Inuvo Q1 Report Update

Inuvo reported first quarter results last week with top line revenue of $15.9m coming in just below management’s previous expected range of $16.2 – $16.5m and the bottom line EBITDA figure of $1.4m slightly better than had been anticipated. Inuvo’s Network segment contributed 68% of total revenue in the quarter delivering strong year over year and quarter over quarter growth. Inuvo’s Applications segment generated a disappointing, but not totally unexpected decline with $5.1m in top line revenue. The Applications segment numbers were heavily impacted by recent changes required by key monetization partner Google and the resulting pullback in Inuvo’s ad spend to promote this segment while the company retooled its customer acquisition model to reflect these changes.

Inuvo management’s comments on the Q2 performance to date suggested some slowing of the top line growth with day to day revenue numbers thus far coming in below Q1. On a brighter note, it appears that the company has subleased the NYC office space at cost and the income statement improvements from the other cost reductions measures should start to be fully realized by the end of Q2. Additionally, the company is working towards the roll out of several new websites and applications that should be live by the end of Q2 or early Q3 at the latest. Overall, the action in trading since the release appears to suggest investors have chosen to focus on the growth of Inuvo’s Mobile traffic and revenues rather than the recent revenue slowdown that was evident in the ALOT Appbar operations. Near term positive catalysts include the opening of a window that would allow insiders to purchase shares (a few Form 4′s would likely do much to boost the stock until all of the expense reductions start to show up in the reported numbers) and upcoming investor conference presentations that might bring more attention to the company.

Remark Media’s “True Public Float” May Be Below 1.5 million Shares Now

Following up on a request from community members for an update to our original post about the smallish public float in Remark, we are adjusting our estimated “True Public Float” number to reflect the new information released by Remark last week. Remark’s 10ka filed last week indicated that 5%+ owners now hold a little over 52% of the 7.1 million shares outstanding.  What the new filing did not show, however, is:

Discovery Communications Shareholders – 1,510,123 shares were distributed to Discovery Shareholders since the last week of 2012.  These shares are no longer included in the 5% owner calculations because they were distributed to multiple individual shareholders of Discovery, who (as mentioned in this blog post a couple of weeks ago) acquired this stock when it was called How Stuff Works International (HSWI) and trading between $50 and $97 per share.  For the reasons discussed in detail here, we do not believe these shareholders will be wiling to sell their Remark shares in the $3.50 – $4 range and probably not even in the $6 – $7 range achieved last year.  These DISCA shareholders as a group now own a little over 21% of Remark shares outstanding in addition to the reported 11% position still owned by Discovery.

Jeff Arnold was a 5.3% shareholder last year when the count was based on 6.4m shares of common stock outstanding, but the issuance of new shares to the owners of Banks.com pushed Arnold’s stake to just below the 5% threshold so he is no longer included in the list of 5% owners, but we have no reason to believe he has sold any shares. 

Over the last few weeks, many GrooveVC participants have indicated that they have been buying (in small lots) shares of Remark Media, with an eye towards a much fuller valuation that reflects the full value of our 10.8% stake in Sharecare and the potential for Dimespring to become the “Sharecare of Personal Finance” with a market valuation that better reflects these assets.  While Groove participants can buy and sell whenever they choose and we do not attempt to ascertain a definitive number, it appears that participants have acquired between 2 and 3% of Remark’s outstanding shares. 

Thus, in addition to the 52% of shares outstanding owned by insiders and 5% owners, an additional 25-30% of Remark’s shares appear to be owned by investors who are unlikely to sell their shares anytime soon, even if the stock bumped up another 40-50% and maybe even to the upper end of last year’s trading range.  This means approximately 80% of Remark’s 7.1 million shares are in “strong hands” that effectively removes them from the shares available to be purchased on the open market. While our thesis could certainly prove to be incorrect as to the nature of some of these shareholders, we note that our analysis of this year’s 10ka filing with last year’s 14D filings indicate that none of the larger holders indicated on this year’s list of insider/5% owners sold even a single share when the stock traded much higher last year. 

In summary, we believe that the “True Public Float” of Remark shares is now in the 1.5 million share range, one of the smallest we have seen for a Nasdaq listed stock.  We believe the increasing demand for MARK shares that will materialize over the coming weeks and months will move the stock to new highs and draw even more investor attention to the evolving Remark story. 

Google Play, the Reach of Sharecare and Remark Media

I have a “Google Play” account and once a month I get an email from their editors telling me about various apps, upgrades, etc.  Today Google Play sent an email titled “Dr. Oz’s favorite Health Apps”.  It was a half page pic of Dr. Oz, a little intro piece on Dr. Oz  (in case you have lived in a hole for most of the last decade) and then it showed the apps he has chosen as his favorite health care apps.  His #1 pick was the “SOS” app, from Sharecare.  I think people are really overlooking the “star power”  and reach that Sharecare will be bringing to the table when it eventually brings its IPO to market.  Between Dr. Oz, Oprah Winfrey, and the reach of Discovery Communications, Sony and Hearst Corporation, the Sharecare IPO is sure to be very widely followed and these high profile shareholders have not just the means but the incentive to drive as much traffic and revenue as they can for Sharecare.

Remark Media (Nasdaq: MARK) has probably the lowest profile of all the top shareholders of Sharecare, but we do not think Remark will be able to remain “below the radar” for very long. We note that investors have recently begun to take notice, as it appears that the very small number of Remark shares that are available to the public are being scooped up, which is causing the stock to move a little higher almost daily now.  Remark Media shares remain the purest vehicle for retail investors to get a stake in what we could be one of the hottest IPOs brought to market over the next few quarters and we believe that this understanding plus the growth of Dimespring.com and its sister sites Banks.com and IRS.com will cause even more investors to “discover” Remark Media over the next few months.

Participants in the GrooveVC community have much to gain by using these sites (and the  search box in the upper right hand corner of Dimespring.com, IRS.com and Banks.com) when searching for information on personal/consumer financial information on things like online brokerage accounts, auto insurance, life insurance, income tax related items, mortgages, credit cards, etc.  Along with much great content from many of the leading financial planners and sources of such information, Remark’s deal with TheStreet.com to provide the advertising has resulted in Google pay per click and contextual ads being offered, thus giving users of these sites easy access to many of the most relevant providers of each type of service the user may be seeking.  Keep spreading the word to associates, colleagues, etc. who can buy the stock, use these services and benefit as we help grow the reach and reputation of Dimespring while Remark shares move to a valuation that better reflects the value of its Sharecare stake and the potential for the company’s growing communities that target the financial and lifestyle verticals.

The Implications of the Small Public Float of Remark Media Shares

Groove participants who have been buying shares in Remark over the last month or so can attest to the difficulty in buying even small lots without driving up the price of Remark shares. One of the main reasons this occurs is that there simply aren’t very many shares of MARK to be had.  The company only has 7.1m shares outstanding and a significant portion of those (11%) are owned by Discovery Communications (Nasdaq: DISCA) and another 29% are owned by Discovery Communications shareholders.  In October of 2007, How Stuff Works International (HSWI, now Remark Media) was created by Discovery contributing the rights to IP related to World Book Encyclopedia content and Discovery’s “How Stuff Works” content in local languages for China and Brazil. As part of that process, DISCA shareholders took a 40% stake in Remark. Remark stock traded as high as $97.80 that month and over the several months that followed, the stock was very volatile and traded between $50 and that high of $97.80 on volumes that were very similar to what we see today.

The takeaway from this should be twofold -
1) Remark (HSWI back then) has always been very thinly traded and volatile based with very low volumes moving the shares substantially.
2) DISCA holders of the stock took ownership when the stock was literally trading as high as 50x its current value.

As Remark noted in its recent filings, the 29% that are now owned by DISCA shareholders were distributed because “… market conditions arising after the consummation of the Merger and securities laws restrictions” made it impossible to sell those shares even if they wanted to.  The restrictions on a HSWI sized stake would severely limit the number of shares that could be sold on any given day based on volumes traded and it would limit the percentage of shares they could sell on any given day IF THEY WANTED TO SELL.  Of course, if we assumed they wanted to dump all of this stock, that would be a huge negative.  However, we do not believe they would have any interest whatsoever in selling this stock at these levels even if there are certain days where they could.  The company has added assets that we believe will prove to be substantially more valuable than what DISC contributed, they know that Sharecare’s IPO will be a watershed event that should bring a major increase to the price of the shares and the volume traded in general and they just witnessed the CEO of the company plowing  almost $6 million of his own capital into the company over the last six months.  While this capital infusion was structured as a hybrid security, the terms were such it will be converted (likely within the current quarter) to stock THAT WILL BE EVEN MORE HEAVILY RESTRICTED THAN THEIRS due to his position as Chairman and CEO.  If this had been a straight stock sale, this would likely be some kind of record for an insider purchase of shares in a Nasdaq company in terms of the percentage of outstanding shares acquired.

The bottom line here is that DISC shareholders would likely have difficulty selling if they wanted to due to SEC restrictions, the CEO will be even more heavily restricted, none of the large shareholders has any incentive to sell at these low levels and we have what will amount to nearly 60% of the outstanding shares will be held by the CEO and DISC shareholders.  Between the other insider’s holdings and the 10 – 12% owned by mutual funds, it appears that close to 70% of the shares will be owned by sophisticated investors, the majority of whom have significant selling restrictions even if they decide they want to sell. That means we will be  working with a “true float” that is somewhere in the 3 million share range. This “true float” represents the total number of shares available to be bought and sold each day by anyone else, including Groove participants, institutions who discover the story and any other investors looking to get shares of MARK.  I know that many Groove participants have indicated that they have been trying to buy shares in small lots, to build a position without pushing the stock too much higher.  This will get increasingly more difficult as more investors become aware of this situation and begin to appreciate and understand why the CEO has just made such a huge bet on this company’s future. Some may join us in buying MARK shares to get a stake in anticipation of the Sharecare IPO, some may want to own a piece of Bikini.com (!!!) or even IRS.com.  Regardless why they decide to join us in buying MARK, it seems like that shares are going to get increasingly difficult to buy at these low levels.  As of this morning, MARK is still trading below $3 and we do not believe this will be the case for very long.

Remark Media (MARK) – Groove Focus Stock #2

As some of you may be aware, we updated the GrooveVC website last night and the due diligence report for our new focus stock – Remark Media (Nasdaq: MARK) was released. You can access the report by clicking here or visiting our home page, http://www.groovevc.com and clicking the link in the menu at the top.  

We no longer post the full due diligence reports to the blog due to the many complaints we had previously. Let us know what you think about our new focus stock and also any ideas you have for helping the company “get the word out” about the great community Remark is building at http://www.dimespring.com and their ridiculously cheap stock. Thanks again for being a party of the GrooveVC community.  

Inuvo Reports Q4 2012

Inuvo reported a mixed quarter with revenue essentially in line with estimates, the bottom line slightly below estimates but good guidance for Q1.  The ALOT business was lagging as the new requirements for all Google Network partners caused Inuvo to take a conservative approach to marketing the Appbar in anticipation of the changes and to allow time to properly assess the impact on acquisition cost and the lifetime value of acquired appbar users.  The good news in this is two fold 1) CEO Howe indicated that the Google Contract extension was in most material respects the same as we previously operated under and 2) the company was able to achieve a very strong overall revenue figure in spite of the pullback that was necessary with the ALOT Appbar marketing.  This suggests the potential for strong revenue growth in Q2 as the ALOT marketing machine moves back into full gear after another month or so to assess the Google changes.  

In addition to providing color beyond the specifics mentioned in the PR, several exciting developments were discussed on the conference call:

1) the company expects to be back on a growth trajectory with ALOT in Q2.  

2) the company is currently ahead of the projections given to NYSE in December

3) the company expects to achieve profitability in CY 2013

4) Inuvo is developing a new version of the Appbar for the Chrome browser

5) Mobile traffic for the Network segment increased from 5% of total in January 2012 to 25% of total in January 2013

6) Bargain Match currently has over 150k active users and the Bargain Match App is being offered with every Alot Appbar download

7) Big expansion planned for local.alot.com into European markets.

While the released numbers would best be described as a mixed bag, it appears that Inuvo is making strides towards profitability and that several of the new developments offer the potential for significant upside over the course of 2013. We would not be surprised to see near term volatility in Invuo’s stock price,but would see any weakness in the shares over the period between now and the reporting of Q2 to be an opportunity to buy shares that will be worth substantially more by year end.  

The Next Focus Stock and Buying AUGT Anyway

We have received several submissions of ideas to be our #2 focus stock to replace Travelzoo.  I am writing a note about one (AUGT) that we will not be our next focus stock and I am doing it because I think many in our community might want to buy shares anyway.  The reason we are not making it the focus stock is it is kind of like the reason we are now longer focusing on Travelzoo in that we do not see a clear and direct way for our members to use their products in a way that could have a material impact on the company.  That aside, AUGT is the picture of a stock we would buy and we think it has the potential to offer strong triple digit (100%+) returns over the next twelve months and possibly much sooner than that.  The stock closed yesterday at $.291 and again touched the multi year low it had set the previous day.  The stock has been getting murdered and it appears that investors/traders are throwing out the baby with the bathwater.  

Here is the lowdown –

Augme Technologies (AUGT) owns HipCricket, one of the most significant players in the mobile marketing/advertising space.  HipCricket has been on a tear growing over 15% sequentially and projecting this to continue for the forseeable future.  HipCricket management has executed quite well in a space where the same can not be said for many of the larger players (Millenial Media, Velti), but its stock has been beaten down due to multiple dilutive stock offerings that were necessary to help the company fund an IP Litigation strategy built around its large stable of mobile and VOIP patents.  While it appears there is the potential for substantial value to be realized from the patent portfolio, the company’s shareholders have experienced the difficulties that can come through the pursuit of the enforcement through litigation approach by a company that has an operating business that actually uses the patents. The company made a decision to refocus its resources on the fast growing HipCricket business and the founder of HipCricket will be taking over as CEO of AUGT as of tomorrow.   AUGT was trading at 89 cents less than 50 days ago (January 9 closing price – $0.89), but saw its valuation destroyed as word of the last stock offering pushed the price down below 60 cents and resulted in the actual placement occurring at 49 cents on Jnauary 30.  Since that time, the perfect storm has emerged to push AUGT down further as investors digested poor quarterly reports by two of the larger players in the space (MM and Velti), the departure of interim CEO Paul Hussey and the settlement of the company’s case with AOL for $650,000 (much less than many expected). As often happens with microcap companies, the decision by some significant holders to sell their stakes was met by more selling which begat more selling and the stock fells another 40%.  AUGT has fallen 67% in the 50 or so days since reporting a very stellar quarter for the HipCricket business that was (as usual) overshadowed by the cash draining IP litigation, even though the company has now completed the restructuring it undertook to refocus its resources to grow the HipCricket business.

The market cap of AUGT now values the company at about half what it paid to acquire a HipCricket business that was less than half its current size at a time when the mobile marketing/advertising space was just beginning its meteoric growth stage.  We believe there remains substantial value in AUGT’s core mobile patents that shareholders will ultimately benefit tremendously from them whether it be through a deal with an NPE to pursue licensing revenue or a buyout by a larger player seeking the protection and licensing revenue that could be achieved by these patents being in the hands of an owner with deeper pockets.  In either case, AUGT is worth substantially more than its current trading price and we think investors at current prices will more than double their money over the next 6-12 months as the market begins to see the HipCricket for its true potential and the street gets a clearer picture of the value that will be realized from the patent portfolio.