Inuvo, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Inuvo develops advertising technology and operates digital publishing properties; it earns revenue when consumers view or click ads. Comparisons below are with Q1 2017 unless otherwise noted. Financial amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $20.50 million | $17.22 million | +19.1% |
| Gross profit / margin | $11.73 million / 57.2% | $9.32 million / 54.2% | +25.8% gross profit |
| Operating expenses | $13.04 million | $10.97 million | +18.8% |
| Operating loss / margin | $(1.31) million / (6.4)% | $(1.65) million / (9.6)% | Loss narrowed |
| Net loss | $(1.41) million | $(1.69) million | Loss narrowed |
| Basic and diluted loss per share | $(0.05) | $(0.06) | |
| Operating cash flow | $0.63 million provided | $1.68 million used | Improved |
| Investing cash flow | $0.51 million used | $0.08 million provided | |
| Cash, March 31 | $4.15 million | $3.92 million |
Cost of revenue rose 11.2%, slower than revenue growth. Marketing costs, principally traffic acquisition for owned websites, increased 28.2% to $8.29 million; compensation increased 9.7% to $2.62 million, while selling, general and administrative expense was nearly flat at $2.13 million. Interest expense rose to $101,000 from $43,000, attributed to higher average credit-line borrowings and rates.
By product, ValidClick revenue was $10.84 million versus $11.00 million; Digital Publishing was $6.55 million versus $4.10 million; VMP was $2.12 million versus $1.00 million; and Audience Delivery Solutions and other revenue was $0.99 million versus $1.12 million. Management attributed growth mainly to publishing, including VMP, which increased 112% year over year.
Balance sheet, liquidity and debt
At March 31, 2018, total assets were $34.62 million, down from $38.25 million at year-end 2017. Current assets were $11.90 million and current liabilities were $18.87 million. Accounts receivable declined to $7.46 million from $10.76 million; accounts payable declined to $11.12 million from $13.61 million. Stockholders’ equity was $13.06 million.
The company had $4.90 million outstanding on its revolving credit facility, classified as current and due September 2018, with approximately $1.2 million available at March 31. The facility is secured by company assets. In an April 2018 modification, the lender continued access to a line of credit of up to $10 million through September 2018 and established quick-ratio and Adjusted EBITDA covenants. Inuvo reported compliance with bank covenants as of March 31. Management cautioned that cash from operations and the credit line might not be sufficient for the next 12 months and said it may seek equity or additional debt financing.
Operating cash flow turned positive primarily as receivables fell, partly offset by lower accounts payable. The company invested $514,000, primarily in capitalized internal development costs. It reported no material off-balance-sheet arrangements.
Changes, outlook and risks
- Management said it expects to focus more on the Demand side, where its IntentKey technology is intended to differentiate the business. It expected compensation expense not to increase in coming quarters and quarterly SG&A to remain relatively flat. The filing provides no quantified revenue or earnings guidance.
- Revenue concentration remains high: Yahoo! contributed 70.5% of Q1 revenue, Google 9.5%, and OpenX 6.7%, for 86.7% combined. The corresponding combined share was 90.9% in Q1 2017. These customers also represented 76.0% of gross receivables at March 31.
- The company describes seasonality: historically, the second half is stronger, while lower first-half demand and revenue per click can constrain cash availability against relatively fixed expenses. Media sales acquired in 2017 may also require additional working capital because of slower collections.
- The lender’s covenants and the September 2018 facility term create financing and refinancing risk; a covenant breach could expose the company to accelerated repayment and collateral enforcement. The company also disclosed the possibility of issuing securities, which could dilute shareholders.
- Inuvo adopted Topic 606 on January 1, 2018 using the modified retrospective approach; it reported no cumulative retained-earnings effect and no impact on revenue through March 31. Management expected the forthcoming lease standard to affect the balance sheet, but not lease-expense presentation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no legal proceedings.
Important facts for investors to verify
- Whether Inuvo can renew or replace its revolving facility before it expires and maintain compliance with its revised financial covenants.
- Whether operating cash generation can fund working capital and planned technology investment, especially during seasonally weaker periods.
- Whether revenue concentration declines further and whether Yahoo!, Google and OpenX relationships and advertising access remain stable.
- Whether growth in Digital Publishing and VMP can continue without traffic-acquisition costs rising faster than revenue.
- The filing gives two dates for the lender modification: April 18, 2018 in the notes and management discussion, but April 30, 2018 in the exhibit list. Verify the executed agreement and applicable terms, including the stated finance charge.