Inuvo, Inc. — Q2 2018 Form 10-Q
Business context and period. Inuvo develops advertising technology, including its IntentKey AI platform, connecting advertisers with online publishers. This filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $19.0 million | $18.3 million | $39.5 million | $35.5 million |
| Gross profit / margin | $12.0 million / 63.2% | $10.7 million / 58.3% | $23.7 million / 60.1% | $20.0 million / 56.3% |
| Operating loss | $0.7 million | $1.3 million | $2.1 million | $3.0 million |
| Net loss | $0.8 million | $1.4 million | $2.2 million | $3.1 million |
- Q2 revenue rose 4.0%; first-half revenue increased 11.3%. Mobile revenue grew 22.2% in Q2 and 34.1% in the first half, while desktop revenue declined in both comparisons.
- Q2 cost of revenue fell 8.3%, lifting gross margin; first-half cost of revenue increased 1.7%. Marketing costs rose 12.7% in Q2 and 19.9% in the first half, contributing to higher operating expenses.
- First-half operating cash use was $0.2 million, compared with $2.8 million in 2017. Investing cash use was $0.9 million; financing provided $1.1 million, including proceeds from the stock offering, net of debt and lease payments. Cash increased by $33,000 to $4.1 million.
- At June 30, cash was $4.1 million, current assets $12.1 million and current liabilities $17.2 million, implying negative working capital of approximately $5.2 million. Revolver borrowings were $4.0 million, with approximately $2.3 million available; the balance-sheet line is current and matures September 29, 2018. Total assets were $34.5 million and stockholders’ equity was $14.6 million.
Changes, outlook and risks
- Management attributed Q2 cost-of-revenue improvement to a revenue mix shift away from third-party exchanges. Higher first-half cost of revenue reflected business growth with major demand partners. Management said its focus is shifting toward the Demand side and expected compensation and SG&A to remain relatively stable.
- In May, Inuvo sold 3.289 million shares at $0.70 per share, including the overallotment, for approximately $2.1 million in net proceeds. The filing also describes approximately $2.3 million taken down from its $15 million shelf registration.
- Management believed the credit line, its expected renewal and operating cash generation would fund operations for the next 12 months, but also identified possible further equity or debt financing. The filing provides no quantified revenue or earnings guidance.
- Revenue concentration is substantial: Yahoo! represented 73.1% and Google 9.0% of Q2 revenue; together they accounted for 80.9% of first-half revenue. Yahoo! and Google represented 71.5% of gross receivables at quarter-end. Loss or material changes in either relationship could adversely affect results.
- Business seasonality typically favors the second half, while lower first-half revenue and fixed costs can constrain cash. The company also expects working-capital needs to rise as media sales grow. The credit facility is secured by company assets, includes financial covenants, and requires renewal; the company disclosed historical difficulty meeting covenants, although it reported compliance at June 30, 2018.
- Other notable items: Inuvo adopted Topic 606 on January 1, 2018 with no reported revenue or retained-earnings impact. It recorded a $2.3 million deferred tax liability and a valuation allowance against essentially all net deferred tax assets. No legal proceedings or material off-balance-sheet arrangements were reported.
Key facts for investors to verify
- Whether the Western Alliance Bank facility was renewed or replaced before its September 2018 maturity, and on what terms.
- Subsequent covenant compliance, available borrowing capacity, and whether liquidity was sufficient through seasonal low periods.
- Yahoo! and Google revenue and receivables concentration, and any changes in partner terms, traffic approval or advertising demand.
- Whether mobile growth and improved gross margins continued, and whether marketing spending translated into profitable growth.
- Cash conversion and working-capital trends, particularly accounts payable, receivables and the growing media-sales business.
- Potential dilution from additional financing and outstanding equity awards; outstanding common shares were 32.1 million at June 30 and 32.2 million on August 3, 2018.