Inuvo, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Inuvo provides digital advertising and marketing technology, including its AI-based IntentKey platform. Unless noted, financial figures are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $24.57 million | $17.07 million | $53.07 million | $58.33 million |
| Gross profit | $22.30 million | $10.29 million | $45.24 million | $33.62 million |
| Gross margin | 90.7% | 60.3% | 85.2% | 57.6% |
| Operating expenses | $23.49 million | $14.06 million | $53.20 million | $42.33 million |
| Operating loss | $1.19 million | $3.77 million | $7.97 million | $8.72 million |
| Net loss | $1.17 million | $3.81 million | $7.99 million | $9.13 million |
| Loss per share, basic and diluted | $0.01 | $0.03 | $0.06 | $0.08 |
Q3 revenue rose 43.9% year over year, while nine-month revenue declined 9.0%. Management attributed the quarterly increase to greater emphasis on indirect customers; direct-customer revenue fell following client losses in late 2022. Indirect customers represented 87.8% of Q3 revenue versus 54.5% a year earlier. Management attributed improved gross margin mainly to revenue mix, with indirect business typically carrying higher margins.
Marketing costs increased 104.5% in Q3 and 37.3% for the nine-month period, reflecting increased spending focused on indirect customers. For the nine months, compensation rose 6.2% and general and administrative costs rose 4.8% year over year.
Cash, liquidity, and capital
- Cash and cash equivalents were $6.98 million at September 30, 2023, versus $2.93 million at year-end 2022. Net working capital was approximately $1.7 million; accumulated deficit was $165.0 million.
- Nine-month operating cash use was $0.46 million, compared with $2.82 million in 2022. Investing activities provided $1.03 million, chiefly from marketable-security sales, partly offset by equipment and capitalized development spending. Financing activities provided $3.48 million, primarily from the May equity raise.
- In May, Inuvo raised $4.0 million gross by issuing 16.0 million shares. A further 173,558 shares were sold through its ATM program in Q2 for approximately $63,000 gross; no ATM shares were sold in Q3.
- The company had no outstanding balance on its $5.0 million receivables-based credit facility at quarter-end. Borrowings and accrued interest are due on demand. Lease liabilities totaled approximately $0.97 million.
- Management said available cash and the credit facility should support operations for at least 12 months from the filing date, while noting continued losses and dependence on executing its plan and potentially obtaining financing.
Material changes, outlook, and risks
- Q3 and nine-month losses narrowed year over year, but the company remained loss-making and reported operating cash outflow for the first nine months.
- Three customers generated 87.2% of Q3 revenue (75.0%, 10.0%, and 2.2%); they accounted for 79.8% of nine-month revenue and 55.2% of gross accounts receivable at quarter-end. Management warned that customer loss, reduced spending, or late payment could materially harm results.
- The allowance for doubtful accounts was $2.19 million, up $0.75 million from year-end. A significant 2022 direct customer had extended payment terms, with agreed payments through September 2024.
- On September 21, 2023, Inuvo reached an agreement with an advertising network over disputed invalid-click transactions, extinguishing related liabilities and reversing marketing costs. The filing does not state the amount of the Q3 reversal. The original matter involved a $1.5 million client refund and approximately $1.4 million in withheld net payments in 2022.
- Management is focusing on multi-channel advertising and IntentKey, which it believes offers higher margins; a return to positive operating cash flow depends on successful execution, with no assurance. Longer-term funding could require equity or debt financing or partnering/licensing transactions.
- Other risks include seasonality, advertising-supplier dependence, traffic acquisition economics, privacy and regulatory changes, technology and cybersecurity issues, and the ability to maintain NYSE American listing standards. No legal proceedings were reported. Management considered disclosure controls effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether revenue growth and the higher gross margin persist, particularly given the sharp increase in marketing spend and reliance on indirect customers.
- Whether the largest customers continue spending and pay on schedule; review receivable aging, the allowance, and the extended payment arrangement through September 2024.
- How much the advertising-network settlement affected Q3 marketing costs and whether any related exposure remains.
- Whether cash burn improves and the demand-based credit facility remains available; management’s 12-month liquidity view depends on execution and available funding.
- The extent of dilution from the May share issuance and outstanding restricted stock units; common shares outstanding were 137,983,918 at September 30, 2023.