Fluent, Inc. — Q1 2022 Form 10-Q
Business context and period: Fluent provides data-driven digital marketing, customer acquisition and lead-generation services. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $89.1 million | $70.2 million | Up 27% |
| Cost of revenue, excluding depreciation and amortization | $67.6 million | $51.0 million | Up 33%; 76% of revenue versus 73% |
| Gross profit, excluding depreciation and amortization | $21.5 million | $19.2 million | Gross margin about 24.1% versus 27.3% |
| Media margin (non-GAAP) | $26.0 million | $24.9 million | Up 4%; 29.1% of revenue versus 35.4% |
| Operating loss | $(1.6) million | $(2.3) million | Improved |
| Net loss / loss per share | $(2.0) million / $(0.02) | $(6.3) million / $(0.08) | Improved; prior period included a $3.0 million debt-extinguishment loss |
| Adjusted EBITDA (non-GAAP) | $4.8 million | $4.7 million | Nearly flat |
| Adjusted net income (non-GAAP) | $1.1 million | $0.4 million | Improved |
Management attributed revenue growth mainly to the Rewards business, broader U.S. and international media reach, demand for Fluent Sales Solution, and expanded customer relationship management capabilities that re-engage registered users. An international customer contributed $13.1 million, or 14.7% of consolidated revenue.
Cash flow and liquidity: Operating activities used $1.8 million, compared with $5.0 million provided in Q1 2021. The company cited working-capital timing, including collections from clients and payments to vendors. Investing activities used $2.0 million, including the True North acquisition; financing activities used $1.7 million. Cash and cash equivalents were $28.9 million at March 31, down from $34.5 million at year-end. Current assets were $96.1 million and current liabilities $49.5 million.
Debt: The credit facility had $45.0 million principal outstanding, including $5.0 million current, and matures March 31, 2026. The March 2022 interest rate was 2.75% and is variable. The facility also includes an undrawn revolving commitment of up to $15.0 million. Fluent reported compliance with financial and other covenants at quarter-end. Debt is secured by substantially all relevant company assets and the agreement restricts additional borrowing and certain transactions, including dividends and repurchases.
Material changes and notable items
- Revenue rose substantially, but cost of revenue grew faster, reducing GAAP gross margin and media margin as a percentage of revenue.
- The company continued its Traffic Quality Initiative, reducing reliance on lower-quality affiliate traffic while increasing spend with major digital media platforms. Management said platform traffic profitability remained below historical affiliate levels, though it was improving, and that new channel mix could affect future profitability.
- On January 1, 2022, Fluent acquired True North Loyalty for a deemed purchase price of $2.3 million, comprising cash, deferred and contingent consideration, and stock. True North is a subscription-based consumer marketing and call-center business.
- Q1 2022 included $1.4 million of litigation-related costs, $0.6 million of acquisition-related costs, and a $0.1 million intangible-asset write-off. Adjusted EBITDA and adjusted net income exclude specified items and are non-GAAP measures; they should not be treated as substitutes for GAAP results.
Outlook, risks and contingencies
- No specific revenue, earnings or other numerical guidance was provided. Management said it expects to have sufficient cash resources for operations and expected capital expenditures for the next twelve months and beyond.
- Management noted seasonality in digital advertising, changing client budgets, competition for media, volatility in affiliate supply, and changes to search, email and text-message blocking algorithms. It expects channel mix and profitability to remain dynamic as it tests and scales sources.
- The company reported that COVID-19 had not significantly disrupted operations, while noting that economic uncertainty could shift client demand and pricing. It adopted a voluntary hybrid office approach beginning April 1, 2022.
- On March 31, 2022, Fluent settled a New York sales-tax matter for $1.7 million and paid it April 1. Separate DOJ and District of Columbia inquiries concerning consumer information remain unresolved; the company said outcomes and significance cannot presently be predicted.
- The Pennsylvania Attorney General asserted in February 2022 that Fluent’s lead-generation practices violate state and federal telemarketing and consumer-protection rules. Fluent disputes the assertions and says it believes its practices comply. An FTC inquiry concerning marketing, text messages, privacy and data security also remains unresolved; outcomes are uncertain.
- The company maintains a full valuation allowance against deferred tax assets. Management stated that sufficient positive evidence might become available within twelve months to support releasing a significant portion, but timing and amount are uncertain.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth can continue while improving gross margin and media margin percentage amid the shift in traffic sources.
- Whether operating cash flow returns to positive levels and whether reported liquidity remains adequate as working capital fluctuates.
- Debt amortization, variable interest costs, covenant compliance and availability of the undrawn revolver.
- Developments, potential costs and business implications of the unresolved DOJ, District of Columbia, FTC and Pennsylvania matters.
- True North’s contribution and performance against acquisition assumptions, and any changes to provisional purchase accounting.
- Non-GAAP reconciliations and adjustments, particularly litigation and acquisition-related costs, when assessing underlying performance.