Inuvo, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Inuvo provides data-driven digital advertising and audience-targeting platforms, including its IntentKey technology. Unless otherwise noted, comparisons are with Q1 2018.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $15.46 million | $20.50 million |
| Gross profit / gross margin | $8.78 million / 56.8% | $11.73 million / 57.2% |
| Operating expenses | $10.73 million | $13.04 million |
| Operating loss | $(1.95) million | $(1.31) million |
| Net loss | $(2.46) million; $(0.08) per share | $(1.41) million; $(0.05) per share |
| Cash from operating activities | $(1.05) million | $0.63 million |
| Cash from investing activities | $(0.31) million | $(0.51) million |
| Cash from financing activities | $1.38 million | $(0.05) million |
- At March 31, cash was $248,000 and current assets were $6.67 million, versus current liabilities of $14.58 million—a working capital deficit of approximately $7.91 million.
- Reported borrowings included $2.09 million of receivables financing, $250,000 of director notes and $2.21 million of convertible promissory notes. The balance sheet also reported $713,000 of operating-lease and $66,000 of finance-lease liabilities.
- Management stated there was substantial doubt about the Company’s ability to continue as a going concern, citing losses, negative operating cash flow, declining revenue, limited credit availability and uncertainty about closing the merger.
Changes and management commentary
- Revenue fell 24.6%. Management attributed the decline to reduced monetization from its largest demand partners and a strategic reduction in focus on non-strategic publisher-side technologies. Q1 2018 demand-partner revenue had been unusually high relative to the Company’s typical seasonal pattern; management said it did not know whether monetization would return to prior levels.
- Cost of revenue decreased 23.9%, while gross profit fell 25.1%. Marketing costs fell 21.1% and compensation declined 31.0%, primarily reflecting lower traffic acquisition and reduced headcount (66 employees versus 91 a year earlier). SG&A increased 11.8%, including approximately $501,000 of merger-related costs.
- Yahoo! generated 73.6% of revenue and Google 11.7%, together accounting for 85.3%; they represented 76.2% of gross accounts receivable at quarter-end. Partner-site revenue was 74.4% of total revenue, compared with 67.8% a year earlier.
- Q1 operating cash outflow compared with operating cash inflow in Q1 2018. The filing attributes the 2019 loss partly to about $1.3 million of non-cash depreciation, amortization, derivative-liability and stock-compensation expense. Financing cash inflow included $1.2 million of proceeds from convertible notes.
Merger, outlook and risks
- Inuvo’s stockholders approved the proposed ConversionPoint merger on May 8, 2019, after the quarter ended. The stated consideration for each Inuvo share is $0.45 in cash plus 0.18877 shares of the new parent, subject to merger terms and the filing’s described dilution adjustment.
- Closing remained conditional on, among other things, $36 million of parent financing, regulatory approvals, Nasdaq listing approval and other customary conditions. The outside financing date was extended to July 12, 2019 and the merger termination date to August 5, 2019. Certain termination circumstances could require either party to pay approximately $2.8 million.
- In March, Inuvo issued $1.44 million principal amount of subordinated convertible notes for $1.20 million in proceeds. The notes carried an initial $1.08 conversion price; the filing reports that purchasers received 1,333,333 shares upon conversion on May 13, 2019, a subsequent event.
- Western Alliance Bank’s $2.5 million sub-limit for eligible uninvoiced receivables was extended only until the earlier of May 31, 2019 or three days after merger closing. The facility is secured by Company assets and may be terminated by either party upon notice.
- Merger-related shareholder lawsuits sought to enjoin the transaction and/or recover fees. Several were dismissed or voluntarily dismissed after amended merger disclosures; fee requests remained pending as of the filing. Inuvo said it believed the claims were without merit.
- No company revenue or earnings guidance is provided. Management highlighted seasonality, uncertainty around ad monetization and credit availability, and the possibility it may need additional credit or substantial expense reductions if the merger does not close or revenue does not recover. The filing also identifies customer concentration, supply-partner dependence, privacy and legal risks, and credit-facility covenant risks.
Important facts for investors to verify
- Whether the merger’s remaining financing, regulatory, listing and other closing conditions were satisfied, and the final consideration and exchange ratio.
- Whether revenue and monetization recovered, particularly given the concentration in Yahoo! and Google and the year-over-year revenue decline.
- Available borrowing capacity after the temporary uninvoiced-receivables sub-limit extension, and the Company’s cash runway and going-concern status.
- The final accounting and dilution effects of the convertible-note conversions, merger consideration and accelerated vesting of restricted stock units.
- The resolution and any fee awards in the merger-related litigation, along with the status of the Arkansas grant contingency recorded at $55,000.