Fluent, Inc. (Cogint, Inc.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing registrant is Cogint, Inc.; Fluent is a wholly owned subsidiary and the business name used in the filing. Unless stated otherwise, dollar amounts below are in millions.
Business context
Cogint describes itself as a data and analytics company operating two segments: Information Services and Performance Marketing. Q2 results include growth in both segments and the effect of the Q Interactive acquisition, which closed in June 2016. The company approved a plan in January 2017 to integrate Q Interactive into Fluent.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $53.0 | $41.0 | $103.8 | $80.5 |
| Gross profit | $16.4 | $11.5 | $32.0 | $22.4 |
| Gross margin | 31% | 28% | 31% | 28% |
| Operating loss | $(18.0) | $(7.9) | $(28.5) | $(16.0) |
| Net loss | $(20.4) | $(7.2) | $(33.1) | $(14.0) |
| Adjusted EBITDA, non-GAAP | $4.8 | $3.1 | $9.8 | $5.5 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.7 | $1.1 |
Q2 revenue rose 29% year over year: Information Services revenue increased 39% to $18.6 million and Performance Marketing revenue increased 24% to $34.4 million. For the six-month period, the respective segment revenues were $35.1 million and $68.7 million. Management attributed the higher consolidated gross margin to scaling in Information Services; it said Performance Marketing margin remained consistent.
Q2 basic and diluted loss per share was $0.37, versus $0.15 in Q2 2016; for the six-month periods, loss per share was $0.61 versus $0.37. The 2017 periods had no income tax benefit, compared with benefits of $3.5 million for Q2 2016 and $7.0 million for the first half of 2016. A full valuation allowance was applied to net deferred tax assets.
At June 30, cash and cash equivalents were $19.2 million, versus $10.1 million at December 31, 2016. Current assets were $54.6 million and current liabilities $33.8 million. Six-month investing cash use was $4.3 million, primarily capitalized intangible costs; financing provided $10.7 million, including $14.0 million of net proceeds from the incremental term loan, partly offset by debt repayments.
Debt carrying amounts at June 30 included $2.8 million current debt, $49.9 million long-term debt, and $10.3 million in shareholder promissory notes, all net of applicable debt costs. The filing also reports approximately $67.5 million of principal plus PIK interest. Term loans bear a high variable rate (LIBOR plus 10.5%, or base rate plus 9.5%, plus 1% payable in cash or in kind) and mature in December 2020. Promissory notes bear 10% interest and are due six months after repayment of the term loans.
Changes, outlook and risks
- Operating expenses increased substantially. Q2 general and administrative expense rose 90% to $25.1 million, including $8.3 million of non-recurring legal and litigation costs, $8.5 million of share-based compensation, and $1.7 million of acquisition and restructuring costs.
- The company accrued a $7.0 million settlement with TransUnion and TRADS, agreed July 22, 2017, for litigation costs as of June 30. Payment is due over one year; settlement terms are confidential. Management expected litigation costs to decline significantly.
- Q Interactive integration generated $0.8 million of restructuring costs in the first half and a $3.6 million write-off of acquired long-lived assets. Management expects approximately $4.5 million in annualized operating expense savings, beginning in Q2 2017.
- Management expects consolidated gross margin to rise over the next 12 months as Information Services scales, and said that segment could reach 70%–85% gross margins at scale. The company also expects higher compensation costs as it expands sales, executive, administrative, and infrastructure staffing. No specific revenue or earnings guidance was provided.
- Management believed cash resources, projected growth, and the incremental loan would fund operations and expected capital expenditures for the next 12 months, including settlement payments. It cautioned that additional financing may be needed and may be dilutive or unavailable on acceptable terms, and that weak cash generation or covenant noncompliance could impair operations.
- Contractual obligations totaled $146.3 million, including $94.9 million of scheduled debt principal and interest, $24.4 million of data licensing commitments, and the $7.0 million litigation settlement. The term loans are secured by substantially all company and subsidiary assets and include restrictive covenants. An August 7 amendment waived the parent-company minimum EBITDA threshold for the twelve months ended June 30, but did not waive the corresponding Fluent-subsidiary threshold. The company reported covenant compliance after the amendment.
- Other notable items: share-based compensation was $16.6 million in the first half; shares outstanding increased with RSU vesting. On August 8, Michael Brauser’s employment agreement was terminated effective June 23; he remained chairman, and Derek Dubner was designated principal executive officer.
Most important facts for investors to verify
- Confirm the correct registrant and corporate relationship: this filing is for Cogint, Inc., with Fluent as a subsidiary.
- Track whether revenue growth and the stated $4.5 million integration savings translate into improved GAAP operating results and cash flow, given continuing net losses.
- Assess the quality of adjusted EBITDA and its exclusions, especially litigation, share-based compensation, restructuring, and asset write-offs.
- Review debt service, variable-rate exposure, liquidity, and compliance with the separate parent-company and Fluent covenant tests; the filing estimates a 10% interest-rate change would affect next-12-month interest expense by $0.8 million.
- Verify the final settlement payments and any subsequent legal developments; settlement terms are confidential.
- Monitor dilution from RSUs and the Q Interactive stock earn-out, valued at $10.2 million and expected to be settled in stock.