Fluent, Inc. quarterly report, Q3 FY2016

Business context and reporting period

This is Cogint, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016, filed November 3, 2016. The request identifies Fluent, Inc., but the filing registrant is Cogint, Inc. (formerly IDI, Inc.); it acquired Fluent in December 2015. Cogint operated Information Services and Performance Marketing segments.

Year-over-year comparisons are not on a like-for-like basis: Fluent’s results were included in 2016 but not in the 2015 comparative periods, and Q Interactive’s results were included from its June 8, 2016 acquisition.

Financial performance and position

At September 30, 2016, cash was $10.4m, current assets $42.2m and current liabilities $28.4m (working capital $13.8m). Total assets were $311.0m and shareholders’ equity $222.4m. Balance-sheet long-term debt, including current portion, was $39.4m; separately, shareholder promissory notes were $10.5m net. Management described the term loan balance as $43.7m and other indebtedness as $10.9m, so investors should reconcile debt balances and classifications in the notes.

Nine-month investing cash use was $9.5m, including $8.0m of capitalized litigation and software development costs; financing provided $2.0m. Cash declined $3.1m from year-end 2015. The company reported $14.9m of commitments under non-cancellable data licensing agreements.

Material changes versus prior comparable periods

• Revenue rose substantially, primarily from the Fluent and Q Interactive acquisitions; the acquired Performance Marketing segment contributed $37.4m in Q3 and $93.4m for the nine-month period.
• Nine-month gross margin fell to 26% from 46%. Management attributed this to acquired Performance Marketing’s lower margin and increased Information Services data costs while new datasets were being integrated.
• Operating expenses increased, including general and administrative expense of $17.7m in Q3. Nine-month share-based compensation was $21.9m; Q3 general and administrative expense included a $4.1m write-off tied to the Purchased IP litigation.
• Net loss worsened year over year in Q3, while nine-month net loss improved largely because 2015 included a $42.0m discontinued-operations loss.

Outlook, risks and unusual items

• Management said it expects cash resources to fund operations and expected capital expenditures for the next 12 months, based on projected revenue growth and operating results. It gave no formal numerical revenue or earnings guidance.
• Management expected combined gross margin to increase over the next 12 months as Information Services revenue scales, and said flat-fee data costs could support margin improvement as sales grow.
• The company cautioned that it may need additional equity or debt financing; this could be dilutive or unavailable on favorable terms. It reported compliance with credit covenants at September 30, 2016, but warned that covenant failure could accelerate debt. The term loan bears variable-rate interest; a hypothetical 10% rate change was estimated to affect next-12-month interest expense by $0.5m.
• In the Purchased IP dispute, a court ruled for TransUnion Risk and Alternative Data Solutions, finding it owned the IP and ordering its turnover, with attorneys’ fees and costs still to be determined. Cogint appealed and obtained an interim stay after quarter-end. The company wrote off $4.1m of related assets and estimated possible losses across pending litigation of $3m–$6m, with no accrual recorded.
• Other litigation includes non-compete disputes involving former or current personnel and Cogint’s suit alleging interference with a proposed Datamyx acquisition. Outcomes remain uncertain.
• Q Interactive’s purchase accounting and contingent consideration remained preliminary. The estimated $10m earn-out was recorded based on management’s assessment that the revenue target was extremely likely to be met.

Important facts for investors to verify

• Confirm the reporting issuer and corporate relationship: this filing is Cogint’s, not a standalone Fluent, Inc. filing.
• Assess acquisition-driven growth separately from organic growth and review segment revenue, margins and integration progress.
• Reconcile the reported debt balances, repayment schedule, interest terms and covenants; compare liquidity and cash generation with upcoming commitments.
• Track the Purchased IP appeal, fee award and other litigation, including any effect on the company’s technology, operations or cash needs.
• Review the assumptions behind the $10m Q Interactive earn-out and the potential dilution from equity compensation and other share issuances.