Fluent, Inc. — Q2 2021 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the same periods in 2020. Dollar amounts are in millions unless otherwise noted.
Business context
Fluent provides data-driven digital marketing, customer acquisition and lead-generation services, connecting advertisers with consumers through its media properties and marketing channels. Its “Fluent” segment is the reportable segment; “All Other” primarily reflects AdParlor.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $73.4 | $71.5 | $143.5 | $150.4 |
| Net income (loss) | $(5.2) | $0.5 | $(11.4) | $0.9 |
| Diluted EPS | $(0.06) | $0.01 | $(0.14) | $0.01 |
| Media margin (non-GAAP) | $20.1; 27.4% of revenue | $24.8; 34.7% | $45.0; 31.4% | $48.7; 32.4% |
| Adjusted EBITDA (non-GAAP) | $1.9 | $9.4 | $6.6 | $18.4 |
| Adjusted net income (loss) (non-GAAP) | $(1.9) | $4.2 | $(1.6) | $8.0 |
Q2 cost of revenue was $56.6 million, up 16% year over year, and increased to 77% of revenue from 69%. For the first half, cost of revenue was $107.6 million, or 75% of revenue, versus $105.6 million, or 70%. Operating loss was $4.8 million in Q2 and $7.0 million for the first half.
For the six months, operating cash flow was a use of $0.7 million, compared with $9.8 million provided in 2020. Investing activities used $1.6 million; financing activities provided $6.3 million. Cash, cash equivalents and restricted cash totaled $26.6 million at June 30, including $25.1 million of unrestricted cash.
Total assets were $310.9 million and total liabilities $102.5 million at June 30. Debt was $48.9 million net carrying value ($50.0 million principal), including $6.3 million current; the undrawn revolving facility provides up to $15 million. The company reported compliance with debt covenants. Current assets were $92.7 million against current liabilities of $48.3 million.
Changes and drivers
- Q2 revenue rose 3%, reflecting stronger monetization and more traffic from major digital platforms, partly offset by lower affiliate traffic. First-half revenue fell 5%, as reduced affiliate traffic outweighed those gains.
- The Traffic Quality Initiative curtailed lower-quality affiliate traffic. Replacement channels, including major platforms and revised affiliate bidding, carried higher acquisition costs and pressured media margin and adjusted EBITDA. Management said timing of traffic replacement and future profitability remained uncertain.
- Q2 general and administrative expense rose 15% to $11.5 million, including increased salaries, Winopoly put/call compensation and acquisition costs. First-half product development expense rose 17% to $6.9 million, partly reflecting development of app-based media properties.
- In March, Fluent refinanced its prior term loan with a $50 million term loan due 2026 and a $15 million undrawn revolver. The refinancing resulted in a $3.0 million early-extinguishment loss in the first half; the new facility had a stated opening interest rate of 2.50%, with rates subject to leverage-based terms.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management expects cash resources to fund operations and expected capital expenditures for the next 12 months and beyond, while noting that the timing of traffic growth and channel profitability is uncertain.
- Management cited media-source consolidation, competition, platform algorithm changes and the possibility that new traffic sources may not sustain quality or profitability. Results also remain exposed to advertiser budgets, seasonality and uncertain COVID-19-related demand shifts.
- Fluent paid a $3.7 million penalty under a May 2021 New York Attorney General settlement and accepted injunctive provisions concerning political advocacy campaigns. Separate New York sales-tax audits remained unresolved; estimated exposure was $0.7–$3.0 million, with an accrual at the low end. DOJ and DC AG inquiries concerning related matters and an FTC investigation remained ongoing; the FTC outcome could not be predicted.
- A first-quarter impairment test found no impairment, but estimated goodwill fair value exceeded carrying value by approximately 17%. Management reported no second-quarter triggering event; future impairment remains possible if results or valuation assumptions deteriorate. A $0.2 million software intangible write-off was recorded in Q2.
- The company maintained a full valuation allowance against deferred tax assets. Management said sufficient positive evidence might become available within 12 months to support release of a significant portion, but timing and amount were uncertain. Disclosure controls were assessed as effective, with no material change in internal control reported.
Media margin, adjusted EBITDA and adjusted net income are non-GAAP measures and are not substitutes for GAAP results or measures of liquidity.
Important facts for investors to verify
- Whether traffic-quality changes restore traffic volume while improving media margin, acquisition costs and adjusted EBITDA.
- Cash conversion and working-capital trends, including accounts receivable of $65.9 million and unbilled revenue of $25.6 million at quarter-end.
- Debt service, interest-rate exposure, covenant compliance and restrictions on additional debt, dividends and share repurchases.
- Resolution and financial impact of the New York sales-tax matter and the outstanding DOJ, DC AG and FTC inquiries.
- Goodwill valuation assumptions and whether operating performance supports the reported impairment headroom.