Fluent, Inc. — Q1 2020 Form 10-Q
Business context and period: Fluent provides data-driven digital marketing and customer-acquisition services. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Financial amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $78.9 | $66.6 |
| Media margin; percent of revenue | $23.9; 30.3% | $23.1; 34.7% |
| Operating income | $1.9 | $2.8 |
| Net income; diluted EPS | $0.4; $0.01 | $1.0; $0.01 |
| Adjusted EBITDA (non-GAAP) | $9.0 | $9.1 |
| Adjusted net income (non-GAAP) | $3.8 | $4.1 |
| Cash from operating activities | $(0.2) | $5.2 |
Revenue rose 19%, reflecting more consumer traffic and demand for performance-based marketing. Cost of revenue increased 26%, faster than revenue, and the media-margin rate fell 4.4 percentage points. Management attributed weaker margins partly to reduced advertiser pricing and demand in staffing/recruitment and financial-services verticals, as well as a larger mix of developing, lower-margin channels and markets.
Cash used in investing activities was $0.6 million and cash used in financing activities was $4.7 million. Cash, cash equivalents and restricted cash totaled $14.6 million at quarter-end, down $5.6 million from year-end 2019. The balance sheet reported cash and cash equivalents of $13.1 million, plus $1.5 million of restricted cash. Current assets were $76.0 million and current liabilities $43.3 million.
Debt had a $48.3 million carrying value, including $4.8 million current; disclosed principal maturities totaled $51.8 million. The term loan bears interest at LIBOR plus 7% or the base rate plus 6%, matures in March 2023, and is secured by substantially all company and subsidiary assets. Fluent reported compliance with its debt covenants at March 31. Management said it expected available cash resources to fund operations and expected capital expenditures for the next twelve months and beyond.
Changes, outlook and risks
- COVID-19: Management said operations had not been significantly disrupted through the quarter and the company had shifted to remote work. Advertiser trends differed by industry: some staffing and financial-services clients reduced spending, while streaming and mobile-gaming demand increased. Management expected pressure on affected verticals to continue and potentially accelerate, but said the subsequent impact could not be reliably estimated. No numerical financial guidance was provided.
- Cash use and share activity: Operating cash flow shifted from $5.2 million provided to $0.2 million used, with working-capital movements cited as the main reason. Fluent repurchased 657,673 shares for $1.3 million and paid $1.15 million to satisfy a warrant-related put right during the quarter.
- Impairment assessments: COVID-related macroeconomic conditions and the stock-price decline triggered interim impairment testing. The company recorded no impairment of goodwill or long-lived assets. Goodwill fair value exceeded carrying value by approximately 18% for Fluent and 4% for All Other; management warned that weaker results or changed valuation assumptions could lead to future impairment.
- Legal and tax contingencies: New York sales-tax audits produced proposed adjustments of $8.2 million, later revised to lower amounts still subject to discussion. Fluent estimated a probable liability range of $0.7 million to $3.7 million and accrued at the low end. Separate NY Attorney General, DOJ and DC Attorney General subpoenas concern consumer information submitted in an FCC proceeding; an FTC demand concerns marketing, text messaging, privacy or data security. Outcomes and potential losses for those investigations were not estimable.
- Controls: Management and the CEO/CFO concluded disclosure controls were not effective at March 31, 2020 because a previously identified material weakness in internal control over financial reporting remained under remediation. NetSuite implementation had begun, but integration of revenue-tracking systems and related control work remained ongoing.
- Subsequent event: On April 1, 2020, Fluent acquired a 50% interest in Winopoly, LLC and amended its credit agreement in connection with the transaction.
Key facts for investors to verify
- Whether COVID-related advertiser spending and the decline in media-margin percentage continued or worsened after quarter-end.
- Cash conversion, working-capital movements, debt service and covenant headroom, given negative Q1 operating cash flow and the term loan’s secured, high-interest structure.
- Final New York sales-tax assessment and resolution or financial impact of the NY AG, DOJ, DC AG and FTC matters.
- Progress in remediating the material weakness and integrating AdParlor and revenue-tracking controls into NetSuite.
- Goodwill impairment sensitivity, particularly the reported 4% fair-value cushion for All Other, and the financial terms and effects of the Winopoly investment.