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Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-02-11 · 161 added, 130 removed, 59 unchanged (83% of the section changed)

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Company Overview

Inuvo is a technology company that develops and sells information technology solutions for marketing.

These platforms predictively identify and message online audiences for any product or service across devices, channels and formats, including video, mobile, connected TV, display, social and native.

These capabilities allow Inuvo's clients to engage with their customers and prospects in a manner that drives engagement from the first contact with the consumer.

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

The AI includes a continually updated database of over 500 million machine profiles which Inuvo utilizes to deliver highly aligned online audiences to its clients.

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

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.

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 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 propriety 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 18 issued and seven pending patents.

Mergers Termination

On June 20, 2019, Inuvo entered into an Agreement and Plan of Merger Termination Agreement (the “Merger Termination Agreement”) with ConversionPoint Technologies Inc., a Delaware corporation (“CPT”), ConversionPoint Holdings, Inc., a Delaware corporation (“Parent”), CPT Merger Sub, Inc., a Delaware corporation, (“CPT Merger Sub”), and CPT Cigar Merger Sub, Inc., a Nevada corporation (“Inuvo Merger Sub”), which, among other things, (1) terminated the Agreement and Plan of Merger, dated November 2, 2018, by and among Inuvo, CPT, Parent, CPT Merger Sub, and Inuvo Merger Sub, as amended (the “Merger Agreement”), pursuant to which Inuvo would have merged with and into Inuvo Merger Sub and become a wholly-owned subsidiary of Parent, and CPT would have merged with and into CPT Merger Sub and become a wholly-owned subsidiary of Parent (the “Mergers”), and (2) terminated each of the Support Agreements that were entered into by certain officers and directors of Inuvo and the parties to the Merger Agreement.

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 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 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.

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.

Under the Merger Termination Agreement, CPT and Inuvo agreed to mutually release all claims that each party had against the other, as well as certain affiliated entities of each.

Inuvo, however, will be able to pursue any claims against CPT and its affiliates for breaches of the Merger Termination Agreement.

An independent valuation of the ReTargeter Business was completed as of September 30, 2019.

The enterprise valuation of the ReTargeter Business was determined to be $2.57 million.

Inuvo’s intellectual property is protected by 17 issued and eight pending patents.

Hitachi Credit Agreement

On March 12, 2020 Inuvo, Inc.

closed a Loan and Security Agreement dated February 28, 2020 by and between our Company and our subsidiaries and 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

(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 was used for working capital at the time.

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.

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.

interest rate under the Hitachi agreement is 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.

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

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.

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.

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.

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.

In addition to a $2,000

document fee we have paid to Hitachi, if we exited our relationship with Hitachi before March 1, 2022, we are obligated to pay

Hitachi an exit fee of $50,000.

On March 12, 2020, we drew $5,000,000 under this agreement, using $2,959,573 of these

proceeds to satisfy all of our obligations under a credit agreement with Western Alliance Bank.

The balance was used for working capital and was repaid in 2020.

At December 31, 2021 and 2020, there were no outstanding balances due under the Loan and Security Agreement with Hitachi.

2021 Overview

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.

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 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 Xandr platform to execute their campaigns.

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.

We had an extraordinary year in 2021 despite recurring pandemic induced disruptions occurring across supply chains and labor markets.

Year-over-year (YOY) revenue was up 34% closing out the fourth quarter of the year at $19.7 million, an increase of 53% YOY and 17% quarter-over-sequential quarter.

Both the ValidClick and IntentKey platforms had strong YOY revenue gains;

ValidClick by 22% and the IntentKey by 75%.

For the first time in 2021, our strategy of bringing together the capabilities of both platforms to serve joint clients was realized.

Gross margins declined slightly in 2021 compared to 2020.

We reported gross margins of 73.4% in 2021 compared to 81.4% in 2020, primarily due to change in revenue mix.

The ValidClick and IntentKey platforms provide a similar service to clients, where ultimately their purpose is the delivery of high converting consumers to maximize return on advertising spend.

The distinction between the platforms is mostly related to the channels each platform serves, social and search for ValidClick and programmatic for the IntentKey.

As the number of joint clients grows, the need to distinguish between the platforms diminishes.

Impact of COVID-19 Pandemic

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.

We did not experience an impact from COVID-19 through the end of fiscal year 2019 and had only minor impact from COVID-19 in the first quarter of 2020.

Because we operate in the digital advertising industry, unlike a brick and mortar-based company, predicting 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

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods.

The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances.

We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our audited consolidated financial statements for 2020 and 2019 appearing elsewhere in this report.

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, income tax valuation allowance and derivative liability.

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

First identified in late 2019 and known now as COVID-19, the outbreak has impacted millions of individuals and businesses

In response, many countries have implemented measures to combat the outbreak which has had an unprecedented

economic consequence.

We did not experience an impact from COVID-19 through the end of fiscal year 2019 and had only

minor impact from COVID-19 in the first quarter of 2020.

Because we operate in the digital advertising industry, unlike a brick

and mortar-based company, predicting 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 IntentKey.

This resulted in a significant reduction in our overall revenue run rates during 2020

with the low point occurring during May 2020.

In response to COVID-19, we curtailed expenses, including compensation and travel throughout 2020 in addition to other

Additionally, in April 2020, we obtained the $1.1 million PPP Loan which we used primarily for payroll costs.

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.

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.

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.

Results of Operations

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Gross Profit $ 43,904,851 $ 36,343,524 $ 7,561,327 20.8 %

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.

We experienced 34% higher year over year revenue for the year ended December 31, 2021 as compared to the same period in 2020.

Revenue from both platforms, ValidClick and IntentKey, exceeded the prior year.

ValidClick YOY revenue was up by 22% and IntentKey YOY revenue by 75%.

Both platforms acquired new customers within the year, benefiting from the agreement with a business development partner discussed in Note 11 to our Consolidated Financial Statements and because of the economic improvements associated with the COVID-19 pandemic recovery.

Revenue in 2020 was affected by the COVID-19 pandemic which had a material impact on advertising budgets beginning in April of 2020.

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

Cost of Revenue

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.

Cost of revenue for the year ended December 31, 2021 was primarily generated by payments to advertising exchanges that provide access to a supply of advertising inventory where we serve advertisements using information predicted by the IntentKey platform and, to a lesser extent, payments to website publishers and app developers that host advertisements we serve through ValidClick.

Cost of revenue for the year ended December 31, 2020 time periods was primarily generated by payments to website publishers and app developers that host advertisements we serve through ValidClick.

The components of the cost of revenue have shifted, as the IntentKey platform revenue becomes a greater percentage of net revenue and as the ValidClick service has continued to expand its owned and operated publishing assets.

The increase in the cost of revenue was largely due to the acquisition of new customers as mentioned in the Net Revenue section above and the renegotiation of payment terms and conditions with a ValidClick marketing partner in the quarter ended June 30, 2020.

Operating Expenses

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2021 2020 Change % Change

Marketing costs (TAC) $ 27,410,284 $ 30,135,991 $ (2,725,707) (9.0 %)

Marketing costs $ 33,096,000 $ 27,410,284 $ 5,685,716 20.7 %

Compensation 11,381,279 9,350,831 2,030,448 21.7 %

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Operating expenses $ 51,675,492 $ 44,392,105 $ 7,283,387 16.4 %

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.

Marketing costs consists mostly of traffic acquisition costs (“TAC”) and includes those expenses required to attract an audience to the ValidClick platform.

The increase in marketing costs was largely due to higher TAC that resulted in the increase in ValidClick revenue discussed above in the Net Revenue section.

Compensation expense was higher for the year ended December 31, 2021 compared to the same time period in 2020 due primarily to higher stock-based compensation expense and to a lesser extent to salaries, benefits, commissions and incentive pay.

Our total employment, both full and part-time, was 78 at December 31, 2021 compared to 75 at December 31, 2020.

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.

Selling, general and administrative costs were lower for the year ended December 31, 2021 compared to the same time period in 2020 primarily due to lower IT costs and lower depreciation and amortization costs.

In addition, professional fees were lower in 2021 than the prior year.

Interest Expense, net

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.

Interest expense, net, was approximately $87 thousand for the year ended December 31, 2021 and was primarily composed of interest expense on finance lease obligations, the Hitachi Loan and Security Agreement and our marketable securities.

For the year ended December 31, 2020, interest expense, net, was approximately $254 thousand and composed of interest expense on financed receivables, finance lease obligations and the PPP loan.

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.

Other income, net, was approximately $257 thousand for the year ended December 31, 2021 and included the reversal of deferred revenue from the contract cancellation discussed in Note 11 to our Consolidated Financial Statements of

approximately $415 thousand and reversal of an accrued sales reserve of $50 thousand, partially offset by the unrealized losses on trading securities discussed in Note 3 to our Consolidated Financial Statements.

For the year ended December 31, 2020, other income, net, was $997 thousand and 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 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.

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.

As of December 31, 2021, we have approximately $13.3 million in cash, cash equivalents and marketable securities.

Our net working capital was $12.4 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 December 31, 2021, our accumulated deficit was $144.0 million.

Our principal sources of liquidity are the sale of our common stock and our credit facility with Hitachi described in Note 7 to

our Consolidated Financial Statements.

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.

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.

In March 2021, we contracted with an investment management company to manage our cash in excess of current operating

We placed $2 million in cash equivalent accounts and $10 million in an interest-bearing account.

At December 31, 2021,

our funds with the investment management company were approximately $8 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, we did not issue any shares of common stock or receive any aggregate proceeds from 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 technological 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.

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.

We believe our current cash position and credit facility will be sufficient to sustain operations for at least the next twelve

months from the date of this filing.

If our plan to grow the IntentKey product is unsuccessful, we may need to fund operations through private or public sales of securities, debt financings or partnering/licensing transactions over the long term.

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 adversely impacted our overall revenue

throughout 2020.

As a result, in May 2020 and June 2020 we implemented a temporary compensation change for senior

officers and employees.

Certain employees with salaries in excess of $100,000 per year had forgone a percentage of the cash portion of their salary and instead received an equivalent restricted stock grant.

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.

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.

The table below sets forth a summary of our cash flows for the years ended 2021 and 2020:

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depreciation and amortization of $3,143,168, amortization of right of use assets $322,746 and stock-based compensation of $2,179,254;

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.

partially offset by the $1.4 million referral agreement and the reversal of $420,000 in deferred revenue discussed in Note 11 to our Consolidated Financial Statements.

The change in operating assets and liabilities was a net use of cash of $3,077,525 primarily due to an increase in accrued liabilities of $1,264,687 and the accounts payable balance by $796,456, offset by an increase in the accounts receivable balance by $3,045,690.

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.

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

During 2020, cash used in operating activities was $5,599,335.

We reported a net loss of $4,488,107.

Additional non-cash expenses included the non-cash expenses of depreciation and amortization of $3,422,385 and stock-based compensation expenses of $789,914.

We reported a net loss of $7,304,569 which included the non-cash expenses of depreciation and amortization of $3,237,930, amortization of right of use assets $367,981 and stock-based compensation expenses of $858,683.

The change in operating assets and liabilities was a net use of cash of $656,529.

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Net cash used in investing activities was $4,597,885 and $1,185,335 for 2021 and 2020, respectively.

Cash used in investing activities in both years has primarily consisted of capitalized internal development costs.

Cash used in investing activities in 2021 consisted of capitalized internal development costs and purchase of marketable securities.

Cash used in investing activities in 2020 consisted of capitalized internal development costs.

Cash Flows - Financing

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, 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.

Net cash provided by financing activities was $12,459,441 and $14,302,346 during 2021 and 2020, respectively, primarily from proceeds from the sale of common stock.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S.

The following disclosure supplements the descriptions of our accounting policies, which are described in Note 2 to our Consolidated Financial Statements regarding significant areas of judgement.

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.

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

A discussion of some of our more significant accounting policies and estimates follows.

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.

Revenues are recognized net of adjustments based on the traffic generated and is billed monthly.

We subsequently settle these transactions with 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.

There have been no material changes to our estimates of revenue for the periods presented within this Annual Report on Form 10-K.

Accounts receivable - Accounts receivable consists of trade receivables from customers.

We record accounts receivable at its net realizable value, recognizing an allowance for doubtful accounts based on our best estimate of probable credit losses on our existing accounts receivable.

Balances are written off against the allowance after all means of collection have been exhausted and the possibility of recovery is considered remote.

Goodwill - Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired.

We perform an impairment test annually as of December 31, 2021.

As a result, we perform our annual goodwill impairment test by comparing the fair value of our reporting unit with its carrying amount.

We generally determine the fair value of our reporting unit using the income approach methodology of valuation that includes the undiscounted cash flow method as well as other generally accepted valuation methodologies.

If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the amount it exceeds fair value is equivalent to the amount of impairment loss.

Intangible Assets - We allocate a portion of the purchase price of acquisitions to identifiable intangible assets and we amortize definite-lived assets over their estimated useful lives.

We consider our indefinite-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Trade names are not amortized as they are believed to have an indefinite life.

Trade names are reviewed annually for impairment under ASC 350.

We also acquire intangible assets outside of acquisitions and record them at their fair value and amortize them over their estimated useful lives.

We recorded no impairment of intangible assets during 2021 or 2020.

Capitalized Software Costs - We capitalize certain costs related to internally developed software and amortize these costs using the straight-line method over the estimated useful life of the software, generally two years.

We do not sell internally developed software.

Certain development costs not meeting the criteria for capitalization, in accordance with ASC 350-40 Internal-Use Software, are expensed as incurred.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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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 7. Management’s Discussion and Analysis