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Item 1A. Risk Factors

2022-03-17 compared with 2021-02-11 · 75 added, 56 removed, 121 unchanged (52% of the section changed)

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If any of the following risks and uncertainties develops into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our Company.

We have a history of losses, and our revenues declined in 2020 from 2019.

Business Risks

We have a history of losses.

We cannot anticipate with any degree of certainty what our revenues will be in future periods.

While our gross profit margin increased to 81.4% in 2020 from 63.1% in 2019, our revenues declined approximately 27% in 2020 as compared to 2019.

While our revenues increased approximately 34% in 2021 as compared to 2020, our gross profit margin decreased to 73.4% in 2021 from 81.4% in 2020.

We reported an operating loss of approximately $7.8 million in 2021 as compared to an operating loss of approximately $8.1 million in 2020.

The lower revenue in 2020 as compared to 2019 was due primarily to the ValidClick operations where monetization from advertising inventory sold to our largest demand partners was lower in 2020 in part due to the COVID-19 pandemic.

The higher gross margin in 2020 was primarily due to the change of revenue mix within the ValidClick business.

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 of an interruption to operating activities.

The lower gross margin in 2021 was primarily due to the change of revenue mix.

Though we have a credit facility dependent upon receivables, the negative cash flows generated from operating activities introduces potential risk of an interruption to operating activities.

The COVID-19 pandemic could have a material adverse impact on our business, results of operations and financial condition .

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The COVID-19 outbreak has already caused severe global disruptions.

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

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

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

We have curtailed 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.

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!

During 2020, we curtailed expenses, including compensation and travel and issued a work from home policy to protect our employees and their families from virus transmission associated with co-workers and we began to experience interruptions in our daily operations, as a result of these policies.

During 2021, we changed our policies and reopened our offices on a limited basis and our revenue has returned to growth on a year over year basis.

We 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.

Any adverse impact on the operations of those companies would have a correspondingly adverse impact on our revenues in future periods.

We will continue to assess the impact of the COVID-19 pandemic on our Company, however, at this time we are unable to predict all possible impacts on our Company, operations and revenues.

Should revenues continue to turn downwards or fail to return to historical levels, we may not be able to offset expenses quickly enough which could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.

We rely on two customers for a significant portion of our revenues.

We are reliant upon Yahoo!

and Google for most of our revenue.

During 2020 they accounted for 33.3%, and 27.2% of our revenues, respectively.

We will continue to assess the impact of the COVID-19 pandemic on our Company, however, at this time we are unable to predict all possible impacts on our Company, operations and

Should revenues turn downwards or fail to return to historical levels on a consistent basis, we may not be able to offset expenses quickly enough which could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.

We rely on three customers for a significant portion of our revenues.

We are reliant upon Google, Yahoo!

and Sovrn for a significant portion of our revenue.

During 2021 these customers accounted for 33.0%, 15.6% and 14.3% of our revenues, respectively.

In 2020, Yahoo!

and Google accounted for 33.3% and 27.2% of our revenues, respectively.

The amount of revenue we receive from these customers is

dependent on a number of factors outside of our control, including the amount they charge for advertisements, the depth of advertisements available from them, and their ability to display relevant ads in response to end-user queries.

The amount of revenue we receive from these customers is dependent on a number of factors outside of our control, including the amount they charge for advertisements, the depth of advertisements available from them, and their ability to display relevant ads in response to end-user queries.

We would likely experience a significant decline in revenue and our business operations could be significantly harmed if these customers do not approve our new websites and applications, or if we violate their guidelines or they change their guidelines.

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The loss of any of these customers or a material change in the revenue or gross profit they generate would have a material adverse impact on our business, results of operations and financial condition in future periods.

Ability to maintain our credit facility could impact our ability to access capital in the future.

On March 12, 2020 we closed a Loan and Security Agreement with Hitachi Capital America Corp.

("Hitachi") the terms of which are described in this report which replaced our credit facility with Western Alliance Bank.

Under the terms of the Loan and Security Agreement, Hitachi has provided us with a $5,000,000 line of credit commitment which permits us to borrow against eligible accounts receivable and unbilled receivables.

The Hitachi Loan and Security Agreement contains certain affirmative and negative covenants to which we are subject.

As of December 31, 2020, we were in compliance or obtained a waiver for these covenants.

There are no assurances that we will be able to comply with all the covenants.

In the event we violate a covenant, Hitachi may limit or demand all amounts due under the credit facility at any time, including upon an event of default outstanding, if any, to be due and payable.

If this occurs and if we have outstanding obligations and are not able to repay, Hitachi could require us to apply all of our available cash to repay the debt amounts and could then proceed against the underlying collateral.

Should this occur, we cannot assure you that our assets would be sufficient to repay our debt in full, we would be able to borrow sufficient funds to refinance the debt.

In such an event, our ability to conduct our business as it is currently conducted would be in jeopardy.

We are exposed to credit risk on our accounts receivable and this risk is heightened during periods when economic conditions worsen .

We sell some of our solutions directly to advertisers and advertising agencies on credit.

Our outstanding accounts receivables to advertisers and advertising agencies are not covered by collateral, third-party financing arrangements or credit insurance.

Our exposure to credit and collectability risk on our accounts receivables is higher with some customers and our ability to mitigate such risks may be limited.

As we continue to add new customers and expand our direct relationships with advertisers and advertising agencies our credit risk increases.

Additionally, our credit risk increases during periods when economic conditions worsen.

While we have procedures to monitor and limit exposure to credit risk on our accounts receivables there can be no assurance such procedures will effectively limit our credit risk and avoid losses.

Our success is dependent upon our ability to establish and maintain direct relationships with advertisers and advertising agencies.

Some of our solutions generate revenue directly from advertisers and advertising agencies.

Accordingly, our ability to generate revenue for our solutions is dependent upon our ability to attract new advertisers, maintain relationships with existing advertisers and fulfill our advertisers’ orders.

Our programs to attract advertisers include direct sales, agency sales, online promotions, referral agreements and participation in tradeshows.

We attempt to maintain relationships with our advertisers through providing quality customer service and delivering on campaign goals.

Our advertisers and advertising agency clients can generally terminate their contracts with us at any time and with limited or no advance notice.

We believe that advertisers and advertising agencies will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner.

If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

We are dependent upon relationships with and the success of our supply partners.

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If we are unable to maintain and grow traffic to our sites in a profitable manner, it could have a material adverse effect on our business, financial condition, and results of operations.

Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our operations and increasing customer base.

In the technology industry, there is substantial and continuous competition for engineers with high levels of experience in designing, developing and managing software and Internet-related services, as well as competition for executives and sales and operations personnel.

Many of our competitors have substantially more resources than we do and have the ability to compensate highly skilled personnel at higher levels than we can.

We may not be successful in attracting and retaining qualified highly skilled personnel.

We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment.

If our stock price performs poorly, it may adversely affect our ability to retain highly skilled employees.

If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

Technological Risks

Our business must keep pace with rapid technological change to remain competitive.

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If our services were to be interrupted, it could cause loss of users, customers and business partners, which could have a material adverse effect on our results of operations and financial position.

We are subject to risks from publishers who could fabricate clicks either manually or technologically.

Our business involves the establishment of relationships with website owners and publishers.

In exchange for their consumer traffic, we provide an advertising placement service and share a portion of the revenue we collect with that website publisher.

Although we have click fraud detection software in place, we cannot guarantee that we will identify all fraudulent clicks or be able to recover funds distributed for fabricated clicks.

This risk could materially impact our ability to borrow, our cash flow and the stability of our business.

Regulatory Risks

Regulatory and legal uncertainties could harm our business.

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We have posted privacy policies and practices concerning the collection, use and disclosure of subscriber data on our websites and applications.

The existing and soon to be enacted privacy and data security related laws and regulations are evolving and subject to potentially differing interpretations.

The existing and soon to be enacted privacy and data security related laws and regulations are evolving and subject to potentially differing

interpretations.

Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices.

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Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or orders or other federal, state or international privacy or consumer protection-related laws, including the GDPR, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business.

We may face third party intellectual property infringement claims that could be costly to defend and result in the loss of significant rights.

From time to time third parties have asserted infringement claims against us including copyright, trademark and patent infringement, among other things.

While we believe that we have defenses to these types of claims under appropriate intellectual property laws, we may not prevail in our defenses to any intellectual property infringement claims.

In addition, we may not be adequately insured for any judgments awarded in connection with any litigation.

Any such claims and resulting litigation could subject us to significant liability for damages or result in the invalidation of our proprietary rights, which would have a material adverse effect on our business, financial condition, and results of operations.

Even if we were to prevail, these claims could be time-consuming, expensive to defend, and could result in the diversion of management's time and attention.

We are subject to risks from publishers who could fabricate clicks either manually or technologically.

Our business involves the establishment of relationships with website owners and publishers.

In exchange for their consumer traffic, we provide an advertising placement service and share a portion of the revenue we collect with that website publisher.

Although we have click fraud detection software in place, we cannot guarantee that we will identify all fraudulent clicks or be able to recover funds distributed for fabricated clicks.

This risk could materially impact our ability to borrow, our cash flow and the stability of our business.

Our business is seasonal and our financial results may vary significantly from period to period.

Our future results of operations may vary significantly from quarter to quarter and year to year because of numerous factors, including seasonality.

Historically, in the later part of the fourth quarter and the earlier part of the first quarter we experience lower Revenue Per Click (“RPC”) due to a decline in demand for inventory on website and app space and the recalibrating of advertiser’s marketing budgets after the holiday selling season.

If we are not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on our financial results.

Failure to comply with the covenants and restrictions in our grant agreement with the State of Arkansas could result in the repayment of a portion of the grant, which we may not be able to repay or finance on favorable terms.

In January 2013, we entered into an agreement with the State of Arkansas whereby we were granted $1,750,000 for the relocation of the Company to Arkansas and for the purchase of equipment.

The grant was contingent upon us having at least 50 full-time equivalent permanent positions within four years, maintaining at least 50 full-time equivalent permanent positions for the following six years and paying those positions an average total compensation of $90,000 per year.

As of December 31, 2020, we had 38 full-time employees located in Arkansas.

Failure to meet the requirements of the grant after the initial four-year period, may require

us to repay a portion of the grant, up to but not to exceed the full amount of the grant.

At December 31, 2020, we accrued a contingent liability of $60,000 for the lower than required employment.

We are subject to the continued listing standards of the NYSE American and our failure to satisfy these criteria may result in delisting of our common stock .

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If the NYSE American delists our common stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our common stock, reduced liquidity, decreased analyst coverage of our common stock, and an inability for us to obtain any additional financing to fund our operations that we may need.

In January 2013, we entered into an agreement with the State of Arkansas whereby we were granted $1,750,000 for the relocation of the Company to Arkansas and for the purchase of equipment.

In March 2021, we received an amendment to the agreement that revised the position maintenance requirement for the reporting period of March 31, 2022 to 43 full-time equivalent permanent positions.

The agreement also extended the reporting period and position maintenance period an additional year to a total of six years ending on March 31, 2024.

As of December 31, 2021, we had 41 full-time employees located in Arkansas.

Failure to meet the requirements of the grant after the initial four-year period, may require us to repay a portion of the grant, up to but not to exceed the full amount of the grant.

At December 31, 2021, we accrued a contingent liability of $10,000 for the lower than required employment.

Financial Risks

Our business is seasonal and our financial results may vary significantly from period to period.

Our future results of operations may vary significantly from quarter to quarter and year to year because of numerous factors, including seasonality.

If we are not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on our financial results

Our quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of our common stock.

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• general economic and financial market conditions.

Ability to maintain our credit facility could impact our ability to access capital in the future.

On March 12, 2020 we closed a Loan and Security Agreement with Hitachi Capital America Corp.

("Hitachi") the terms of which are described in this report which replaced our credit facility with Western Alliance Bank.

The Hitachi Loan and Security Agreement contains certain affirmative and negative covenants to which we are subject.

As of December 31, 2021, we were in compliance with these covenants.

There are no assurances that we will be able to comply with all the covenants.

In the event we violate a covenant, Hitachi may limit or demand all amounts due under the credit facility at any time, including upon an event of default outstanding, if any, to be due and payable.

Should this occur, we cannot assure you that our assets would be sufficient to repay our debt in full, we would be able to borrow sufficient funds to refinance the debt.

In such an event, our ability to conduct our business as it is currently conducted would be in jeopardy.

Significant dilution will occur when outstanding restricted stock unit grants vest.

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If we raise additional capital by issuing additional equity securities or use equity securities for acquisitions, existing shareholders may be diluted.

If our capital resources are insufficient at any time in the

future, we may be unable to fund acquisitions, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

If our capital resources are insufficient at any time in the future, we may be unable to fund acquisitions, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

Any usage of capital to fund an acquisition could lead to a decrease in liquidity.

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If we are unsuccessful in completing acquisitions of other operations or assets, our financial condition could be adversely affected and we may be unable to implement an important component of our business strategy successfully.

In addition, if we are unsuccessful in integrating our acquisitions in a timely and cost-effective manner, our financial condition and results of operations could be adversely affected.

In addition, if we

are unsuccessful in integrating our acquisitions in a timely and cost-effective manner, our financial condition and results of operations could be adversely affected.

UNRESOLVED STAFF COMMENTS.

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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 1A. Risk Factors