Inuvo, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017. Inuvo provides digital advertising technology connecting advertisers and publishers; beginning in Q1 2017, it reported as one operating segment. The interim statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $18.27 million | $15.65 million | $35.49 million | $34.38 million |
| Gross profit | $10.65 million | $11.68 million | $19.97 million | $26.12 million |
| Gross margin | 58.3% | 74.6% | 56.3% | 76.0% |
| Operating loss | $(1.31) million | $(0.61) million | $(2.96) million | $(0.20) million |
| Net loss | $(1.38) million | $(0.57) million | $(3.08) million | $(0.20) million |
| Net loss per share, basic and diluted | $(0.05) | $(0.02) | $(0.11) | $(0.01) |
Cash flow and liquidity: First-half operating cash flow was $(2.84) million, versus $0.45 million provided in the prior-year period. Investing activities used $0.38 million; financing provided $2.96 million, including $5.0 million of revolving-credit proceeds and repayment of approximately $2.02 million of NetSeer debt. Cash was $3.68 million at June 30, 2017, down from $3.95 million at year-end 2016. Current assets were $11.80 million and current liabilities $15.15 million. The revolving facility had $5.0 million outstanding, split equally between current and long-term portions, and approximately $1.7 million available. Total assets were $35.07 million and stockholders’ equity $13.50 million.
Changes and business drivers
- Q2 revenue rose 16.8%, while first-half revenue rose 3.2%. NetSeer contributed approximately $3.3 million of Q2 and $5.2 million of first-half revenue after its February acquisition; growth was partly offset by lower revenue from owned properties.
- Cost of revenue increased 91.9% in Q2 and 87.9% for the first half. Management attributed the increase to higher revenue and a mix shift toward media sales and other traffic with publisher costs, versus owned-site revenue that has little cost of revenue. Management expected this mix trend to continue for the rest of 2017.
- Gross profit fell 8.8% in Q2 and 23.5% in the first half; the corresponding gross-margin declines reflect the changed revenue mix.
- Marketing expense declined 20.4% in Q2 and 31.8% in the first half as the company reduced spending to drive traffic to owned sites. Compensation increased 45.9% and 41.1%, respectively, primarily reflecting NetSeer employees; management expected moderate further increases for development and sales hiring. SG&A increased 66.8% in Q2 and 69.3% for the first half, including acquisition-related costs and higher IT, depreciation/amortization, travel, doubtful-account reserve, and facilities expenses.
- The NetSeer asset acquisition involved 3,529,000 Inuvo shares and assumed specified liabilities reported at approximately $6.8 million. The company recorded $4.01 million of goodwill and approximately $350,000 of acquisition-related costs. Shares outstanding increased to 28.45 million at June 30 from 24.92 million at December 31, 2016.
Outlook, risks, and notable items
- Management said the credit line and operating cash were expected to be sufficient for operations over the next 12 months, while noting that the company may seek equity or additional debt to fund technology development, acquisitions, and growth. It also cited greater working-capital needs as media sales expand.
- A July 31, 2017 credit amendment, after quarter-end, revised financial covenants and definitions, raised the receivables advance rate to 85%, reduced non-formula availability over time, and increased financing charges. The filing reported covenant compliance at June 30; it also disclosed a history of covenant difficulties and lender waivers or resets. The facility runs through September 2018.
- Yahoo! and Google together represented 80.0% of Q2 revenue and 84.0% of first-half revenue, down from 98.6% and 98.0% in the comparable 2016 periods. In Q2 2017, Yahoo! accounted for 69.1% and Google 10.8% of revenue. The company warned that loss or reduced contribution from either customer could materially harm results.
- Other cited risks include successful integration and performance of NetSeer, the possibility of impairment of acquired assets, dependence on distribution partners and traffic, technology and regulatory changes, and compliance with credit-facility and Arkansas grant requirements.
- A $222,477 adjustment reduced the carrying value of acquired domain assets and the related contingent liability after the seller failed to meet a second-year performance target. The filing reported no legal proceedings and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective as of June 30, 2017.
Key facts for investors to verify
- Whether NetSeer integration delivers the anticipated revenue, advertiser and publisher growth, and cost synergies—and whether acquired goodwill and intangibles remain recoverable.
- Whether the company can improve gross margins and operating cash generation as the lower-margin media-sales mix grows.
- Customer concentration, particularly Yahoo!’s share of revenue, and the terms and durability of the Yahoo! and Google relationships.
- Liquidity headroom, working-capital requirements, covenant performance under the amended facility, and availability of financing if cash use continues.
- Potential dilution from acquisition shares, outstanding equity awards, and future financing; also review the ongoing lease commitments and the status of Arkansas grant obligations.