What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-17 · 84 added, 102 removed, 118 unchanged (61% of the section changed)

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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.

These solutions predictively identify and message online audiences for any product, service or brand 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 audiences 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.

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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.

The AI can identify and advertise to the reasons why consumers are purchasing products and services not to who those consumers are.

In this regard, the technology is designed for a privacy conscious future and is focused on the components of the advertising value chain most responsible for return on advertising spend, the intelligence behind the advertising decision.

Inuvo technology can be consumed both as a managed service and SaaS.

For clients, Inuvo has also developed a collection of proprietary websites collectively branded as Bonfire Publishing where content is created specifically to attract qualified consumer traffic for clients through the publication of information across a wide range of topics including health, finance, travel, careers, auto, education and lifestyle.

These sites also provide the means to market test various Inuvo advertising

technologies.

Further, Inuvo also provides Search and Social advertising services through a proprietary set of technologies branded as CampSight.

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.

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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.

document fee we have paid to Hitachi, if we had exited our relationship with Hitachi before March 1, 2022, we were 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

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2022 Overview

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 grew revenue, added new clients, and increased awareness in 2022.

Year-over-year (YOY) revenue was up 26%.

Our strategy of bringing together the capabilities of both platforms to serve joint clients was successfully implemented throughout the year.

Consequently, we were able to differentiate ourselves even further in the following ways:

• through the development of data warehousing and reporting that serves multi-channel clients;

• by conceiving, building and deploying AI based media-mix predictive technology;

• by extending the AI targeting technology to cable television;

• by incorporating AI based campaign decisions with CampSight;

• through the use of AI for content creation within Bonfire Publishing;

• through the development of a GUI that allows clients to visualize the AI targeting signals;

• by augmenting the AI brain with new concept understanding;

Gross margins declined in 2022 compared to 2021.

We reported gross margins of 60% in 2022 compared to 73.4% in 2021, 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

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.

The IntentKey and CampSight 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, programmatic for the IntentKey and social and search for CampSight.

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

Results of Operations

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Gross Profit $ 45,359,358 $ 43,904,851 $ 1,454,507 3.3 %

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.

We experienced 26% higher YOY revenue for the year ended December 31, 2022 as compared to the same period in 2021.

The amount of business served exceeded the prior year across both platforms.

Both platforms benefited from the acquisition of new customers, in part as a result of the 2021 agreement with a business development partner discussed in Note 9 to our Consolidated Financial Statements.

During 2022, three material clients accounted for 29.1%, 24.1% and 12.9% of our revenue, respectively.

In 2021, three separate material clients accounted for 14.3%, 15.6% and 33.0% of our revenue, respectively.

In 2021 and throughout 2022 we onboarded several Direct clients that contributed to revenue growth.

We have experienced churn in our Direct client base where some Direct clients that were material to 2021 were not served or only partially served in 2022 and some Direct clients that were material to 2022 are no longer being served.

Historically, we have been able to replace lost clients with new clients or by expanding our relationship with existing clients, however, we would likely experience a significant decline in revenue and our business operations could be significantly harmed if we are unable to replace lost clients.

Cost of Revenue

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.

Cost of revenue is primarily composed of payments to advertising exchanges that provide access to digital inventory where we serve advertisements using information predicted by the IntentKey platform.

To a lesser extent, cost of revenue includes payments to website publishers and app developers that host advertisements we serve through CampSight.

CampSight cost of revenue is relatively small and therefore generates a higher gross margin.

In recent quarters, the components of the cost of revenue have shifted, as the IntentKey platform revenue becomes a greater percentage of Net Revenue.

As CampSight revenue declines as a percent of total Net Revenue, one should expect total gross margin to decrease.

Cost of revenue increased 90% in 2022 compared to the prior year due to this shift in revenue and to the acquisition of new customers as mentioned in the Net Revenue section above.

Operating Expenses

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Compensation 12,463,095 11,381,279 1,081,816 9.5 %

Selling, general and administrative 7,198,213 7,630,990 (432,777) (5.7 %)

General and administrative 8,624,998 7,198,213 1,426,785 19.8 %

Operating expenses $ 58,009,232 $ 51,675,492 $ 6,333,740 12.3 %

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.

Marketing costs consist mostly of traffic acquisition costs and include those expenses required to attract an audience to owned

and operated web properties.

Marketing costs year ended December 31, 2022 compared to the same period in 2021 increased as the result of higher revenue.

In June 2022, we identified some of the advertising we purchased from a prominent advertising network during the quarter ended June 30, 2022 appeared, according to our technology and assessment, to be comprised of invalid advertising clicks.

As a result, we refunded $1.5 million to our clients that were impacted by the invalid clicks and reversed any revenue that would have been recognized during the quarter ended June 30, 2022 related to this invalid traffic.

In addition, we provided evidence to the network from which we bought the media and demanded a refund of the spend.

The network in question immediately launched an internal investigation.

We have held back approximately $1.4 million in net payments due until such time as a satisfactory resolution is determined and have not reflected any offsetting adjustment to the related marketing expense and payables.

As a result, we have entered into a mediation process with the advertising network.

For the time being, the amount held back is recorded as a marketing expense and an accounts payable.

The fraud that was discovered was atypical, sophisticated and not common within the network in question.

As of December 31, 2022, no invalid traffic associated from the fraud was detected and the recompense from the advertising network is still pending.

Compensation expense was higher for the year ended December 31, 2022 compared to the same time period in 2021 due primarily to higher salaries and benefits.

Our total employment, both full and part-time, was 86 at December 31, 2022 compared to 75 at December 31, 2021.

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, 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, 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.

General and administrative costs were higher for the year ended December 31, 2022 compared to the same time period in 2021 primarily due to higher reserve for doubtful accounts, professional fees, travel and entertainment expense, IT costs and insurance expense.

Financing expense, net

Finance expense, net, for the year ended December 31, 2022 was approximately $21 thousand and was primarily due to financing expenses of approximately $59 thousand offset by interest income, net of fees, on marketable securities of approximately $38 thousand.

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

Other (expense) income, net

Other income (expense), net, for the year ended December 31, 2022 was an expense of approximately $436

thousand from net realized and unrealized gains and losses discussed in Note 3 to our Consolidated Financial Statements.

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 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.

Liquidity and Capital Resources

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

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.

On January 19, 2021, we raised $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 needs.

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.

At December 31, 2022, our funds with the investment management company were approximately $2 million and were invested in cash equivalent accounts and marketable debt and equity securities.

A detail of the activity is described in Note 3 to our Consolidated Financial Statements.

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However, there is no assurance that we will be able to achieve this objective.

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.

As of December 31, 2022, we have approximately $4.5 million in cash, cash equivalents and short-term marketable securities.

Our net working capital was $2.8 million.

We have encountered recurring losses and cash outflows from operations, which historically we have funded through equity offerings and debt facilities.

For the year ended December 31, 2022 we had a net loss of $13.1 million and net cash outflows from operations of $5.6 million.

In addition, our investment in internally developed

software consists primarily of labor costs which are of a fixed nature and amounted to approximately $1.7 million for the year ended December 31, 2022.

Through December 31, 2022, our accumulated deficit was $157.1 million.

Management plans to support the Company’s future operations and capital expenditures primarily through borrowings from the Hitachi credit facility, until reaching profitability.

The credit facility is due upon demand and therefore there can be no assurances that sufficient borrowings will be available to support future operations until profitability is reached.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 2022 and 2021:

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$(1,666,125) $(4,597,885)

Net cash provided by financing activities

Net cash (used in)/provided by financing activities

$(304,433) $12,459,441

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depreciation and amortization of $2,598,957, amortization of right of use assets $103,926 and stock-based compensation of $2,350,314;

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.

change in operating assets and liabilities was a net use of cash of $753,111 primarily due to an increase in the accounts receivable balance by $3,119,222, partially offset by an increase in the accounts payable balance of $3,200,086.

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

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

However, our Media sales arrangements typically have slower payment terms than the terms of related payables.

In recent quarters, we expanded our Direct customer business in part by acquiring new customers (see Note 2).

These customers typically require longer credit terms than traditional cents per click ("CPC") based customer, in some cases to 120 days and beyond.

During 2021, cash used in operating activities was $5,276,257.

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Net cash used in investing activities was $1,666,125 and $4,597,885 for 2022 and 2021, respectively.

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 used in investing activities in 2022 and 2021 consisted of capitalized internal development costs and purchase of marketable securities.

Cash Flows - Financing

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.

Net cash used in financing was $304,433 during 2022.

Net cash provided by financing activities was $12,459,441 in 2021, primarily from proceeds from the sale of common stock.

Critical Accounting Policies and Estimates

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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.

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.

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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