Fluent, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context
Fluent provides data-driven digital marketing and customer-acquisition services, including lead generation, performance marketing, and contact-center services. It uses owned digital media properties and consumer data to connect advertisers with consumers. The company completed its acquisition of the remaining 50% of Winopoly on September 1, 2021; Winopoly operates a contact-center business under the Fluent Sales Solutions name.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $85.9M | $78.3M | $229.4M | $228.7M |
| Gross profit, excluding depreciation and amortization | $22.1M | $25.5M | $58.0M | $70.3M |
| Gross margin on that basis | 25.7% | 32.6% | 25.3% | 30.7% |
| Media margin (non-GAAP) | $24.2M | $29.7M | $69.2M | $78.4M |
| Adjusted EBITDA (non-GAAP) | $6.4M | $11.6M | $12.9M | $30.0M |
| Net income (loss) | $(2.5)M | $1.2M | $(13.9)M | $2.0M |
| Basic and diluted earnings (loss) per share | $(0.03) | $0.01 | $(0.17) | $0.03 |
- Cash flow: Operating cash used was $6.9M in the first nine months of 2021, versus $12.9M provided in 2020. Investing activities used $2.3M; financing activities provided $3.7M. Cash, cash equivalents, and restricted cash declined $5.5M to $17.1M.
- Balance sheet and liquidity: Cash and cash equivalents were $15.6M; restricted cash was $1.5M. Current assets were $94.4M and current liabilities were $53.0M at September 30, 2021.
- Debt: Long-term debt had a $47.5M principal balance and $46.5M carrying value, including $5.0M current. The company also had an undrawn revolving facility of up to $15.0M. The term loan matures in 2026, has quarterly principal amortization, and bears floating-rate interest; its stated opening rate was 2.50%. Fluent reported compliance with loan covenants at quarter-end.
- Other balance-sheet items: Goodwill was $165.1M and net intangible assets were $38.1M. Shareholders’ equity was $208.4M.
Material changes versus the prior comparable periods
- Q3 revenue increased 10%, but cost of revenue rose 21%, compressing gross margin and media margin. The company attributed higher media costs partly to shifting away from lower-quality affiliate traffic toward other channels, including major digital media platforms.
- Q3 net results shifted from income to loss, and adjusted EBITDA fell 45%. For the first nine months, revenue was nearly flat, while net results shifted to a loss and adjusted EBITDA declined 57%.
- Management said Winopoly growth, staffing and recruitment demand, and a new email re-engagement capability helped offset reduced traffic volumes from the Traffic Quality Initiative. Q3 Fluent segment revenue was $82.6M versus $76.7M; All Other segment revenue was $3.3M versus $1.6M.
- Interest expense declined year over year following the March 2021 refinancing. The refinancing also generated a $3.0M early-extinguishment loss in the nine-month period.
Outlook, management commentary, and risks
- No numerical revenue or earnings guidance is provided. Management said it expects cash resources to be sufficient for operations and anticipated capital expenditures for the next 12 months and beyond.
- Management expects to continue testing and scaling traffic channels, strategies, and partners. It said newer channels had improved in profitability compared with Q2, but profitability remained below historical affiliate-marketing levels; timing of traffic-volume recovery is uncertain. These efforts may affect future costs and margins.
- Management identified volatility in affiliate supply, media-source consolidation, platform blocking algorithms, and competition for media as challenges. Seasonal advertising patterns and uncertain COVID-19-related demand and pricing shifts may also affect results.
- The credit agreement imposes restrictions on debt, investments, asset sales, and certain shareholder payments. A future covenant breach could trigger default and potential acceleration of debt. The company cautioned that future covenant compliance is not assured.
- Legal and tax matters: Fluent paid a $3.7M penalty under a May 2021 settlement with the New York Attorney General concerning political advocacy campaign practices. A New York sales-tax dispute remained unresolved; the company estimated possible liability of $0.8M–$3.0M and accrued at the low end. FTC and Pennsylvania Attorney General inquiries remained ongoing, with outcomes not predictable.
- Winopoly transaction: Consideration for the remaining interest included $3.4M cash at closing, $2.0M due January 2022, $1.0M in deferred cash payments, and 500,000 shares valued at $1.4M. Termination of the prior put/call consideration resulted in a net $2.8M expense.
- The company reported no material changes to risk factors from its 2020 Form 10-K, and management concluded disclosure controls were effective as of September 30, 2021.
Important facts for investors to verify
- Whether media-channel changes and traffic-quality initiatives can improve profitability while restoring or growing traffic volume.
- The continuing trend in gross margin, media margin, adjusted EBITDA, and operating cash flow; non-GAAP measures are not substitutes for GAAP results.
- Cash conversion and working-capital needs, including the timing of collections from customers and payments to vendors.
- Debt terms, floating interest exposure, covenant headroom, upcoming amortization, and the remaining Winopoly payments.
- Resolution and potential financial impact of the New York sales-tax matter and the FTC and Pennsylvania inquiries.
- The assumptions supporting goodwill recoverability: the March 2021 test estimated fair value about 17% above carrying value, and management cited possible future impairment if results or valuation assumptions weaken.