Fluent, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 10, 2021. Fluent provides data-driven digital marketing, customer-acquisition and lead-generation services. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $70.2 | $78.9 |
| Operating income (loss) | ($2.3) | $1.9 |
| Net income (loss) | ($6.3) | $0.4 |
| Diluted EPS | ($0.08) | $0.01 |
| Media margin, non-GAAP | $24.9; 35.4% of revenue | $23.9; 30.3% of revenue |
| Adjusted EBITDA, non-GAAP | $4.7 | $9.0 |
| Adjusted net income, non-GAAP | $0.4; $0.00 per share | $3.8; $0.05 per share |
| Operating cash flow | $5.0 | ($0.2) |
- Cash, cash equivalents and restricted cash were $34.1 at March 31, 2021, including $32.7 of unrestricted cash. Current assets were $94.0 and current liabilities $48.1.
- Debt principal was approximately $51.3, including $50.0 under the new term loan and the remaining note payable. The balance sheet reports $50.1 of debt net of discounts and financing costs; $6.3 was current and $43.8 non-current.
- Investing cash outflow was $0.8; financing cash inflow was $7.4. The company reported no off-balance-sheet arrangements and $10.2 of noncancelable operating lease commitments.
Material changes and unusual items
- Revenue fell 11%, primarily as Fluent curtailed lower-quality affiliate traffic under its Traffic Quality Initiative. U.S. Fluent-segment revenue declined to $58.3 from $68.2; All Other segment revenue rose to $2.6 from $1.4.
- Cost of revenue declined 10% to $51.0, but increased to 73% of revenue from 72%. Management cited higher reward-fulfillment costs, partly offset by improved monetization. Media margin rose despite lower revenue.
- Adjusted EBITDA fell 48%. GAAP results also included a $3.0 loss on early debt extinguishment and $1.7 of accrued Winopoly put/call compensation. These items, along with lower revenue, contributed to the net loss.
- On March 31, Fluent refinanced its prior term loan with a $50.0 term loan due March 31, 2026 and an undrawn revolving facility of up to $15.0. Opening interest was 2.50%; quarterly principal payments of $1.25 were scheduled to begin in Q2 2021. The facility is secured by substantially all relevant assets and contains restrictive covenants. Fluent reported covenant compliance at quarter-end.
- A decline in operating results and share price triggered interim impairment testing. Goodwill of $160.9 was not impaired; estimated fair value exceeded carrying value by approximately 17%. Long-lived assets also were not impaired. Future impairment remains possible if performance or valuation assumptions weaken.
Outlook, risks and contingencies
- Management said reduced traffic volumes and related revenue trends were continuing into Q2 2021. It expects traffic volumes to increase as replacement sources are developed, but the timing is uncertain. No quantified revenue or earnings guidance was provided.
- Management said it believes available cash resources are sufficient for operations and expected capital expenditures for the next 12 months and beyond. Acquisition activity could require additional financing, potentially on unfavorable terms or with shareholder dilution.
- The Traffic Quality Initiative is intended to improve traffic quality, conversion and monetization over time. Replacing curtailed traffic is challenging amid media-source consolidation, platform blocking changes and competition.
- On May 6, 2021, after quarter-end, Fluent and the New York Attorney General executed an Assurance of Discontinuance resolving an investigation into consumer information and political advocacy campaigns. It imposed a $3.7 penalty, consistent with the company’s March 31 accrual, and injunctive provisions, most of which Fluent said it had already implemented.
- New York sales-tax assessments were under challenge; the company estimated a possible liability of $0.7–$3.0 and accrued the low end. DOJ and District of Columbia inquiries concerning the same consumer-information matter remained ongoing. An FTC inquiry into rewards marketing, text messages and consumer privacy or data security also remained unresolved; the ultimate outcome was not predictable.
- COVID-19 continued to create uncertainty in client demand and pricing across industry verticals. The filing said operations had not been significantly disrupted, while noting possible employee, systems, cybersecurity and operational risks. A full valuation allowance remained against net deferred tax assets; management said a significant release might become supportable within 12 months, but timing and amount were uncertain.
Important facts for investors to verify
- Whether replacement traffic restores volume and revenue, and whether improved monetization and media margin can be sustained.
- Whether cash generation supports the debt schedule and the company remains in compliance with credit-facility covenants.
- The eventual outcomes and costs of the New York sales-tax matter and the DOJ, DC AG and FTC inquiries.
- Whether goodwill valuation assumptions remain supportable given the narrow 17% fair-value cushion and continued operating pressures.
- How non-GAAP measures are defined and reconciled: media margin, adjusted EBITDA and adjusted net income are supplemental measures, not substitutes for GAAP results or liquidity measures.