Business Context and Reporting Period
Company: Think Partnership Inc. (formerly Inuvo, Inc.)
Filing Type: Form 10-Q
Period Ended: September 30, 2006
Business Overview: The Company provides technology solutions through four operating segments: Network (affiliate marketing), Direct (lead generation), Advertising (online/offline marketing), and Consumer Services (dating and real estate education). The Company is headquartered in Clearwater, Florida.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2005 | Three Months Ended Sep 30, 2006 | Three Months Ended Sep 30, 2005 |
|---|---|---|---|---|
| Net Revenue | $52,912,752 | $30,736,524 | $21,560,721 | $11,249,239 |
| Gross Profit | $33,891,801 | $20,412,544 | $13,901,152 | $7,690,936 |
| Gross Margin | 64.1% | 66.4% | 64.5% | 68.4% |
| Net Income | $276,453 | $1,136,163 | $912,192 | $572,662 |
| Net Income (Loss) to Common Shareholders | $(2,719,230) | $1,136,163 | $(527,284) | $572,662 |
| Diluted EPS | $(0.06) | $0.03 | $(0.01) | $0.01 |
| Cash from Operating Activities | $2,902,102 | $213,152 | N/A | N/A |
| Cash and Cash Equivalents (Sep 30, 2006) | $4,290,890 | N/A | N/A | N/A |
| Total Assets | $120,513,096 | $57,494,319 | N/A | N/A |
| Total Liabilities | $28,952,688 | $18,846,789 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 72.2% for the nine months ended September 30, 2006, driven primarily by the launch of the Direct segment (lead generation) and growth in the Network segment. The Direct segment contributed $11.6 million in revenue, a new line of business.
- Profitability Decline: While Net Income was positive ($276k), Net Income allocable to common shareholders turned negative ($(2.7)M) due to the issuance of Series A Convertible Preferred Stock. This resulted in $1.1 million in preferred dividends and $1.9 million in accretion charges.
- Acquisition Activity: Total assets more than doubled from $57.5 million to $120.5 million, largely due to $45.4 million in goodwill and $11 million in intangible assets from four major acquisitions (Morex, Litmus, Web Diversity, iLead).
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose to $30.4 million (57% of sales) from $17.5 million, driven by corporate overhead, legal fees for acquisitions, and the adoption of SFAS 123R (stock-based compensation expense of $493k).
- Debt Financing: The Company entered a $17.5 million credit facility with Wachovia Bank in January 2006. As of September 30, 2006, $10.7 million remained on the revolving line and $0.8 million on the term note.
Guidance, Outlook, Risks, and Unusual Items
- Preferred Stock Financing: In April 2006, the Company sold $26.5 million of Series A Convertible Preferred Stock. This instrument is treated as a liability/debt hybrid for accounting purposes, carrying a 10% cumulative dividend (reduced to 6% after registration) and accretion charges that significantly reduced earnings available to common shareholders.
- Contingent Consideration: The Company has significant earn-out obligations totaling approximately $29.7 million (maximum potential) related to recent acquisitions. The cash portion of these potential payments is approximately $15.3 million, payable between 2006 and 2009 based on performance targets.
- Segment Sale: The Company received an offer to sell its Consumer Services segment. A letter of intent was signed but has expired; no definitive agreement has been reached. Management intends to focus on the other three segments.
- Accounting Changes: Adoption of SFAS 123R in Q1 2006 resulted in the recognition of stock-based compensation expense, reducing net income by approximately $306k for the nine-month period compared to prior accounting methods.
- Market Risk: The Company has exposure to variable interest rates on its debt and foreign exchange risk (approx. 6% of costs in CAD, 8% of revenue/costs in GBP).
Investor Verification Checklist
- Preferred Stock Impact: Verify the dilution and cash flow impact of the Series A Preferred Stock dividends and accretion on future earnings per share.
- Earn-out Liabilities: Assess the likelihood of meeting performance targets for the $15.3 million in potential cash earn-outs and the impact on future liquidity.
- Consumer Services Sale: Monitor the status of the potential sale of the Consumer Services segment, as the letter of intent has expired.
- Debt Covenants: Review the financial covenants associated with the Wachovia credit facility to ensure compliance.
- Integration Costs: Evaluate the sustainability of SG&A expenses as the Company integrates four major acquisitions completed in the first nine months of 2006.