Inuvo, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; year-over-year comparisons are against Q1 2019. Inuvo provides digital advertising and marketing technology through its ValidClick and IntentKey platforms. Its IntentKey platform uses machine learning to identify consumer intent.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $14.93 million | $15.46 million | Down 3.4% |
| Gross profit | $11.49 million | $8.78 million | Up 30.8% |
| Gross margin | 77.0% | 56.8% | Up 20.2 percentage points |
| Operating loss | $2.53 million | $1.95 million | Loss widened |
| Net loss | $2.83 million | $2.46 million | Loss widened |
| Net loss per share | $0.05 | $0.08 | Improved; weighted-average shares increased |
| Operating cash flow | $0.82 million provided | $1.05 million used | Improved |
| Investing cash flow | $0.31 million used | $0.31 million used | Broadly unchanged |
| Cash, quarter-end | $0.47 million | $0.25 million | Up |
Gross profit increased as cost of revenue fell 48.5%, principally reflecting lower ValidClick revenue. However, operating expenses rose 30.7% to $14.03 million: marketing costs increased 47.0% to $9.62 million, compensation rose 29.6% to $2.34 million, and selling, general and administrative expense declined 13.4% to $2.06 million. Operating and net margins were approximately negative 17.0% and negative 18.9%, respectively, versus negative 12.6% and negative 15.9% in Q1 2019. Q1 2020 net loss included about $1.1 million of depreciation, amortization and stock-based compensation, which were non-cash expenses.
Operating cash flow benefited from working-capital changes, especially a $1.74 million reduction in accounts receivable and increases in accounts payable and accrued liabilities. The positive operating cash flow therefore occurred despite the net loss. Cash at March 31 was $0.47 million. Current assets were $6.62 million and current liabilities $14.31 million, implying negative working capital of approximately $7.69 million. Stockholders’ equity was $11.58 million.
The balance sheet reported $1.50 million drawn on the line of credit, $0.27 million carrying value for convertible notes, and $2.02 million of deferred tax liabilities. Operating and finance lease liabilities were also reported. The filing says the company drew $5.00 million under its new Hitachi facility in March and used $2.96 million to repay Western Alliance; the filing text does not clearly reconcile that stated draw with the $1.50 million line-of-credit balance reported at quarter-end.
Material changes and operating mix
- IntentKey revenue increased 45% to $1.86 million and grew to 12.4% of total revenue from 8.3%. ValidClick revenue fell to $13.08 million from $14.19 million.
- Mobile revenue declined to $7.67 million from $10.55 million, while desktop revenue increased to $6.89 million from $4.59 million.
- Yahoo! generated 51.4% of Q1 2020 revenue and Google 18.4%, together 69.8%, down from 85.3% in Q1 2019. The two customers accounted for 55.0% of gross receivables at quarter-end.
- Shares outstanding were 60.35 million at March 31; 63.61 million were reported outstanding as of May 8. The company sold shares in March and April, including a private placement to directors and a registered direct offering.
Liquidity, outlook, risks and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern. It said available operating cash flow and credit were expected to support operations into at least Q3 2020, but this depended on revenue, borrowing availability and execution of its plans.
- COVID-19: The company reported only minor Q1 impact, but beginning in April experienced significant reductions in advertiser budgets, supply partners, ValidClick traffic and monetization. Management could not reliably forecast Q2 performance, and said the lower revenue run rate would adversely affect liquidity.
- Financing: The Hitachi receivables-based facility has a $5.00 million maximum commitment, with interest at prime plus 2% subject to a 6.75% minimum; outstanding principal and interest are due on demand. The company reported approximately $1.47 million of gross equity proceeds raised in March and April and obtained a $1.1 million unsecured PPP loan in April, primarily for payroll. PPP forgiveness is not assured.
- Management plan: The company is prioritizing growth of higher-margin IntentKey and said it expected, if successful, to return to positive operating cash flow in the second half of 2020. No assurance was given. Management also described expense reductions and a temporary compensation reduction program beginning May 2020.
- Convertible notes: The remaining $315,000 principal was amended in April to extend maturity and reduce the conversion price; the holder converted the balance into shares by May 5, 2020.
- Other item: A March ValidClick licensing agreement generated a nonrefundable $500,000 fee recorded as deferred revenue; further fees and potential royalties depend on later activity and targets.
- Key risks: Revenue dependence on Yahoo! and Google, seasonality, receivables-based borrowing capacity, ability to acquire profitable traffic, COVID-related advertising declines, and potential need for additional financing or substantial expense reductions.
Important facts for investors to verify
- Whether post-quarter revenue and cash collections stabilized after the reported April advertising-market deterioration.
- Actual borrowing availability and the reconciliation between the stated $5.00 million Hitachi draw and the $1.50 million balance-sheet line-of-credit amount.
- Whether the company secured additional capital, maintained sufficient liquidity, and made progress toward positive operating cash flow.
- Revenue and receivables concentration in Yahoo! and Google, and whether IntentKey growth can reduce that concentration.
- The status and terms of PPP loan repayment or forgiveness, and the effect of equity issuance and note conversions on dilution.