Fluent, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; dollar amounts below are in millions unless stated otherwise. Fluent provides data-driven digital marketing and customer-acquisition services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $78.3 | $64.6 | $228.7 | $201.7 |
| Media margin (non-GAAP) | $29.7 (37.9%) | $21.3 (33.0%) | $78.4 (34.3%) | $67.3 (33.4%) |
| Operating income (loss) | $2.6 | $(2.7) | $6.3 | $2.5 |
| Net income (loss) | $1.2 | $(4.5) | $2.0 | $(2.7) |
| Adjusted EBITDA (non-GAAP) | $11.6 | $4.3 | $30.0 | $23.2 |
| Operating cash flow | Not separately presented | Not separately presented | $12.9 | $26.6 |
Q3 revenue rose 21%, primarily from improved consumer-offer matching, more completed offers, and stronger re-engagement through text messaging and push notifications. Cost of revenue rose 18%, slower than revenue growth; management attributed improved media margin to relatively slower media-cost growth, partly offset by higher reward-fulfillment costs. For the nine-month period, revenue increased 13%, while cost of revenue rose 14% and media margin increased 17%.
Q3 GAAP diluted earnings were $0.01 per share, versus a loss of $0.06; nine-month diluted earnings were $0.03 per share, versus a loss of $0.03. Adjusted net income was $6.3 million in Q3 and $14.3 million for nine months, but these are non-GAAP measures and include exclusions such as litigation, share-based compensation, and other specified items.
Liquidity, cash flow and debt
- At September 30, cash and cash equivalents were $15.4 million; restricted cash was $1.5 million. Cash, cash equivalents and restricted cash totaled $16.9 million, down $3.3 million from year-end 2019.
- Current assets were $77.7 million and current liabilities $43.2 million. Accounts receivable was $59.4 million, including $27.5 million of unbilled revenue.
- Nine-month operating cash flow was $12.9 million, down from $26.6 million. Management cited working-capital changes; accounts payable declined $14.1 million in the period.
- Investing activities used $3.4 million and financing activities used $12.7 million. Financing outflows included $10.9 million of debt repayments and $1.3 million of share repurchases.
- Debt carrying value, net of discounts and financing costs, was $41.1 million; scheduled principal maturities totaled $43.9 million. The term loan matures in 2023, bears interest at LIBOR plus 7% or the base rate plus 6%, and is secured by substantially all company assets. Fluent reported covenant compliance at quarter-end. It also reported $11.3 million of noncancelable operating lease commitments.
Material changes, outlook and risks
- Fluent acquired a 50% interest in Winopoly, LLC on April 1 for a deemed purchase price of $2.6 million, including $1.6 million cash and $1.0 million contingent consideration. Fluent consolidates Winopoly as a variable interest entity. Sellers may have put rights, and Fluent has a call option, over the remaining interest beginning in the fourth year, subject to service conditions.
- Management said COVID-19 had not significantly disrupted operations to date, but advertiser demand and pricing varied by vertical. Staffing and recruitment remained pressured; financial-services spending improved in Q3 but had not returned to pre-pandemic levels. Management could not predict future traffic, demand, or pricing trends and noted work-from-home-related operational and cybersecurity risks.
- A second-quarter review resulted in a $0.8 million goodwill impairment in the All Other reporting unit. No further triggering event was identified in Q3, but management warned that a weaker or slower recovery could lead to further impairment.
- Legal and regulatory exposures include a New York Attorney General investigation concerning consumer information practices, for which $1.45 million was accrued; DOJ and District of Columbia subpoenas regarding the same subject; New York sales-tax assessments with an estimated liability range of $0.7 million to $3.0 million, accrued at the low end; and an FTC investigative demand for which the outcome could not be predicted. The NY AG matter could result in additional loss that management could not estimate.
- Management stated it expected sufficient cash to fund operations and anticipated capital expenditures for the next twelve months and beyond. No specific financial guidance or numerical forecast was provided. The company noted that debt covenants and prepayment terms may constrain financing, acquisitions, and shareholder returns.
- Disclosure controls and procedures were deemed ineffective at September 30, 2020 because a previously identified material weakness in internal control over financial reporting remained under remediation. Fluent was implementing and integrating NetSuite; the control assessment excluded certain controls for newly acquired Winopoly.
Most important facts for investors to verify
- Whether revenue growth and stronger media margin persist as advertiser verticals, consumer traffic, and reward costs shift.
- Cash conversion and working-capital trends, particularly receivables, unbilled revenue, and accounts payable.
- Debt repayment capacity, covenant headroom, interest costs, and the secured term loan’s maturity and restrictions.
- Final outcomes and potential additional costs from the NY AG, sales-tax, DOJ/DC AG, and FTC matters.
- Progress remediating the material weakness and completing Winopoly’s internal controls and purchase accounting.
- Potential impairment exposure if economic recovery or reporting-unit performance falls short of assumptions.