UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2022
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number: 001-32442
| | |
Inuvo, Inc. |
(Exact name of registrant as specified in its charter) |
| | | | | |
Nevada | 87-0450450 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
500 President Clinton Ave., Suite 300 Little Rock, AR | 72201 |
(Address of principal executive offices) | (Zip Code) |
(501) 205-8508
Registrant's telephone number, including area code
not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock | INUV | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act: ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. | | | | | | | | |
Title of Class | | May 6,November 11, 2022 |
Common Stock | | 119,804,962120,134,884 |
TABLE OF CONTENTS
| | | | | | | | | | | |
| | | Page No. |
Part I |
|
Item 1. | Financial Statements. | | |
| Consolidated Balance Sheets | | |
| Consolidated Statements of Operations and Comprehensive Loss | | |
| Consolidated Statements of Cash Flows | | |
| Consolidated Statements of Stockholders' Equity | | |
| Notes to Consolidated Financial Statements | | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | | |
Item 4. | Controls and Procedures. | | |
|
Part II |
|
Item 1. | Legal Proceedings. | | |
Item 1A. | Risk Factors. | | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | | |
Item 3. | Defaults upon Senior Securities. | | |
Item 4. | Mine Safety and Disclosures. | | |
Item 5. | Other Information. | | |
Item 6. | Exhibits. | | |
Signatures | | |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of such terms or other comparable terminology. This report includes, among others, statements regarding our risks associated with:
•a decline in general economic conditions;
•decreased market demand for our products and services;
•customer revenue concentration;
•risks associated with customer collections;
•seasonality impacts on financial results and cash availability;
•dependence on advertising suppliers;
•the ability to acquire traffic in a profitable manner;
•failure to keep pace with technological changes;
•interruptions within our information technology infrastructure;
•dependence on key personnel;
•regulatory and legal uncertainties;
•failure to comply with privacy and data security laws and regulations;
•third party infringement claims;
•publishers who could fabricate fraudulent clicks;
•the ability to continue to meet the NYSE American listing standards;
•the impact of quarterly results on our common stock price;
•dilution to our stockholders upon the exercise of outstanding restricted stock unit grants and warrants;
•the on-going impact of the COVID-19 pandemic on our Company; and
•our ability to identify, finance, complete and successfully integrate future acquisitions.
These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing in this report, together with those appearing in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission ("SEC") on March 17, 2022 and our subsequent filings with the SEC.
Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms “Inuvo,” the “Company,” “we,” “us,” “our” and similar terms refer to Inuvo, Inc., a Nevada corporation, and its subsidiaries. When used in this report, “first“third quarter 2022” means for the three months ended March 31,September 30, 2022, “first“third quarter 2021” means for the three months ended March 31,September 30, 2021, “2021” means the fiscal year ended December 31, 2021 and “2022” means the fiscal year ending December 31, 2022. The information which appears on our corporate web site at www.inuvo.com and our various social media platforms are not part of this report.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INUVO, INC.
CONSOLIDATED BALANCE SHEETS
March 31,September 30, 2022 (Unaudited) and December 31, 2021 | | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Assets | Assets | | | | Assets | | | |
Current assets | Current assets | | | | Current assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 5,743,149 | | | $ | 10,475,964 | | Cash and cash equivalents | $ | 5,780,882 | | | $ | 10,475,964 | |
Marketable securities - short term | Marketable securities - short term | 2,478,628 | | | 1,927,979 | | Marketable securities - short term | 1,871,051 | | | 1,927,979 | |
Accounts receivable, net of allowance for doubtful accounts of $121,151 and $202,904, respectively. | 10,049,987 | | | 9,265,813 | | |
Accounts receivable, net of allowance for doubtful accounts of $462,480 and $202,904, respectively. | | Accounts receivable, net of allowance for doubtful accounts of $462,480 and $202,904, respectively. | 9,557,103 | | | 9,265,813 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 2,257,404 | | | 1,408,186 | | Prepaid expenses and other current assets | 1,092,683 | | | 1,408,186 | |
Total current assets | Total current assets | 20,529,168 | | | 23,077,942 | | Total current assets | 18,301,719 | | | 23,077,942 | |
| Property and equipment, net | Property and equipment, net | 1,616,607 | | | 1,506,766 | | Property and equipment, net | 1,693,407 | | | 1,506,766 | |
Other assets | Other assets | | | | Other assets | | | |
Goodwill | Goodwill | 9,853,342 | | | 9,853,342 | | Goodwill | 9,853,342 | | | 9,853,342 | |
Intangible assets, net of accumulated amortization | Intangible assets, net of accumulated amortization | 6,387,666 | | | 6,720,585 | | Intangible assets, net of accumulated amortization | 5,895,416 | | | 6,720,585 | |
Referral and support services agreement advance | Referral and support services agreement advance | 1,025,000 | | | 1,100,000 | | Referral and support services agreement advance | 875,000 | | | 1,100,000 | |
Marketable securities - long term | Marketable securities - long term | 762,311 | | | 859,512 | | Marketable securities - long term | 619,546 | | | 859,512 | |
Right of use assets - operating lease | Right of use assets - operating lease | 569,407 | | | 641,306 | | Right of use assets - operating lease | 397,850 | | | 641,306 | |
Right of use assets - finance lease | Right of use assets - finance lease | 177,643 | | | 201,902 | | Right of use assets - finance lease | 128,589 | | | 201,902 | |
Other assets | Other assets | 35,720 | | | 35,719 | | Other assets | 35,170 | | | 35,719 | |
Total other assets | Total other assets | 18,811,089 | | | 19,412,366 | | Total other assets | 17,804,913 | | | 19,412,366 | |
| Total assets | Total assets | $ | 40,956,864 | | | $ | 43,997,074 | | Total assets | $ | 37,800,039 | | | $ | 43,997,074 | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | Liabilities and Stockholders’ Equity | |
Current liabilities | Current liabilities | | Current liabilities | |
Accounts payable | Accounts payable | $ | 4,516,798 | | | $ | 4,844,716 | | Accounts payable | $ | 5,651,540 | | | $ | 4,844,716 | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 4,389,777 | | | 5,374,391 | | Accrued expenses and other current liabilities | 6,281,538 | | | 5,374,391 | |
Lease liability - operating lease | Lease liability - operating lease | 349,103 | | | 340,478 | | Lease liability - operating lease | 342,488 | | | 340,478 | |
Lease liability - finance lease | Lease liability - finance lease | 106,130 | | | 102,954 | | Lease liability - finance lease | 92,887 | | | 102,954 | |
| Total current liabilities | Total current liabilities | 9,361,808 | | | 10,662,539 | | Total current liabilities | 12,368,453 | | | 10,662,539 | |
| Long-term liabilities | Long-term liabilities | | | | Long-term liabilities | | | |
Deferred tax liability | Deferred tax liability | 107,000 | | | 107,000 | | Deferred tax liability | 107,000 | | | 107,000 | |
| Lease liability - operating lease | Lease liability - operating lease | 220,305 | | | 300,827 | | Lease liability - operating lease | 56,602 | | | 300,827 | |
Lease liability - finance lease | Lease liability - finance lease | 77,828 | | | 105,411 | | Lease liability - finance lease | 39,630 | | | 105,411 | |
Other long-term liabilities | Other long-term liabilities | 14,226 | | | 13,302 | | Other long-term liabilities | 13,773 | | | 13,302 | |
Total long-term liabilities | Total long-term liabilities | 419,359 | | | 526,540 | | Total long-term liabilities | 217,005 | | | 526,540 | |
| Stockholders’ equity | Stockholders’ equity | | Stockholders’ equity | |
Preferred stock, $0.001 par value: | Preferred stock, $0.001 par value: | | Preferred stock, $0.001 par value: | |
Authorized shares 500,000, none issued and outstanding | Authorized shares 500,000, none issued and outstanding | — | | | — | | Authorized shares 500,000, none issued and outstanding | — | | | — | |
Common stock, $0.001 par value: | Common stock, $0.001 par value: | | Common stock, $0.001 par value: | |
Authorized shares 200,000,000; issued and outstanding shares 119,807,202 and 118,747,447, respectively. | 119,808 | | | 118,748 | | |
Authorized shares 200,000,000; issued and outstanding shares 120,137,124 and 118,747,447, respectively. | | Authorized shares 200,000,000; issued and outstanding shares 120,137,124 and 118,747,447, respectively. | 120,138 | | | 118,748 | |
Additional paid-in capital | Additional paid-in capital | 177,140,590 | | | 176,586,529 | | Additional paid-in capital | 178,307,716 | | | 176,586,529 | |
Accumulated other comprehensive income | (44,419) | | | 53,737 | | |
Accumulated other comprehensive (loss) income | | Accumulated other comprehensive (loss) income | (132,502) | | | 53,737 | |
Accumulated deficit | Accumulated deficit | (146,040,282) | | | (143,951,019) | | Accumulated deficit | (153,080,771) | | | (143,951,019) | |
| Total stockholders' equity | Total stockholders' equity | 31,175,697 | | | 32,807,995 | | Total stockholders' equity | 25,214,581 | | | 32,807,995 | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 40,956,864 | | | $ | 43,997,074 | | Total liabilities and stockholders' equity | $ | 37,800,039 | | | $ | 43,997,074 | |
See accompanying notes to the consolidated financial statements.
INUVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited) | | | For the Three Months Ended March 31, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
Net revenue | Net revenue | $ | 18,609,367 | | | $ | 10,617,809 | | | Net revenue | $ | 17,072,189 | | | $ | 16,841,035 | | | $ | 58,332,859 | | | $ | 40,094,427 | |
Cost of revenue | Cost of revenue | 8,661,506 | | | 1,444,059 | | | Cost of revenue | 6,782,047 | | | 3,757,938 | | | 24,717,143 | | | 7,466,017 | |
Gross profit | Gross profit | 9,947,861 | | | 9,173,750 | | | Gross profit | 10,290,142 | | | 13,083,097 | | | 33,615,716 | | | 32,628,410 | |
Operating expenses | Operating expenses | | | | | Operating expenses | | | | |
Marketing costs | Marketing costs | 7,169,449 | | | 7,305,784 | | | Marketing costs | 8,620,161 | | | 10,163,006 | | | 26,778,020 | | | 25,681,930 | |
Compensation | Compensation | 3,157,706 | | | 2,737,867 | | | Compensation | 3,237,414 | | | 2,840,149 | | | 9,611,011 | | | 8,458,233 | |
General and administrative | General and administrative | 1,726,672 | | | 1,724,978 | | | General and administrative | 2,206,119 | | | 1,824,869 | | | 5,944,027 | | | 5,226,737 | |
Total operating expenses | Total operating expenses | 12,053,827 | | | 11,768,629 | | | Total operating expenses | 14,063,694 | | | 14,828,024 | | | 42,333,058 | | | 39,366,900 | |
Operating loss | Operating loss | (2,105,966) | | | (2,594,879) | | | Operating loss | (3,773,552) | | | (1,744,927) | | | (8,717,342) | | | (6,738,490) | |
| Interest expense, net | (999) | | | (22,389) | | | |
Other income, net | 17,702 | | | 470,000 | | | |
Financing expense, net | | Financing expense, net | (13,149) | | | (6,261) | | | (11,078) | | | (36,641) | |
Other income (expense), net | | Other income (expense), net | (23,861) | | | (79,080) | | | (401,336) | | | 415,468 | |
| Net loss | Net loss | (2,089,263) | | | (2,147,268) | | | Net loss | (3,810,562) | | | (1,830,268) | | | (9,129,756) | | | (6,359,663) | |
Other comprehensive income | Other comprehensive income | | | | | Other comprehensive income | | | | | | | |
Unrealized loss on marketable securities | (98,156) | | | — | | | |
Unrealized gain (loss) on marketable securities | | Unrealized gain (loss) on marketable securities | 36,170 | | | — | | | (186,239) | | | $ | — | |
Comprehensive loss | Comprehensive loss | $ | (2,187,419) | | | $ | (2,147,268) | | | Comprehensive loss | $ | (3,774,392) | | | $ | (1,830,268) | | | $ | (9,315,995) | | | $ | (6,359,663) | |
| Per common share data | Per common share data | | | | | Per common share data | | | | |
Basic and diluted: | Basic and diluted: | | | | | Basic and diluted: | | | | |
| Net loss | Net loss | $ | (0.02) | | | $ | (0.02) | | | Net loss | $ | (0.03) | | | $ | (0.02) | | | $ | (0.08) | | | $ | (0.05) | |
| Weighted average shares | Weighted average shares | | | Weighted average shares | |
Basic | Basic | 119,282,114 | | | 114,430,201 | | | Basic | 119,995,367 | | | 116,645,509 | | | 118,838,258 | | | 117,230,419 | |
Diluted | Diluted | 119,282,114 | | | 114,430,201 | | | Diluted | 119,995,367 | | | 116,645,509 | | | 118,838,258 | | | 117,230,419 | |
See accompanying notes to the consolidated financial statements.
INUVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | For the Three Months Ended March 31, | | For the Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Operating activities: | Operating activities: | | | | Operating activities: | | | |
Net loss | Net loss | $ | (2,089,263) | | | $ | (2,147,268) | | Net loss | $ | (9,129,756) | | | $ | (6,359,663) | |
Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
Depreciation and amortization | Depreciation and amortization | 689,712 | | | 771,904 | | Depreciation and amortization | 1,949,845 | | | 2,343,874 | |
Depreciation-Right of Use Assets | 24,259 | | | 80,117 | | |
Depreciation-Right of Use Assets - Financing | | Depreciation-Right of Use Assets - Financing | 73,313 | | | 237,423 | |
Stock based compensation | Stock based compensation | 671,158 | | | 394,870 | | Stock based compensation | 1,890,991 | | | 1,566,016 | |
Stock warrant expense | Stock warrant expense | 12,483 | | | — | | Stock warrant expense | 28,477 | | | — | |
Gain on marketable securities | (17,702) | | | — | | |
Loss (gain) on marketable securities | | Loss (gain) on marketable securities | 401,336 | | | (54,532) | |
Amortization of financing fees | Amortization of financing fees | 2,500 | | | 1,250 | | Amortization of financing fees | 2,500 | | | 8,750 | |
Recovery of doubtful accounts | (81,753) | | | (18,000) | | |
Provision (recovery) of doubtful accounts | | Provision (recovery) of doubtful accounts | 259,576 | | | (47,763) | |
Derecognition of contingency and grant | Derecognition of contingency and grant | (10,000) | | | (110,000) | | Derecognition of contingency and grant | (10,000) | | | (110,000) | |
Third party rights agreement termination | Third party rights agreement termination | — | | | (420,000) | | Third party rights agreement termination | — | | | (420,000) | |
Change in operating assets and liabilities: | Change in operating assets and liabilities: | | Change in operating assets and liabilities: | |
| Accounts receivable | Accounts receivable | (702,421) | | | 496,349 | | Accounts receivable | (550,866) | | | (2,645,508) | |
Prepaid expenses, unbilled revenue and other current assets | Prepaid expenses, unbilled revenue and other current assets | (849,218) | | | (136,586) | | Prepaid expenses, unbilled revenue and other current assets | 316,053 | | | (77,503) | |
Referral and support services agreement advance | Referral and support services agreement advance | 75,000 | | | — | | Referral and support services agreement advance | 225,000 | | | (1,500,000) | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | (977,599) | | | (97,455) | | Accrued expenses and other liabilities | 916,363 | | | 1,754,574 | |
Accounts payable | Accounts payable | (327,918) | | | (1,257,828) | | Accounts payable | 806,824 | | | 632,369 | |
| Net cash used in operating activities | Net cash used in operating activities | (3,580,762) | | | (2,442,647) | | Net cash used in operating activities | (2,820,344) | | | (4,671,963) | |
Investing activities: | Investing activities: | | Investing activities: | |
Purchases of equipment and capitalized development costs | Purchases of equipment and capitalized development costs | (466,634) | | | (411,400) | | Purchases of equipment and capitalized development costs | (1,311,315) | | | (1,180,107) | |
Purchase of marketable securities | Purchase of marketable securities | (1,081,080) | | | — | | Purchase of marketable securities | (1,693,963) | | | (2,973,453) | |
Proceeds from the sale of marketable securities | Proceeds from the sale of marketable securities | 548,589 | | | — | | Proceeds from the sale of marketable securities | 1,403,282 | | | 102,200 | |
Net cash used in investing activities | Net cash used in investing activities | (999,125) | | | (411,400) | | Net cash used in investing activities | (1,601,996) | | | (4,051,360) | |
Financing activities: | Financing activities: | | Financing activities: | |
Proceeds from sale of common stock, net | Proceeds from sale of common stock, net | — | | | 13,137,500 | | Proceeds from sale of common stock, net | — | | | 13,137,500 | |
| Proceeds from ValidClick licensing agreement | Proceeds from ValidClick licensing agreement | — | | | (149,900) | | Proceeds from ValidClick licensing agreement | — | | | (149,900) | |
| Payments on finance lease obligations | Payments on finance lease obligations | (24,407) | | | (59,219) | | Payments on finance lease obligations | (75,848) | | | (181,998) | |
| Proceeds from exercise of options | Proceeds from exercise of options | — | | | 1,569 | | Proceeds from exercise of options | — | | | 1,569 | |
| Net taxes paid on restricted stock unit grants exercised | Net taxes paid on restricted stock unit grants exercised | (128,521) | | | (161,244) | | Net taxes paid on restricted stock unit grants exercised | (196,894) | | | (272,049) | |
Net cash (used in)/provided by financing activities | Net cash (used in)/provided by financing activities | (152,928) | | | 12,768,706 | | Net cash (used in)/provided by financing activities | (272,742) | | | 12,535,122 | |
| Net change – cash | Net change – cash | (4,732,815) | | | 9,914,659 | | Net change – cash | (4,695,082) | | | 3,811,799 | |
Cash and cash equivalent, beginning of year | Cash and cash equivalent, beginning of year | 10,475,964 | | | 7,890,665 | | Cash and cash equivalent, beginning of year | 10,475,964 | | | 7,890,665 | |
Cash and cash equivalent, end of period | Cash and cash equivalent, end of period | $ | 5,743,149 | | | $ | 17,805,324 | | Cash and cash equivalent, end of period | $ | 5,780,882 | | | $ | 11,702,464 | |
Supplemental information: | Supplemental information: | | | | Supplemental information: | | | |
Interest paid | Interest paid | $ | 7,782 | | | $ | 21,656 | | Interest paid | $ | 15,128 | | | $ | 42,474 | |
| Non cash investing and financing activities: | Non cash investing and financing activities: | | Non cash investing and financing activities: | |
| Assets purchased under finance lease obligations | | Assets purchased under finance lease obligations | $ | — | | | $ | 125,825 | |
Assets purchased under operating lease obligations | Assets purchased under operating lease obligations | $ | — | | | $ | 303,031 | | Assets purchased under operating lease obligations | $ | — | | | $ | 344,311 | |
|
See accompanying notes to the consolidated financial statements.
INUVO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
For the ThreeNine Months Ended March 31,September 30,
| 2022 | 2022 | 2022 |
| | Common Stock | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | | Total | | Common Stock | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | | Total |
| | Shares | | Stock | | | | | Shares | | Stock | | | |
Balance as of December 31, 2021 | Balance as of December 31, 2021 | 118,747,447 | | | $ | 118,748 | | | $ | 176,586,529 | | | $ | (143,951,019) | | | $ | 53,737 | | | | $ | 32,807,995 | | Balance as of December 31, 2021 | 118,747,447 | | | $ | 118,748 | | | $ | 176,586,529 | | | $ | (143,951,019) | | | $ | 53,737 | | | | $ | 32,807,995 | |
Net loss | Net loss | | (2,089,263) | | | | (2,089,263) | | Net loss | | (2,089,263) | | | | (2,089,263) | |
Unrealized loss on debt securities | Unrealized loss on debt securities | | (98,156) | | | | (98,156) | | Unrealized loss on debt securities | | (98,156) | | | | (98,156) | |
Stock-based compensation | Stock-based compensation | | 671,158 | | | | 671,158 | | Stock-based compensation | | 671,158 | | | | 671,158 | |
Stock issued for vested restricted stock awards | Stock issued for vested restricted stock awards | 1,059,755 | | | 1,060 | | (1,060) | | | | — | | Stock issued for vested restricted stock awards | 1,059,755 | | | 1,060 | | (1,060) | | | | — | |
Shares withheld for taxes on vested restricted stock | Shares withheld for taxes on vested restricted stock | | (128,520) | | | | (128,520) | | Shares withheld for taxes on vested restricted stock | | (128,520) | | | | (128,520) | |
Stock warrants issued for referral agreement | Stock warrants issued for referral agreement | | 12,483 | | | | 12,483 | | Stock warrants issued for referral agreement | | 12,483 | | | | 12,483 | |
Balance as of March 31, 2022 | Balance as of March 31, 2022 | 119,807,202 | | | $ | 119,808 | | | $ | 177,140,590 | | | $ | (146,040,282) | | | $ | (44,419) | | | | $ | 31,175,697 | | Balance as of March 31, 2022 | 119,807,202 | | | $ | 119,808 | | | $ | 177,140,590 | | | $ | (146,040,282) | | | $ | (44,419) | | | | $ | 31,175,697 | |
Net loss | | Net loss | | | | | | | (3,229,927) | | | | | | (3,229,927) | |
Unrealized loss on debt securities | | Unrealized loss on debt securities | | (124,253) | | | | (124,253) | |
Stock-based compensation | | Stock-based compensation | | 684,376 | | | | 684,376 | |
Stock issued for vested restricted stock awards | | Stock issued for vested restricted stock awards | 66,666 | | | 66 | | | (66) | | | | — | |
Stock warrants issued for referral agreement | | Stock warrants issued for referral agreement | | 462 | | | | 462 | |
| Balance as of June 30, 2022 | | Balance as of June 30, 2022 | 119,873,868 | | | $ | 119,874 | | | $ | 177,825,362 | | | $ | (149,270,209) | | | $ | (168,672) | | | | $ | 28,506,355 | |
Net loss | | Net loss | | | | | | | (3,810,562) | | | | | | (3,810,562) | |
Unrealized gain on debt securities | | Unrealized gain on debt securities | | 36,170 | | | | 36,170 | |
Stock-based compensation | | Stock-based compensation | | 535,458 | | | | 535,458 | |
Shares withheld for taxes on vest restricted stock | | Shares withheld for taxes on vest restricted stock | | (68,372) | | | | (68,372) | |
Stock issued for vested restricted stock awards | | Stock issued for vested restricted stock awards | 263,256 | | | 264 | | | (264) | | | | — | |
Stock warrants issued for referral agreement | | Stock warrants issued for referral agreement | | 15,532 | | | | 15,532 | |
Balance as of September 30, 2022 | | Balance as of September 30, 2022 | 120,137,124 | | | $ | 120,138 | | | $ | 178,307,716 | | | $ | (153,080,771) | | | $ | (132,502) | | | | $ | 25,214,581 | |
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2021 |
| Common Stock | | Additional Paid in Capital | | Accumulated Deficit | | Total |
| Shares | | Stock | | | | | | |
Balance as of December 31, 2020 | 98,035,829 | | | $ | 98,036 | | | $ | 161,541,448 | | | $ | (136,350,370) | | | $ | 25,289,114 | |
Net loss | | | | | | | (2,147,268) | | | (2,147,268) | |
Stock-based compensation | | | | | 394,870 | | | | | 394,870 | |
Stock issued for vested restricted stock awards | 1,467,465 | | | 1,467 | | (1,467) | | | | | — | |
Shares withheld for taxes on vested restricted stock | | | | | (161,244) | | | | | (161,244) | |
Proceeds from exercise of options | | | | | 1,569 | | | | | 1,569 | |
Sale of common stock, net | 19,015,151 | | | 19,016 | | | 13,118,484 | | | | | 13,137,500 | |
Balance as of March 31, 2021 | 118,518,445 | | | $ | 118,519 | | | $ | 174,893,660 | | | $ | (138,497,638) | | | $ | 36,514,541 | |
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2021 |
| Common Stock | | Additional Paid in Capital | | Accumulated Deficit | | Total |
| Shares | | Stock | | | | | | |
Balance as of December 31, 2020 | 98,035,829 | | | $ | 98,036 | | | $ | 161,541,448 | | | $ | (136,350,370) | | | $ | 25,289,114 | |
Net loss | | | | | | | (2,147,268) | | | (2,147,268) | |
Stock-based compensation | | | | | 394,870 | | | | | 394,870 | |
Stock issued for vested restricted stock awards | 1,467,465 | | | 1,467 | | (1,467) | | | | | — | |
Shares withheld for taxes on vested restricted stock | | | | | (161,244) | | | | | (161,244) | |
Proceeds from exercise of options | | | | | 1,569 | | | | | 1,569 | |
Sale of common stock, net | 19,015,151 | | | 19,016 | | | 13,118,484 | | | | | 13,137,500 | |
Balance as of March 31, 2021 | 118,518,445 | | | $ | 118,519 | | | $ | 174,893,660 | | | $ | (138,497,638) | | | $ | 36,514,541 | |
Net loss | | | | | | | (2,382,127) | | | (2,382,127) | |
Stock-based compensation | | | | | 557,602 | | | | | 557,602 | |
Balance as of June 30, 2021 | 118,518,445 | | | $ | 118,519 | | | $ | 175,451,262 | | | $ | (140,879,765) | | | $ | 34,690,016 | |
Net loss | | | | | | | (1,830,268) | | | (1,830,268) | |
Stock-based compensation | | | | | 613,544 | | | | | 613,544 | |
Shares withheld for taxes on vest restricted stock | | | | | (110,805) | | | | | (110,805) | |
Stock issued for vested restricted stock awards | 229,002 | | | 229 | | | (229) | | | | | — | |
Stock warrants issued for referral agreement | | | | | 6,575 | | | | | 6,575 | |
Balance as of September 30, 2021 | 118,747,447 | | | $ | 118,748 | | | $ | 175,960,347 | | | $ | (142,710,033) | | | $ | 33,369,062 | |
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Inuvo, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Business
Company Overview
Inuvo is a technology company that develops and sells information technology solutions for marketing and advertising. These solutions predictively identify and message online audiences for any product, service or servicebrand across devices, formats, and channels including video, mobile, connected TV, linear TV, display, social, search and native. These solutions allow Inuvo’s clients to engage with their customers and prospectsaudiences in a manner that drives responsiveness. Inuvo facilitates the delivery of hundreds of millions of marketing messages to consumers every single month and counts among its clients numerous world-renowned names across industries.
The Inuvo solution incorporates a proprietary form of artificial intelligence, or AI, branded the IntentKey. This patented machine learning technology uses interactions with Internet content as a source of information from which to predict consumer intent. The AI can identify and advertise to the reasons why consumers are purchasing products and services not to who those consumers are. In this regard, the technology is designed for a privacy conscious future and is focused on the components of the advertising value chain most responsible for return on advertising spend, the intelligence behind the advertising decision.
Inuvo technology can be consumed both as a managed service and software-as-a-service. For clients, Inuvo has also developed a collection of proprietary websites collectively branded as Bonfire Publishing where content is created specifically to attract qualified consumer traffic for clients through the publication of information across a wide range of topics including health, finance, travel, careers, auto, education and lifestyle. These sites also provide the means to market test various Inuvo advertising technologies. Further, Inuvo also provides Search and Social advertising services through a proprietary set of technologies branded as ValidClick.
There are many barriers to entry associated with the Inuvo business model, including a proficiency in large scale information processing, predictive software development, marketing data products, analytics, artificial intelligence, integration to the internet of things ("IOT"), and the relationships required to execute within the IOT. Inuvo’s intellectual property is protected by 17 issued and eight pending patents.
Liquidity
As of March 31,September 30, 2022, we have approximately $9$7.7 million in cash, cash equivalents and short-term marketable securities. Our net working capital was $11.2$5.9 million. We have encountered recurring losses and cash outflows from operations, which historically we have funded through equity offerings and debt facilities. In addition, our investment in internally developed software consists primarily of labor costs which are of a fixed nature. Through March 31,September 30, 2022, our accumulated deficit was $146.0$153.1 million.
Our principal sources of liquidity are the sale of our common stock and our credit facility with Hitachi described in Note 6 to our Consolidated Financial Statements. On January 19, 2021, we raised $8.0 million in gross proceeds in a registered direct offering, before expenses, through the sale of an aggregate of 13,333,334 shares of our common stock, and on January 22, 2021, we raised an additional $6.25 million in gross proceeds in a registered direct offering, before expenses, through the sale of an aggregate of 5,681,817 shares of our common stock. On January 7, 2021, we filed Articles of Amendment to our Articles of Incorporation in the State of Nevada increasing the number of authorized shares of our common stock from 100,000,000 to 150,000,000. On August 19, 2021, we filed Articles of Amendment to our Articles of Incorporation in the State of Nevada increasing the number of authorized shares of our common stock from 150,000,000 to 200,000,000.
In March 2021, we contracted with an investment management company to manage our cash in excess of current operating
needs. We placed $2 million in cash equivalent accounts and $10 million in an interest-bearing account. At March 31,September 30, 2022,
our funds with the investment management company were approximately $6$4.2 million and were invested in cash equivalent accounts and marketable debt and equity securities. A detail of the activity is described in Note 3 to our Consolidated Financial Statements.
On May 28, 2021, we entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners, as sales agent (the “Sales Agent”), pursuant to which we may offer and sell through or to the Sales Agent shares of our common stock (the “ATM Program”) up to an aggregate amount of gross proceeds of $35,000,000. During the year ended December 31, 2021 and through March 31,September 30, 2022, we did not issue any shares of common stock or receive any aggregate proceeds under the ATM Program, and we did not pay any commissions to the Sales Agent. Any shares of common stock offered and sold in the ATM Program will be issued pursuant to our universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”). The ATM Program will terminate upon (a) the election of the Sales Agent upon the occurrence of certain adverse events, (b) 10
days’ advance notice from one party to the other, or (c) the sale of the balance available under our Shelf
Registration Statement. Under the terms of the Sales Agreement, the Sales Agent is entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of shares under the Sales Agreement.
We have focused our resources behind a plan to growmarket our collective multi-channel advertising capabilities differentiated by our AI technology, the IntentKey, where we have a technology advantage
and higher margins. If we are successful in implementing our plan, we expect to return to a positive cash flow from operations.
However, there is no assurance that we will be able to achieve this objective.
Though weWe believe our current cash position and credit facility will be sufficient to sustain operations for the next twelve
months if our plan to growfrom the IntentKey business is unsuccessful, wefiling date. We may need to fund operations over the longer term through private or public
sales of securities, debt financings or partnering/licensing transactions. There can be no assurances that financing will be available on acceptable terms, if at all, in the future.
Customer concentration
For the three monththree-month period ending March 31,September 30, 2022, our fourthree largest customers by revenue accounted for 67.0%74.0% of our overall revenue at 22%33.1%, 18.2%30.0% and 10.9%, 14.5%respectively and for the nine-month period ending September 30, 2022, 61.6% of our overall revenue at 26.1%, 26.4% and 12.3%9.1%, respectively. Those same fourthree customers accounted for 64.1%70.3% of our gross accounts receivable balance as of March 31,September 30, 2022. As of December 31, 2021, the same customers accounted for 45.6%34.3% of our gross accounts receivable balance.
We still source the majority of our ValidClick revenue through these relationships where we have access to advertiser budgets indirectly. While this strategy creates a concentration risk, we believe that it also provides upside opportunities including; access to hundreds of thousands of advertisers across geographies; the ability to scale our business across verticals; an avoidance of the sales costs associated with a large direct to advertisers’ sales force; access to innovation; overall media budget market insights; attractive payment terms; and low risk on receivables.
COVID-19
In AprilMarch 2020, we experienced a significant reduction in advertiser marketing budgets across both the ValidClick and IntentKey platformsWorld Health Organization classified the COVID-19 outbreak as a direct consequence of COVID-19. These reductions adversely impacted our overall revenue throughout 2020. In April 2020, we obtained the $1.1 million PPP Loan which we used primarily for payroll costs.pandemic. The PPP Loan was fully forgiven by the SBA on November 2, 2020. Beginning mid-June 2020, we began to experience an improvement in overall daily revenue. Due to the unprecedented sustainability of COVID-19 on our business, we were unable to predict with any certainty how our clients would adapt their business strategies within the context of COVID-19 and therefore how our revenue run rate would change as a result. We, therefore, focused our resources on areas we believed could have more immediate revenue potential, attempting to reduce expenses and raising additional capital so as to mitigate operating disruptions while thefull impact of the COVID-19 abates. Sinceoutbreak continues to evolve as of the startdate of 2021 with the roll out of vaccinations, we have seen an increase in our client’s willingness to spend on advertising and thereby an improvement in our revenue run rates. Though wethis report. We continue to monitor the pandemic and related government guidelines and regulations we have returned to a hybrid working model where employees are working partially from the office and partially from home.their impact on our operations, financial condition and liquidity.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements presented are for Inuvo and its subsidiaries. The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2021, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). In our opinion, these consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 17, 2022.
Use of estimates
The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s regular evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. We regularly evaluate estimates and assumptions related to capitalized labor, goodwill and purchased intangible asset valuations and income tax valuation allowance. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.
Revenue Recognition
Both of our platforms generate revenue from ad placements and clicks on advertisements on websites, some of which we own. We recognize revenue from ad placements and clicks in the period in which they occur. We also recognize revenue from serving impressions when we complete all or a part of an order from an advertiser. The revenue is recognized in the period that the impression is served. We subsequently settle these transactions with it our business partners at which time adjustments for invalid traffic may impact the amount collected. Payments to publishers who display advertisements on our behalf and payments to ad exchanges are recognized as cost of revenue.
The below table is the proportion of revenue that is generated through advertisements on our ValidClick (Search and Social) and IntentKey (Programmatic) platforms:
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| | For the Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
ValidClick Platform | | $ | 10,496,983 | | | 56.4 | % | | $ | 8,484,813 | | | 79.9 | % | | | | | | | | |
IntentKey Platform | | 8,112,384 | | | 43.6 | % | | 2,132,996 | | | 20.1 | % | | | | | | | | |
Total | | $ | 18,609,367 | | | 100.0 | % | | $ | 10,617,809 | | | 100.0 | % | | | | | | | | |
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| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
ValidClick Platform | | $ | 11,376,654 | | | 66.6 | % | | $ | 11,742,855 | | | 69.7 | % | | $ | 35,895,754 | | | 61.5 | % | | $ | 29,955,169 | | | 74.7 | % |
IntentKey Platform | | 5,695,535 | | | 33.4 | % | | 5,098,180 | | | 30.3 | % | | 22,437,105 | | | 38.5 | % | | $ | 10,139,258 | | | 25.3 | % |
Total | | $ | 17,072,189 | | | 100.0 | % | | $ | 16,841,035 | | | 100.0 | % | | $ | 58,332,859 | | | 100.0 | % | | $ | 40,094,427 | | | 100.0 | % |
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. On November 15, 2019, the FASB delayed the effective date for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. We are currently evaluating the potential impact of this new standard to our consolidated financial statements.
Reclassification:
We have reclassified amounts pertaining to marketable securities on the statement of cash flows for the nine months ended September 30, 2021 to conform to the current period's presentation.
Note 3 – Fair Value Measurements
The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term nature of these items.
In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy prioritizes the inputs used to measure fair value as follows:
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following table summarizes our cash equivalents and marketable securities measured at fair value. Certain marketable
securities consist of investments in debt and equity securities. Debt securities are classified as available for sale securities. We classify our cash equivalents and marketable securities within Level 1 because we use observable inputs that reflect quoted market prices for identical assets in active markets to determine their fair value. We have classified debt securities as available for sale securities with unrealized gains and losses recorded as other comprehensive income. EquityWe have classified equity securities as trading and are marked to market with changes recorded as other income on the income statement. Any interest income or dividends are recorded as interest incomewithin financing expense, net on the income statement.
The investments were purchased in April 2021 and therefore, no comparable first quarter 2021 change in fair value was available. | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Assets at Fair Value | | Investment Assets at Fair Value |
| As of September 30, 2022 | | As of December 31, 2021 |
| Level 1 | | Total | | Level 1 | | Total |
| | | | | | | |
Debt securities | $ | 888,928 | | | $ | 888,928 | | | $ | 959,207 | | | $ | 959,207 | |
Equity securities | $ | 1,601,669 | | | $ | 1,601,669 | | | $ | 1,828,284 | | | $ | 1,828,284 | |
Cash equivalents | $ | 1,756,382 | | | $ | 1,756,382 | | | $ | 5,222,759 | | | $ | 5,222,759 | |
Total Investments at Fair Value | $ | 4,246,979 | | | $ | 4,246,979 | | | $ | 8,010,250 | | | $ | 8,010,250 | |
The cost, gross unrealized gains (losses) and fair value of marketable securities by major security type as of March 31, 2022 were as follows:
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| Cost | | Unrealized Gain (Loss) | | Fair Value |
| | | | | |
Marketable securities | | | | | |
Debt securities | $ | 908,059 | | | $ | (44,419) | | | $ | 863,640 | |
Equity securities | 2,645,869 | | | (268,570) | | | 2,377,299 | |
Total marketable securities | | | | | 3,240,939 |
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| As of September 30, 2022 | | As of December 31, 2022 |
| Cost | | Unrealized Gain (Loss) | | Fair Value | | Cost | | Unrealized Gain (Loss) | | Fair Value |
| | | | | | | | | | | |
Marketable securities | | | | | | | | | | | |
Debt securities | $ | 1,021,430 | | | $ | (132,502) | | | $ | 888,928 | | | $ | 905,470 | | | $ | 53,737 | | | $ | 959,207 | |
Equity securities | 2,216,621 | | | (614,952) | | | 1,601,669 | | | 2,100,305 | | | (272,021) | | | 1,828,284 | |
Total marketable securities | | | | | $ | 2,490,597 | | | | | | | $ | 2,787,491 | |
Note 4 – Property and Equipment
The net carrying value of property and equipment was as follows as of: | | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Furniture and fixtures | Furniture and fixtures | $ | 293,152 | | | $ | 293,152 | | Furniture and fixtures | $ | 293,152 | | | $ | 293,152 | |
Equipment | Equipment | 1,188,802 | | | 1,164,671 | | Equipment | 1,263,308 | | | 1,164,671 | |
Capitalized internal use and purchased software | Capitalized internal use and purchased software | 13,357,323 | | | 12,914,820 | | Capitalized internal use and purchased software | 14,125,059 | | | 12,914,820 | |
Leasehold improvements | Leasehold improvements | 458,885 | | | 458,885 | | Leasehold improvements | 461,325 | | | 458,885 | |
Subtotal | Subtotal | 15,298,162 | | | 14,831,528 | | Subtotal | 16,142,844 | | | 14,831,528 | |
Less: accumulated depreciation and amortization | Less: accumulated depreciation and amortization | (13,681,555) | | | (13,324,762) | | Less: accumulated depreciation and amortization | (14,449,437) | | | (13,324,762) | |
Total | Total | $ | 1,616,607 | | | $ | 1,506,766 | | Total | $ | 1,693,407 | | | $ | 1,506,766 | |
During the three months ended March 31,September 30, 2022 and March 31,September 30, 2021, depreciation expense was $356,793$394,942 and $305,528,$325,112, respectively. During the nine months ended September 30, 2022 and September 30, 2021, depreciation expense was $1,124,674 and $944,746, respectively.
Note 5 – Other Intangible Assets and Goodwill
The following is a schedule of intangible assets and goodwill as of March 31,September 30, 2022: | | | Term | | Carrying Value | | Accumulated Amortization and Impairment | | Net Carrying Value | | Year-to-date Amortization | | Term | | Carrying Value | | Accumulated Amortization and Impairment | | Net Carrying Value | | Year-to-date Amortization |
| Customer list, Google | Customer list, Google | 20 years | | $ | 8,820,000 | | | $ | (4,446,750) | | | $ | 4,373,250 | | | $ | 110,250 | | Customer list, Google | 20 years | | $ | 8,820,000 | | | $ | (4,667,250) | | | $ | 4,152,750 | | | $ | 330,750 | |
Technology | Technology | 5 years | | 3,600,000 | | | (3,600,000) | | | $ | — | | | 60,000 | | Technology | 5 years | | 3,600,000 | | | (3,600,000) | | | — | | | 60,000 | |
Customer list, ReTargeter | Customer list, ReTargeter | 5 years | | 1,931,250 | | | (1,030,000) | | | $ | 901,250 | | | 96,562 | | Customer list, ReTargeter | 5 years | | 1,931,250 | | | (1,223,126) | | | 708,124 | | | 289,688 | |
Customer list, all other | Customer list, all other | 10 years | | 1,610,000 | | | (1,610,000) | | | $ | — | | | 26,794 | | Customer list, all other | 10 years | | 1,610,000 | | | (1,610,000) | | | — | | | 26,794 | |
Brand name, ReTargeter | Brand name, ReTargeter | 5 years | | 643,750 | | | (343,333) | | | $ | 300,417 | | | 32,188 | | Brand name, ReTargeter | 5 years | | 643,750 | | | (407,708) | | | 236,042 | | | 96,562 | |
Customer relationships | Customer relationships | 20 years | | 570,000 | | | (147,251) | | | $ | 422,749 | | | 7,125 | | Customer relationships | 20 years | | 570,000 | | | (161,500) | | | 408,500 | | | 21,375 | |
Trade names, web properties (1) | Trade names, web properties (1) | - | | 390,000 | | | — | | | $ | 390,000 | | | — | | Trade names, web properties (1) | - | | 390,000 | | | — | | | 390,000 | | | — | |
Intangible assets classified as long-term | Intangible assets classified as long-term | | $ | 17,565,000 | | | $ | (11,177,334) | | | $ | 6,387,666 | | | $ | 332,919 | | Intangible assets classified as long-term | | $ | 17,565,000 | | | $ | (11,669,584) | | | $ | 5,895,416 | | | $ | 825,169 | |
| Goodwill, total | Goodwill, total | - | | $ | 9,853,342 | | | $ | — | | | $ | 9,853,342 | | | $ | — | | Goodwill, total | - | | $ | 9,853,342 | | | $ | — | | | $ | 9,853,342 | | | $ | — | |
(1) The trade names related to our web properties have an indefinite life, and as such are not amortized.
Amortization expense over the next five years and thereafter is as follows:
| 2022 (remainder of year) | 2022 (remainder of year) | $ | 738,375 | | 2022 (remainder of year) | $ | 246,125 | |
2023 | 2023 | 984,500 | | 2023 | 984,500 | |
2024 | 2024 | 769,917 | | 2024 | 769,917 | |
2025 | 2025 | 469,500 | | 2025 | 469,500 | |
2026 | 2026 | 469,500 | | 2026 | 469,500 | |
Thereafter | Thereafter | 2,565,874 | | Thereafter | 2,565,876 | |
Total | Total | $ | 5,997,666 | | Total | $ | 5,505,418 | |
Note 6 – Bank Debt
On March 12, 2020, we closed on the Loan and Security Agreement dated February 28, 2020 with Hitachi. Under the terms of the Loan and Security Agreement, Hitachi has provided us with a $5,000,000 line of credit commitment. We are permitted to borrow (i) 90% of the aggregate Eligible Accounts Receivable, plus (ii) the lesser of (A) 75% of the aggregate Unbilled
Accounts Receivable or (B) 50% of the amount available to borrow under (i), up to the maximum credit commitment. We pay Hitachi a monthly interest at the rate of 2% in excess of the Wall Street Journal Prime Rate, with a minimum rate of 6.75% per annum, on outstanding amounts. The principal and all accrued but unpaid interest are due on demand.
We agreed to pay Hitachi a commitment fee of $50,000, with one half due upon the execution of the agreement and the balance due six months thereafter. Thereafter, we are obligated to pay Hitachi a commitment fee of $15,000 annually. We are also obligated to pay Hitachi a quarterly service fee of 0.30% on the monthly unused amount of the maximum credit line. The Loan and Security Agreement continues for an indefinite term. At March 31,September 30, 2022, there were no outstanding balances due under the Loan and Security Agreement.
Note 7 – Accrued Expenses and Other Current Liabilities
The accrued expenses and other current liabilities consist of the following as of: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Accrued marketing costs (TAC) | $ | 3,531,936 | | | $ | 4,267,980 | |
Accrued expenses and other | 534,148 | | | 956,998 | |
Accrued payroll and commission liabilities | 316,468 | | | 121,533 | |
Accrued taxes, current portion | 7,225 | | | 17,880 | |
Arkansas grant contingency | — | | | 10,000 | |
| | | |
Total | $ | 4,389,777 | | | $ | 5,374,391 | |
Note 8 – Other Long-Term Liabilities
The lease liabilities and other long-term liabilities consist of the following as of: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Deferred rent | $ | 14,226 | | | $ | 13,302 | |
Total | $ | 14,226 | | | $ | 13,302 | |
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued marketing costs | $ | 4,404,234 | | | $ | 4,267,980 | |
Accrued expenses and other | 1,006,427 | | | 956,998 | |
Accrued payroll and commission liabilities | 864,239 | | | 121,533 | |
Arkansas grant contingency | 5,000 | | | 10,000 | |
Accrued taxes, current portion | 1,638 | | | 17,880 | |
| | | |
Total | $ | 6,281,538 | | | $ | 5,374,391 | |
Note 98 – Commitments
On September 17, 2021, we signed a multi-year agreement with a business development partner to provide referral and support services to us. The agreement required an advance fee of $1.5 million with $300,000 recorded as a current asset and $1.2 million as other assets. The advance is being amortized as marketing expenses over five years. As of March 31,September 30, 2022, $175,000$325,000 has been amortized. As part of the agreement, we granted a warrant exercisable into 300,000 shares of our common stock, which vests over two years upon achieving certain performance metrics (see Note 1211 - Stockholders' Equity). Additionally, we agreed to pay quarterly support fees upon reaching certain levels of operational activity.
Note 109 – Income Taxes
We have a deferred tax assets of $33,988,760.$35,576,360. We believe it is more likely than not that essentially none of our deferred tax assets will be realized, and we have recorded a valuation allowance of $33,988,760 for the deferred tax assets that may not be realized as of March 31,September 30, 2022 and December 31, 2021. We also have deferred tax liabilities totaling $1,694,600 as of March 31,September 30, 2022, related to intangible assets acquired in March 2012 and February 2017. These balances are presented as a net deferred tax liability of $107,000 composed of indefinite lived intangible assets.
Note 1110 – Stock-Based Compensation
We maintain a stock-based compensation program intended to attract, retain and provide incentives for talented employees and directors and align stockholder and employee interests. During the 2022 and 2021 periods, we granted restricted stock units ("RSUs") from the 2017 Equity Compensation Plan, as amended (“2017 ECP”). RSU vesting periods are generally up to three years and/or based upon achieving certain financial targets.
On January 1, 2022, in accordance with the plan provisions, the number of shares available for issuance under the 2017 ECP plan was increased by 150,000 shares. On June 16, 2022, our stockholders approved an amendment to the 2017 ECP increasing the number of shares of our common stock reserved for issuance by 15,000,000 shares. As of September 30, 2022, the total number of shares of our common stock reserved for issuance under the 2017 ECP was 24,550,000.
Compensation Expense
For the three and nine months ended March 31,September 30, 2022, we recorded stock-based compensation expense for all equity incentive plans of $535,457 and $1,890,991, respectively. For the three and nine months ended September 30, 2021, we recorded stock-based compensation expense for all equity incentive plans of $671,158$613,544 and $394,870,$1,566,016, respectively. Total
compensation cost not yet recognized at March 31,September 30, 2022 was $3,986,060,$2,762,270, which will be recognized over a weighted-average recognition period of approximately two years.one year.
The following table summarizes the stock grants outstanding under the 2017 ECP and the 2010 Equity Compensation Plan (“2010 ECP”) for the threenine months ended March 31,September 30, 2022:
| | | Options Outstanding | | RSUs Outstanding | | Options and RSUs Exercised | | Available Shares | | Total Awards Authorized | | Options Outstanding | | RSUs Outstanding | | Options and RSUs Exercised | | Available Shares | | Total Awards Authorized |
2017 ECP | 2017 ECP | — | | | 5,290,007 | | | 4,094,132 | | | 165,861 | | | 9,550,000 | | 2017 ECP | 100,000 | | | 4,913,339 | | | 4,560,799 | | | 14,975,862 | | | 24,550,000 | |
2010 ECP (*) | 2010 ECP (*) | 1,500 | | | — | | | 5,011,511 | | | — | | | 5,013,011 | | 2010 ECP (*) | — | | | — | | | 5,011,511 | | | — | | | 5,011,511 | |
Total | Total | 1,500 | | | 5,290,007 | | | 9,105,643 | | | 165,861 | | | 14,563,011 | | Total | 100,000 | | | 4,913,339 | | | 9,572,310 | | | 14,975,862 | | | 29,561,511 | |
(*) Expired April 2020
The following table summarizes the activity of stock option awards under the 2010 ECP for the threenine months ended March 31,September 30, 2022: | | | Shares Subject to Options Outstanding | | | Shares Subject to Options Outstanding | |
| | Number of Shares | | Weighted Average Exercise Price | | | | Number of Shares | | Weighted Average Exercise Price | | |
Outstanding, beginning of period | Outstanding, beginning of period | 1,500 | | | $ | 0.56 | | | | Outstanding, beginning of period | 1,500 | | | $ | 0.56 | | | |
Stock options exercised | Stock options exercised | — | | | $ | — | | | | Stock options exercised | — | | | $ | — | | | |
Stock options granted | | Stock options granted | 100,000 | | | $ | 0.52 | | | |
Stock options canceled | Stock options canceled | — | | | $ | — | | | | Stock options canceled | (1,500) | | | $ | 0.56 | | | |
Outstanding, end of period | Outstanding, end of period | 1,500 | | | 0.56 | | | | Outstanding, end of period | 100,000 | | | 0.52 | | | |
Exercisable, end of period | Exercisable, end of period | 1,500 | | | 0.56 | | | | Exercisable, end of period | 100,000 | | | 0.52 | | | |
The following table summarizes the activities for our unvested RSUs for the threenine months ended March 31,September 30, 2022:
| | | Unvested RSUs | | RSUs |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding, beginning of period | Outstanding, beginning of period | 3,960,001 | | | $ | 1.33 | | Outstanding, beginning of period | 3,960,001 | | | $ | 1.33 | |
Granted | Granted | 2,690,000 | | | $ | 0.39 | | Granted | 2,960,000 | | | $ | 0.41 | |
Vested | Vested | 1,359,994 | | | $ | 1.37 | | Vested | (1,826,661) | | | $ | 1.34 | |
Canceled | | Canceled | (180,001) | | | $ | 0.95 | |
Outstanding, end of period | Outstanding, end of period | 5,290,007 | | | $ | 0.85 | | Outstanding, end of period | 4,913,339 | | | $ | 0.79 | |
Note 1211 – StockholdersStockholders' Equity
Warrants
On September 17, 2021, we signed an agreement with a marketing platform and consulting company to provide referral and support services to us for a period of five years (see Note 98 - Commitments). As part of that agreement, we granted a warrant exercisable into 300,000 shares of our common stock, at $.72 per share, which vests in two tranches when certain performance metrics are achieved. The warrant was valued using the Black Scholes option pricing model at a total of $149,551 based on a seven-year term, an implied volatility of 100%, a risk-free equivalent yield of 1.17%, and a stock price of $0.71. The warrant is classified as equity and will be expensed on a ratable basis over the vesting period of each tranche.tranche if the performance criteria are achieved. On August 31, 2022, 85,862 shares vested in accordance with the contracted performance criteria. For the three monthsnine- month period ended March 31,September 30, 2022, we recognized approximately $12$28 thousand in expense and $118 thousand in expense will be recognized over the remaining service period.expense.
Earnings per Share
For the three monthsthree- and nine-month periods ended March 31,September 30, 2022 and 2021, we generated a net loss from continuing operations and as a result, any potential common shares are anti-dilutive.
Common Stock
On January 7, 2021, we filed Articles of Amendment to our Articles of Incorporation in the State of Nevada increasing the number of authorized shares of our common stock from 100,000,000 to 150,000,000. On August 19, 2021, we filed Articles of Amendment to our Articles of Incorporation in the State of Nevada increasing the number of authorized shares of our common stock from 150,000,000 to 200,000,000.
Note 1312 – Leases
We have entered into operating and finance leases primarily for real estate and equipment rental. These leases have terms which range from three years to five years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment. These operating and finance leases are listed as separate line items on our consolidated balance sheets and represent our right to use the underlying asset for the lease term. Our obligation to make lease payments is also listed as separate line items on our consolidated balance sheets. As of March 31,September 30, 2022 and December 31, 2021, total operating and financed right-of-use assets were $569,407$397,850 and $177,643,$128,589, and $641,306 and $201,902, respectively.
As of March 31,September 30, 2022 and 2021, we recorded $24,259$73,313 and $80,117,$237,423, respectively, in amortization expense related to finance leases.
Because the rate implicit in each lease is not readily determinable, we use our incremental borrowing rate to determine the present value of the lease payments.
Information related to our operating lease liabilities are as follows:
| | | | | |
| For the ThreeNine Months Ended March 31,September 30, |
Cash paid for operating lease liabilities | $ | 112,695316,597 | |
Weighted-average remaining lease term | 3.53.2 years |
Weighted-average discount rate | 6.25 | % |
| | | | | | |
Minimum future lease payments ended March 31, 2022 | | |
2022 (remainder of the year) | 287,795 | | |
2023 | 301,029 | | |
2024 | 16,236 | | |
2025 | 5,251 | | |
2026 | 1,590 | | |
| 611,901 | | |
Less imputed interest | (42,493) | | |
Total lease liabilities | $ | 569,408 | | |
| | | | | | |
Minimum future lease payments ended September 30, 2022 | | |
2022 (remainder of the year) | $ | 97,360 | | |
2023 | 301,029 | | |
2024 | 16,236 | | |
2025 | 5,251 | | |
2026 | 1,590 | | |
| 421,466 | | |
Less imputed interest | (22,376) | | |
Total lease liabilities | $ | 399,090 | | |
Information related to our financed lease liabilities are as follows:
| | | | | |
| For the ThreeNine Months Ended March 31,September 30, |
Cash paid for finance lease liabilities | $ | 29,86392,622 | |
Weighted-average remaining lease term | 2.31.6 years |
Weighted-average discount rate | 6.25 | % |
| | | | | |
Minimum future lease payments ended March 31, 2022 | |
2022 (remainder of the year) | $ | 85,002 | |
2023 | 84,127 | |
2024 | 31,220 | |
| 200,349 | |
Less imputed interest | (16,391) | |
Total lease liabilities | $ | 183,958 | |
| | | | | |
Minimum future lease payments ended September 30, 2022 | |
2022 (remainder of the year) | $ | 25,276 | |
2023 | 84,127 | |
2024 | 31,220 | |
| 140,623 | |
Less imputed interest | (8,106) | |
Total lease liabilities | $ | 132,517 | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
Inuvo is a technology company that develops and sells information technology solutions for marketing and advertising. These solutions predictively identify and message online audiences for any product, service or servicebrand across devices, formats, and channels including video, mobile, connected TV, linear TV, display, social, search and native. These solutions allow Inuvo’s clients to engage with their customers and prospectsaudiences in a manner that drives responsiveness. Inuvo facilitates the delivery of hundreds of millions of marketing messages to consumers every single month and counts among its clients numerous world-renowned names across industries.
The Inuvo solution incorporates a proprietary form of artificial intelligence, or AI, branded the IntentKey. This patented machine learning technology uses interactions with Internet content as a source of information from which to predict consumer intent. The AI can identify and advertise to the reasons why consumers are purchasing products and services not to who those consumers are. In this regard, the technology is designed for a privacy conscious future and is focused on the components of the advertising value chain most responsible for return on advertising spend, the intelligence behind the advertising decision.
Inuvo technology can be consumed both as a managed service and software-as-a-service. For clients, Inuvo has also developed a collection of proprietary websites collectively branded as Bonfire Publishing where content is created specifically to attract qualified consumer traffic for clients through the publication of information across a wide range of topics including health, finance, travel, careers, auto, education and lifestyle. These sites also provide the means to market test various Inuvo advertising technologies. Further, Inuvo also provides Search and Social advertising services through a proprietary set of technologies branded as ValidClick.
There are many barriers to entry associated with the Inuvo business model, including a proficiency in large scale information processing, predictive software development, marketing data products, analytics, artificial intelligence, integration to the internet of things ("IOT"), and the relationships required to execute within the IOT. Inuvo’s intellectual property is protected by 17 issued and eight pending patents.
Impact of COVID-19 Pandemic
First identified in late 2019 and known nowIn March 2020, the World Health Organization classified the COVID-19 outbreak as COVID-19, the outbreak has impacted millions of individuals and businesses worldwide. In response, many countries have implemented measures to combat the outbreak which has had an unprecedented economic consequence. We did not experience an impact from COVID-19 through the end of fiscal year 2019 and had only minor impact from COVID-19 in the first quarter of 2020. Because we operate in the digital advertising industry, unlike a brick and mortar-based company, predicting thepandemic. The full impact of the coronavirusCOVID-19 outbreak continues to evolve as of the date of this report. We continue to monitor the pandemic and related government guidelines and regulations and their impact on our company is difficult.
Beginning in late April 2020, we experienced a significant reduction in marketing budgetsoperations, financial condition and a decrease in monetization rates which impacted ValidClick more severely than IntentKey. This resulted in a significant reduction in our overall revenue run rates during 2020 with the low point occurring during May 2020.
In response to COVID-19, we curtailed expenses, including compensation and travel throughout 2020 in addition to other actions. Additionally, in April 2020, we obtained the $1.1 million PPP Loan which we used primarily for payroll costs. The PPP Loan was fully forgiven by the SBA on November 2, 2020.
Beginning mid-June 2020, we began to experience an improvement in overall daily revenue. Due to the unprecedented
sustainability of COVID-19 on our business, we were unable to predict with any certainty how our clients would adapt their
business strategies within the context of COVID-19 and therefore how our revenue run rate would change as a result. We,
therefore, focused our resources on areas we believed could have more immediate revenue potential, attempting to reduce
expenses and raising additional capital so as to mitigate operating disruptions while the impact of COVID-19 abates. Since the
start of 2021 with the roll out of vaccinations, we have seen an increase in our client’s willingness to spend on advertising and thereby an improvement in our revenue run rates.liquidity.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, and accounts receivable allowances.allowances, capitalized software costs, goodwill and stock-based compensation. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our
audited consolidated financial statements for 2021 appearing in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 17, 2022. The estimates and assumptions that management makes affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions that management makes affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used are based upon management’s regular evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. We regularly evaluate estimates and assumptions related to goodwill and purchased
intangible asset valuations and valuation allowance. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.
Results of Operations | | | For the Three Months Ended March 31, | | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2022 | | 2021 | | Change | | % Change | | | | 2022 | | 2021 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
Net Revenue | Net Revenue | $ | 18,609,367 | | | $ | 10,617,809 | | | $ | 7,991,558 | | | 75.3 | % | | | Net Revenue | $ | 17,072,189 | | | $ | 16,841,035 | | | $ | 231,154 | | | 1.4 | % | | $ | 58,332,859 | | | $ | 40,094,427 | | | $ | 18,238,432 | | | 45.5 | % |
Cost of Revenue | Cost of Revenue | 8,661,506 | | | 1,444,059 | | | 7,217,447 | | | 499.8 | % | | | Cost of Revenue | 6,782,047 | | | 3,757,938 | | | 3,024,109 | | | 80.5 | % | | 24,717,143 | | | 7,466,017 | | | 17,251,126 | | | 231.1 | % |
Gross Profit | Gross Profit | $ | 9,947,861 | | | $ | 9,173,750 | | | $ | 774,111 | | | 8.4 | % | | | Gross Profit | $ | 10,290,142 | | | $ | 13,083,097 | | | $ | (2,792,955) | | | (21.3) | % | | $ | 33,615,716 | | | $ | 32,628,410 | | | $ | 987,306 | | | 3.0 | % |
Net Revenue
Revenue for the three-month period ended September 30, 2022 was up 1% as compared to the same time period in 2021. We experienced 75%reported 45% higher year over year revenue for the threenine months ended March 31,September 30, 2022 as compared to the same period in 2021. Revenue from both platforms,Generally, we believe revenue in the period was negatively impacted by a deceleration in consumer spending. ValidClick andrevenue was down by 3% for three-month period ending September 30, 2022 compared to the same period in 2021. The ValidClick revenue decrease was due in part to our accounts being shut down due to our dispute with a well-known advertising platform regarding invalid advertising clicks we purchased in the second quarter of this year (See Operating Expenses below). We are currently in an arbitration proceeding with the advertising platform regarding the invalid advertising clicks. IntentKey exceededrevenue was up 12% for the prior year.three-month period ending September 30, 2022 compared to the same period in 2021. IntentKey revenue was negatively impacted by the loss of clients sourced through an advertising agency that lost the client to a competitor. ValidClick YOY revenue was up by 24%19.8% and IntentKey YOY revenue by 280%.up 121% for nine months period ending September 30, 2022. Both platforms acquired new customers within the year, benefiting from the agreement with a business development partner discussed in Note 9 to our Consolidated Financial Statements and because of the economic improvements associated with the COVID-19 pandemic recovery.year.
Cost of Revenue
Cost of revenue for the three and nine months ended March 31,September 30, 2022, was primarily generated by payments to advertising exchanges that provide access to a supply of advertising inventory where we serve advertisements using information predicted by the IntentKey platform and, to a lesser extent, payments to website publishers and app developers that host advertisements we serve through ValidClick. Cost of revenue associated with ValidClick revenue is small and generates a high gross margin. As ValidClick revenue declines as a percent of total Net Revenue, total gross margin similarly decreases. The components of the cost of revenue have shifted, as the IntentKey platform revenue becomes a greater percentage of net revenue and as the ValidClick service has continued to expand its owned and operated publishing assets. The increase in the cost of revenue was due to this shift in revenue and to the acquisition of new customers as mentioned in the Net Revenue section above.
Operating Expenses | | | For the Three Months Ended March 31, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2022 | | 2021 | | Change | | % Change | | | 2022 | | 2021 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
Marketing costs | Marketing costs | $ | 7,169,449 | | | $ | 7,305,784 | | | $ | (136,335) | | | (1.9 | %) | | Marketing costs | $ | 8,620,161 | | | $ | 10,163,006 | | | $ | (1,542,845) | | | (15.2 | %) | | $ | 26,778,020 | | | $ | 25,681,930 | | | $ | 1,096,090 | | | 4.3 | % |
Compensation | Compensation | 3,157,706 | | | 2,737,867 | | | 419,839 | | | 15.3 | % | | Compensation | 3,237,414 | | | 2,840,149 | | | 397,265 | | | 14.0 | % | | 9,611,011 | | | 8,458,233 | | | $ | 1,152,778 | | | 13.6 | % |
General and administrative | General and administrative | 1,726,672 | | | 1,724,978 | | | 1,694 | | | 0.1 | % | | General and administrative | 2,206,119 | | | 1,824,869 | | | 381,250 | | | 20.9 | % | | 5,944,027 | | | 5,226,737 | | | $ | 717,290 | | | 13.7 | % |
Operating expenses | Operating expenses | $ | 12,053,827 | | | $ | 11,768,629 | | | $ | 285,198 | | | 2.4 | % | | Operating expenses | $ | 14,063,694 | | | $ | 14,828,024 | | | $ | (764,330) | | | (5.2 | %) | | $ | 42,333,058 | | | $ | 39,366,900 | | | $ | 2,966,158 | | | 7.5 | % |
Marketing costs consistsconsist mostly of traffic acquisition costs and includes those expenses required to attract an audience to the ValidClick platform.owned and operated web properties. Marketing costs as of March 31,for the three months ended September 30, 2022 compared to the same period in 2021 decreased as the result of lower revenue within ValidClick due to ongoing, incidental issues resulting from ownedthe invalid advertising clicks acquired in the second quarter of this year. Marketing costs for the nine months ended September 30, 2022 compared to the same period in 2021 increased as the result of higher revenue within ValidClick. In June 2022, we identified some of the advertising we purchased from a prominent advertising network during the quarter ended June 30, 2022 appeared, according to our technology and operated operations.assessment, to be comprised of invalid advertising clicks. As a result, we refunded $1.5 million to our clients that were impacted by the invalid clicks and reversed any revenue that would have been recognized during the quarter ended June 30, 2022 related to this invalid traffic. In addition, we provided evidence to the network from which we bought the media and demanded a refund of the spend. The network in question immediately launched an internal investigation.
We have held back approximately $1.4 million in net payments due until such time as a satisfactory resolution is determined and have not reflected any offsetting adjustment to the related marketing expense and payables. For the time being, the amount held back is recorded as a marketing expense and an accounts payable. The fraud that was discovered was atypical, sophisticated and not common within the network in question. As of September 30, 2022, no invalid traffic associated from the fraud was detected and the recompense from the advertising network is still pending.
Compensation expense was higher for the three and nine months ended March 31,September 30, 2022 compared to the same time periodperiods in 2021 due primarily to higher salary expense, stock-based compensation expense and incentive expense. Our total employment, both fullfull- and part-time, was 8392 at March 31,September 30, 2022 compared to 77 at March 31,September 30, 2021.
General and administrative costs for the three and nine months ended March 31,September 30, 2022 increased 21% and 14%, respectively, compared to the same time periodperiods in 2021 remained relatively flat.2021. These costs included professional fees, facilities, expenses, IT costs, travel and entertainment, corporate expenses and depreciation and amortization costs.expense. The largest increases in the three months ended September 30, 2022 as compared to the same period last year were from bad debt expense ($247 thousand higher), professional fees ($226 thousand higher) and travel and entertainment ($121 thousand higher), partially offset by lower facilities and amortization expense in 2022.
InterestFinancing expense, net
InterestFinance expense, net, for the three and nine months ended March 31,September 30, 2022 was approximately $1$13 thousand and $11 thousand, respectively, and was primarily due to finance lease obligations and the Hitachi Loan and Security Agreementfinancing expenses of approximately $8 thousand;$22 thousand and $35 thousand, respectively; offset by interest income, net of fees, on marketable securities of approximately $7 thousand.
Interest expense, net, for the three months ended March 31, 2021 was approximately $22$9 thousand and primarily represents interest expense on finance lease obligations and the Hitachi Loan and Security Agreement.$24 thousand, respectively.
Other income (expense), net
Other income was approximately $18 thousand(expense), net, for the three and nine months ended March 31,September 30, 2022 was an expense of approximately $24 thousand and was$401 thousand, respectively, from thenet realized and unrealized gaingains and losses discussed in Note 3 to our Consolidated Financial Statements.
Other income (expense), net, for the three months ended March 31,September 30, 2021 was $470an expense of approximately $79 thousand and represents unrealized losses on trading securities discussed in Note 3 to our Consolidated Financial Statements. Other income (expense), net, for the nine months ended September 30, 2021 was income of approximately $415 thousand and included the reversal of the deferred revenue from athe contract cancellation and the reversal of thean accrued sales reserve of $50 thousand.
Liquidity and Capital Resources
As of March 31,September 30, 2022, we have approximately $9$7.7 million in cash, cash equivalents and short-term marketable securities. Our net working capital was $11.2$5.9 million. We have encountered recurring losses and cash outflows from operations, which historically we have funded through equity offerings and debt facilities. In addition, our investment in internally developed software consists primarily of labor costs which are of a fixed nature. Through March 31,September 30, 2022, our accumulated deficit was $146.0$153.1 million.
Our principal sources of liquidity are the sale of our common stock and our credit facility with Hitachi described in Note 6 to our Consolidated Financial Statements. On January 19, 2021, we raised $8.0 million in gross proceeds in a registered direct offering, before expenses, through the sale of an aggregate of 13,333,334 shares of our common stock, and on January 22, 2021, we raised an additional $6.25 million in gross proceeds in a registered direct offering, before expenses, through the sale of an aggregate of 5,681,817 shares of our common stock. On January 7, 2021, we filed Articles of Amendment to our Articles of Incorporation in the State of Nevada increasing the number of authorized shares of our common stock from 100,000,000 to 150,000,000. On August 19, 2021, we filed Articles of Amendment to our Articles of Incorporation in the State of Nevada increasing the number of authorized shares of our common stock from 150,000 to 200,000.
In March 2021, we contracted with an investment management company to manage our cash in excess of current operating
needs. We placed $2 million in cash equivalent accounts and $10 million in an interest-bearing account. At March 31,September 30, 2022,
our funds with the investment management company were approximately $6$4.2 million and were invested in cash equivalent accounts and marketable debt and equity securities. A detail of the activity is described in Note 3 to our Consolidated Financial Statements.
On May 28, 2021, we entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners, as sales agent (the “Sales Agent”), pursuant to which we may offer and sell through or to the Sales Agent shares of our common stock (the
(the “ATM Program”) up to an aggregate amount of gross proceeds of $35,000,000. During the year ended December 31, 2021 and through March 31,September 30, 2022, we did not issue any shares of common stock or receive any aggregate proceeds under the ATM Program, and we did not pay any commissions to the Sales Agent. Any shares of common stock offered and sold in the ATM Program will be issued pursuant to our universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”). The ATM Program will terminate upon (a) the election of the Sales Agent upon the occurrence of certain adverse events, (b) ten10 days’ advance notice from one party to the other, or (c) the sale of the balance available under our Shelf Registration Statement. Under the terms of the Sales Agreement, the Sales Agent is entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of shares under the Sales Agreement.
We have focused our resources behind a plan to grow our AI technology, the IntentKey, where we have a technology advantage
and higher margins. If we are successful in implementing our plan, we expect to return to a positive cash flow from operations.
However, there is no assurance that we will be able to achieve this objective.
Though we We believe our current cash position and credit facility will be sufficient to sustain operations for the next twelve
months, if our plan to grow the IntentKey business is unsuccessful, we months. We may need to fund operations over the longer term through private or public
sales of securities, debt financings or partnering/licensing transactions. There can be no assurances that financing will be available on acceptable terms, if at all, in the future.
Cash Flows
The table below sets forth a summary of our cash flows for the threenine months ended March 31,September 30, 2022 and 2021:
| | | For the Three Months Ended March 31, | | For the Nine Months Ended September 30, |
| | 2022 | 2021 | | 2022 | 2021 |
Net cash used in operating activities | Net cash used in operating activities | $(3,580,762) | $(2,442,647) | Net cash used in operating activities | $(2,820,344) | $(4,671,963) |
Net cash used in investing activities | Net cash used in investing activities | $(999,125) | $(411,400) | Net cash used in investing activities | $(1,601,996) | $(4,051,360) |
Net cash (used in)/provided by financing activities | Net cash (used in)/provided by financing activities | $(152,928) | $12,768,706 | Net cash (used in)/provided by financing activities | $(272,742) | $12,535,122 |
Cash Flows - Operating
Net cash used in operating activities was $3,580,762$2,820,344 during the threenine months ended March 31,September 30, 2022. We reported a net loss of $2,089,263,$9,129,756, which included non-cash expenses of depreciation and amortization expense of $689,712,$1,949,845, depreciation of right of use assets of $24,259$73,313 and stock-based compensation expense of $671,158.$1,890,991. The change in operating assets and liabilities during the threenine months ended March 31,September 30, 2022 was a net use of cash of $2,782,156$1,713,374 primarily due to a decrease in the accrued expenses of $977,599 and accounts payable balance of $327,918, partially offset by an increase in the accounts receivable balance by $702,421$550,866, partially offset by the increase in accrued expenses of $916,363 and prepaid expenses, unbilled revenue and other assetsaccounts payable balance of $849,218.$806,824. Our ValidClick sales terms are such that we generally collect receivables prior to paying trade payables. Our mediaIntentKey sales arrangements typically have slower payment terms than the terms of related payables. As our IntentKey sales grow proportionally our accounts receivable and our days sales outstanding have increased resulting in increased capital needs for our business and we expect this trend to continue with the anticipated growth of IntentKey. The net loss was partially a result of the network media issue noted in Marketing Expense above. We refunded $1.5 million to our clients and reversed revenue that would have been recognized during the quarter ended June 30, 2022. In addition, we demanded a refund of the spend and held back approximately $1.4 million in net payments until such time as a satisfactory resolution is determined. The held payments may be reversed in future quarters upon a satisfactory resolution.
During the comparable three-monthnine-month period in 2021, cash used in operating activities was $2,442,647$4,671,963 from a net loss of $2,147,268,$6,359,663, which included several non-cash expenses of depreciation and amortization expense of $771,904$2,343,874 and stock-based compensation expense of $394,870.$1,566,016.
Cash Flows - Investing
Net cash used in investing activities was $999,125$1,601,996 and $411,400$4,051,360 for the threenine months ended March 31,September 30, 2022 and 2021, respectively. Cash used in investing activities in 2022 and 2021 consisted primarily of the purchase of marketable securities and to a lesser extent, capitalized internal development costs. Cash used in investing activities in 2021 consisted of capitalized internal development costs.
Cash Flows - Financing
Net cash used in financing activities was $152,928$272,742 during the threenine months ended March 31,September 30, 2022.
Net cash provided by financing activities was $12,768,706$12,535,122 during the threenine months ended March 31,September 30, 2021 was primarily from proceeds from the sale of common stock.
Off Balance Sheet Arrangements
As of March 31,September 30, 2022, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management does not expect that our disclosure controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31,September 30, 2022, the end of the period covered by this report, our management concluded their evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As of the evaluation date, our Chief Executive Officer and Chief Financial Officer concluded that we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the periodquarter ended March 31,September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1 - LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS-UPDATE
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 17, 2022 and our subsequent filings with the SEC, subject to the new or modified risk factors appearing below that should be read in conjunction with the risk factors disclosed in such Form 10-K and our subsequent filings.
We rely on fourthree customers for a significant portion of our revenues. We are reliant upon four customerthree customers for most of our revenue. During the firstthird quarter of 2022, they accounted for 22.0%33.1%, 18.2%, 14.5%30.0% and 12.3%10.9% of our revenues.revenues, respectively. During the same period in 2021, twothree different customers made up 40.0%accounted for our largest revenue source at 36.4%, 14.3% and 19.2%.13.6%, respectively. The amount of revenue we receive from these customers is dependent on a number of factors outside of our control, including changes in the amount they charge for advertisements,respective customers advertising budget, both in terms of allocated dollars and media mix, financial resources of the depth of advertisements available from them, and their ability to display relevant ads in response to end-user queries.customers, as well as general economic conditions. We would likely experience a significant decline in revenue and our business operations could be significantly harmed if these customers do not
approve continue to utilize our new websitesservices. Additionally, our business operations and applications, orfinancial condition could be significantly harmed if we violate their guidelines or they change their guidelines. In addition, if any of these preceding circumstances were to occur, we maycustomers do not be able to findpay for our services on a suitable alternate paid search results provider or otherwise replace the lost revenues.timely basis. The loss of any of these customers or a material change in the revenue or gross profit they generate or their failure to timely pay us for our services would have a material adverse impact on our business, results of operations and financial condition in future periods.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY AND DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
No. | | Exhibit Description | | Form | | Date Filed | Number | Filed or Furnished Herewith |
3(i).1 | | | | 10-KSB | | 3/1/04 | 4 | |
3(i).2 | | | | 10-KSB | | 3/31/06 | 3.2 | |
3(i).3 | | | | 8-K | | 7/24/09 | 3.4 | |
3(i).4 | | | | 8-K | | 12/10/10 | 3(i).4 | |
3(i).5 | | | | 10-K | | 3/29/12 | 3(i).5 | |
3(i).6 | | | | 10-K | | 3/29/12 | 3(i).6 | |
3(i).7 | | | | 10-Q | | 5/15/20 | 3(i).7 | |
3(i).8 | | Certificate of Validation of Amendment to Amended Articles of Incorporation as filed October 16, 2020. | | 10-Q | | 11/9/20 | 3(i).8 | |
3(i).9 | | | | 10-K | | 2/11/21 | 3(i).9 | |
3(i).10 | | | | 10-Q | | 11/12/21 | 3(i).10 | |
3(ii).1 | | | | 10-K | | 3/31/10 | 3(ii).4 | |
3(ii).2 | | | | 8-K | | 3/6/12 | 3(ii).1 | |
31.1 | | | | | | | | Filed |
31.2 | | | | | | | | Filed |
32.1 | | | | | | | | Furnished |
32.2 | | | | | | | | Furnished |
101.INS | | Inline XBRL Instance Document | | | | | | Filed |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | Filed |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | Filed |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | Filed |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | Filed |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | Filed |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | Filed |
104 | | The cover page for Inuvo, Inc.’s quarterly report on Form 10-Q for the period ended March 31,September 30, 2022, formatted in Inline XBRL (included with Exhibit 101 attachments). | | | | | | Filed |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| Inuvo, Inc. | |
| | | |
May 12,November 14, 2022 | By: | /s/ Richard K. Howe | |
| | Richard K. Howe, | |
| | Chief Executive Officer, principal executive officer | |
| | | |
May 12,November 14, 2022 | By: | /s/ Wallace D. Ruiz | |
| | Wallace D. Ruiz, | |
| | Chief Financial Officer, principal financial and accounting officer | |