Filing summary
Issuer and period: The supplied filing is Cogint, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, filed March 14, 2018—not a standalone Fluent, Inc. filing. Fluent, LLC was a Cogint subsidiary and the principal business in the Performance Marketing segment. Figures below are in U.S. dollars; financial amounts are generally in millions unless stated otherwise.
Business context and reporting period
Cogint provided cloud-based data analytics and performance marketing through two segments: Information Services, including risk-management and data-acquisition solutions, and Performance Marketing, including digital advertising and customer acquisition. Q Interactive was integrated into Fluent during 2017. Comparisons with 2015 are substantially affected by acquisitions and the disposal of Cogint’s former advertising business; 2016 is the more relevant comparable period.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $220.3 million | $186.8 million |
| Information Services revenue | $78.4 million | $55.4 million |
| Performance Marketing revenue | $141.9 million | $131.4 million |
| Operating loss | $42.5 million | $34.0 million |
| Net loss | $53.2 million | $29.1 million |
| Adjusted EBITDA (non-GAAP) | $24.2 million | $15.0 million |
| Cash from operating activities | $2.4 million | $2.1 million |
- Revenue rose 18% year over year: Information Services grew 41%, while Performance Marketing grew 8%. Cost of revenue was $147.4 million, or 67% of revenue, versus $133.8 million, or 72%, in 2016. On that basis, gross profit was approximately $72.9 million (33% of revenue), compared with $53.0 million (28%).
- Adjusted EBITDA increased 62%, but it is a non-GAAP measure with substantial add-backs. GAAP net loss widened, including no income tax benefit in 2017 versus a $14.0 million benefit in 2016. Share-based compensation was $34.0 million in 2017; litigation costs were $9.4 million, including a $7.0 million settlement expense; and acquisition/restructuring costs were $5.5 million.
- Fourth-quarter revenue was $59.2 million, up 9% year over year; net loss was $6.0 million versus $5.4 million; adjusted EBITDA was $8.6 million versus $6.3 million. Fourth-quarter Information Services revenue increased 27% to $20.5 million, while Performance Marketing revenue increased 2% to $38.7 million.
- At year-end, cash and cash equivalents were $16.6 million, current assets $57.0 million, and current liabilities $32.8 million. Cash from operations was modest despite the reported net loss, which included substantial non-cash charges. Investing activities used $8.1 million, principally for capitalized software development; financing activities provided $12.3 million.
- Reported debt, net of issuance costs and including accrued PIK interest, was approximately $63.0 million; principal plus PIK interest before issuance costs was approximately $66.7 million. Term loans carried a variable cash rate of LIBOR plus 10.5% (subject to a 0.5% floor), or the base rate plus 9.5%, plus 1% payable in cash or in kind, and mature in December 2020. Shareholder promissory notes accrue 10% PIK interest and are due after repayment of the term loans. Contractual debt payments, including interest, were listed at $90.0 million.
- Management said available cash, forecast operating performance, and $13.5 million raised in a January 2018 stock offering were expected to fund operations and capital expenditures for the next 12 months. This outlook depends on revenue growth and continued covenant compliance. The company also planned a $20.0 million cash contribution to Red Violet upon completion of its spin-off.
Material changes, outlook, and unusual items
- Spin-off and failed transaction: Cogint terminated its proposed BlueFocus transaction on February 20, 2018 after CFIUS indicated it would not approve it. Cogint nevertheless planned to spin off its data-and-analytics business into Red Violet, with a March 26, 2018 distribution date and one Red Violet share for every 7.5 Cogint shares. The filing describes these as planned subsequent events, not completed transactions.
- Post-spin-off estimates: Unaudited pro forma results, based on specified assumptions including $70 million of refinancing debt at an estimated 8.5% rate, show Cogint revenue of $211.7 million and net income of $1.8 million for 2017, and adjusted EBITDA of $34.0 million. The filing cautions these estimates are informational and may not reflect future results.
- Equity financing and dilution: In January 2018, Cogint issued 2.7 million shares for $13.5 million gross proceeds and warrants for 1.35 million additional shares at a $6.00 exercise price. The filing also reported acceleration of equity awards relating to 5.2 million shares in March 2018; $15.3 million of compensation expense was expected in first-quarter 2018 discontinued operations.
- Settlement and asset write-off: Cogint agreed to pay $7.0 million to settle litigation with TransUnion and TRADS; $4.0 million remained payable at year-end. It also wrote off $3.6 million of Q Interactive-related long-lived assets following integration. Management reported no then-pending legal matter it believed likely to have a material adverse effect.
- Controls and audit: Management and the auditor identified a material weakness in controls over measurement and recording of non-employee restricted stock unit compensation. The auditor issued an adverse opinion on internal control over financial reporting, while issuing an unqualified opinion on the financial statements. Remediation steps were planned.
- Management expected lower litigation costs going forward and projected further improvement in cost of revenue as Information Services scaled. The filing provides no formal numerical revenue or earnings guidance. Key risks include data privacy and marketing regulation, cybersecurity, dependence on data suppliers and advertising publishers/search platforms, competition and media pricing, customer credit and campaign performance, debt covenants, and the planned separation’s costs and liabilities.
Important facts for investors to verify
- Confirm the spin-off’s completion, final distribution terms, cash transfer to Red Violet, and post-separation debt and liquidity; the dates and terms in this filing were prospective.
- Assess recurring cash generation against GAAP losses, the substantial non-cash and excluded items in adjusted EBITDA, and the planned $20.0 million spin-off contribution.
- Review debt service, variable-rate exposure, excess-cash-flow provisions, covenant headroom, and refinancing assumptions. The filing estimated a $0.8 million annual interest-expense impact from a 10% rate change.
- Track remediation and auditor reassessment of the material weakness, and determine whether subsequent filings disclose any restatement or control deficiencies.
- Monitor equity-award acceleration, warrants, offering-related dilution, and the $15.3 million expected first-quarter 2018 compensation charge.
- Check whether the expected reduction in litigation expense and improvement in Information Services cost ratios materialized, and whether advertiser, supplier, and publisher concentration or data-regulation risks changed.