Inuvo, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Inuvo provides internet advertising technology and digital publishing through its Partner Network and Owned and Operated Network. This unaudited filing covers the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $17.49 million | $19.25 million | $51.86 million | $49.40 million |
| Gross profit / margin | $12.35 million / 70.6% | $13.38 million / 69.5% | $38.47 million / 74.2% | $30.36 million / 61.5% |
| Operating income (loss) | $(0.45) million | $0.64 million | $(0.66) million | $1.42 million |
| Net income (loss) | $(0.26) million | $0.65 million | $(0.46) million | $1.72 million |
| Operating cash flow | Not separately presented for the quarter | $0.49 million | $5.20 million |
Q3 revenue fell 9.2% year over year, while nine-month revenue rose 5.0%. Partner Network revenue declined 14.9% in Q3 and 32.8% year to date; Owned and Operated Network revenue declined 5.8% in Q3 but increased 41.0% year to date. Management attributed Partner Network weakness to advertiser-demand fluctuations that reduced transaction volume and revenue per click, with both improving by mid-Q3; the segment grew 30% sequentially. Owned and Operated’s year-to-date growth reflected a larger user base and increased marketing, while Q3 was affected by reduced marketing spend and advertiser-demand weakness.
Q3 operating expenses were $12.80 million, nearly flat year over year. Nine-month operating expenses increased 35.2% to $39.13 million, mainly from higher marketing to launch and promote ALOT properties. Nine-month net loss from continuing operations was $0.64 million; discontinued operations contributed $0.17 million, primarily from writing off old accrued liabilities. For comparison, 2015 included a one-time $0.41 million income tax benefit from settlement of a New Jersey tax claim.
Financial position and liquidity
At September 30, 2016, cash was $3.64 million, total assets $26.47 million, current assets $10.35 million, and current liabilities $10.68 million. Stockholders’ equity was $11.66 million. The revolving credit balance was zero; approximately $5.7 million was available under the renewed facility, subject to its borrowing base. The facility permits borrowing up to $10 million and runs through September 2018, secured by company assets. The filing reports covenant compliance. No separate term-loan balance is reported.
Cash decreased $0.62 million from year-end 2015. Nine-month investing cash use was $0.93 million, principally equipment and capitalized development; financing cash use was $0.18 million. The company said cash from operations and the credit line were expected to fund operations for the next 12 months, while noting it could issue securities or borrow to support development, acquisitions, or growth.
Outlook, risks, and notable items
- No specific numerical revenue or earnings guidance was provided. Management expected SearchLinks to contribute during the remainder of 2016 and in 2017, and anticipated continued expansion of ALOT properties, applications, and acquired websites.
- Management expected marketing expense to rise proportionally with expansion and compensation to increase moderately to support SearchLinks. It did not expect SG&A to increase for the remainder of 2016.
- Yahoo! and Google represented 98.6% of Q3 revenue and 98.2% of nine-month revenue. In Q3, Yahoo! accounted for 67.3% and Google 31.3%. The filing warns that changes to these relationships, ad availability, pricing, or partner policies could materially harm results.
- The credit agreement includes a minimum monthly quick ratio of 0.75:1.00, limits quarterly revenue shortfall versus projections to 20%, and limits quarterly Adjusted EBITDA shortfall versus projections to $500,000.
- The first-year performance target for acquired domains was achieved; 166,667 shares were issued. The related contingent asset and liability were adjusted by approximately $46,000. A separate $250,000 sales-allowance adjustment increased Q1 2016 revenue.
- The UK approved dissolution of the remaining EU subsidiary in Q3, producing the discontinued-operations gain described above. A long-running Canadian employment case was dismissed by consent without costs to the company.
- Other disclosed risks include dependence on traffic acquisition and distribution partners, advertising and technology changes, legal and regulatory uncertainty, seasonality, and potential share dilution.
Most important facts for investors to verify
- Whether the Partner Network’s sequential recovery and advertiser-demand improvement continued after Q3, and how revenue per click and volume evolved.
- Whether Owned and Operated growth can be sustained profitably given substantial marketing costs and the Q3 revenue decline.
- The company’s continuing dependence on Yahoo! and Google and any changes in their revenue contribution or partner terms.
- Available borrowing capacity under the asset-based facility, covenant compliance, and operating cash generation relative to working-capital needs.
- The effects of the $250,000 sales-allowance adjustment, discontinued-operations gain, and outstanding domain earn-out shares on reported results and dilution.