Inuvo, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; financial statements are unaudited. Inuvo delivers online advertising and reports two segments: Partner Network and Owned and Operated Network.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $14.51 million | $15.48 million | $43.56 million | $37.12 million |
| Gross profit / margin | $6.33 million / 43.6% | $8.74 million / 56.4% | $20.93 million / 48.1% | $18.93 million / 51.0% |
| Operating income (loss) | $613,000 | $(1.12) million | $306,000 | $(5.47) million |
| Net income (loss) | $640,000 | $(1.32) million | $731,000 | $(6.16) million |
Q3 revenue fell 6%, while nine-month revenue rose 17%. Q3 gross profit and margin declined despite lower operating expenses. Nine-month results improved to net income, including $458,000 of income from discontinued operations; continuing-operations income was $273,000.
- Partner Network revenue increased 67% in Q3 and 59% year to date; it represented 74.5% of Q3 revenue, versus 41.8% a year earlier. Owned and Operated Network revenue declined 59% in Q3 and 21% year to date.
- Q3 operating expenses fell 42% to $5.71 million, mainly from reduced Appbar user-acquisition spending and lower selling, general and administrative costs. Nine-month operating expenses fell 15% to $20.62 million.
- Net cash from operating activities was $1.89 million for the first nine months, versus $367,000 in the comparable 2012 period. Investing activities used $518,000 and financing activities used $1.12 million. Cash increased $255,000 to $3.64 million.
- At September 30, cash was $3.64 million and bank debt was $6.40 million, comprising a $3.22 million term note and $3.18 million revolving-line balance. Revolver availability was approximately $1.2 million. The company reported a working-capital deficit of approximately $2.5 million.
- Total assets were $26.72 million, total liabilities $21.26 million and stockholders’ equity $5.46 million. Equity remained below the NYSE MKT’s $6 million continued-listing threshold.
Material changes and outlook
- Management attributed Partner Network growth to increased transactions through its platform and mobile advertising. It expects growth from mobile ads and new publisher ad units.
- Google policy changes hindered Appbar user acquisition and monetization. Inuvo cut acquisition spending; management expected the product to stabilize during the rest of 2013 and planned new apps and alternative distribution channels. New ALOT health and finance websites were launched to support the Owned and Operated Network.
- Inuvo relocated its headquarters and data center to Arkansas, closed its Clearwater office and subleased its New York office. Management said compensation and selling, general and administrative costs together were below $1 million per month and expected those costs to remain optimized below that level.
- The company received an Arkansas relocation grant of up to $1.75 million. It had 28 Arkansas employees at quarter-end and must reach at least 50 full-time-equivalent positions within four years and maintain that level for six more years, with specified compensation requirements; failure could require repayment of some or all grant funds.
- Management believed cash from operations and the revolving credit line would be sufficient for the next 12 months. The company was in compliance with its credit agreement at September 30; a January 2013 default had been waived. Management also disclosed that it may delay payments to publishers and vendors to conserve cash.
Risks, contingencies and unusual items
- Yahoo! and Google generated 95.6% of Q3 and 93.2% of nine-month net revenue; together they represented 92.2% of gross accounts receivable at quarter-end. Yahoo! extended its agreement through April 24, 2015. The filing reports a two-year Google services agreement beginning February 2013; the risk disclosure says the contract expires in January 2015.
- The NYSE MKT compliance-plan period was extended to April 24, 2014. The company’s $5.46 million stockholders’ equity was below the stated $6 million threshold.
- Discontinued-operations income included reversals of older accrued liabilities and a favorable German tax-audit resolution. In Q1, Inuvo recorded a $323,000 charge to write off the remaining names-database asset after changing its useful-life estimate.
- Outstanding litigation includes legacy Vertro shareholder and derivative actions, merger-related litigation, a former landlord claim of approximately $60,000, Canadian employment claims totaling $587,500, and a French trademark case. The filing does not provide a clear aggregate estimate of potential losses for these matters.
- Other risks include dependence on paid-listing providers and distribution partners, Appbar user attrition, competition, possible service interruptions, and potential dilution from equity awards and warrants. A related-party lease was entered into for the Arkansas office; a director and shareholder is the lessor’s majority owner.
Important facts for investors to verify
- Whether Partner Network growth and gross margins can offset continued Owned and Operated Network declines.
- Current revenue dependence on Yahoo! and Google, contract terms and renewal prospects, and the effect of any provider policy or monetization changes.
- Progress toward the Arkansas grant’s hiring and compensation commitments, and the potential repayment exposure.
- Liquidity, working-capital deficit, revolving-line availability, debt-covenant compliance and the NYSE MKT equity threshold and deadline.
- Developments and potential financial exposure from the outstanding litigation and discontinued European operations.