Inuvo, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative period is Q1 2010. Unaudited consolidated results. Inuvo operates Performance Marketing and Web Properties businesses and reorganized reporting into these segments in 2011. It had exited or sold the businesses classified as discontinued operations by the end of 2010.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net revenue | $11.79 million | $9.34 million |
| Gross profit / gross margin | $5.42 million / about 46% | $3.56 million / about 38% |
| Operating loss | $(1.18) million | $(1.81) million |
| Continuing-operations net loss | $(1.65) million | $(1.97) million |
| Net loss, including discontinued operations | $(1.39) million | $(1.03) million |
| Operating cash flow | $813,000 | $295,000 |
| Cash at period end | $1.81 million | $1.81 million |
Revenue grew 26.3%. Performance Marketing revenue rose 9.7% to $7.50 million; Web Properties revenue rose 71.6% to $4.30 million. Web Properties generated $3.67 million of gross profit, up 93.3%, while Performance Marketing gross profit was $1.75 million, up 5.4%. Gross margin improvement reflected greater contribution from owned and operated websites and lower affiliate expense as a share of revenue.
Operating expenses increased 23% to $6.60 million, principally because search costs rose $2.00 million to $2.49 million as the company invested to drive traffic to its own websites. Compensation and telemarketing expense fell 5.6%, and selling, general and administrative expense fell 29.7%. Interest expense was $99,000, versus $161,000. Other expense included a $375,000 litigation-settlement loss; discontinued operations included a $257,000 settlement gain. Q1 2010 included $935,000 of discontinued-operations income, contributing to the lower comparative net loss.
Cash provided by operating activities was $813,000; investing activities used $965,000, primarily for a $917,000 names-database purchase; financing activities provided $1.85 million. Management attributed operating cash generation in part to increased payables and accrued liabilities, including extended payment timing. Working capital remained negative at approximately $2.1 million, improved from $4.3 million at December 31, 2010.
At March 31, 2011, term and credit notes payable totaled approximately $4.22 million: $995,000 current and $3.23 million long-term. The new Bridge Bank facility is a two-year, receivables-based revolving line of up to $8.0 million. Approximately $3.745 million was outstanding and only about $51,000 was available under the borrowing formula at quarter-end. A separate $475,000 term note funded restricted cash for a lease letter of credit. Inuvo reported compliance with facility covenants at quarter-end.
Material changes and management commentary
- Revenue and gross profit increased, but the company remained loss-making. Continuing-operations loss improved by about $316,000 year over year; reported net loss worsened because Q1 2010 included substantially more discontinued-operations income.
- Management said Yahoo!-Bing platform migration disrupted search traffic and reduced revenue per click in late 2010. Revenue and transaction volumes improved through Q1 2011, but management could not predict the continuing impact and cautioned that volatility could persist.
- Performance Marketing remained highly concentrated: one top-three search-engine relationship accounted for 94.7% of segment revenue. A single customer represented 83.4% of continuing-operations revenue and 69.9% of gross receivables at March 31, 2011.
- Web Properties growth was driven mainly by increased traffic to owned websites. BabytoBee revenue declined to about $1.5 million from $1.7 million as outsourced telesales call volume fell; management expected this level to stabilize in the foreseeable future.
- Management cited cost reductions, compensation deferrals, lower outsourced call-center costs and the new bank facility, and stated it believed these measures would provide sufficient cash for the next 12 months. The company nevertheless said it may seek additional equity financing; availability and terms are uncertain and issuance could dilute shareholders.
- Three litigation settlements were disclosed in subsequent-events discussion, with related charges or gains recorded in March: a $375,000 loss on settlements with two former employees, and a $257,000 gain in discontinued operations related to lease litigation. Settlement agreements were executed in April 2011 and included cash payments and share issuances.
- The company reported effective disclosure controls as of March 31, 2011 and no material change in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Outlook, risks and contingencies
No numerical revenue or earnings guidance was provided. Management expected segment expense trends to remain near historical levels as a percentage of revenue and corporate expenses to decline as a percentage of revenue with continued cost management. Key stated risks include the company’s history of losses, dependence on a significant customer and search-engine relationships, competition and industry changes, limited credit availability, potential need for capital, technology and service interruptions, regulation, and litigation. The bank facility is secured by company assets and includes financial and operating covenants.
Important facts for investors to verify
- Whether search-platform traffic and revenue-per-click recovery continued after March 31, and the extent of ongoing dependence on the major search-engine relationship.
- Whether the dominant customer paid receivables on time and whether customer and receivables concentration changed.
- Actual borrowing availability under the receivables-based facility, covenant compliance, and liquidity relative to the $2.1 million working-capital deficit.
- Whether operating cash flow remains positive without relying on extended supplier and settlement payments.
- Whether Web Properties traffic and margins justify increased search spending, and whether BabytoBee telesales revenue stabilizes.
- The cash and dilution effects of the litigation settlements, deferred compensation and any future equity financing.