Inuvo, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Filed November 8, 2012. Inuvo operates an Internet marketing and technology business spanning Software Search and Publisher Network. Results include Vertro, acquired March 1, 2012, for seven months; comparisons with 2011 are therefore not fully like-for-like.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenue | $15.48 million | $8.20 million | $37.12 million | $29.21 million |
| Gross profit; margin | $8.74 million; 56.4% | $3.57 million; 43.5% | $18.93 million; 51.0% | $13.10 million; 44.9% |
| Operating loss | $1.12 million | $1.24 million | $5.47 million | $4.03 million |
| Net loss | $1.32 million | $1.37 million | $6.16 million | $4.59 million |
| Net loss per share | $0.06 | $0.14 | $0.30 | $0.50 |
- Q3 revenue rose 88.7% and gross profit rose 144.9% year over year, primarily reflecting acquired Software Search revenue. Q3 continuing-operations net loss narrowed by about $33,000. For the nine months, revenue increased 27.1%, while continuing-operations net loss widened by about $1.17 million.
- Q3 operating expenses increased 105.3% to $9.86 million, including search costs of $5.83 million, up 197.7%, largely due to paid advertising to generate ALOT Appbar downloads. Management expected search costs to rise, though not significantly, as the user base grows.
- For the nine months, cash from operating activities was $541,000, versus $408,000 in 2011. Investing activities used $1.25 million; financing activities provided $3.91 million. Cash at September 30 was $3.20 million, plus $301,000 restricted cash.
- At September 30, total assets were $31.73 million, stockholders’ equity was $5.11 million, and working capital deficit was approximately $3 million. Debt notes totaled $7.86 million: $1.33 million current and $6.52 million long-term. About $1.1 million remained available on the revolving facility.
Material changes and business developments
- The March Vertro merger issued 12.7 million Inuvo shares to Vertro shareholders and added the ALOT products to Software Search. Q3 revenue was split roughly evenly between Software Search ($7.88 million) and Publisher Network ($7.61 million).
- Publisher Network revenue fell 6.7% year over year in Q3 and 33.4% for the nine-month period, amid reduced transactions and traffic restrictions following Yahoo-identified traffic irregularities. Inuvo recorded a $170,000 Q3 revenue reserve for a potential additional Yahoo chargeback; a $238,000 chargeback was recorded in Q1, most of which the company said had been charged back to vendors.
- Management reported sequential Q3 revenue growth of 40% in Publisher Network and 6% in Software Search. It said revenue growth had triggered higher revenue-share rates from Yahoo in September and Google in July.
- Management cited expected annualized merger savings of about $2.9 million and said it was approximately $900,000 ahead of that run-rate expectation as of September 30. It expected savings to benefit results in Q4 and thereafter.
Liquidity, outlook, risks, and unusual items
- Bridge Bank provided a revolving facility of up to $10 million and a term loan of up to $5 million. The company reported covenant noncompliance at September 30; an October 11 amendment waived specified defaults and revised covenant thresholds. Management said compliance was regained upon the amendment. The amendment also required a warrant for 51,724 shares at $0.87 per share.
- Management believed cash, improving cash flow, merger cost reductions, and bank-facility capacity would provide sufficient cash for the next 12 months. This is a forward-looking assertion, not assurance; the company reported limited revolver availability and a working capital deficit.
- NYSE MKT’s applicable minimum stockholders’ equity requirement was $6 million; Inuvo reported $5.11 million at quarter-end. Management expected to regain compliance in 2013 through cost reductions and revenue growth. Failure to comply could lead to delisting.
- Customer concentration is substantial: two customers represented 91.6% of Q3 continuing-operations revenue and 79.4% of gross receivables. Google accounted for 49.2% of consolidated Q3 revenue and Yahoo for 42.4%. The Google paid-search contract was due to expire December 31, 2012; the Yahoo contract expires April 2014.
- Other items include a $75,000 Q3 litigation-settlement charge, a $4.54 million deferred tax liability recorded in the Vertro merger, and a $143,000 nine-month loss from discontinued operations. The company disclosed pending shareholder litigation and merger-related litigation; other settlements included a $75,000 Florida class-action settlement and a $255,803 settlement payable in quarterly installments, already accrued.
- Hurricane Sandy closed the New York office for a week and interrupted power at a data center; the company said operations were not materially affected and a redundant data center was used.
Important facts for investors to verify
- Whether the Google agreement was renewed or replaced after its stated December 31, 2012 expiration, and the revenue and margin effect of any changed terms.
- Subsequent customer concentration, receivable collections, Yahoo traffic-related chargebacks, and the performance and quality of Publisher Network traffic.
- Subsequent covenant compliance, actual borrowing availability, cash generation, and progress toward reducing the working capital deficit.
- Progress toward the $6 million NYSE MKT equity threshold and management’s projected 2013 compliance date.
- Whether merger savings, sequential segment growth, and ALOT customer-acquisition spending translated into improved operating results and cash flow.