Fluent, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 21, 2023. Fluent provides data-driven digital marketing and customer acquisition services. Financial amounts below are in U.S. dollars; figures are rounded to millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $82.1 million | $98.4 million | $159.4 million | $187.4 million |
| Gross profit, excluding depreciation and amortization | $22.6 million (28% of revenue) | $28.3 million (29%) | $41.6 million (26%) | $49.8 million (27%) |
| Media margin (non-GAAP) | $25.9 million (31.5%) | $32.3 million (32.8%) | $47.9 million (30.0%) | $58.3 million (31.1%) |
| Operating income (loss) | $6.7 million | ($51.4 million) | ($24.4 million) | ($53.0 million) |
| Net income (loss) | $4.3 million ($0.05 per share) | ($56.9 million) ($0.70 per share) | ($27.7 million) ($0.34 per share) | ($59.0 million) ($0.73 per share) |
| Adjusted EBITDA (non-GAAP) | $5.6 million | $9.4 million | $6.0 million | $14.2 million |
- Cash flow: First-half operating cash flow was $2.1 million, versus cash used of $1.9 million in the prior-year period. Investing activities used $3.6 million and financing activities used $3.0 million. Cash declined $4.6 million from year-end to $21.0 million at June 30.
- Balance sheet: Current assets were $89.0 million and current liabilities $54.0 million. Accounts receivable was $58.1 million. Total assets were $155.1 million, down from $184.0 million at year-end, chiefly reflecting a goodwill impairment.
- Debt: Credit Facility principal was $38.75 million at June 30, with $37.99 million reported net of unamortized discount and financing costs. The interest rate was 7.95%, up from the facility’s opening rate of 2.50%; first-half net interest expense increased to $1.5 million from $0.8 million. The facility matures in March 2026.
Material changes and operating drivers
- Revenue fell 16% in Q2 and 15% in the first half year over year. Management attributed the decline mainly to lower U.S. Rewards client spending and weaker employment-marketplace revenue, including effects of regulatory changes. Growth in call solutions and influencer-based business partly offset the declines; international Rewards also grew in the first half.
- Cost of revenue fell less quickly than revenue, increasing as a share of sales to 72% in Q2 from 71% and to 74% in the first half from 73%. Management cited higher media costs as a percentage of revenue. Media margin declined in both periods.
- Q2 returned to GAAP profitability, but the comparison is affected by the prior-year $55.4 million goodwill impairment. First-half 2023 included a separate $25.7 million non-cash goodwill impairment, recorded in Q1; no goodwill impairment was recorded in Q2. Management’s Q2 test found only 5% fair-value headroom for the Fluent reporting unit.
- Q2 general and administrative expense included a $5.7 million net litigation-related credit, associated in part with a lower-than-previously-accrued FTC settlement amount and insurance reimbursement for prior legal fees. The company subsequently reported receiving $4.0 million of insurance proceeds in August.
- Management reported first-quarter workforce reductions of approximately 20 employees and $0.5 million of restructuring costs.
Outlook, risks, and unusual matters
- No quantified revenue or earnings guidance is provided. Management said regulatory changes tied to the FTC Consent Order would negatively affect revenue and media margin in Q3 and beyond. It expects compliance investments may become a competitive advantage over time, but cautioned the adverse effects could last longer than expected.
- Management cited economic uncertainty, inflation, higher interest rates, cautious client spending, and softness in Media & Entertainment, Staffing & Recruitment, and Financial Products & Services. It also reported Q3 pricing pressure in parts of Media & Entertainment.
- Credit amendments and access to liquidity: Under the May 2023 amendment, the company could not draw on its revolving facility as of June 30 because it did not meet added conditions for revolver access; the filing says this was not an Event of Default and did not affect the Term Loan. On August 21, after the reporting date, the company amended the agreement to address projected covenant violations in Q3 and Q4. Terms included adjusted covenants and temporary interest rates, a $5 million Term Loan prepayment, reducing revolving availability to $10 million, weekly liquidity reporting, and a lender-retained business consultant at the company’s expense. Management expected covenant compliance under the amendment but warned that regulatory and macroeconomic pressures could affect compliance and further amendments might be needed. Management stated it believed available cash would fund operations and expected capital expenditures for at least the next twelve months.
- Legal matters: The FTC Consent Order set a $2.5 million civil penalty and required business-practice changes and compliance measures; the court entered the order in August 2023 and escrow funds were released. A Pennsylvania matter settled for $0.25 million, paid by June 30. A TCPA class-action settlement calls for a $3.1 million company contribution, including $1.1 million cash and a $2.0 million two-year note; final approval was expected in mid-2024.
- Controls and listing: Management concluded disclosure controls were ineffective at June 30 because of a material weakness in timely accounting for unusual or complex transactions; remediation was in development. Nasdaq had notified the company it was below the $1.00 minimum bid-price requirement, with an October 30, 2023 deadline to regain compliance.
- First-half revenue included $42.0 million from one international Fluent-segment customer, or 26% of consolidated revenue. Goodwill impairment estimates are sensitive to operating results, market capitalization, forecast assumptions, and discount rates.
Important facts for investors to verify
- Progress toward compliance with the amended credit covenants, required loan prepayment, borrowing availability, and any further lender amendments.
- Whether post-FTC business changes produce the expected revenue and media-margin impact, and whether the anticipated longer-term compliance advantage materializes.
- Revenue trends in U.S. Rewards and the employment marketplace, plus growth in call solutions, influencer business, and international Rewards.
- Cash generation, working-capital movements, and management’s liquidity outlook against debt service and legal obligations.
- Remediation of the material weakness and Nasdaq bid-price compliance; monitor goodwill headroom and the final approval and payment terms of the TCPA settlement.