Business context and reporting period
Unaudited Form 10-Q for the three months ended March 31, 2016. The filing is by IDI, Inc. (the registrant identified in the filing), which acquired Fluent in December 2015; Fluent is reported as the Performance Marketing segment. The company provides data analytics and information services and digital marketing solutions.
Year-over-year comparisons are not like-for-like: Fluent’s results are included for all of Q1 2016 but not Q1 2015, and the prior-year period also reflects the company’s 2015 merger and discontinued advertising operations.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $39.424 million | $1.258 million |
| Gross profit / margin | $10.930 million / 27.7% | $0.704 million / 56.0% |
| Operating loss | $8.172 million | $1.563 million |
| Net loss attributable to IDI | $6.772 million | $1.637 million |
| Basic and diluted loss per share | $0.25 | $0.22 |
| Adjusted EBITDA (non-GAAP) | $2.390 million | $(0.799) million |
| Cash from operating activities | $0.453 million | $(1.879) million |
Q1 2016 revenue comprised $11.051 million from Information Services and $28.373 million from Performance Marketing. The company attributed the lower consolidated gross margin primarily to Performance Marketing’s lower margin profile and increased Information Services data costs. The $3.522 million income tax benefit primarily reflected recognition of deferred tax assets. Adjusted EBITDA is management’s non-GAAP measure and should not be treated as a substitute for GAAP results or operating cash flow.
At March 31, 2016, cash and cash equivalents were $10.138 million, down from $13.462 million at year-end. Total assets were $286.358 million and shareholders’ equity was $206.806 million. Debt, net of issuance costs, was $50.939 million, including $2.250 million current and $48.689 million non-current. The debt includes a $45 million term loan bearing LIBOR (minimum 0.5%) plus 10.5% in cash interest and an additional 1% payable in cash or in kind, and $10 million of 10% promissory notes. The company repaid $0.563 million of debt in the quarter and paid $1.276 million in cash interest.
Investing activities used $3.214 million, principally for capitalized software and litigation costs; financing activities used $0.563 million. The company reported $2.473 million of future operating lease payments and $15.634 million of non-cancellable data-licensing commitments.
Material changes and unusual items
- Reported revenue increased substantially following the Fluent acquisition; the reported comparison does not represent organic growth on a consistent business perimeter.
- General and administrative expenses were $13.367 million, including $6.832 million of share-based compensation. Total share-based compensation expense was $7.656 million, including capitalized amounts.
- Fluent’s acquisition added substantial acquired intangibles and goodwill. Goodwill totaled $161.753 million; the purchase price allocation remained preliminary at quarter-end.
- Preferred-stock conversions, earn-out issuances, warrant exchanges, and vesting contributed to substantial share-count changes. Common shares outstanding were 46,924,183 at May 4, 2016.
Outlook, risks and contingencies
Management said it expected available resources to fund operations and expected capital expenditures for the next 12 months, based on projected revenue growth and operating results. No quantified revenue, earnings, or cash-flow guidance was provided. Management noted that additional equity or debt financing might be needed, potentially on unfavorable terms and with shareholder dilution. It also expected higher compensation costs as sales, administrative, and infrastructure staffing expanded. Management anticipated Information Services gross margin could improve as data costs shift toward flat-fee licensing arrangements.
- The term loan imposes financial and other covenants, including minimum EBITDA, leverage and fixed-charge coverage tests, a minimum cash requirement of $2.0 million (unless reduced by the agent), and mandatory excess-cash-flow prepayments. The company reported compliance at March 31, 2016; covenant failure could trigger default and acceleration.
- TRADS litigation over ownership of purchased intellectual property remained ongoing; the court denied the company’s summary-judgment motion and trial was scheduled for May 2016. The filing warned an adverse ruling could affect financial position, results, and liquidity. Other TRADS disputes involving executives were also pending or under appeal; one former-CFO matter was settled and dismissed.
- The company recorded a $0.238 million provision for a claim. Management stated it did not believe outstanding matters were likely to have a material adverse effect, while cautioning outcomes could not be predicted.
- Disclosure controls were deemed ineffective because of a previously identified material weakness in controls over non-routine transactions, including business combinations and debt and equity accounting. Remediation efforts were planned but not yet demonstrated as effective.
- A hypothetical 10% change in interest rates was estimated to affect interest expense over the next 12 months by $0.5 million, reflecting the variable-rate term loan.
Most important facts for investors to verify
- How much of revenue and adjusted EBITDA growth reflects Fluent’s inclusion rather than underlying organic performance, and whether segment margins are improving.
- Whether cash generation, liquidity, and covenant headroom can support debt service and the $15.634 million data-licensing commitments.
- The final Fluent purchase-price allocation, including acquired intangible values, deferred taxes, and goodwill impairment assumptions.
- Progress in remediating the material weakness and whether controls are operating effectively.
- Developments in the purchased-IP litigation, related executive disputes, and the potential financial or operational consequences.
- Potential dilution from outstanding awards, unvested restricted stock units, and future financing needs.