Inuvo, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited consolidated results. Inuvo provides internet advertising through its Partner Network and Owned and Operated Network, including ALOT websites and applications.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $10.94 million | $13.13 million | $21.06 million | $29.05 million |
| Gross profit (margin) | $6.28 million (57.4%) | $6.17 million (47.0%) | $12.72 million (60.4%) | $14.61 million (50.3%) |
| Operating income (loss) | $468,000 | $86,000 | $1.14 million | ($306,000) |
| Net income | $382,000 | $382,000 | $1.06 million | $91,000 |
| Operating cash flow | — | $1.50 million | $663,000 |
Q2 diluted EPS was $0.02, unchanged from a year earlier; first-half diluted EPS was $0.04 versus approximately break-even. Net income included income from discontinued operations of $18,000 in Q2 and $44,000 in the first half; the comparable 2013 amounts were $283,000 and $408,000.
Balance sheet, liquidity and debt
- At June 30, cash was $3.40 million and current assets were $7.76 million, versus current liabilities of $13.48 million. Total assets were $24.71 million; stockholders’ equity was $6.68 million.
- Debt to Bridge Bank was $5.32 million, all classified as current, compared with total debt of $6.14 million at December 31, 2013. The term loan and revolving line mature in March 2015; the term loan rate was 9.25% and the revolver rate 4.25% at quarter-end.
- Approximately $446,000 remained available on the revolving line. Management said cash and expected operating cash flows should fund operations and capital needs for at least 12 months. First-half investing cash use was $375,000 and financing cash use was $861,000, primarily debt reduction.
Changes, outlook and risks
- Revenue fell 16.7% in Q2 and 27.5% in the first half year over year, primarily because of Partner Network declines and the transition away from the Appbar product. Partner Network revenue fell 34.5% in Q2; Owned and Operated revenue rose 16.2% in Q2, although it declined 13.6% for the first half.
- Management reported ALOT website revenue growth of 156% in Q2, to $4.8 million, and 109% for the first half, to $8.5 million. It planned to expand ALOT websites and applications, expected Appbar revenue to continue declining, and anticipated website revenue growth. Marketing costs were expected to rise through the remainder of 2014; compensation and SG&A were not expected to increase much. No specific full-year revenue or earnings guidance was provided.
- Yahoo! and Google generated 96.87% of Q2 revenue and 96.30% of first-half revenue. Their combined share of gross receivables was 92.5% at June 30. Loss or reduced contribution from either customer could materially harm results.
- Bridge Bank covenants were revised in March 2014; the company reported compliance at June 30, but disclosed prior covenant difficulties and risk of acceleration if it defaults. Arkansas grant terms require at least 50 full-time-equivalent positions within four years and then maintenance for six years, with average compensation of $90,000; Inuvo had 33 Arkansas employees and believed it would comply. Failure could require repayment of up to the $1.75 million grant.
- A new $164,000 advertiser adjustment reserve was accrued in Q2. The company reported a $349,926 loss contingency. Inuvo’s 2005 shareholder class action settlement, funded by insurance for $2.4 million with no expected company payment, had preliminary court approval and awaited final approval. Separately, former distribution partners sued Inuvo in July 2014 over approximately $696,000 allegedly owed; Inuvo had filed a claim seeking return of approximately $134,000.
- Other material risks include a history of losses and a $120.1 million accumulated deficit, dependence on distribution partners and search-ad relationships, and potential dilution from equity awards and warrants. Management concluded disclosure controls were effective; no material change in internal control was reported.
Facts investors should verify
- Whether ALOT website growth can offset continued Partner Network and Appbar declines while preserving improved gross margins.
- Revenue, receivable exposure and relationship developments with Yahoo! and Google.
- Compliance with Bridge Bank covenants, remaining availability, debt repayment or refinancing before March 2015.
- Progress toward Arkansas grant employment and compensation requirements.
- Final disposition of the shareholder settlement and distribution-partner litigation, and adequacy of recorded reserves.