Fluent, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Fluent provides data-driven digital and performance marketing services, connecting advertisers with consumers through its media properties and marketing technology. This unaudited filing covers the three and nine months ended September 30, 2019; financial amounts below are in millions of dollars unless noted. Comparisons are with the corresponding 2018 periods.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $64.6 | $66.5 | $201.7 | $179.5 |
| Operating income (loss) | ($2.7) | $6.3 | $2.5 | $7.8 |
| Net income (loss) from continuing operations | ($4.5) | $4.5 | ($2.7) | $1.5 |
| GAAP diluted EPS from continuing operations | ($0.06) | $0.06 | ($0.03) | $0.02 |
| Media margin (non-GAAP) | $21.3; 33.0% of revenue | $25.8; 38.8% | $67.3; 33.4% | $67.1; 37.4% |
| Adjusted EBITDA (non-GAAP) | $4.3 | $12.4 | $23.2 | $32.9 |
| Adjusted net income (loss) (non-GAAP) | ($1.0) | $7.2 | $7.7 | $16.7 |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $26.6 | $16.6 |
Media margin, adjusted EBITDA and adjusted net income are company-defined non-GAAP measures, not substitutes for GAAP results or liquidity measures.
Financial position and liquidity
- At September 30, 2019, cash and cash equivalents were $24.2 million, plus $1.5 million of restricted cash. Total current assets were $72.0 million and current liabilities were $44.0 million.
- Total debt, net of unamortized discounts, was $53.0 million, of which $6.1 million was current. The company reported approximately $57.0 million of principal maturities, including a $1.3 million required excess-cash-flow prepayment. Debt is secured by substantially all company assets; the term loan matures in March 2023.
- Nine-month investing cash outflow was $11.2 million, including $7.3 million cash paid for AdParlor and $2.1 million for property and equipment. Financing cash outflow was $8.9 million, primarily debt repayments and taxes on share settlements. Cash, cash equivalents and restricted cash increased $6.5 million to $25.7 million.
- Management stated that available cash was expected to fund operations and expected capital expenditures for the next 12 months. The company was in compliance with debt covenants at quarter-end.
Material changes and notable items
- Q3 performance weakened: Revenue fell 3% year over year while cost of revenue rose 7%. Management attributed lower revenue to reduced availability of cost-effective media and traffic; higher media costs pressured media margin. Q3 adjusted EBITDA fell 65%.
- Nine-month growth did not translate to improved profitability: Revenue rose 12%, but cost of revenue increased 20%, and media margin as a share of revenue fell from 37.4% to 33.4%. Adjusted EBITDA decreased 30%. Higher demand drove revenue growth, while greater media costs and increased general and administrative and product development expenses weighed on results.
- General and administrative expense rose 44% in Q3, mainly because the bad-debt provision increased to $1.9 million from $0.2 million. For the nine months, the provision was $2.1 million versus $0.5 million. The nine-month period also included higher share-based compensation, professional fees and product development costs.
- AdParlor was acquired effective July 1, 2019, to expand performance-based marketing capabilities. Consideration included $7.3 million cash and a $2.35 million seller note. Its Q3 revenue was $1.6 million; purchase accounting remained preliminary.
- Q3 included a $0.28 million write-off of internally developed software. The company conducted interim impairment tests after declining operating results and a falling share price; it reported no impairment, but goodwill fair value exceeded carrying value by only approximately 12%.
- The 2018 comparison includes Red Violet discontinued operations and substantial spin-off charges. Nine-month 2018 net loss included $21.1 million from discontinued operations, including a $19.0 million disposal loss; comparisons with 2019 should account for this difference.
Outlook, risks and contingencies
- No formal revenue, earnings or other forward guidance is provided. Management said October 2019 workforce reductions affected approximately 48 employees; it expected $1.5 million of cash exit costs in Q4 2019 and Q1 2020 and lower quarterly expenses thereafter.
- On November 8, 2019, after quarter-end, the company amended its credit agreement, modifying certain financial covenants and increasing the interest rate by 0.50% during periods when total leverage exceeds 2.5.
- Disclosure controls and procedures were deemed ineffective at September 30, 2019 because a previously identified material weakness in revenue-recognition controls remained under remediation. The plan includes changes to revenue confirmation and implementation of an ERP system.
- The New York Attorney General and U.S. Department of Justice issued subpoenas concerning consumer information submitted in connection with an FCC proceeding. The company is cooperating; timing, outcome and potential loss are not estimable.
- New York tax authorities asserted that certain customer-acquisition data services may be taxable. Fluent disputes the position but says an unfavorable outcome could create a liability that cannot currently be estimated.
- A full valuation allowance remains against deferred tax assets. Management said a significant release might become supportable within 12 months, depending on profitability; timing and amount are uncertain. Goodwill impairment remains a risk if actual results or valuation assumptions deteriorate.
- The company warned that failure to meet debt covenants could trigger default and acceleration. Its floating-rate debt, mandatory excess-cash-flow payments and restrictions on additional debt and other actions constrain financial flexibility.
Most important facts for investors to verify
- Whether media costs, traffic availability and media-margin percentage stabilize, and whether revenue growth can produce improved GAAP profitability.
- Bad-debt exposure, receivable collectability and customer confirmation practices, given the elevated provision and revenue-control material weakness.
- AdParlor’s post-acquisition contribution, integration results and final purchase-price allocation.
- Debt covenant headroom, the impact of the November amendment and ability to service or refinance debt.
- Developments in the NY AG/DOJ investigations, New York sales-tax dispute, and goodwill impairment assumptions.
- Actual restructuring costs and savings, and any change in the timing or likelihood of a deferred-tax valuation-allowance release.