Inuvo, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Inuvo provides data-driven digital advertising platforms, including its IntentKey AI technology. Figures are unaudited; dollar amounts are U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $14.05 million | $19.00 million | $29.51 million | $39.51 million |
| Gross profit | $8.37 million | $12.01 million | $17.16 million | $23.74 million |
| Gross margin | 59.6% | 63.2% | 58.1% | 60.1% |
| Operating loss | $(2.10) million | $(0.74) million | $(4.05) million | $(2.05) million |
| Net loss | $(1.95) million | $(0.83) million | $(4.42) million | $(2.24) million |
| Loss per share, basic and diluted | $(0.06) | $(0.03) | $(0.14) | $(0.08) |
| Cash used in operating activities | Not presented quarterly | $(0.71) million | $(0.15) million |
At June 30, cash was $995,000, current assets were $6.27 million, and current liabilities were $15.67 million (current ratio approximately 0.40). Total assets were $27.64 million and stockholders’ equity was $6.75 million. Financing included $2.86 million of receivables financing, $2.25 million of convertible notes, and $250,000 of notes payable to directors. The receivables facility is secured by company assets; financing of eligible unbilled receivables is at the lender’s discretion and may be terminated on notice.
Changes and management commentary
- Q2 revenue fell 26.1% year over year; first-half revenue fell 25.3%. Management attributed the decline partly to reduced emphasis on non-strategic publisher-side technology and lower monetization from major demand partners, alongside a strategy shift during the pending merger. Management said it had not seen an appreciable change in inventory monetization and could not determine whether it would return to prior levels.
- First-half gross profit declined 27.7%. Operating expenses fell 17.8%, including lower traffic acquisition costs and compensation; SG&A rose 11.7%, partly due to approximately $887,000 of merger-related costs. First-half net loss included about $1.8 million of non-cash depreciation, amortization, and stock compensation.
- First-half operating cash use was $710,000. Investing cash use was $582,000, primarily for capitalized development and equipment. Financing provided $2.06 million, principally from convertible notes and receivables financing. Cash increased by $767,000 from year-end.
- Yahoo! and Google generated 81.0% of Q2 revenue and 83.3% of first-half revenue. They represented 62.5% of gross receivables at quarter-end.
Outlook, liquidity, and material events
- The filing provides no numerical revenue or earnings guidance. Management said lower revenue, reduced receivables-based borrowing capacity, and negative operating cash flow create a risk to uninterrupted operations. It stated that substantial doubt exists about the company’s ability to continue as a going concern; additional credit or expense reductions may be needed, with possible disruption to the business.
- In June, Inuvo terminated its proposed merger with ConversionPoint after the acquirer failed to meet a $36 million financing condition. The termination agreement provides for a $2.8 million fee, subject to specified conditions: $1.063 million was satisfied when the CPTI note was cancelled in July; $1.612 million was to be satisfied by transfer of the ReTargeter business or cash payment by December 31, 2019; and $125,000 was due toward merger-related litigation settlement. Inuvo did not recognize the fee in Q2 because gain recognition criteria were not met.
- After quarter-end, Inuvo sold 15,812,500 shares at $0.30 per share, generating approximately $4.7 million gross and $3.8 million net proceeds. The Calvary Notes’ conversion price was adjusted from $1.08 to $0.30 per share. The filing reports 48,500,689 shares outstanding on August 9, 2019.
- Merger-related stockholder litigation was settled subject to payment by September 30, 2019; plaintiffs may pursue attorneys’ fees if the settlement payment is not made by then. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor facts to verify
- Whether revenue and advertising monetization stabilize, and whether Inuvo can reduce its dependence on Yahoo! and Google.
- Current borrowing availability and renewal terms for the receivables-based facility, including the lender’s discretion over unbilled receivables.
- Completion and value of the ReTargeter asset transfer or payment under the merger termination agreement, and satisfaction of litigation settlement obligations.
- Post-offering cash runway, use of proceeds, and potential dilution from the offering and convertible notes.
- Progress toward addressing the going-concern uncertainty and returning to positive operating cash flow.