What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-11 compared with 2020-05-12 · 98 added, 121 removed, 91 unchanged (71% of the section changed)

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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 in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance.

Inuvo has contractual relationships with three clients who collectively manage over 50% of all U.S.

digital advertising spend.

Inuvo’s solution incorporates a proprietary form of artificial intelligence, or AI, branded the IntentKey.

The Inuvo solution incorporates a proprietary form of artificial intelligence, or AI, branded the IntentKey.

This sophisticated machine learning technology uses interactions with Internet content as a source of information from which to predict consumer intent.

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Inuvo earns revenue when consumers view or click on its client’s messages.

Inuvo’s business scales through account management activity with existing clients and by adding new clients through sales activity.

As part of Inuvo’s technology strategy, it owns a collection of websites including alot.com and earnspendlive.com, where Inuvo creates content in health, finance, travel, careers, auto, education and living categories.

These sites provide the means to test Inuvo’s technologies, while also delivering high quality consumers to clients through the interaction with proprietary content in the form of images, videos, slideshows and articles.

There are many barriers to entry associated with Inuvo’s 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.

The Inuvo business scales through account management activity with existing clients and by adding new clients through sales activity.

As part of the Inuvo technology strategy, it owns a collection of websites including alot.com and earnspendlive.com, where Inuvo creates content in health, finance, travel, careers, auto, education and living categories.

These sites provide the means to test the Inuvo technologies, while also delivering high quality consumers to clients through the interaction with proprietary content in the form of images, videos, slideshows and articles.

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 18 issued and seven pending patents.

Mergers Termination

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The Merger Agreement was terminated as a result of Parent’s inability to fulfill the closing condition of the Mergers that Parent raise $36,000,000 in gross proceeds from an equity, debt, or equity-linked offering of its securities which no longer obligated Inuvo to consummate the Mergers contemplated by the Merger Agreement.

Concurrently with the execution of the Merger Termination Agreement, CPT Investments, LLC, a California limited liability company and an affiliate of CPT (“CPT Investments”), and Inuvo entered into a certain Inuvo Note Termination Agreement (the “Note Termination Agreement”) and agreed to (1) terminate and cancel the 10% Senior Unsecured Subordinated Convertible Promissory Note, dated November 1, 2018, executed by Inuvo in favor of CPT Investments (the “CPTI Note”), which as of June 20, 2019, had $1,063,288 in accrued principal and interest outstanding (the “Outstanding Indebtedness”) by July 20, 2019, (2) effective immediately, terminate all conversion rights under the CPTI Note to convert amounts outstanding into shares of Inuvo’s common stock, (3) terminate the Securities Purchase Agreement, dated November 1, 2018, by and between Inuvo and CPTI (the “Securities Purchase Agreement”), and (4) terminate the Registration Rights Agreement, dated November 1, 2018, by and between Inuvo and CPTI.

Concurrently with the execution of the Merger Termination Agreement, CPT Investments, LLC, a California limited liability company and an affiliate of CPT (“CPT Investments”), and Inuvo entered into a certain Inuvo Note Termination Agreement (the “Note Termination Agreement”) and agreed to (1) terminate and cancel the 10% Senior Unsecured Subordinated Convertible Promissory Note, dated November 1, 2018, executed by Inuvo in favor of CPT Investments (the “CPTI Note”), which as of June 20, 2019, had $1,063,288 in accrued principal and interest outstanding (the “Outstanding Indebtedness”) by July 20, 2019, (2) effective immediately, terminate all conversion rights under the CPTI Note to convert amounts outstanding into shares of Inuvo’s common stock, (3) terminate the Securities Purchase Agreement, dated November 1, 2018, by and between Inuvo and CPT Investments (the “Securities Purchase Agreement”), and (4) terminate the Registration Rights Agreement, dated November 1, 2018, by and between Inuvo and CPT Investments.

The Merger Termination Agreement provided that the termination fee of $2,800,000 to be paid to Inuvo (the “Termination Fee”) for failure to fulfill the Financing Condition would be satisfied as follows:

(1) $1,063,288 of the Termination Fee (the “Indebtedness Satisfaction Amount”) was satisfied in consideration of the termination and cancellation of the Outstanding Indebtedness pursuant to the CPTI Note Termination Agreement that was approved by CPT’s senior lenders Montage Capital II, L.P.

(1) $1,063,288 of the Termination Fee was satisfied in consideration of the termination and cancellation of the Outstanding Indebtedness pursuant to the CPTI Note Termination Agreement that was approved by CPT’s senior lenders Montage Capital II, L.P.

and Partners for Growth IV, L.P.

(the “Senior Lenders”) of CPT’s issuance of a replacement note to CPT Investments that was entered into in July 2019;

(2) $1,611,712 of the Termination Fee (the “ReTargeter Satisfaction Amount”) was satisfied by CPT transferring all of the assets related to CPT’s programmatic and RTB advertising solutions business conducted through managed services and a proprietary SaaS solution (the “ReTargeter Business”), free and clear of all liabilities, encumbrances, or liens, to Inuvo (the “ReTargeter Asset Transfer”);

(3) CPT paid $125,000 to Inuvo on September 15, 2019 to be contributed to the settlement of ongoing litigation with respect to the Mergers (the “Litigation Fee”).

and CPT’s issuance of a replacement note to CPT Investments that was entered into in July 2019;

(2) $1,611,712 of the Termination Fee was satisfied by CPT transferring all of the assets related to CPT’s programmatic and RTB advertising solutions business conducted through managed services and a proprietary SaaS solution (the “ReTargeter Business”), free and clear of all liabilities, encumbrances, or liens, to Inuvo;

(3) CPT paid $125,000 to Inuvo on September 15, 2019 to be contributed to the settlement of ongoing litigation with respect to the Mergers.

On September 30, 2019, Inuvo paid its obligation of $250,000 under a confidential settlement agreement that it entered into on June 20, 2019 resolving certain outstanding litigation related to the Mergers.

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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 (i) the lesser of 75% of the aggregate Unbilled Accounts Receivable (as those terms are defined in the Loan and Security Agreement) or 50% of the amount available to borrow under (i), up to the maximum credit commitment.

On March 12, 2020 we drew $5,000,000 under this agreement, using $2,959,573 of these proceeds to satisfy our obligations to Western Alliance Bank under our credit agreement with it and the balance is being used for working capital.

Following the satisfaction of our obligations to Western Alliance Bank, all agreements with that entity have been terminated.

We are permitted to borrow (i) 90% of the aggregate Eligible Accounts Receivable, plus

(i) the lesser of 75% of the aggregate Unbilled Accounts Receivable (as those terms are defined in the Loan and Security Agreement) or 50% of the amount available to borrow under (i), up to the maximum credit commitment.

Following the satisfaction of our obligations to Western Alliance Bank, all agreements with that entity were terminated.

We will pay Hitachi 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.

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We are also obligated to pay Hitachi a quarterly service fee of 0.30% on the monthly unused amount of the maximum credit line.

In addition to a $2,000 document fee we have paid to Hitachi, if we should repay the amounts due under the Loan and Security Agreement before March 1, 2022, we are obligated to pay Hitachi an exit fee of $50,000.

In addition to a $2,000 document fee we have paid to Hitachi, if we should exit the Agreement before March 1, 2022, we are obligated to pay Hitachi an exit fee of $50,000.

2020 Overview

We entered 2019 with two product lines, ValidClick and the IntentKey, the latter having been launched through an integration with AppNexus at the end of 2018.

We entered 2020 with two product lines, ValidClick and IntentKey, the latter having been launched through an integration with Xandr at the end of 2018.

For ValidClick, our objective was to keep the business steady while diversifying revenue within the product line.

Through the first half of 2019 we were consumed with the announced Mergers with CPT.

While that Merger looked promising at the close of 2018, we encountered a number of obstacles, including the 35 day federal government shutdown, that eventually lead to its termination in June 2019.

The first two quarters of 2019 were negatively affected by management’s focus on Mergers integration, and the legal, public company and due diligence expenditures required to execute the Mergers.

The Merger Agreement was terminated due to CPT's inability to fulfill the closing condition to raise $36,000,000 in gross proceeds from an equity, debt, or equity-linked offering of its securities.

As a result, we were entitled to a termination fee of $2,800,000 that was satisfied by the cancellation of an outstanding note payable to CPT Investments of $1,063,288;

the transfer of all of the assets related to CPT's programmatic advertising solutions business of $1,611,712 ;

and the contribution of $125,000 towards the settlement of ongoing litigation resulting from the Mergers.

With the termination of the Merger Agreement in June 2019, we began to reassess our strategy and capital needs.

First, and as a result of the costs associated with the Mergers, we needed to raise capital.

In July 2019, we completed a public offering of 15,812,500 shares of our common stock for gross proceeds of approximately $4.7 million.

Second, we needed to refocus the operating teams back to our pre-Merger Agreement growth and margin strategies.

We estimate that approximately $11.3 million of year over year revenue within ValidClick was lost in part because of a change in strategy associated with the Mergers.

We also estimate that an additional $4.9 million in revenue was lost in 2019 from an announced 2018 reduction in support for certain supply side technologies and revenue associated with the redesign of the IntentKey and its integration to AppNexus, which was offset by an increase of roughly $4.5 million in new IntentKey sales in 2019 where our win rates on RFP submissions closed out the year at better than 60% having signed a number of notable name brand clients within the year.

The Integration of the IntentKey to AppNexus leading into 2019 provided a means to distribute our IntentKey product.

We had conducted an extensive evaluation of potential partners in late 2018 having ultimately selected AppNexus due to their scale and the immediate fit of their technology.

This relationship allowed our proprietary data, which is manufactured by our patented artificial intelligence, to become available for sale by Inuvo as a service to online advertisers, thousands of which use the AppNexus platform to execute their campaigns.

January of 2019 effectively marked the end of a major, roughly 18-month product investment and development cycle which began in the second quarter of 2017 following the acquisition of a core artificial intelligence technology.

This capability became the foundation of the IntentKey.

We remain convinced, following the 2019 performance that the technology we have and the

integration engineered is a game changing paradigm shift for an industry burdened by a plethora of consumer data privacy and technology complications which we believe have been re-imagined as part of the IntentKey platform.

Since the launch of the integrated IntentKey/AppNexus product, results have been strong with revenue growing 60% in the second half of 2019 over the first half of 2019.

Only four salespeople were onboard for the entire 2019 period and contributed to that result.

Equally important are the gross margins, which started 2019 at 27.4% (which we expected for a new product launch) and ended 2019 with 40+% gross margin.

We also announced in late 2019, a technology enhancement called the IntentCloud that will allow the product to respond faster to marketing opportunities which could contribute to both revenue and margins beginning in the first quarter of 2020.

The ValidClick product line remains an important component of our overall strategy having delivered roughly $53 million dollars in 2019.

With the termination of the Merger Agreement with CPT in June 2019, we began to reassess our strategy.

The integration of the IntentKey to Xandr leading into 2019 provided a means to distribute our IntentKey product.

We had conducted an extensive evaluation of potential partners in late 2018 having ultimately selected Xandr due to their scale and the immediate fit of their technology.

This year, 2020, has been an extraordinary year that could not have been predicted at the time it was forecasted.

The COVID-19 pandemic resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines and travel bans, intended to control the spread of the virus.

Beginning in late April 2020, we experienced a significant reduction in demand (marketing budgets) within the ValidClick business and a modest decline in demand within the IntentKey business, the combination of which has resulted in a significant reduction in our revenue run rate.

Generally, marketing budgets tend to decline in times of a recession.

We curtailed expenses, including compensation and travel and we issued a work from home policy to protect our employees and their families from virus transmission between co-workers.

We began to experience interruptions in our daily operations, as a result of these policies.

The revenue impact on our industry could vary dramatically by vertical.

For example, we experienced less advertising demand from the travel, leisure and hospitality verticals.

We also maintain long-standing relationships with Yahoo!

and Google that provide access to hundreds of thousands of advertisers from which most of our ValidClick and digital publishing revenue originates.

We continue to assess the impact of the COVID-19 pandemic on our Company.

We reported lower revenue for the year ended December 31, 2020 as compared to 2019 due predominately to the impact of the COVID-19 pandemic on customer advertising budgets.

Gross margins improved significantly in 2020 compared to 2019.

We reported gross margins of 81.4% in 2020 compared to 63.1% in the prior year due to reducing outsourced campaign management for the ValidClick platform as well as growing acceptance of the IntentKey.

Impact of COVID-19 Pandemic

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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.

Beginning in late April 2020, we experienced a significant reduction in Demand (marketing budgets) within the ValidClick business and a modest decline in Demand within the IntentKey business, the combination of which has resulted in a significant reduction in our revenue run rate.

In response to COVID-19, we have started to curtail expenses, including compensation and travel, and we have issued a work from home policy to protect our employees and their families from virus transmission associated with co-workers.

Additionally, in April 2020, we obtained an unsecured Paycheck Protection Program loan under the Coronavirus Aid, Relief and Economic Security Act of $1.1 million which we are using primarily for payroll costs.

Because of the impact of COVID-19 on our business, we are unable at this time to predict with any certainty how the second quarter will materialize and whether our revenue run rate will improve.

As a result of this uncertainty we are focusing our resources on areas we believe have immediate revenue potential and attempting to reduce expenses where necessary with as little disruption on our daily operations as possible.

Should revenues continue to turn downwards or fail to return to historical levels, we may not be able to offset expenses quickly enough.

Our net working capital was negative $7.5 million as of December 31, 2019.

During March 2020 and April 2020 we raised approximately $1.5 million of working capital through the sale of our securities and in April 2020 we obtained the PPP Loan of $1.1 million.

There is no assurance that we will be successful in obtaining funding to continue operations, particularly in light of the current impact of COVID-19 on the U.S.

capital markets.

Going Concern

For the year ended December 31, 2019, we reported a net loss of $4,488,107 and net cash used in operating activities of $5,338,383.

The report of our independent registered public accounting firm on our audited consolidated financial statements at December 31, 2019 and 2018 and for the years then ended contains an explanatory paragraph regarding substantial doubt of our ability to continue as a going concern based upon our recurring losses from operations and our net capital deficiency.

These factors, among others, raise substantial doubt about our ability to continue as a going concern.

Our audited consolidated financial statements appearing elsewhere in this report do not include any adjustments that might result from the outcome of this uncertainty.

There are no assurances we will be successful in our efforts to significantly increase our revenues or report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.

Because we operate in the digital advertising industry, unlike a brick and mortar-based company, predicting the impact of the coronavirus pandemic on our Company is difficult.

Beginning in late April 2020, we experienced a significant reduction in marketing budgets and a decrease in monetization rates which impacted ValidClick more severely than the IntentKey.

This resulted in a significant reduction in our overall revenue run rates within the year with the low point having occurred in May.

In response to COVID-19, we curtailed expenses, including compensation and travel throughout the year in addition to the other actions described above.

Additionally, in April 2020, we obtained an unsecured Paycheck Protection Program ("PPP") loan under the Coronavirus Aid, Relief and Economic Security ("CARES") Act of $1.1 million which we used primarily for payroll costs.

The loan was fully forgiven by the Small Business Administration (SBA) on November 2, 2020.

Beginning mid-June 2020, we began to experience an improvement in overall daily revenue, but because of the unprecedented sustainability of COVID-19 on our business, we are unable at this time to predict with any certainty how our clients will adapt their business strategies within the context of COVID-19 and therefore how our revenue run rate will change as a result.

As a result of this uncertainty, we are focusing our resources on areas we believe 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.

Our net working capital was a positive $5.9 million as of December 31, 2020.

During January 2021, the Company raised approximately $14.3 million, before expenses, through the sale of our securities in two offerings.

During the second and third quarters of 2020, we raised approximately $16.5 million, before expenses, through the sale of our securities and in April 2020, we obtained a $1.1 million loan under the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (“PPP Loan”).

With the reduction in our revenue run rate, there is an increased need for working capital to fund our operations.

There is no assurance that we will be successful in obtaining additional funding to continue operations, particularly in light of the current impact of COVID-19 on the U.S.

capital markets, but believe we have sufficient capital to operate during the next twelve months.

Critical Accounting Policies and Estimates

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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 allowances for doubtful accounts, goodwill and purchased intangible asset valuations, valuation of long-lived assets and derivative liability.

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.

Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.

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Gross Profit $ 36,343,524 $ 38,824,341 (2,480,817) (6.4) %

We experienced lower year over year revenue in 2019 as compared to 2018 due primarily to lower monetization from advertising inventory sold to our largest demand partners in the ValidClick operations largely as a result of a shift in focus associated with the Mergers which were terminated in June 2019.

In addition, the previously announced strategy to reduce focus on the non-strategic publisher side technologies, along with lost clients due to the reengineering of the IntentKey, resulted in approximately $4.8 million lower revenue.

Overall revenue from the IntentKey business partially offset these declines and was approximately $8.5 million, 86.9% higher in 2019 compared to the same period last year.

Though we saw improvements associated with ValidClick monetization in the fourth quarter of 2019, we do not know whether monetization will return to former levels.

We experienced lower year over year revenue for the year ended December 31, 2020 as compared to the same period in 2019.

Revenue declined within the ValidClick platform where COVID-19 had a material impact on advertising budgets.

The renegotiation of payment terms and conditions with marketing partners in the quarter ended June 30, 2020 also contributed to the lower ValidClick revenue as a trade off for higher gross margins.

The IntentKey platform grew 22.2% for the year ended December 31, 2020 over the prior year.

Cost of Revenue

Cost of revenue is primarily generated by payments to website publishers and app developers that host advertisements we serve and to ad exchanges that provide access to supply inventory where we serve advertisements.

The decrease in the cost of revenue in 2019 compared to 2018 is due primarily to lower revenue and to the loss of revenue associated with the discontinuation of non-strategic revenue including a proprietary marketing platform discussed in the Net Revenue section.

The higher gross margin in 2019 of 63.1% compared to 59.2% is primarily due to the change of revenue mix within the ValidClick business.

Cost of revenue is primarily generated by payments to website publishers and app developers that host advertisements we serve through ValidClick and to ad exchanges that provide access to a supply of advertising inventory where we serve advertisements

using information predicted by the IntentKey.

The decrease in the cost of revenue for the year ended December 31, 2020 compared to the same time period in 2019 was due primarily to the decline in ValidClick revenue as described in the Net Revenue section and the decision to reduce certain historically outsourced campaign management tasks.

Operating Expenses

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Operating expenses $ 44,392,105 $ 46,562,534 $ (2,170,429) (4.7 %)

Marketing costs include those expenses required to attract an audience to our owned web properties.

Marketing costs decreased in 2019 compared to 2018 primarily due to adjusting traffic acquisition campaigns as a result of lower monetization described in the Net Revenue section.

Compensation expense decreased in 2019 as compared to 2018 due primarily to lower headcount and lower capitalized software costs.

Our full-time employment was 61 at December 31, 2019 compared to 63 at December 31, 2018.

The increases in selling, general and administrative costs in 2019 as compared to 2018 was primarily due to expenses associated with the underwritten public offering of our common stock, the settlement of litigation associated with the Mergers and approximately $1 million of expense associated with the terminated Mergers.

Marketing costs or TAC include those expenses required to attract an audience to the ValidClick owned and operated web properties.

The decrease in marketing costs for the year ended December 31, 2020 compared to the same period in 2019 was due primarily to the decline in revenue as described in the Net Revenue section, the decision to reduce the use of outside agencies for traffic acquisition and due to renegotiating payment terms and conditions with a ValidClick marketing partner in the second quarter.

Compensation expense was higher for the year ended December 31, 2020 compared to the same time period in 2019 due primarily to higher employee salary expense, commissions, stock-based compensation and accrued incentive pay.

Our total employment, both full and part-time, was 75 at December 31, 2020 compared to 65 at December 31, 2019.

The higher head count at the end of 2020, as described above, was primarily the result of a decision to reduce the use of outside agencies for traffic acquisition and take the function in-house.

Selling, general and administrative costs were lower for the year ended December 31, 2020 compared to the same time period in 2019 due primarily to approximately $1 million in legal and professional fees related to the terminated Merger in 2019.

Interest Expense, net

Interest expense, net, which represents interest expense on financed receivables, capital lease obligations and notes payable, was higher in 2019 compared to 2018 primarily due to higher interest rates on the financed receivables this year compared to last year.

Interest expense, net, which represents interest expense on financed receivables, finance lease obligations and PPP loan, was approximately $254 thousand for the year ended December 31, 2020.

Interest expense, net, was approximately $482 thousand for the year ended December 31, 2019.

The higher amounts were primarily due to increased borrowings from financed receivables.

Other income, net

Other income, net, of $997 thousand in 2020 was primarily due to the $1.1 million PPP loan being fully forgiven on November 2, 2020.

The PPP loan helped fund compensation expenses.

Partially offsetting the PPP loan was a $103 thousand other expense due to the change of the fair market value of the derivative liability associated with convertible promissory notes that were extinguished by May 2020.

Other income, net, of $3.4 million in 2019 is due primarily to the Termination Fee of $2.8 million and the excess fair value over assets received for ReTargeter of $967 thousand (see Mergers Termination above ) , offset by approximately $191 thousand due to the change of the fair market value of the derivative liability associated with convertible promissory notes and to $255 thousand due to the conversion of a portion of the convertible promissory notes (as described in Note 7).

Liquidity and Capital Resources

The change in operating assets and liabilities during 2019 was a use of cash of $5,338,383 primarily due to a net loss of $4,488,107, a decrease in the accounts payable balance by $1,978,974, and an increase of accounts receivable of $973,522, offset by a increase in accrued expenses and other liabilities balance by $1,334,271.

The seasonal nature of our business is such that the second half year revenue is typically greater than the first half year revenue and therefore, the related accounts receivable balance is higher.

The change in cash flows from operating activities during 2020 was a use of cash of $5,599,335 primarily due to a net loss of $7,304,569, a decrease in the accounts payable balance by $2,271,578, the benefit of $1,260,978 from a contract cancellation and $1,109,000 from the forgiveness of the PPP loan, partially offset by the decrease in the accounts receivable balance of $1,317,508 and the increase in accrued expenses and other liabilities balance by $623,576.

Our terms are such that we generally collect receivables prior to paying trade payables.

Media sales typically have slower payment terms than the terms of related payables.

During 2019, our principal sources of liquidity were our borrowings under our credit facility with Western Alliance Bank which is described in Note 6 to our 2019 audited consolidated financial statements appearing elsewhere in this report, the sale of our common stock and borrowings from non-bank financial institutions.

In March 2020, this credit facility was replaced by our credit facility with Hitachi as described earlier in this section.

Our net working capital was negative $7.5 million as of December 31, 2019 compared to negative $6.9 million as of December 31, 2018.

The lower net working capital is primarily due to a $4.5 million net loss for the year ended December 31, 2019, which is net of certain one-time gains of approximately $3.7 million, and which included approximately $1 million of expense associated with the failed Mergers described earlier in this section.

On March 1, 2019, we entered into a Securities Purchase Agreement with three accredited investors pursuant to which we sold an aggregate of $1,440,000 of principal of Original Issue Discount Unsecured Subordinated Convertible Notes due September 1, 2020.

On November 11, 2019 we entered into Note Modification and Release Agreements with the holders of two of these notes representing an aggregate of $1,080,000 principal amount of these notes.

The third noteholder did not enter into a Note Modification and Release Agreement.

Under the terms of the Note Modification and Release Agreement, the parties agreed that in consideration of such noteholder’s agreement to convert a minimum of 50% of the outstanding amount of the note (the “First Conversion Amount”) that the conversion price for the First Conversion Amount would be $0.265 per share and that the conversion price for any remaining amount due under the note would be $0.30 per share, subject to future adjustment under the terms of the note including dilutive issuances at price below $0.30 per share.

Following the execution of the Note Modification and Release Agreement, the noteholders converted an aggregate of $765,000 principal amount due under the notes into 2,886,792 shares of our common stock.

In January 2020, a noteholder converted $360,000 principal amount due under the note into 1,200,000 shares of our common stock.

After this conversion, $315,000 of the original principal amount was outstanding under all of these notes.

Effective April 20, 2020, the terms of this remaining note were amended to extend the maturity date to December 31, 2020 and reduce the conversion price to $0.175 per share.

On April 21,2020, the remaining noteholder converted $200,000 principal amount due under the remaining note into 1,142,857 shares of our common stock.

For 2019, our revenues declined 16% from the same period in the prior year.

We reported losses from operations of approximately $7.7 million for the year ended December 31, 2019.

In addition to the $1 million Mergers costs described above, the lower revenue in 2019 is principally responsible for our losses.

Of the net loss after the one-time gains described above for 2019, approximately $4.2 million were the non-cash expenses of depreciation, amortization and stock-based compensation.

Since our credit facility is dependent upon receivables, and we do not know when, if ever, that our revenues will return to historic levels or if we will be able to replace those lost revenues with revenues from other sources, the combination of lower credit availability and recent negative cash flows generated from operating activities introduces potential risk to operation without interruption.

We have pooled our resources behind a plan to grow our AI technology, the IntentKey, where we have a technology advantage and higher margins.

Our principal sources of liquidity are the sale of our common stock, our borrowings under our credit facility with Hitachi, described in Note 6, and borrowings from non-bank financial institutions (see Note 7).

During March 2020 and April 2020, we raised approximately $1.5 million in gross proceeds, before expenses, through sales of our common stock and in April 2020 we received a $1.1 million PPP Loan.

On June 8, 2020, we raised an additional $5.5 million in gross proceeds, before expenses, through the sale of our common stock and on July 27, 2020, we raised an additional $10.75 million in gross proceeds, before expenses, through sales of our common stock.

On January 19, 2021, we raised an additional $8 million in gross proceeds, before expenses, through the sale of our common stock, and on January 22, 2021, we raised an additional $6.25 million in gross proceeds, before expenses, through sales of our common stock.

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.

We use our credit facility with Hitachi discussed above to partially fund operations.

However, if we continue to experience losses, we may be unable to borrow funds under this agreement.

Though we believe current operating cash flows and the credit facility will be sufficient to sustain operations into at least the third quarter of 2020, 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.

During March 2020 and April 2020, we raised approximately $1.5 million of working capital through the sale of our securities and in April 2020 we obtained the unsecured PPP Loan of $1.1 million which we are using primarily for payroll costs.

The PPP Loan is scheduled to mature two years from the date of issuance and has a 1% interest rate.

Commencing on the date which is seven months following the date of the loan and continuing on the same day of each following month, we are obligated to pay principal and interest payments which will fully amortize all principal and interest (including accrued interest prior to the initial payment date) by the maturity date.

The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults and provisions of the promissory note.

Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP Loan.

Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent and utility costs.

No assurance is provided that we will apply for and obtain forgiveness of the PPP Loan in whole or in part.

There is no assurance that we will be successful in obtaining additional funding to continue operations in which case we would need to find additional sources of credit and make substantial reductions to operating expense.

A substantial reduction of operating expense may cause disruption to the business and the generation of future revenue.

Given the above conditions, there is doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared with the realization of assets and the satisfaction of liabilities in the normal course of business.

First identified in late 2019 and known now 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.

The Company had not experienced 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.

In April of 2020, the Company experienced a significant reduction in advertiser marketing budgets across both the ValidClick and IntentKey platforms as a direct consequence of COVID-19.

The Company is unable at this time to predict with any certainty how the second quarter will materialize and as a result is taking a just-in-time approach to business operations, focusing resources on areas with immediate revenue potential and reducing expenses where necessary.

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.

In April 2020, the Company experienced a significant reduction in advertiser marketing budgets across both the ValidClick and IntentKey platforms as a direct consequence of COVID-19.

These reductions continued to adversely impact overall revenue throughout the year.

While COVID-19 is still present, we are at this time, unable to quantify the long-term impacts on our Company.

As a result, in May 2020 and June 2020 we implemented a temporary compensation change for senior officers and certain other highly compensated employees.

We also curtailed expenses, including compensation and travel for the months of May and June, and we issued a work from home policy to protect our employees and their families from virus transmission associated with co-workers.

As a result of this uncertainty, we continue to focus our resources on areas we believe have immediate revenue potential while concurrently reducing expenses where necessary with an objective to minimize daily operating disruptions.

On October 7, 2020, we held a Special Meeting of Stockholders for the purpose of approving and adopting the ratification and validation of the amendment to our articles of incorporation to increase the number of authorized shares of common stock that we may issue from 60,000,000 to 100,000,000.

The proposal was approved.

On December 16, 2020, stockholders approved an amendment to our articles of incorporation increasing the number of authorized shares of common stock, $0.001 par value per share from 100,000,000 to 150,000,000.

The table below sets forth a summary of our cash flows for the years ended 2020 and 2019:

Net cash used in operating activities

$5,559,335 $5,338,383

Net cash used in investing activities

$1,185,335 $1,194,164

Net cash provided by financing activities

$14,302,346 $6,676,580

Cash Flows - Operating

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We reported a net loss of $7,304,569, which included non-cash expenses;

depreciation and amortization of $3,422,385 and stock-based compensation of $789,914.

The change in operating assets and liabilities was a net use of cash of $1,583,570 primarily due to a decrease in the accounts payable balance by $1,978,974 and an increase in the accounts receivable and unbilled revenue balance by $973,522.

depreciation and amortization of $3,237,930, amortization of right of use assets $367,981 and stock-based compensation of $858,683.

The change in operating assets and liabilities was a net use of cash of $506,196 primarily due to a decrease in the accounts payable balance by $2,271,578, offset by a decrease in the accounts receivable balance by $1,317,508.

Our terms are such that we generally collect receivables prior to paying trade payables.

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Cash Flows - Financing

Net cash provided by financing activities was $6,676,580 during 2019 primarily from proceeds from the sale of common stock and the Convertible Promissory Notes.

During 2018, net cash used in financing activities was $120,644 primarily from proceeds of the secondary public offering in May 2018.

Net cash provided by financing activities was $14,302,346 during 2020 primarily from proceeds from the sale of common stock.

During 2019, net cash used in financing activities was $6,676,580 primarily from proceeds from the sale of common stock and the convertible promissory notes (as described in Note 8).

Off Balance Sheet Arrangements

As of December 31, 2019, 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.

As of December 31, 2020, 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.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis