Inuvo, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Inuvo operates an advertising technology marketplace connecting advertisers with online publishers. Beginning in 2017, it reports as one segment rather than two. Results include NetSeer from its February 6, 2017 acquisition.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $17.22 million | $18.73 million | Down 8.1% |
| Gross profit | $9.32 million | $14.45 million | Down 35.5% |
| Gross margin | 54.2% | 77.1% | Down 22.9 percentage points |
| Operating income (loss) | ($1.65 million) | $0.40 million | Declined $2.05 million |
| Net income (loss) | ($1.69 million) | $0.37 million | Declined $2.07 million |
| Basic and diluted EPS | ($0.06) | $0.02 | |
| Operating cash flow | ($1.68 million) | $0.57 million |
Cost of revenue rose 84.2% to $7.89 million, substantially faster than revenue. Operating expenses fell 21.9% to $10.97 million, mainly because marketing costs declined 41.6% to $6.47 million. Compensation increased 39.1% to $2.39 million, and selling, general and administrative expense increased 68.2% to $2.12 million. Approximate operating margin was negative 9.6%, compared with positive 2.2% a year earlier.
Balance sheet and liquidity
- Cash was $3.92 million at March 31, 2017, versus $3.95 million at year-end 2016. Current assets were $11.40 million and current liabilities $13.75 million; the current ratio was approximately 0.83.
- Revolving credit borrowings totaled $3.60 million, with approximately $2.90 million available under the $10 million facility. The facility bears interest at prime plus 0.5% (4.50% at quarter-end), is secured by company assets, and runs through September 2018. The company reported covenant compliance at March 31.
- Total assets were $34.93 million, including $9.77 million of goodwill and $12.12 million of net intangible assets. Total liabilities were $20.35 million.
- Operating cash use was partly offset by $1.58 million of financing cash flow, principally revolving-credit proceeds. Investing cash flow was positive $84,000, including $236,000 received with the NetSeer acquisition.
Material changes and unusual items
- Revenue decreased despite approximately $2.8 million more revenue from third-party publishers and $1.9 million of post-acquisition NetSeer revenue. Management attributed the overall decline partly to a strong January 2016 comparison and reduced marketing spend, which lowered revenue from owned Alot.com properties.
- NetSeer was acquired for 3,529,000 Inuvo shares, with specified liabilities assumed. The filing records $4.46 million as consideration and approximately $6.8 million of specified liabilities assumed. Purchase-price allocation remains preliminary; recorded goodwill was $4.01 million. Acquisition-related costs were approximately $350,000 in the notes; MD&A separately cites $264,000 of transaction costs.
- In March, the company recorded a $222,477 reduction to the carrying value of acquired domain websites and the related contingent liability after determining the seller would not meet the second-year performance target.
- Yahoo! and Google together generated 88.3% of Q1 revenue, down from 97.4% in Q1 2016. The filing’s risk-factor discussion attributes 75.4% to Yahoo! and 12.9% to Google in Q1 2017. They accounted for 68.7% of gross receivables at quarter-end.
- NetSeer integration contributed to increased staffing and expenses. The company had 93 full- and part-time employees at quarter-end, including 21 NetSeer employees.
Outlook, risks, and contingencies
Management says it is focused on growth, expects positive cash flow over the long term, and plans continued strategic investment in marketing, advertising, supply, demand, and audience-targeting technology. It expects compensation expense to rise moderately as it hires developers and sales personnel; it expects some acquisition-related expenses to decline as integration proceeds. The filing provides no quantitative revenue or earnings guidance.
Key risks include dependence on Yahoo! and Google, whose revenue decisions and policies are outside Inuvo’s control; integration and performance risks related to NetSeer; and credit-facility covenants. The lender’s modified covenants include minimum quick ratios and quarterly adjusted EBITDA limits; a breach could jeopardize access to credit or trigger repayment. Inuvo also disclosed a $3.74 million deferred tax liability and a valuation allowance against substantially all of its approximately $31.33 million net deferred tax assets. No material off-balance-sheet arrangements or legal proceedings were reported.
Important facts for investors to verify
- Whether NetSeer integration delivers expected revenue, margin, and operating benefits, and whether preliminary purchase accounting changes materially.
- Whether the company can improve gross margin and operating cash flow amid higher publisher costs and working-capital demands.
- Continued Yahoo! and Google dependence, including the filing’s reported customer revenue shares and receivables concentration.
- Compliance with the credit facility’s financial covenants, remaining borrowing availability, and refinancing or liquidity needs.
- The differing acquisition-cost figures disclosed in the notes and MD&A, and the accounting impact of the domain earn-out adjustment.