Inuvo, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Inuvo provides digital advertising technology, including its AI-based IntentKey platform, and earns revenue when consumers view or click advertisements.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $13.79 million | $16.81 million | $43.30 million | $56.32 million |
| Gross profit | $8.83 million | $10.61 million | $25.99 million | $34.35 million |
| Gross margin | 64.1% | 63.1% | 60.0% | 61.0% |
| Operating loss | $2.37 million | $1.34 million | $6.42 million | $3.39 million |
| Net income (loss) | $0.79 million | $(1.44) million | $(3.63) million | $(3.68) million |
| Operating cash flow | Not separately presented | Not separately presented | $(4.64) million | $(0.28) million |
Q3 2019 basic and diluted earnings per share were $0.02; nine-month loss per share was $0.10. Q3 net income included $3.3 million of net other income, substantially related to the terminated merger and ReTargeter asset transfer, partly offset by a $460,800 derivative-liability expense. The quarter’s reported profit therefore does not reflect positive operating performance.
At September 30, cash was $714,000 and accounts receivable was $6.08 million. Current liabilities were $15.17 million versus current assets of $7.04 million, a working-capital deficit of approximately $8.1 million. Total liabilities were $18.03 million. Financing included $2.43 million of receivables financing, a $1.24 million current convertible note, and $250,000 of notes payable; the director notes were repaid November 1, 2019. The credit facility is secured by company assets, and financing of unbilled receivables is discretionary for the lender.
Material changes and business developments
- Revenue fell 17.9% year over year in Q3 and 23.1% for the first nine months. Management attributed the decline to weaker monetization from major demand partners, the shift in focus around the abandoned merger, and lower revenue from non-strategic publisher technologies.
- IntentKey revenue was approximately $2.6 million in Q3, up 61.6% year over year. Management reported approximately 30% sequential quarterly growth during 2019 following integration with the AppNexus platform. This growth partly offset declines in ValidClick and alot operations.
- Revenue mix shifted toward partner sites: partners represented 63.2% of Q3 revenue versus 45.0% a year earlier. Mobile revenue declined to $8.03 million from $12.53 million, while desktop revenue increased to $5.53 million from $4.01 million.
- Yahoo! and Google together generated 74.0% of Q3 revenue and 80.4% of nine-month revenue. Yahoo! alone contributed 59.9% of Q3 revenue. The two customers represented 62.5% of gross receivables at quarter-end.
- Inuvo raised approximately $4.4 million net from a July public offering of 15.8125 million shares at $0.30 per share. Shares outstanding were 48.96 million at September 30; the company later increased authorized common shares to 100 million.
- The failed ConversionPoint merger generated a $2.8 million termination fee, satisfied through cancellation of approximately $1.06 million of debt, transfer of ReTargeter assets valued at approximately $1.61 million, and a $125,000 cash payment. Inuvo separately paid $250,000 to settle merger-related litigation; the disclosed cases were dismissed with prejudice.
Outlook, risks and unusual items
Management said its plan prioritizes IntentKey, which it believes offers technology advantages and higher margins, and targets a return to positive cash flow in the second half of 2020. Management believed operating cash flows and the credit facility would support operations into at least Q3 2020, but cautioned that neither the growth plan nor additional financing is assured. The filing states that substantial doubt exists about the company’s ability to continue as a going concern.
- Key risks include continued revenue decline, negative operating cash flow, the working-capital deficit, dependence on receivables-based borrowing, and the lender’s ability to terminate or decline unbilled-receivable financing.
- Customer concentration is significant: loss of Yahoo! or Google, or a change in their advertising policies or monetization, could materially harm results.
- The company reported a material weakness in internal control over financial reporting related to accounting for modified stock awards. The error was corrected before filing, but management concluded controls were not effective as of September 30.
- The Calvary convertible notes had $1.44 million principal issued in March 2019, with an initial conversion price adjusted to $0.30 after the equity offering. After quarter-end, holders converted $765,000 into 2,886,792 shares at $0.265; $315,000 remained under a modified note and a separate $360,000 note was not modified.
- Other stated risks include reliance on supply partners, profitable traffic acquisition, privacy and data-security compliance, technology and infrastructure changes, seasonality, and possible dilution from equity awards and convertible debt.
Investor verification priorities
- Track revenue, monetization and customer concentration, especially Yahoo! and Google, alongside IntentKey growth and margins.
- Assess cash burn, working-capital needs, receivables availability, and whether the credit facility remains available on workable terms.
- Evaluate progress toward management’s second-half 2020 positive-cash-flow target and the assumptions behind the stated liquidity runway.
- Reconcile reported net income with the one-time merger-related gain, operating losses, and cash-flow results.
- Verify post-quarter convertible-note conversions, remaining note balances, share dilution, and the remediation of the stock-compensation control weakness.