Inuvo, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Inuvo develops advertising technology connecting advertisers and publishers. Results include NetSeer from its February 2017 asset acquisition.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $20.31 million | $17.49 million | $55.80 million | $51.86 million |
| Gross profit | $10.66 million | $12.35 million | $30.64 million | $38.47 million |
| Gross margin | 52.5% | 70.6% | 54.9% | 74.2% |
| Operating loss | $0.89 million | $0.45 million | $3.85 million | $0.66 million |
| Net loss | $0.99 million | $0.26 million | $4.06 million | $0.46 million |
| Net loss per share | $0.03 | $0.01 | $0.14 | $0.02 |
Q3 revenue increased 16.2% year over year; nine-month revenue rose 7.6%. Management attributed the growth to NetSeer’s direct-media and image-based advertising, which contributed approximately $4.8 million in Q3 and $10.0 million year to date. Growth was more than offset at the gross-profit level by a sharp increase in cost of revenue and a mix shift away from owned websites, which have little cost of revenue. Gross profit declined 13.7% in Q3 and 20.4% year to date.
Marketing costs fell 27.8% in Q3 and 30.5% year to date, reflecting reduced spending to drive traffic to owned properties. Compensation rose 43.2% in Q3 and 41.8% year to date, principally due to increased staffing, including NetSeer employees. SG&A increased 64.8% in Q3 and 67.8% year to date, including acquired-business costs and $350,000 of acquisition transaction costs in the nine-month period. Net interest expense was $97,318 in Q3 and $212,922 year to date.
Cash, debt and liquidity
- Cash was $2.90 million at September 30, 2017, down from $3.95 million at December 31, 2016.
- Operating activities used $2.96 million in the first nine months, compared with $0.49 million provided in the prior-year period. Investing activities used $0.83 million; financing activities provided $2.74 million, including $5.0 million of revolving-credit proceeds and repayment of approximately $2.0 million of NetSeer debt.
- The Western Alliance Bank revolving facility had $5.0 million outstanding and approximately $3.6 million available. It is secured by company assets, bears interest at 5.0% at quarter-end, and is scheduled to mature in September 2018. The company reported compliance with covenants at September 30.
- Current assets were $13.23 million versus current liabilities of $19.70 million. Accounts payable were $11.76 million. Total assets were $36.65 million and stockholders’ equity was $12.73 million.
Material changes, outlook and risks
- NetSeer acquisition: Inuvo issued 3,529,000 common shares and assumed specified liabilities; the filing describes approximately $6.8 million of assumed liabilities. NetSeer contributed approximately $10.0 million of revenue since acquisition. The company recorded $4.01 million of goodwill and $4.36 million of identifiable intangible assets, and recognized $350,000 in acquisition-related expense.
- Management outlook: Management expects direct-media and image-based advertising to grow faster than owned-web-property revenue and believes this mix may improve operating results. It expects cost of revenue to remain higher due to the mix shift, compensation to increase moderately as it hires, and quarterly SG&A to be relatively flat in 2018. Management said cash and the credit facility should be sufficient for operations over the next 12 months, while also noting potential use of equity or additional borrowing to fund investment and growth. No specific financial guidance was provided.
- Working-capital and credit risk: Media sales may have customer collection terms longer than related publisher-payment terms, increasing working-capital needs. The lender revised financial covenants and reduced non-formula availability over time; the company noted a history of difficulty meeting covenants and prior lender waivers. A breach could put the facility and collateral at risk.
- Customer concentration: Yahoo!, Google and OpenX represented 83.9% of Q3 revenue and 86.7% for the first nine months. Yahoo! alone represented 62.1% and 68.5%, respectively. The three customers accounted for 77.1% of gross receivables at quarter-end.
- Other items: The company filed a replacement $15 million shelf registration statement but reported no sales under it to date. It repurchased 45,900 shares in September at an average $0.97 per share under a $500,000 authorization. Management identified NetSeer integration and potential impairment, customer dependence, financing and covenant compliance among relevant risks. No legal proceedings were reported.
Important facts for investors to verify
- Whether NetSeer’s revenue growth can translate into improved gross margins and profitability as the business mix changes.
- Whether operating cash use and the longer working-capital cycle remain supportable with $2.90 million cash and the available credit line.
- Current and forecast compliance with the amended lender covenants, including the declining non-formula availability and 2018 requirements.
- Revenue and receivables exposure to Yahoo!, Google and OpenX, and the durability of those relationships.
- NetSeer integration performance, acquired-asset carrying values and possible goodwill or intangible-asset impairment.