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 or service 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 prospects 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 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.
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, 2022, we have approximately $9 million in cash, cash equivalents and marketable securities. Our net working capital was $11.2 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, 2022, our accumulated deficit was $146.0 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, 2022,
our funds with the investment management company were approximately $6 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, 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 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 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 may need to fund operations through private or public
sales of securities, debt financings or partnering/licensing transactions.
Customer concentration
For the three month period ending March 31, 2022, our four largest customers by revenue accounted for 67.0% of our overall revenue at 22%, 18.2%, 14.5%, and 12.3%, respectively. Those same four customers accounted for 64.1% of our gross accounts receivable balance as of March 31, 2022. As of December 31, 2021, the same customers accounted for 45.6% 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 April 2020, we experienced a significant reduction in advertiser marketing budgets across both the ValidClick and IntentKey platforms 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. 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. Though 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.
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 and IntentKey platforms:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % | | | | | | | | |
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.
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. Equity securities are marked to market with changes recorded as other income on the income statement. Any interest income or dividends are recorded as interest income on the income statement.
The investments were purchased in April 2021 and therefore, no comparable first quarter 2021 change in fair value was available. The cost, gross unrealized gains (losses) and fair value of marketable securities by major security type as of March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
| 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 |
Note 4 – Property and Equipment
The net carrying value of property and equipment was as follows as of: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Furniture and fixtures | $ | 293,152 | | | $ | 293,152 | |
Equipment | 1,188,802 | | | 1,164,671 | |
Capitalized internal use and purchased software | 13,357,323 | | | 12,914,820 | |
Leasehold improvements | 458,885 | | | 458,885 | |
Subtotal | 15,298,162 | | | 14,831,528 | |
Less: accumulated depreciation and amortization | (13,681,555) | | | (13,324,762) | |
Total | $ | 1,616,607 | | | $ | 1,506,766 | |
During the three months ended March 31, 2022 and March 31, 2021, depreciation expense was $356,793 and $305,528, respectively.
Note 5 – Other Intangible Assets and Goodwill
The following is a schedule of intangible assets and goodwill as of March 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term | | Carrying Value | | Accumulated Amortization and Impairment | | Net Carrying Value | | Year-to-date Amortization |
| | | | | | | | | |
Customer list, Google | 20 years | | $ | 8,820,000 | | | $ | (4,446,750) | | | $ | 4,373,250 | | | $ | 110,250 | |
Technology | 5 years | | 3,600,000 | | | (3,600,000) | | | $ | — | | | 60,000 | |
Customer list, ReTargeter | 5 years | | 1,931,250 | | | (1,030,000) | | | $ | 901,250 | | | 96,562 | |
Customer list, all other | 10 years | | 1,610,000 | | | (1,610,000) | | | $ | — | | | 26,794 | |
Brand name, ReTargeter | 5 years | | 643,750 | | | (343,333) | | | $ | 300,417 | | | 32,188 | |
Customer relationships | 20 years | | 570,000 | | | (147,251) | | | $ | 422,749 | | | 7,125 | |
Trade names, web properties (1) | - | | 390,000 | | | — | | | $ | 390,000 | | | — | |
Intangible assets classified as long-term | | | $ | 17,565,000 | | | $ | (11,177,334) | | | $ | 6,387,666 | | | $ | 332,919 | |
| | | | | | | | | |
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) | $ | 738,375 | |
2023 | 984,500 | |
2024 | 769,917 | |
2025 | 469,500 | |
2026 | 469,500 | |
Thereafter | 2,565,874 | |
Total | $ | 5,997,666 | |
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, 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 | |
Note 9 – 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, 2022, $175,000 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 12 - Stockholders' Equity). Additionally, we agreed to pay quarterly support fees upon reaching certain levels of operational activity.
Note 10 – Income Taxes
We have a deferred tax assets of $33,988,760. 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, 2022 and December 31, 2021. We also have deferred tax liabilities totaling $1,694,600 as of March 31, 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 11 – 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 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.
Compensation Expense
For the three months ended March 31, 2022 and 2021, we recorded stock-based compensation expense for all equity incentive plans of $671,158 and $394,870, respectively. Total compensation cost not yet recognized at March 31, 2022 was $3,986,060, which will be recognized over a weighted-average recognition period of approximately two years.
The following table summarizes the stock grants outstanding under the 2017 ECP and the 2010 Equity Compensation Plan (“2010 ECP”) for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | RSUs Outstanding | | Options and RSUs Exercised | | Available Shares | | Total Awards Authorized |
2017 ECP | — | | | 5,290,007 | | | 4,094,132 | | | 165,861 | | | 9,550,000 | |
2010 ECP (*) | 1,500 | | | — | | | 5,011,511 | | | — | | | 5,013,011 | |
Total | 1,500 | | | 5,290,007 | | | 9,105,643 | | | 165,861 | | | 14,563,011 | |
(*) Expired April 2020
The following table summarizes the activity of stock option awards under the 2010 ECP for the three months ended March 31, 2022: | | | | | | | | | | | | | | | | | |
| Shares Subject to Options Outstanding | |
| Number of Shares | | Weighted Average Exercise Price | | |
Outstanding, beginning of period | 1,500 | | | $ | 0.56 | | | |
Stock options exercised | — | | | $ | — | | | |
Stock options canceled | — | | | $ | — | | | |
Outstanding, end of period | 1,500 | | | 0.56 | | | |
Exercisable, end of period | 1,500 | | | 0.56 | | | |
The following table summarizes the activities for our unvested RSUs for the three months ended March 31, 2022:
| | | | | | | | | | | |
| Unvested RSUs |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding, beginning of period | 3,960,001 | | | $ | 1.33 | |
Granted | 2,690,000 | | | $ | 0.39 | |
Vested | 1,359,994 | | | $ | 1.37 | |
Outstanding, end of period | 5,290,007 | | | $ | 0.85 | |
Note 12 – Stockholders 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 9 - Commitments). As part of that agreement, we granted a warrant exercisable into 300,000 shares of our common stock, 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. For the three months ended March 31, 2022, we recognized approximately $12 thousand in expense and $118 thousand in expense will be recognized over the remaining service period.
Earnings per Share
For the three months ended March 31, 2022 and 2021, we generated a net loss from continuing operations and as a result, any potential common shares are anti-dilutive.
Note 13 – 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, 2022 and December 31, 2021, total operating and financed right-of-use assets were $569,407 and $177,643, and $641,306 and $201,902, respectively.
As of March 31, 2022 and 2021, we recorded $24,259 and $80,117, 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 Three Months Ended March 31, |
Cash paid for operating lease liabilities | $ | 112,695 | |
Weighted-average remaining lease term | 3.5 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 | | |
Information related to our financed lease liabilities are as follows:
| | | | | |
| For the Three Months Ended March 31, |
Cash paid for finance lease liabilities | $ | 29,863 | |
Weighted-average remaining lease term | 2.3 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 | |