Inuvo, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company Overview Inuvo is an advertising technology and services business selling information technology solutions to brands, agencies and large consolidators of advertising demand (“Platforms”). Inuvo’s revenue is derived from the placement of digital advertising throughout devices, websites, applications and browsers across social, search and programmatic advertising channels. Inuvo facilitates, and gets paid, to deliver millions of advertising messages monthly and counts among its client's numerous world-renowned companies across industries. Inuvo’s primary mission is to disrupt the advertising industry with its proprietary and patented generative large language artificial intelligence (AI), a technology capable of identifying and targeting audiences without using a consumer’s identity or data. The AI was designed to replace the consumer data, analytics, segmentation and lookalike modeling technologies that have traditionally served the advertising industry as it transitions to a new paradigm where a consumer’s identity and data are no longer available for advertising decisions due to legislative and technological changes. The advertising industry Inuvo serves is going through an unprecedented change the likes of which has never occurred with the potential to disrupt the over $600 billion dollars in annual worldwide digital media spend that supports the internet. The cornerstone of the change revolves around the use of a consumer’s identity and data for ad-targeting. While there are many ways to identify consumers, the principal method that has evolved within the browsers has been the cookie, which is the location within the browser where a consumer's identity gets stored. When the cookie is no longer available, the means to lookup a consumer’s personal information in a database is no longer possible. No Cookie. No Data. No Targeting. Thirteen states have now signed consumer privacy legislation and another 17 have privacy bills in process. Apple has already eliminated the use of cookies within its browser and Google began phasing them out in January of 2024. Inuvo’s AI technology solves this challenge and can be consumed by clients both as a managed service and software-as-a-service. For certain clients, Inuvo has also developed various proprietary technology and assets that include digital content, websites, automated campaigns, ad fraud detection, performance reporting and predictive media mix modeling. There are many barriers to entry associated with the Inuvo business model, including a proficiency in large language model based artificial intelligence, large scale information processing, software development, consumer data products, analytics, IOT (internet of things) integration and the relationships required to execute within the IOT. In 2023, Inuvo delivered roughly 11.27 billion ads. Inuvo’s intellectual property is protected by 19 issued and eight pending patents. 17 Table of Contents 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 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. Our significant accounting policies related to Revenue Recognition, Equity-Based Compensation, Capitalized Software Costs, Goodwill, Long-lived Assets and others are described in Note 2 — Summary of Significant Accounting Policies, of the Consolidated Financial Statements included elsewhere in this Report. Results of Operations For the Three Months Ended March 31, 2024 2023 Change % Change Net Revenue $ 17,023,777 $ 11,847,440 $ 5,176,337 43.7 % Cost of Revenue 2,099,042 3,190,563 (1,091,521 ) (34.2 )% Gross Profit $ 14,924,735 $ 8,656,877 $ 6,267,858 72.4 % Net Revenue Revenue for the three-month period ended March 31, 2024, increased 43.7% as compared to the same time period in 2023. The higher revenue this quarter compared to the prior year period was attributable to accelerating demand within Platforms since the third quarter of last year. Cost of Revenue Cost of revenue is primarily composed of payments to advertising exchanges that provide access to digital inventory where we serve advertisements. To a lesser extent, cost of revenue includes payments to website publishers and app developers that host advertisements. The decline in cost of revenue for the period ended March 31, 2024, compared to the same time period in 2023 was related to the change in revenue mix due to increasing demand and consequently revenue from Platform clients. The higher gross margin in the current year quarter, 87.7% compared to 73.1% in the same quarter last year was primarily due to a change in the revenue mix, where Platform clients typically have higher gross margins. 18 Table of Contents Operating Expenses For the Three Months Ended March 31, 2024 2023 Change % Change Marketing costs $ 13,102,644 $ 7,087,550 $ 6,015,094 84.9 % Compensation 3,224,859 3,422,841 (197,982 ) (5.8 %) General and administrative 688,510 1,581,889 (893,379 ) (56.5 %) Operating expenses $ 17,016,013 $ 12,092,280 $ 4,923,733 40.7 % Marketing costs consist mostly of traffic acquisition (i.e., media) costs and include those expenses required to attract audiences to various web properties. Marketing costs for the three-month period ended March 31, 2024 compared to the same period in 2023 increased due to a higher costs associated with higher revenue with Platforms. Compensation expense was lower for the three-month period ended March 31, 2024, compared to the same time period in 2023 due primarily to lower commission expense and a decrease in our incentive accrual, partially offset by higher payroll expense. Our total employment, both full- and part-time, was 93 at March 31, 2024 compared to 85 at March 31, 2023. General and administrative costs for the three months ended March 31, 2024, decreased 56% compared to the same period in 2023 due primarily to a $1.1 million dollar adjustment to the expected losses for accounts receivable for a balance due from a former client in 2022 that now pays consistently, has significantly reduced its outstanding amount owed and is expected to pay the remaining amount due. Financing expense, net Finance expense, net, for the three months ended March 31, 2024, was approximately $20 thousand compared to $19 thousand in the same quarter last year. Other income, net Other income was approximately $0 and $14 thousand for the three months ended March 31, 2024 and 2023, respectively. Liquidity and Capital Resources Our principal sources of liquidity are the sale of our common stock and our credit facility discussed in Note 5 - Bank Debt. 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, 2023, we sold 173,558 shares of common stock for gross proceeds totaling $63,136 under the ATM Program and paid the Sales Agent a commission of $1,902, all of which occurred during the second quarter of 2023. For the three-month period ended March 31, 2024, we did not issue any shares of common stock or receive any aggregate proceeds under the ATM Program, and we did not pay any commissions to the Sales Agent. Any shares of common stock offered and sold in the ATM Program were issued pursuant to our universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”). The ATM Program terminated on March 15, 2024, the third (3rd) anniversary of the initial effective date of the Shelf Registration Statement. Under the terms of the Sales Agreement, the Sales Agent was entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of shares under the Sales Agreement. 19 Table of Contents On May 30, 2023, we raised $4.0 million in gross proceeds in a registered direct offering, before expenses, through the sale of an aggregate of 16,000,000 shares of our common stock. The shares were offered pursuant to the Shelf Registration Statement and a prospectus supplement relating to the offering was filed with the SEC on May 26, 2023. We have focused our resources behind a plan to market our collective multi-channel advertising capabilities differentiated by our AI technology, the IntentKey, where we have a technology advantage and higher margins. If we are successful in implementing our plan, we expect to return to positive cash flows from operations. However, there is no assurance that we will be able to achieve this objective. As of March 31, 2024, we have over $2 million in cash and cash equivalents. Our net working capital deficit was approximately $1.5 million. We have encountered recurring losses and cash outflows from operations, which historically we have funded through equity offerings and debt facilities. In addition, our investment in internally developed software consists primarily of labor costs which are of a fixed nature. Through March 31, 2024, our accumulated deficit was $169.6 million. Management plans to support the Company’s future operations and capital expenditures primarily through cash raised through the sale of stock in May 2023, cash generated from future operations and borrowings from the 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. Our collection period is less than 30 days and can also be used to meet accrued obligations. 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. Cash Flows The table below sets forth a summary of our cash flows for the three months ended March 31, 2024 and 2023: For the Three Months Ended March 31, 2024 2023 Net cash used in operating activities $ (1,355,592 ) $ (3,230,999 ) Net cash provided by/(used in) investing activities $ (472,228 ) $ 1,877,638 Net cash provided by/(used in) financing activities $ (180,677 ) $ 391,529 Cash Flows - Operating Net cash used in operating activities was $1,355,592 during the three months ended March 31, 2024. We reported a net loss of $2,111,658, which included non-cash expenses of depreciation and amortization expense of $673,203, depreciation of right of use assets of $18,649 and stock-based compensation expense of $396,312. The change in operating assets and liabilities during the three months ended March 31, 2024 was a net provision of cash of $772,069 primarily due to a decrease in the accounts payable balance of $1,101,313, partially offset by the decrease in accounts receivable balance of $1,616,597. Our terms are such that we generally collect receivables prior to paying trade payables. However, our Media sales arrangements typically have slower payment terms than the terms of related payables. During the comparable three-month period in 2023, cash used in operating activities was $3,230,999 from a net loss of $3,440,105 and included several non-cash expenses of depreciation and amortization expense of $639,026 and stock-based compensation expense of $432,084. The change in operating assets and liabilities during the three months ended March 31, 2023, was a net use of cash of $836,562. 20 Table of Contents Cash Flows - Investing Net cash used by investing activities was $472,228 for the three months ended March 31, 2024, and consisted primarily of capitalized internal development costs. Net cash used in investing activities was $1,877,638 for the three months ended March 31, 2023, and consisted primarily of the purchase of marketable securities and to a lesser extent, capitalized internal development costs. Cash Flows - Financing Net cash used financing activities was $180,677 and during the three months ended March 31, 2024, and was primarily from net taxes paid on restricted stock unit grants exercised. Net cash used in financing activities was $391,529 during the three months ended March 31, 2023. Off Balance Sheet Arrangements As of March 31, 2024, 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable to a smaller reporting company.