Inuvo, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited consolidated financial statements. Inuvo operates Performance Marketing and Web Properties businesses, generating revenue from online advertising, leads, and product sales.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $8.20 million | $14.27 million | $29.21 million | $34.97 million |
| Gross profit / margin | $3.57 million / 43.5% | $5.82 million / 40.8% | $13.10 million / 44.9% | $13.58 million / 38.8% |
| Operating loss | $(1.24) million | $(0.20) million | $(4.03) million | $(3.00) million |
| Net loss | $(1.37) million | $(2.23) million | $(4.59) million | $(4.32) million |
| Operating cash flow | Not separately presented for the quarter | $0.41 million total; $0.78 million from continuing operations | $1.89 million total |
- Balance sheet at September 30: Cash was $1.16 million and restricted cash $0.48 million. Total assets were $12.81 million; total liabilities $9.67 million; stockholders’ equity $3.14 million. Working capital deficit was approximately $2.2 million.
- Debt and borrowing capacity: Term and credit notes totaled $3.01 million on the balance sheet. The Bridge Bank revolver had $2.53 million outstanding and no further availability. Inuvo was compliant with facility covenants at quarter-end, following a temporary waiver for June through August.
- Cash flows: Nine-month investing activities used $2.57 million, including $2.14 million for a names database. Financing activities provided $3.21 million, including approximately $2.64 million net proceeds from an equity offering.
Material changes versus prior periods
- Q3 revenue fell 42.5% year over year; nine-month revenue fell 16.5%. Performance Marketing revenue declined 49.7% in Q3 and 28.0% for the nine-month period, principally amid lower affiliate transactions and volatility following the Yahoo!-Bing search platform migration.
- Web Properties revenue decreased 21.6% in Q3 but rose 17.1% for the nine-month period. The shift toward owned websites improved consolidated gross margin, though lower revenue reduced gross profit.
- Q3 operating expenses declined 20.2%, but the operating loss widened as lower gross profit more than offset cost reductions. Nine-month operating expenses rose $0.56 million, principally reflecting a $3.69 million increase in search costs.
- One customer accounted for 88.8% of Q3 and 86.4% of nine-month continuing revenue, and held 66.1% of gross receivables at September 30. A top-three search-engine relationship generated 94.3% of Q3 Performance Marketing revenue.
Outlook, risks, and unusual items
- Management said search traffic and revenue remained volatile after the Yahoo!-Bing migration and could continue to fluctuate; it could not determine how long the volatility would last. Management expected gross margin to remain near the then-current level for the rest of 2011.
- Inuvo launched BargainMatch and Kowabunga in Q3. Kidzadu was delayed after weaker-than-expected consumer acceptance and difficulties integrating a finance partner; the company wrote off approximately $78,000 of development costs.
- In September, Inuvo eliminated 16 full-time and six part-time positions, estimating savings of about $92,000 monthly. It also reported deferred compensation of $736,000 for the nine months, with related restricted stock awards.
- The company raised $2.7 million in June through common stock and warrants. It said available resources might fund the next 12 months, but warned that weaker search operations, adverse litigation outcomes, or inability to raise further capital could leave it without adequate cash and jeopardize continued operations and NYSE Amex listing compliance. Equity financing could dilute shareholders.
- Stockholders’ equity was below the exchange’s $4.0 million threshold at September 30, despite an accepted compliance plan. The plan included raising up to $4.0 million in equity, launching new initiatives, and continuing cost reductions.
- On October 16, 2011, after quarter-end, Inuvo agreed to acquire Vertro in a stock-for-stock merger at an exchange ratio of 1.546 Inuvo shares per Vertro share. Closing remained subject to shareholder approvals, listing approval, financing, and other conditions; management anticipated closing in Q4 2011 or Q1 2012. Benefits described by management were expectations, not assured outcomes.
- Other notable items include $374,800 of nine-month litigation settlement expense, a $101,000 note receivable write-off related to terminating the outsourced call-center contract, and a $283,000 increase in option fair value from extending option expirations. A putative Florida class action sought unspecified damages; Inuvo was defending it. A former CEO’s indemnification claim had an undetermined potential cost.
Important facts for investors to verify
- Whether revenue and traffic stabilize after the Yahoo!-Bing transition, and whether the dominant customer and search-engine relationships continue.
- Cash runway, vendor and publisher payment timing, revolver availability, covenant compliance, and progress toward NYSE Amex listing compliance and the $4.0 million equity target.
- Actual operating results and cash contribution from BargainMatch and Kowabunga, and whether Kidzadu remains on hold.
- Whether the Vertro merger closes, its financing and dilution effects, and whether projected synergies materialize.
- Developments and potential exposure from the class action, other litigation, and the former CEO indemnification claim.