of awards.
- Revenue recognition standard ASC 606 was adopted in 2018 with no material impact. The filing also describes an immaterial correction to 2017 weighted-average shares and EPS; 2017 net loss was unchanged.
Outlook, risks and controls
No specific revenue, earnings or margin guidance was provided. Management described opportunities in programmatic advertising, identity resolution, marketing research and insights, while noting these data offerings were nascent. Its outlook depends on sourcing quality media at acceptable costs, client demand and the continued effectiveness of its marketing campaigns.
- Financial reporting control weakness: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2018 because of a material weakness in revenue-recognition controls, involving segregation of duties, IT general controls and manual controls. The weakness did not result in a reported material misstatement or restatement. The independent auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements.
- Data, privacy and regulatory exposure: The business relies on personal information and is subject to evolving privacy, marketing and data-security laws, including GDPR and the upcoming CCPA. Breaches, noncompliance or limits on data use could increase costs or impair operations.
- Media and client concentration risks: Fluent depends substantially on third-party publishers, search and social platforms for traffic; media availability or pricing changes can reduce margins. Its top ten advertisers represented 27% of revenue, and most client agreements lacked fixed spending commitments.
- Debt and liquidity risks: Debt covenants, mandatory payments, prepayment provisions and secured borrowing could constrain operations, strategic options and access to capital. Covenant breach could trigger acceleration. Management’s liquidity outlook is subject to these risks.
- Contingencies: The company reported no pending legal matter it considered likely to have a material adverse effect, but noted that ordinary-course disputes and regulatory proceedings remain possible. It also agreed to indemnify Red Violet for certain liabilities.
Investor verification priorities
- Review remediation progress and testing of revenue-recognition controls, particularly given the adverse auditor opinion on internal control.
- Examine the quality and collectability of receivables: year-end accounts receivable was $48.7 million, including $25.5 million of unbilled revenue, and the allowance for doubtful accounts was $1.8 million.
- Assess debt-service capacity, covenant headroom, interest-rate exposure and mandatory prepayment terms against operating cash flow and available cash.
- Separate continuing-business operating improvement from spin-off-related charges and discontinued-operation losses; assess whether margin gains persist without the one-time items.
- Track revenue dependence on major advertisers and third-party traffic sources, alongside privacy-law compliance and the commercial contribution of emerging data products.