Inuvo, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Inuvo develops advertising technology connecting advertisers and publishers, including its IntentKey machine-learning platform and owned content sites.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $16.81 million | $20.31 million | $56.32 million | $55.80 million |
| Gross profit | $10.61 million | $10.66 million | $34.35 million | $30.64 million |
| Gross margin | 63.1% | 52.5% | 61.0% | 54.9% |
| Operating loss | $(1.34) million | $(0.89) million | $(3.39) million | $(3.85) million |
| Net loss | $(1.44) million | $(0.99) million | $(3.68) million | $(4.06) million |
| Net loss per share | $(0.04) | $(0.03) | $(0.12) | $(0.14) |
Q3 revenue fell 17.3%, while nine-month revenue increased 0.9%. Gross margin improved in both comparisons, but higher marketing costs and lower Q3 revenue contributed to a larger quarterly operating and net loss. Nine-month operating expenses rose 9.5%, including an 18.5% increase in marketing costs.
For the nine months, operating cash flow was $(0.28) million, investing cash flow $(1.30) million, and financing cash flow $1.69 million. Cash increased by $0.11 million to $4.19 million. At September 30, current assets were $10.11 million and current liabilities $16.30 million; the balance sheet showed a $4.83 million revolving-credit balance and $13.15 million of stockholders’ equity. The company reported no availability under its credit line at quarter-end.
Material changes and business drivers
- Management attributed the Q3 revenue decline partly to a strategic reduction in support of its proprietary supply-side platform, which reduced SSP revenue 74% year over year, and partly to lower monetization from its largest demand partner in the second half of the quarter.
- Mobile revenue rose to $12.53 million from $12.90 million in Q3 2017 only slightly lower, while desktop revenue fell to $4.01 million from $7.20 million. For nine months, mobile revenue increased to $39.80 million from $33.24 million and desktop revenue decreased to $15.67 million from $21.79 million.
- Yahoo! represented 75.6% of Q3 revenue and Google 8.5%, together 84.1%; their combined share was 81.9% for the first nine months. Management cited an approximately 40% decrease in revenue per click and said it had not seen an appreciable recovery after Q3.
- Compensation expense declined year over year, and average headcount was 68 versus 90. The 2017 acquired business is included in the prior-year comparison, affecting comparability.
Liquidity, outlook, and risks
Management stated that declining revenue reduces borrowing capacity because the credit facility depends on receivables. It warned that lower credit availability and negative operating cash flow raised concern about continuing operations without interruption. The company did not provide a clear revenue recovery timetable or assurance of profitability.
On October 11, 2018, after quarter-end, Inuvo amended and restated its Western Alliance Bank facility. The new arrangement advances 85% of eligible invoiced receivables and includes a temporary sublimit for certain uninvoiced receivables; it is secured by all company assets and may be terminated by either party on notice. The filing says the new facility has no financial covenants.
On November 2, 2018, Inuvo signed a merger agreement with ConversionPoint Technologies and related entities. Inuvo shareholders would receive $0.45 cash and 0.18877 Parent shares per Inuvo share, subject to closing conditions, including shareholder approvals and $36 million of financing for Parent. The agreement includes approximately $2.8 million termination payments in specified circumstances. The transaction was not assured to close.
Also on November 2, an affiliate of CPT provided a $1 million, 10% subordinated convertible note for working capital, and directors provided $250,000 in aggregate 10% notes for merger costs. Management said, subject to the merger agreement and credit facility, these borrowings were expected to provide sufficient cash and credit until a merger closing. If the merger did not close, the company said it might need other credit and substantial expense reductions. Other disclosed risks include seasonal cash constraints, credit covenant compliance, dependence on Yahoo! and Google, and potential Arkansas grant repayment; the filing reports 39 full-time permanent Arkansas positions against a 50-position grant requirement.
Important facts for investors to verify
- Whether Yahoo! monetization and revenue per click recover, and whether Inuvo can diversify demand-partner concentration.
- Availability, borrowing-base capacity, fees, and termination terms under the amended Western Alliance facility; confirm covenant status and any subsequent waivers.
- Merger-condition progress, particularly the required $36 million financing, approvals, listing conditions, and potential termination payments.
- Repayment, maturity, and potential conversion or dilution terms of the $1 million affiliate note and $250,000 director notes.
- Whether cash generation, operating costs, and Arkansas grant headcount requirements remain manageable if the merger is delayed or does not close.