Fluent, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Fluent provides data-driven digital marketing and customer-acquisition services. Comparisons below are against the corresponding 2018 periods; amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $70.6 million | $56.9 million | $137.1 million | $112.9 million |
| Operating income | $2.5 million | $4.6 million | $5.3 million | $1.4 million |
| Net income (loss) from continuing operations | $0.7 million | $2.6 million | $1.8 million | $(2.9) million |
| Net income (loss), including discontinued operations | $0.7 million | $2.6 million | $1.8 million | $(24.0) million |
| Media margin, non-GAAP | $22.9 million; 32.5% of revenue | $22.0 million; 38.6% | $46.0 million; 33.5% | $41.3 million; 36.6% |
| Adjusted EBITDA, non-GAAP | $9.7 million | $10.9 million | $18.8 million | $20.5 million |
| Adjusted net income, non-GAAP | $4.6 million | $5.7 million | $8.7 million | $9.5 million |
- Revenue increased 24% in Q2 and 21% for the six-month period, which management attributed primarily to greater demand for performance-based marketing services.
- Cost of revenue rose faster than revenue: 37% in Q2 and 28% for the six-month period. It represented 70% of Q2 revenue versus 63% in 2018, and 69% for the first half versus 65%. Management said higher media costs supported additional client volume.
- Media margin dollars increased, but media margin as a share of revenue declined. Product development and general and administrative expenses also increased, including higher development spending and share-based compensation.
- Q2 GAAP income from continuing operations declined year over year. For the first half, the comparison improved partly because 2018 included $7.7 million of spin-off transaction costs. The 2018 first-half net loss also included $21.1 million of discontinued-operation losses related to the Red Violet spin-off.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $21.8 million; including $1.5 million of restricted cash, total cash, cash equivalents and restricted cash were $23.3 million, up $4.1 million from year-end 2018.
- Six-month operating cash flow was $13.1 million, compared with $10.4 million from continuing operations in the prior-year period. Investing activities used $2.9 million and financing activities used $6.2 million. Capital expenditures for property and equipment were $1.9 million; capitalized intangible-asset costs were $1.0 million.
- Term-loan principal was $57.2 million and its net carrying amount was $53.0 million. The loan matures March 2023, bears interest at LIBOR plus 7% or the base rate plus 6%, and is secured by substantially all company assets. The company reported covenant compliance at quarter-end and a $1.9 million excess-cash-flow prepayment due in Q3.
- Operating lease liabilities totaled $11.8 million. Management said available cash should be sufficient for operations and expected capital expenditures over the next 12 months, while noting that acquisitions or working-capital needs could require additional financing.
Outlook, developments and risks
- No specific revenue or earnings guidance was provided. Management described ongoing product development, innovation and exploration of complementary acquisitions.
- On July 1, 2019, after quarter-end, Fluent acquired substantially all assets of AdParlor and related entities for $7.5 million cash, subject to adjustments, plus a $2.5 million seller promissory note. The company had incurred $0.45 million of transaction expenses by June 30.
- The company disclosed subpoenas from the New York Attorney General and U.S. Department of Justice concerning collection, use or disclosure of consumer information connected with an FCC proceeding. Fluent said it was cooperating; duration, outcome and potential loss could not be estimated.
- New York tax authorities asserted that certain customer-acquisition data services may be taxable as information services. Fluent disputes that position but said a reasonably possible liability could arise and could not be estimated.
- Management concluded disclosure controls were not effective at June 30 because of an ongoing material weakness in revenue-recognition controls, involving segregation of duties, IT general controls and manual controls. Remediation efforts, including process changes and an ERP implementation, were in progress.
- A full valuation allowance remained against deferred tax assets. Management said a significant release might become supportable within 12 months, depending on profitability; timing and amount were uncertain.
- The filing reported no material changes to previously disclosed risk factors. Debt covenants, mandatory prepayments and potential default or refinancing constraints remain relevant risks.
Key facts for investors to verify
- Whether revenue growth can translate into improved media-margin percentage and profitability as media costs rise.
- Progress and testing of the revenue-recognition control remediation, given management’s finding that disclosure controls were ineffective.
- Outcomes and potential financial exposure from the NY AG/DOJ inquiries and New York sales-tax dispute; the filing gives no clear estimate.
- AdParlor’s integration, subsequent-period performance and the effect of its cash payment and seller note on liquidity and debt capacity.
- Term-loan interest costs, required excess-cash-flow payments and continued covenant compliance.
- Non-GAAP measures and narrative consistency: the Q2 highlights describe 2018 adjusted EBITDA as based on a net loss, while the financial statements report Q2 2018 continuing-operations net income of $2.6 million. Verify the underlying presentation and reconciliation.