Inuvo, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Inuvo provides internet advertising and technology services through its Partner Network and Owned and Operated Network, including ALOT websites and applications.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior period |
|---|---|---|
| Revenue | $10.12 million | $15.92 million; down 36.4% |
| Gross profit / margin | $6.44 million / 63.7% | $8.44 million / 53.0% |
| Operating income (loss) | $670,751 | $(392,134) |
| Net income (loss) | $674,759; $0.03 per diluted share | $(290,710); $(0.01) per share |
| Operating cash flow | $380,069 | $653,393 |
| Cash | $2.72 million | $3.14 million at Dec. 31, 2013 |
| Debt | $5.55 million, all classified current | $6.14 million at Dec. 31, 2013 |
| Stockholders’ equity | $6.05 million | $5.34 million at Dec. 31, 2013 |
Cash declined by $414,172 during the quarter. Investing activities used $178,423 and financing activities used $615,818. The company reported approximately $627,000 available on its Bridge Bank revolving line at quarter-end. Current assets of $7.14 million were below current liabilities of $13.73 million. Gross profit margin improved despite lower revenue; the company attributed improved Partner Network margins partly to publisher policy and payment enforcement, and said those margins were expected to return to normal operating levels in subsequent quarters.
Partner Network revenue fell 38.9% to $5.45 million; segment gross margin rose to 34.1% from 20.2%. Owned and Operated Network revenue fell 33.3% to $4.67 million; segment gross margin was 98.2%, versus 94.8%. Owned and Operated accounted for 46.1% of revenue, up from 44.0%.
Material changes and management commentary
- Revenue declined in both segments. Management linked Owned and Operated declines to the transition away from Appbar and expected Appbar revenue to continue declining while website revenue increased during 2014.
- Operating expenses fell 34.6% to $5.77 million, reflecting lower Appbar marketing, relocation-related savings, and reduced compensation and overhead. Compensation and selling, general and administrative costs together were expected to remain below $3 million per quarter for the rest of 2014.
- Management planned to expand ALOT websites and applications and expected marketing costs to increase during the rest of 2014. It cited recovering Partner Network activity and expected mobile advertising and new publisher solutions to support growth, but provided no quantified guidance.
- Bridge Bank waived prior covenant defaults and amended its facility in Q1. The term loan rate increased to prime plus 6%, and the remaining term loan was to be fully amortized by March 2015. Revised financial covenants apply, with testing and required ratios stepping up through August 2014.
- Management said cash, operating cash generation and the revolver were expected to fund operations for the next 12 months. It anticipated seeking additional debt financing in 2014, but gave no assurance financing would be available on acceptable terms. An S-3 shelf registration was filed; no equity sale agreement was in place.
Risks, contingencies and unusual items
- Yahoo! and Google generated 95.7% of Q1 revenue; the filing identifies their shares as 52.8% and 42.9%, respectively. They also accounted for 90.2% of gross accounts receivable at March 31. Changes in either relationship could materially affect results.
- The company has a $120.52 million accumulated deficit and a history of losses. It also has significant covenant and refinancing risk: approximately $5.55 million of debt was current, and a covenant breach could permit acceleration and enforcement against collateral.
- NYSE MKT compliance remained subject to exchange monitoring. The exchange extended the compliance deadline to May 30, 2014, with no further extension available; failure to comply could lead to delisting. The company believed Q1 continuing income and equity above $6 million put it in compliance.
- The Arkansas relocation grant provides up to $1.75 million but requires at least 50 qualifying full-time positions within four years and their maintenance for six more years, with average total compensation of $90,000. Inuvo reported 26 employees located in Arkansas at quarter-end and said it expected to meet the requirements; failure could require repayment of some or all of the grant.
- A proposed settlement of a shareholder class action was reached in principle, subject to court approval; the insurer was expected to pay $2.4 million to class members, with no direct company payment expected. Other disclosed litigation includes a former landlord claim of about $60,000 and employment claims totaling up to $587,500 in asserted damages.
- Q1 discontinued-operations income of $26,112 primarily reflected adjustment of old accrued liabilities. The quarter also included an approximately $107,000 adjustment for previously over-accrued payables, $82,000 of severance, and a $75,698 income tax benefit. The company’s approximately $32 million net deferred tax asset remained fully reserved.
Important facts for investors to verify
- Subsequent revenue trends by segment, especially whether Partner Network recovery and ALOT website growth offset the Appbar decline.
- Bridge Bank covenant compliance, remaining revolver availability, debt amortization, and access to additional financing.
- Yahoo! and Google relationship terms, revenue dependence, and accounts receivable concentration.
- NYSE MKT’s determination of continued listing compliance and the company’s progress toward Arkansas grant employment requirements.
- Approval and final terms of the shareholder settlement, and developments in the other disclosed litigation.