Fluent, Inc. annual report, FY2015

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Business context and reporting period

This is IDI, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, filed March 18, 2016. IDI is the registrant; it acquired Fluent on December 8, 2015, and included Fluent’s results only from December 9 through year-end. The company operated Information Services and Performance Marketing businesses and discontinued its former China-focused advertising operations. The 2014 comparison covers IDI Holdings only from its September 2014 inception, so year-over-year comparisons are not like-for-like. The filing is an annual report, not a standalone Q4 filing; it does provide unaudited Q4 results.

Financial results and liquidity

  • Revenue: 2015 revenue was $14.1 million, versus $0.8 million in the partial 2014 comparison. Information Services contributed $6.4 million and Performance Marketing $7.7 million. Fluent contributed $10.1 million of revenue during its partial-period consolidation.
  • Profitability and margins: Gross profit was $3.8 million, a 27% gross margin versus 59% in 2014. Operating loss was $44.4 million; continuing-operations net loss was $42.6 million; total net loss attributable to IDI was $84.5 million, or $6.48 per diluted share. Information Services reported a $43.8 million operating loss and Performance Marketing a $0.6 million operating loss.
  • Cash flow: Operating activities used $10.7 million; investing activities used $93.8 million, primarily for the Fluent acquisition; financing activities provided $111.9 million. Year-end cash was $13.5 million, up from $6.0 million.
  • Balance sheet and liquidity: Total assets were $289.2 million, liabilities $83.3 million, and shareholders’ equity $205.9 million. Current assets were $37.6 million and current liabilities $21.1 million. Management said available cash was expected to fund operations and planned capital expenditures for the next 12 months, based on projected growth.
  • Debt and commitments: At year-end, debt principal was $55.0 million—$45.0 million term debt and $10.0 million bridge loans—with carrying debt of $50.9 million after issuance costs and accrued PIK interest. The term loan bears LIBOR (minimum 0.5%) plus 10.5%, with an additional 1% payable in cash or in kind; bridge loans bear 10%. Debt is secured by substantially all relevant assets and includes financial covenants, excess-cash-flow repayments, and a minimum cash requirement. Contractual obligations totaled $108.9 million, including debt payments, data licenses, leases, incentive compensation, and employment agreements.

Fourth-quarter snapshot

For the three months ended December 31, 2015, revenue was $10.8 million, gross profit $2.3 million, operating loss $34.6 million, and continuing-operations net loss $32.6 million. The quarter included nearly all of Fluent’s reported contribution. The filing does not provide a comparable Q4 2014 operating period for the combined business.

Material changes versus the prior comparable period

  • Reported revenue rose sharply, but the comparison is distorted by the short 2014 reporting period, the March 2015 reverse merger, and Fluent’s late-December acquisition.
  • Gross margin fell to 27%; management cited data costs and investment in additional datasets, as well as the mix of the newly acquired Performance Marketing business.
  • General and administrative expense reached $44.5 million, including $33.4 million of non-cash share-based compensation and $5.6 million of professional fees. The company also recorded $14.3 million of non-cash contingent earn-out costs.
  • Discontinued operations generated a $42.0 million loss, including a $41.1 million largely non-cash disposal loss, principally from goodwill and intangible-asset write-offs and exit costs.

Outlook, risks, contingencies, and unusual items

  • Outlook: No specific revenue or earnings guidance was provided. Management cited product development, sales-force expansion, and anticipated higher personnel and infrastructure costs. Its liquidity outlook depends on revenue growth, positive cash generation, covenant compliance, and access to additional financing if needed.
  • Controls: Management concluded internal control over financial reporting and disclosure controls were ineffective because of a material weakness in accounting for complex, non-routine transactions, including acquisitions and debt and equity transactions. The weakness was not remediated by the filing date. The auditor issued an adverse opinion on internal control. Fluent, representing 94% of year-end assets and 72% of 2015 revenue, was excluded from the control assessment.
  • Legal matters: Several ongoing disputes with TransUnion Risk and Alternative Data Solutions involve purchased intellectual property and alleged noncompetition violations by current or former employees. The company warned that adverse rulings could affect its financial position, results, and liquidity. Outcomes were uncertain.
  • Key business risks: The filing highlights recurring losses and negative operating cash flow, customer and supplier concentration, dependence on licensed data and third-party media/search platforms, intense competition, privacy and advertising regulation, cybersecurity and data-breach exposure, and risks integrating acquisitions. One customer represented 14% of 2015 revenue and 17% of year-end receivables.
  • Capital structure: The Fluent acquisition was funded with cash, preferred stock, a term loan, and bridge loans. Subsequent to year-end, preferred-stock conversions, earn-out shares, and warrant exchanges increased potential common-share dilution; the company indicated approximately 46.9 million common shares outstanding after the disclosed transactions.

Important facts for investors to verify

  1. Reconcile the reported 2015 and Q4 results with Fluent’s full-year performance; consolidated results include Fluent only from December 9, while the filing’s unaudited 2015 pro forma combined revenue was $148.9 million.
  2. Review the drivers and expected cash impact of the substantial stock compensation, contingent earn-out charge, and discontinued-operations disposal loss.
  3. Assess whether operating cash flow, available liquidity, and the stated growth assumptions can support debt service, covenant requirements, and the $11.4 million of data-license commitments.
  4. Track remediation of the non-routine-transaction control weakness and clarify the scope of controls not assessed at Fluent.
  5. Monitor the intellectual-property and employment-related litigation, customer and data-provider concentration, and the effect of post-year-end share conversions and issuances on dilution.