Fluent, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Fluent provides data-driven digital marketing and customer-acquisition services. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $71.5 | $70.6 | $150.4 | $137.1 |
| Media margin (non-GAAP) | $24.8; 34.7% of revenue | $22.9; 32.5% | $48.7; 32.4% | $46.0; 33.5% |
| Operating income | $1.8 | $2.5 | $3.7 | $5.3 |
| Net income | $0.5 | $0.7 | $0.9 | $1.8 |
| GAAP diluted EPS | $0.01 | $0.01 | $0.01 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $9.4 | $9.7 | $18.4 | $18.8 |
| Adjusted net income (non-GAAP) | $4.2 | $4.6 | $8.0 | $8.7 |
Q2 cost of revenue was $49.0 million, or 69% of revenue, versus $49.1 million, or 70%, a year earlier. For the first half, it was $105.6 million, or 70% of revenue, compared with $94.0 million, or 69%. Net interest expense was $1.3 million in Q2 and $2.9 million for the first half, down from $1.8 million and $3.5 million, respectively.
Cash flow, debt and liquidity
- First-half operating cash flow was $9.8 million, down from $13.1 million. Investing cash use was $2.7 million; financing cash use was $5.6 million.
- Cash and cash equivalents were $20.2 million at June 30, 2020; including restricted cash, total cash was $21.7 million. Cash, cash equivalents and restricted cash increased $1.5 million from year-end 2019.
- Debt had a $50.9 million principal balance and $47.8 million net carrying value, including $9.7 million classified as current. The term loan matures in March 2023, is secured by substantially all company assets, and bears interest at LIBOR plus 7.00% or the base rate plus 6.0%. The company made a $4.9 million excess-cash-flow prepayment in Q2 and reported covenant compliance at June 30.
- Operating lease commitments were $11.9 million. Management said available cash should fund operations and expected capital expenditures for the next 12 months and beyond.
Changes and business developments
- Q2 revenue rose 1%; first-half revenue rose 10%. Management attributed growth mainly to consumer traffic availability and demand for performance marketing. Q2 Fluent-segment revenue was $70.4 million versus $70.6 million; the acquired All Other segment contributed $1.1 million.
- Despite revenue growth, GAAP income declined in both comparison periods. First-half media margin dollars increased, but media margin as a percentage of revenue fell to 32.4% from 33.5%, reflecting increased media sourcing at slightly lower margins and higher reward-fulfillment costs.
- Q2 included an $0.8 million goodwill impairment for the All Other reporting unit. Management cited pandemic-related economic conditions and June social unrest affecting certain customers’ media-buying patterns. Long-lived assets were not impaired in the interim test.
- On April 1, Fluent acquired a 50% interest in Winopoly for a deemed $2.6 million purchase price, including $1.6 million paid in cash and $1.0 million contingent consideration. Fluent consolidates Winopoly as a variable interest entity. The arrangement includes future put/call rights concerning the remaining 50% interest.
- Fluent repurchased 657,673 shares for $1.3 million in the first half. The company also paid $1.15 million to repurchase 300,000 shares after warrant holders exercised a put right.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management said COVID-19 had not significantly disrupted operations through the reporting period, but advertiser demand and pricing shifted: staffing/recruitment and financial-services clients reduced spend, while streaming and mobile-gaming demand increased. Management expects further shifts and said their future effect is uncertain.
- The company moved to company-wide remote work on March 13. It identified potential employee, systems, cybersecurity and operational disruption risks. It also flagged risks from international expansion, including privacy and data-protection compliance, foreign regulation, collections and higher operating costs.
- Legal and regulatory matters include NY, DOJ and DC AG investigations concerning consumer information submitted in an FCC proceeding. Fluent said a loss was probable but could not yet reasonably estimate the amount; an unfavorable outcome could materially affect the company.
- New York sales-and-use-tax notices totaled $3.0 million, including $0.7 million interest. The company estimated a probable liability range of $0.7 million to $3.0 million and accrued at the low end. An FTC civil investigative demand concerns marketing and rewards, text messages, and/or consumer privacy or data security; the outcome is not predictable.
- Management concluded disclosure controls and procedures were not effective at June 30, 2020 because a previously reported material weakness remained under remediation. NetSuite implementation began, but integration of internal revenue-tracking platforms and control testing remained ongoing.
- The company maintained a full valuation allowance against deferred tax assets. Management said sufficient positive evidence might become available within 12 months to support a significant release, but timing and amount are uncertain.
Key investor verification points
- Track advertiser demand, pricing, consumer-traffic supply and media-margin trends as pandemic effects evolve.
- Assess receivables and collections: accounts receivable was $55.3 million, including $23.1 million of unbilled revenue; the doubtful-account allowance was $0.3 million versus $2.0 million at year-end 2019.
- Review debt repayment capacity, mandatory excess-cash-flow prepayments, covenant headroom and the $7.9 million scheduled debt maturities for the remainder of 2020.
- Monitor outcomes and potential cash exposure from the government inquiries and New York tax matter, including any change to the recorded tax accrual.
- Follow remediation of the material weakness and implementation of controls for the AdParlor and Winopoly businesses.
- Evaluate non-GAAP measures alongside GAAP results; adjusted EBITDA and adjusted net income exclude specified expenses, including litigation costs and, in 2020, goodwill impairment and Winopoly put/call compensation.