Inuvo, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 8, 2013. Inuvo provides targeted internet advertising through its Network and Applications segments.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $13.13 million | $12.87 million | $29.05 million | $21.64 million |
| Gross profit / margin | $6.17 million / 47.0% | $6.78 million / 52.6% | $14.61 million / 50.3% | $10.20 million / 47.1% |
| Operating income (loss) | $85,638 | $(2.66) million | $(306,496) | $(4.35) million |
| Continuing-operations income (loss) | $98,557 | $(2.81) million | $(317,246) | $(4.68) million |
| Net income (loss) | $381,572 | $(2.96) million | $90,862 | $(4.84) million |
| Operating cash flow | Not presented for quarter alone | Not presented for quarter alone | $662,619 | $(302,905) |
- Revenue and segments: Q2 revenue increased 2.0%; Network revenue rose 85.5% to $10.09 million, while Applications revenue fell 59.1% to $3.04 million. For the first half, revenue grew 34.2%; Network rose 76.6% and Applications declined 16.8%.
- Profitability: Q2 operating expenses fell 35.6%, led by lower search costs and relocation-related savings, but gross profit declined and gross margin narrowed. Six-month operating results remained negative. Q2 net income included $283,015 from discontinued operations; first-half discontinued-operations income was $408,108.
- Cash and liquidity: Cash was $3.15 million at June 30, down from $3.38 million at year-end. Working capital was approximately negative $3.1 million. First-half investing cash outflow was $320,419 and financing cash outflow was $571,459.
- Debt and balance sheet: Term note and revolving credit borrowings totaled $6.94 million, compared with $7.82 million at December 31, 2012. Revolver availability was approximately $1.2 million. Total assets were $27.06 million; stockholders’ equity was $4.58 million.
Material changes and management outlook
- Management attributed Network growth to increased transactions across owned and partner properties and mobile growth. Chargebacks and Yahoo policy changes affected April and May revenue, with a recovery in June.
- Google policy changes impaired Applications user acquisition and monetization. Inuvo reduced Appbar acquisition spending and expected the business to stabilize during the rest of 2013; it planned new apps and additional distribution and revenue channels.
- The Arkansas relocation, office changes, and planned data-center move were expected to produce approximately $120,000 in monthly savings and about $2.5 million in annual rent, payroll, and other operating-cost savings. Data-center relocation was expected to finish in Q3 2013. Management believed cash from operations, the credit line, and relocation savings would fund operations for the next 12 months; no formal revenue or earnings guidance was provided.
- Inuvo received an Arkansas grant of up to $1.75 million, subject to employment and compensation commitments: at least 50 permanent full-time-equivalent positions within four years and maintained for six additional years, with average annual compensation of $90,000. Failure to meet requirements could require repayment, up to the full grant.
Risks, contingencies, and unusual items
- Yahoo! and Google generated 92.8% of Q2 and 92.0% of first-half revenue. The filing identifies the Yahoo contract expiry as April 2014 and the Google contract expiry as January 2015; the company disclosed a new two-year Google services agreement in February 2013.
- Inuvo was below the NYSE MKT’s $6 million stockholders’ equity requirement; its accepted compliance plan ran through December 2, 2013, subject to review. Equity at June 30 was $4.58 million.
- Bridge Bank waived a January 2013 event of default in March; Inuvo reported compliance with the credit agreement at June 30. The facility is secured by company assets, and management said it might delay vendor and publisher payments to conserve cash.
- A $322,771 charge in Q1 wrote off the remaining names-database intangible asset after management determined it no longer had a useful life; names purchases are now expensed when acquired.
- Q2 and first-half discontinued-operations gains largely reflected releases of old accrued liabilities and, for the first half, a favorable German tax-audit resolution. These items contributed materially to reported net income.
- A Conway office lease was prepaid for $193,200 and is with a lessor majority-owned by an Inuvo director and shareholder. The filing also describes ongoing legacy litigation; the Sobota class action was dismissed with prejudice in July 2013, and Express Revenue settled in August for an immaterial amount.
Important facts for investors to verify
- Whether Network growth and the June recovery persisted, and whether customer concentration or Yahoo and Google policy changes affected subsequent results.
- Progress toward Applications stabilization and the economics of user acquisition and new distribution channels.
- Operating cash generation, working-capital needs, vendor-payment practices, covenant compliance, and actual revolver availability.
- Progress on Arkansas hiring, grant conditions, relocation execution, and realized cost savings.
- NYSE MKT compliance-plan progress and any developments in the remaining litigation or other contingencies.