Inuvo, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Inuvo provides internet advertising technology and digital publishing through its Partner Network and Owned and Operated Network.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $15.65 million | $16.73 million | $34.38 million | $30.15 million |
| Gross profit | $11.68 million | $9.64 million | $26.12 million | $16.99 million |
| Gross margin | 74.6% | 57.6% | 76.0% | 56.3% |
| Operating income (loss) | $(0.61) million | $0.53 million | $(0.20) million | $0.78 million |
| Net income (loss) | $(0.57) million | $0.45 million | $(0.20) million | $1.07 million |
| Diluted EPS | $(0.02) | $0.02 | $(0.01) | $0.04 |
Q2 revenue declined 6.4% year over year, while first-half revenue increased 14.0%. Q2 gross profit rose despite lower revenue, but higher operating expenses—particularly marketing—contributed to an operating and net loss. First-half operating expenses increased 62.5% to $26.33 million.
Segment trends: Q2 Partner Network revenue fell 48.9% to $4.75 million; Owned and Operated Network revenue grew 46.5% to $10.90 million. For the first half, the segments declined 40.6% and grew 83.3%, respectively. Owned and Operated represented 69.7% of Q2 revenue, compared with 44.5% a year earlier. Its near-100% segment gross margin contrasts with the Partner Network’s 16.8% Q2 margin.
Cash, liquidity and balance sheet
Six-month operating cash flow was $0.45 million, down from $3.07 million in 2015. Investing used $0.70 million, primarily for equipment and capitalized development; financing used $0.04 million. Cash declined $0.28 million from year-end to $3.97 million.
At June 30, cash was $3.97 million, current assets $9.71 million and current liabilities $10.27 million, a working-capital deficit of approximately $0.56 million. Total assets were $26.15 million and stockholders’ equity was $11.73 million. The Bridge Bank term loan and revolver had no outstanding balance; approximately $5.1 million remained available under the revolving facility, which was due to expire in September 2016. The company said it intended to obtain a replacement line and believed cash and operating cash generation would fund operations for the next 12 months. It was in compliance with bank covenants at quarter-end.
No material off-balance-sheet arrangements were reported. The balance sheet included a $3.80 million deferred tax liability related to intangible assets; management maintained a valuation allowance against essentially all deferred tax assets.
Changes, outlook and notable items
- Management attributed Partner Network weakness to advertiser-demand fluctuations, which reduced both transaction volume and revenue per click. It said the issues appeared to have stabilized and believed the segment could grow, while noting its dependence on its advertising supplier.
- Owned and Operated growth reflected a larger user base and increased advertising, supported by higher marketing spend. Management expected marketing costs to continue increasing as it expands ALOT websites and applications. It expected moderate compensation growth to support SearchLinks development and sales, but did not expect SG&A to increase in the remainder of 2016.
- Management expected SearchLinks, launched to the marketplace in 2015, to contribute to 2016 growth. The filing provides no quantitative revenue or earnings guidance.
- A $250,000 adjustment to the accrued sales allowance in Q1 2016 benefited results after no advertiser chargeback during the prior year. By contrast, the first half of 2015 included a one-time $406,000 tax benefit from settlement of a New Jersey tax claim.
- Inuvo issued 166,667 shares in May 2016 as the first-year earn-out payment for acquired websites; the related intangible asset and contingent liability were also adjusted by approximately $46,000.
- Two customers, Yahoo! and Google, generated 98.6% of Q2 revenue and 98.0% for the first half. A long-running Alberta wrongful-dismissal case remained in discovery, with no progress reported since April 2013; the company was seeking dismissal for want of prosecution.
Key facts for investors to verify
- Whether the Partner Network’s advertiser-demand and revenue-per-click trends stabilized, and whether the segment recovered after its sharp year-over-year decline.
- Whether growth in Owned and Operated revenue can be sustained and justify rising marketing costs.
- Whether Inuvo renewed its revolving credit facility before the September 2016 expiration and maintained adequate liquidity.
- Whether customer concentration, particularly dependence on Yahoo! and Google, changed after quarter-end.
- The potential dilution from outstanding equity awards and future earn-out shares, and the status or potential exposure from the Alberta litigation.