Inuvo, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited. Inuvo is an Internet marketing and technology company reporting Performance Marketing and Web Properties segments; it exited the ValidClick AdExchange business in March 2011 and reorganized its segments during 2011.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $9.21 million | $11.37 million | $21.01 million | $20.70 million |
| Gross profit | $4.11 million | $4.20 million | $9.54 million | $7.76 million |
| Gross margin | 44.7% | 36.9% | 45.4% | 37.5% |
| Operating loss | $(1.62) million | $(0.99) million | $(2.80) million | $(2.80) million |
| Net loss | $(1.83) million | $(1.06) million | $(3.22) million | $(2.09) million |
- Q2 revenue fell 18.9%; six-month revenue rose 1.5%. Performance Marketing revenue declined 31.3% in Q2 and 13.1% year to date, while Web Properties revenue increased 18.6% and 43.5%, respectively.
- Higher gross margins reflected a greater contribution from owned websites. Six-month gross profit rose 22.9%, but higher operating costs offset that improvement. Q2 search costs were $2.30 million versus $0.86 million a year earlier; six-month search costs rose to $4.79 million from $1.35 million.
- Six-month other expenses included $374,800 in litigation settlements and a $100,745 write-off of a note receivable. Discontinued operations contributed $257,136 of income in 2011, versus $1.02 million in 2010; the 2011 amount was attributed to a settlement-related accrued-rent liability write-off.
- Segment earnings before interest, taxes, depreciation and amortization and stock-based payments, a non-GAAP measure, were a loss of $333,010 for Q2 and $131,021 for the first half, compared with income of $496,848 and $136,998, respectively, in 2010.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $77,910, comprising $374,334 provided by continuing operations and $296,424 used by discontinued operations. Investing activities used $1.79 million, including $1.54 million for a names database. Financing activities provided $3.51 million. Cash ended the period at $1.91 million; restricted cash was a separate $478,374.
- Working capital remained negative at approximately $1.4 million, improved from a $4.3 million deficit at December 31, 2010. Accounts payable totaled $4.48 million.
- Debt consisted of approximately $2.76 million outstanding on Bridge Bank’s revolving facility and a $475,000 term note; the filing reported no remaining availability under the facility at June 30. The facility is secured by company assets and includes financial covenants.
- In June, Inuvo raised $2.7 million gross through the sale of 1.35 million shares at $2.00 each and warrants for up to 675,000 shares at $2.20. Proceeds partly repaid a $1 million borrowing supported by a director’s letter of credit.
Management outlook, risks and unusual items
- Management cited ongoing volatility following migration to the Yahoo!-Bing search platform, including disrupted traffic and lower revenue per click. The company could not determine whether volatility would continue. One customer accounted for 88.0% of Q2 continuing revenue and 85.4% for the first half; it also represented 62.6% of gross receivables at June 30.
- Management expected gross margin to remain near the Q2 level and search costs to stay at or below current levels for the rest of 2011. It forecast approximately $600,000 quarterly improvement in operating results after ending outsourced telesales, alongside an expected $150,000 quarterly reduction in lead-generation revenue. Management also described expected net cash-flow improvement of $150,000 per month.
- Management’s plan to address NYSE Amex listing deficiencies included raising up to $4 million in equity during 2011, launching three marketing initiatives, and continuing cost reductions. The Exchange accepted the compliance plan in July 2011, with a December 8, 2012 deadline and progress-reporting conditions. Management warned that expected 2011 losses could again reduce equity below the $4 million listing threshold.
- Inuvo said its cash, bank facility and equity raise should provide sufficient cash for the next 12 months, but also disclosed no remaining revolver availability, delayed payments to publishers and vendors, and possible need for additional financing. Further equity financing could dilute shareholders; availability and terms were not assured.
- The company breached its Bridge Bank operating-profit covenant at June 30, primarily due to a $340,000 telesales contract termination fee. The bank waived noncompliance for June, July and August 2011. The termination also led to a $100,745 receivable write-off.
- Three litigation settlements were recorded in March, including approximately $375,000 of charges for two settlements; certain settlements also involved stock issuance. A former CEO sought indemnification for legal costs tied to an SEC claim; Inuvo was evaluating the claim and could not estimate its potential cost.
- Stockholders’ equity was $4.24 million at June 30. Management prepared the statements on a going-forward basis and stated that they included no adjustments to assets or liabilities. Disclosure controls were assessed as effective; no material change in internal control was reported.
Investor verification points
- Track customer concentration, receivable collection and the effect of Yahoo!-Bing traffic and pricing on revenue.
- Verify whether the new marketing initiatives deliver the projected revenue, profitability and cash-flow improvements.
- Monitor operating cash generation, vendor payment timing, revolver availability, covenant compliance and the need for further capital.
- Check progress toward NYSE Amex compliance and the effect of continued losses on stockholders’ equity and listing status.
- Assess potential dilution from outstanding warrants and any future financing, and clarify the possible exposure from the former CEO’s indemnification claim.