Inuvo, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Inuvo sells digital advertising and marketing technology through its ValidClick and IntentKey platforms. Results were significantly affected by COVID-19-related reductions in advertising demand.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $7.59 million | $14.05 million | $22.52 million | $29.51 million |
| Gross profit | $6.52 million | $8.37 million | $18.01 million | $17.16 million |
| Gross margin | 85.9% | 59.6% | 80.0% | 58.1% |
| Operating loss | $1.24 million | $2.10 million | $3.77 million | $4.05 million |
| Net loss | $1.36 million | $1.95 million | $4.18 million | $4.42 million |
- Q2 revenue declined 46.0% year over year; first-half revenue declined 23.7%. Management attributed the decline primarily to reduced advertiser budgets, especially in ValidClick.
- IntentKey revenue was approximately flat in Q2 and up 16% for the first half. Its share of revenue rose to 25.6% in Q2 and 16.9% for the first half, versus 14.0% and 11.0%, respectively, in 2019.
- Q2 gross margin improved substantially, while gross profit fell 22.1%. Management cited lower costs with lower ValidClick revenue and renegotiated ValidClick partner terms. A $1.3 million partner credit in Q2 reduced cost of revenue and marketing costs and accounts payable; this is an unusual item to consider when assessing margins.
- Q2 operating expenses fell 26.0% year over year, including lower traffic acquisition and SG&A costs, partly offset by higher compensation. First-half operating expenses rose 2.7%.
Cash flow, balance sheet and financing
- Cash was $4.18 million at June 30, 2020, versus $0.37 million at year-end 2019. Current assets were $7.68 million and current liabilities $8.88 million, leaving negative working capital of approximately $1.2 million.
- First-half operating cash use was $2.34 million, compared with $0.71 million in 2019; investing cash use was $0.56 million. Financing provided $6.70 million, principally from stock offerings and borrowing. Ending cash also reflected $4.23 million collected from accounts receivable, partly offset by reductions in payables and accrued liabilities.
- At June 30, the company had $2.16 million outstanding on Hitachi’s receivables-based credit line, with a $5 million maximum commitment and a stated minimum interest rate of 6.75%. The balance is payable on demand. It also reported $1.26 million of PPP and SBA loans in long-term liabilities; the PPP loan bears 1% interest and the company applied for forgiveness in July.
- In March–June, Inuvo raised approximately $7.0 million gross from common-stock sales, including a private placement to directors. On July 27, it raised a further $10.75 million gross by issuing 21.5 million shares. Outstanding common shares were 75.8 million at June 30 and 97.6 million as of August 11.
Outlook, risks and other material items
- Management said daily revenue began improving in mid-June but could not predict the second-half trend. It is prioritizing IntentKey, which management believes offers higher margins, and reducing costs. Management expected available cash, operating cash flows and credit access to support operations for the next 12 months, but cautioned that this depends on revenue and execution; further financing may be needed if the plan is unsuccessful.
- COVID-19 reduced some IntentKey clients’ budgets and ValidClick supply partners, traffic and monetization rates. Management warned that revenue could remain depressed and that costs might not be reduced quickly enough if revenue declines or fails to recover.
- Yahoo! and Google accounted for 61.7% of Q2 revenue and 67.1% of first-half revenue. Their combined share of gross receivables was 34.1% at June 30. Loss of either relationship or changes to their policies could materially harm results.
- The company revised its 2019 balance sheet for a deferred-tax accounting error it deemed immaterial to previously issued statements. The correction reduced the reported deferred tax liability and accumulated deficit by $1.91 million. Management also disclosed a material weakness in internal control over financial reporting and concluded disclosure controls were ineffective; remediation had begun after quarter-end.
- The effectiveness of the increase in authorized common shares from 60 million to 100 million was in question because of possible approval-process deficiencies. Stockholder ratification was proposed; failure could affect the validity of past share issuances and the company’s ability to issue shares or complete strategic transactions.
- No formal revenue or earnings guidance was provided. The filing reported no legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the mid-June revenue improvement continued, and whether advertiser budgets, ValidClick supply and monetization recovered.
- How much the $1.3 million partner credit contributed to Q2 cost reductions and gross-margin improvement, and whether similar credits or terms recur.
- Liquidity needs, availability under the receivables-based facility, and the status and terms of PPP loan forgiveness.
- Progress in growing IntentKey revenue and reducing reliance on Yahoo! and Google.
- Outcome of the authorized-share ratification proposal, potential share-issuance validity issues, and dilution from recent offerings and outstanding equity awards.
- Remediation of the disclosed internal-control weakness and any further tax-accounting revisions.