Fluent, Inc. — 2018 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2018. Formerly Cogint, Inc., the company changed its name to Fluent, Inc. effective April 16, 2018. Unless otherwise indicated, financial amounts below are in millions.
Business context and major transaction
Fluent is a data-driven digital marketing business focused on customer acquisition and performance marketing. It reported one segment, performance marketing, following the March 26, 2018 spin-off of its risk-management business, Red Violet, Inc. Red Violet’s results are presented as discontinued operations. Fluent described its proprietary Fluent Identity Graph as containing 182 million unique email addresses representing more than 150 million individuals.
Financial results and liquidity
- Revenue: $56.0 million, up 14% from $49.2 million in Q1 2017. Management attributed growth to increased adoption of performance-marketing products across advertiser categories and channels.
- Continuing operations: Operating loss was $3.2 million versus $7.6 million; net loss was $5.6 million versus $9.8 million. Interest expense, net, was $2.4 million versus $2.2 million. Income tax expense was zero in both periods.
- Margins and costs: Cost of revenue was $35.7 million, or 64% of revenue, compared with $33.8 million, or 69%, in Q1 2017. Management cited improved targeting and audience segmentation. Sales and marketing expense rose to $4.0 million from $3.7 million; general and administrative expense fell to $8.4 million from $12.5 million, mainly due to lower share-based compensation. Q1 2018 included $7.7 million of spin-off transaction costs.
- Discontinued operations and total loss: Discontinued operations reported a $21.1 million net loss, including a $19.0 million disposal loss, versus a $2.9 million loss in Q1 2017. The disposal loss included $16.0 million of non-cash items. Consolidated net loss was $26.7 million versus $12.7 million; reported loss per share was $0.40 versus $0.24.
- Non-GAAP measures: Adjusted EBITDA was $9.6 million, up 42% from $6.7 million. Adjusted net income was $2.2 million, or $0.03 per share, compared with an adjusted net loss of $9.8 million, or $0.18 per share. These company-defined measures are not substitutes for GAAP results.
- Cash flow: Continuing operations generated $2.9 million of operating cash, down from $3.8 million. Discontinued operations used $5.8 million, resulting in total operating cash use of $3.0 million, compared with $2.2 million provided in Q1 2017. Investing activities used $21.3 million, including $19.7 million contributed to Red Violet. Financing activities provided $13.1 million.
- Liquidity and debt: Cash was $5.4 million at March 31, down from $16.6 million at year-end. The company reported $70.0 million of principal on its refinanced term loan; balance-sheet debt, net of issuance costs and including the current portion, was $64.0 million. The loan bears variable interest at the company’s option: LIBOR plus 7.00% or base rate plus 6.0%, and matures March 26, 2023. Total shareholders’ equity was $191.5 million.
Changes, outlook, and risks
- The spin-off separated the risk-management operation from Fluent’s marketing business. Fluent refinanced its prior term loans and shareholder promissory notes with a new $70.0 million term loan, and completed a $13.4 million net-proceeds registered direct offering. The offering involved 2.7 million shares and warrants for a further 1.35 million shares.
- Management said it expected available resources to fund operations and planned capital expenditures for the next 12 months, based on projected revenue and operating results. No specific revenue or earnings guidance was provided. Management also expected increased sales, marketing, executive, and administrative compensation as it builds out the sales organization.
- The loan agreement imposes restrictive covenants and excess-cash-flow prepayment requirements; financial and other covenant requirements begin with the quarter ending June 30, 2018. The company warned that noncompliance could lead to default and acceleration. Management said no covenant requirements applied as of March 31.
- A hypothetical 10% increase or decrease in interest rates would affect interest expense over the next 12 months by approximately $0.6 million. The company had no derivatives to hedge rate exposure.
- Management reported a full valuation allowance against deferred tax assets, but said sufficient future profitability could support release of a significant portion within 12 months; timing and amount were uncertain. The company also continued evaluating certain tax-reform effects.
- Disclosure controls were deemed ineffective as of March 31, 2018 because of a previously identified material weakness in accounting for non-employee restricted stock units. Management described planned remediation but had not yet established that it was operating effectively.
- The filing reported no legal proceeding believed likely to have a material adverse effect and no material changes to previously disclosed risk factors, apart from those related specifically to the spun-off business.
Important facts for investors to verify
- Whether Fluent’s stated 12-month liquidity expectation is supported by subsequent operating cash flows, particularly given quarter-end cash of $5.4 million and the term loan’s variable-rate interest and covenants.
- How the marketing business performs on a standalone basis after the Red Violet spin-off, including revenue growth and the sustainability of improved cost-of-revenue ratios.
- The cash and share-based components of spin-off costs and disposal losses, and the basis for the reported non-GAAP adjusted results.
- The effect of the registered offering, outstanding warrants, and equity compensation on share dilution; shares outstanding were 75,218,044 as of May 7, 2018.
- Progress remediating the material weakness in non-employee stock-based compensation controls, and any subsequent covenant-compliance or tax-valuation-allowance developments.