Fluent, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement figures are in thousands unless noted. Fluent, formerly Cogint, changed its name effective April 16, 2018.
Business context and reporting period
Fluent provides data-driven digital performance marketing services. After spinning off its risk management business, Red Violet, on March 26, 2018, Fluent reported one operating and reportable segment: Performance Marketing. Red Violet’s results are presented as discontinued operations.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $66.5m | $54.9m | $179.5m | $155.2m |
| Operating income (loss) | $6.3m | ($8.3m) | $7.8m | ($21.8m) |
| Net income (loss) from continuing operations | $4.5m | ($10.8m) | $1.5m | ($28.9m) |
| Net income (loss), including discontinued operations | $4.5m | ($14.1m) | ($19.6m) | ($47.2m) |
| Adjusted gross profit / margin (non-GAAP) | $27.4m / 41% | $19.2m / 35% | $70.8m / 39% | $50.9m / 33% |
| Adjusted EBITDA (non-GAAP) | $12.4m | $7.9m | $33.0m | $21.8m |
| Basic and diluted EPS from continuing operations | $0.06 | ($0.19) | $0.02 | ($0.53) |
Q3 revenue grew 21%; nine-month revenue grew 16%. Management attributed growth and margin improvement to broader adoption of performance marketing, lifecycle marketing that re-engages consumers, and machine-learning-supported audience segmentation. Adjusted measures are non-GAAP and should not be viewed as substitutes for GAAP results or cash flow.
Cash flow and liquidity: For the first nine months, operating cash flow was $22.5m from continuing operations and $16.6m including discontinued operations. Investing cash flow was a $22.2m use, including a $19.7m capital contribution to Red Violet related to the spin-off. Financing cash flow was $6.4m. Cash was $17.4m at September 30, versus $16.6m at December 31, 2017. Management said available cash should fund operations and expected capital expenditures for the next 12 months.
Debt: Term debt principal was $64.9m at September 30, 2018, under a refinanced facility maturing March 26, 2023. The variable rate is, at Fluent’s option, LIBOR plus 7.00% or base rate plus 6.0%, payable in cash. The facility is secured by substantially all company and subsidiary assets and includes financial covenants, excess-cash-flow prepayments and restrictions on additional debt and certain investments. Fluent reported covenant compliance at quarter-end.
Material changes versus the prior comparable period
- Q3 continuing operations moved from a $10.8m loss to $4.5m of income; nine-month continuing operations moved from a $28.9m loss to $1.5m of income. Higher revenue, lower cost of revenue as a share of sales, lower share-based compensation and lower interest expense contributed.
- Adjusted gross margin increased 6 percentage points for both Q3 and the nine-month period. Cost of revenue was 59% of revenue in Q3 and 61% for the nine months, versus 65% and 67%, respectively, in 2017.
- Nine-month GAAP net loss includes a $19.0m loss on disposal of discontinued operations, primarily non-cash, and $7.7m of continuing-operations spin-off transaction costs. The spin-off also reduced equity by $41.5m, representing Red Violet’s net assets distributed.
- Share count increased: weighted-average shares for Q3 were 78.2m versus 55.4m a year earlier. A January direct offering issued 2.7m shares for $13.4m net proceeds and warrants for 1.35m shares at $6.00 per share.
Outlook, commentary, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management expressed confidence in liquidity for the next 12 months and cited consumer re-engagement, machine learning, and growth in its UK beta launch as business highlights.
- Management said a significant portion, potentially all, of the deferred-tax valuation allowance might be released within 12 months if profitability provides sufficient positive evidence; timing and amount remain uncertain. The company reported a full valuation allowance and a 0% effective tax rate.
- Disclosure controls and procedures were deemed ineffective at September 30, 2018, because a previously identified material weakness in controls over accounting for non-employee restricted stock unit awards remained. Remediation efforts were underway but had not yet been demonstrated effective.
- Key stated risks include variable-rate debt and restrictive credit covenants; possible need for additional financing, potentially dilutive; evolving sales-tax rules following the Wayfair decision; and privacy regulation, including GDPR and the California Consumer Privacy Act. The company reported no legal proceeding believed likely to have a material adverse effect and no material changes to previously disclosed risk factors other than those noted.
- On October 10, 2018, after quarter-end, Fluent entered a seven-year lease for approximately 43,000 square feet of New York office space. It requires a $1.48m collateral account; the filing estimates $14.9m in future lease commitments for the new space.
Important facts for investors to verify
- Whether Fluent sustains revenue growth and improved margins, and how much improvement is reflected in GAAP results rather than adjusted measures.
- Cash conversion and the quality of receivables: accounts receivable was $39.7m, including $20.2m of unbilled revenue based on internally tracked conversions and subject to later customer confirmation.
- Debt repayment capacity, variable-rate exposure, required excess-cash-flow prepayments, covenant compliance and the effect of the new office lease on liquidity.
- Progress and independent effectiveness testing of remediation for the material weakness in stock-based compensation accounting.
- Potential dilution from outstanding warrants, unvested awards and the expanded 2018 equity incentive plan; also monitor any tax-valuation-allowance release and compliance costs from privacy and sales-tax regulation.
- The spin-off’s continuing effects on reported comparability, including discontinued-operation losses and the removal of Red Violet from Fluent’s ongoing business and financial statements.