Fluent, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Fluent provides data-driven digital marketing, customer acquisition and lead-generation services.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $98.4 | $73.4 | $187.4 | $143.5 |
| Gross profit, excluding depreciation and amortization | $28.3; 29% of revenue | $16.8; 23% | $49.8; 27% | $36.0; 25% |
| Media margin (non-GAAP) | $32.3; 32.8% of revenue | $20.1; 27.4% | $58.3; 31.1% | $45.0; 31.4% |
| Net loss | $(56.9); $(0.70) per share | $(5.2); $(0.06) per share | $(59.0); $(0.73) per share | $(11.4); $(0.14) per share |
| Adjusted EBITDA (non-GAAP) | $9.4; 9.6% of revenue | $1.9 | $14.2; 7.6% of revenue | $6.6 |
| Adjusted net income (loss) (non-GAAP) | $0.6; $0.01 per share | $(1.9); $(0.02) per share | $1.6; $0.02 per share | $(1.6); $(0.02) per share |
Non-GAAP measures are management-defined supplemental measures and are not substitutes for GAAP results.
- Cash flow: For the first half of 2022, operating activities used $1.9 million, investing activities used $3.2 million, and financing activities used $2.9 million. Cash and cash equivalents declined $8.1 million to $26.4 million from December 31, 2021.
- Liquidity and debt: Current assets were $106.5 million and current liabilities $59.6 million at June 30, 2022. Debt principal was $43.8 million, with $43.0 million reported as debt net of unamortized discount and financing costs. The term loan matures in 2026; its rate was 3.92% at quarter-end, up from 2.50% at origination. The $15 million revolving facility was undrawn. Fluent reported compliance with debt covenants at June 30.
- Other balance-sheet items: Goodwill was $110.8 million, down from $165.1 million at year-end 2021. Total assets were $259.1 million and shareholders’ equity was $156.1 million.
Material changes and operating commentary
- Q2 revenue grew 34% year over year; first-half revenue grew 31%. Management attributed growth primarily to the Rewards business, expanded U.S. and international media reach, increased Fluent Sales Solution demand, and improved customer relationship management and re-engagement capabilities.
- Management continued its Traffic Quality Initiative, reducing reliance on lower-quality affiliate traffic and increasing use of major digital media platforms. It said improved monetization partly offset lower traffic volume. Media-channel mix and profitability remain dynamic, and increased platform spend initially carried lower margins.
- Cost of revenue increased 24% in Q2 and 28% in the first half, slower than revenue growth. Its share of revenue declined to 71% in Q2 from 77%, and to 73% for the first half from 75%.
- Sales and marketing and product development costs increased as the company resumed in-person activity and invested in technology, analytics and app-based media properties.
- Q2 GAAP loss included a $55.4 million non-cash goodwill impairment charge. The interim test followed a decline in share price and market capitalization; the Fluent reporting unit’s carrying value exceeded estimated fair value by 27%. Management said the impairment assumptions included forecast cash flows, market multiples and control premiums. The impairment reduced reported goodwill, but did not represent a cash outflow.
- Fluent acquired True North Loyalty on January 1, 2022, for a deemed purchase price of $2.3 million, including cash, deferred and contingent consideration, and shares. True North represented 2% of first-half revenue.
Outlook, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided. Management stated it expects cash resources to be sufficient for operations and expected capital expenditures for the next twelve months and beyond.
- Management expects to continue testing and scaling media channels and partnerships, while noting that traffic-source quality, competition, platform algorithms and changing media costs could affect growth and profitability. Seasonality, client-industry and macroeconomic conditions may also affect results.
- Debt covenants restrict certain borrowing, investments and distributions. Fluent cautioned that future covenant compliance is not assured; a default could accelerate debt repayment. The company may need financing for future acquisitions or working capital, potentially on unfavorable or dilutive terms.
- Legal matters include a Pennsylvania Attorney General inquiry: the agency alleged violations relating to lead-generation practices, and Fluent was negotiating a possible Assurance of Voluntary Compliance; outcome and terms were uncertain. The FTC inquiry concerning marketing, text messaging, rewards and consumer privacy/data security remained unresolved. DOJ and District of Columbia inquiries relating to a separate matter had produced no communications since Q2 2020; outcomes were uncertain.
- A New York sales-tax dispute was settled for $1.7 million and paid in April 2022. A separate New York Attorney General matter was resolved in 2021 with a $3.7 million penalty and injunctive provisions. The company reported no material changes to risk factors previously disclosed in its 2021 Form 10-K.
Key facts for investors to verify
- Whether revenue and margin gains persist as Fluent shifts traffic sources and scales newer media initiatives, and whether those channels meet its quality and profitability targets.
- The key assumptions behind the $55.4 million goodwill impairment and the potential for further impairment if forecasts, market multiples or interest rates worsen.
- The outcome and possible financial or operational impact of the Pennsylvania AG and FTC matters, and any developments in the DOJ or DC AG inquiries.
- Cash conversion and working-capital needs: first-half operating cash use was $1.9 million despite positive adjusted EBITDA.
- Debt service, the rising interest rate, covenant headroom and the basis for management’s liquidity expectation. The filing states covenant compliance but does not provide a clear quantified covenant cushion.
- Customer concentration: one international Fluent-segment customer generated $40.6 million, or 22% of consolidated first-half revenue.