Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations for 2024 and 2023 should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Cautionary Statements Regarding Forward-Looking Information, Part I. Item 1. Business and Item 1A. Risk Factors. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.
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Company Overview
Inuvo is a leading advertising technology and services business that has successfully developed and commercialized large language generative artificial intelligence that can discover and target digital audiences instantly without having to track consumers around the internet. Inuvo’s innovative technology positions it as a leader within the advertising industry, offering a valuable solution to marketers seeking to navigate the evolving landscape of consumer privacy. Rather than targeting people, the artificial intelligence (AI) targets the reasons behind why people are interested in products, services and brands.
Inuvo sells its information technology solutions to agencies and brands (collectively, “Agencies & Brands”) along with large consolidators of advertising demand (“Platforms”). Inuvo’s revenue is derived from the placement of digital advertising across devices, websites, applications and browsers within 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 artificial intelligence, a technology capable of identifying and targeting audiences without using a consumer’s identity or data. The AI, marketed as IntentKey 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 targeting based on a consumer’s identity and data are no longer possible due to the legislative and technological changes occurring.
Inuvo’s AI technology solves the identity challenge by leveraging artificial intelligence, data analytics, and automation that can optimize the purchase and placement of advertising in real time without consumer data. The technology can be consumed by clients as a managed service or self-service (SaaS). Additionally, Inuvo has developed proprietary technology and assets tailored to certain clients 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. Inuvo’s intellectual property is protected by 19 issued and eight pending patents.
Credit Agreement
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 were 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. The interest rate under the Hitachi agreement was 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 were due on demand. In the event of a default under the terms of the Loan and Security Agreement, the interest rate increases to 6% greater than the interest rate in effect from time to time prior to a default. The Loan and Security Agreement contained certain affirmative and negative covenants to which we were also subject.
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On March 1, 2023, we entered into Amendment No. 1 to Loan and Security Agreement and Collateral Documents (“Agreement”) with Mitsubishi HC Capital America, Inc., f/k/a/ Hitachi Capital America Corp. (“MHCA”). Under the terms of the Agreement, MHCA provided us with a $5,000,000 line of credit commitment. We were permitted to borrow up to 85% of the aggregate Eligible Accounts Receivable, up to the maximum credit commitment of $5,000,000. We paid MHCA monthly interest at the rate of 1.75% in excess of the Wall Street Journal Prime Rate. We paid MHCA an amendment fee of $10,000 on issuance of the Agreement, and thereafter an annual commitment fee of $10,000. We also paid MHCA a quarterly service fee of 0.20% on the monthly unused amount of the maximum credit line. All obligations to MHCA have been satisfied and the Agreement was terminated on July 31, 2024. At December 31, 2024 and 2023, there were no outstanding balances due under the Agreement.
On July 30, 2024, we entered into a Financing and Security Agreement and Collateral Documents (“Financing Agreement”) with SLR Digital Finance LLC (“SLR”). Under the terms of the Financing Agreement, SLR has provided us with a $10,000,000 line of credit commitment. We are permitted to borrow up to 90% of eligible accounts receivable under the Financing Agreement, up to the maximum credit commitment of $10,000,000. We will pay SLR monthly interest at the rate of 1.0% in excess of the Prime Rate but not less than 7%. The Financing Agreement has a three year term. The Financing Agreement contains certain affirmative and negative covenants to which we are also subject. We agreed to pay SLR an annual facility fee of 0.80% of the maximum credit commitment. We also agreed to pay a minimum utilization amount of the interest rate multiplied by difference between $500,000 and the average daily outstanding loan during a month. We are obligated to pay SLR a monthly service fee of 0.15% on of the average net amount of outstanding loans during each month. If we terminate the Financing Agreement prior to the second anniversary of the effective date, an amount equal to 1.0% of the maximum credit commitment will be due as an early termination payment and if we terminate after the second anniversary of the effective date but prior to the end of the term, an amount equal to 0.25% of the maximum credit commitment will be due. Repayment of the Financing Agreement will be made through collections from eligible accounts receivable. At December 31, 2024 there were no outstanding balances due under the Financing Agreement.
2024 Overview
We reported net revenue of $83.8 million in 2024, a 13.4% increase over the prior year. The highlights of 2024, include:
·
13.4% increase in net revenue to $83.8 million
·
13% increase in gross profit to $71.8 million
·
45% reduction in the net loss
·
6X improvement in the adjusted EBITDA loss for 2024
·
Net cash provided by operating activities of $230,000 in 2024
·
All time company quarterly record of $26.2 million of net revenue in Q4 2024
·
Net Income of $141,000 in Q4 2024
·
33 new Agencies/Brands were signed up
·
Secured a $10.0 million credit line in July
·
Completed a Master Services Agreement with one of the largest retailers in the world, and
·
Launched the IntentKey Platform, an advanced AI agent specifically designed for audience modeling.
Results of Operations
For the Years Ended December 31,
2024
2023
Change
% Change
Net Revenue
$ 83,793,859
$ 73,911,528
$ 9,882,331
13.4 %
Cost of Revenue
12,033,777
10,477,272
1,556,505
14.9 %
Gross Profit
$ 71,760,082
$ 63,434,256
$ 8,325,826
13.1 %
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Net Revenue
We reported $83.8 million in net revenue for the year ended December 31, 2024, a 13.4% increase compared to $73.9 million during the same period in 2023. During 2024, the higher revenue was primarily driven by Platform customers where we launched new product enhancements tailored to their needs. Net revenue for the quarter ended December 31, 2024 was $26.2 million, representing the highest quarterly revenue in the Company's history and a 25% increase compared to the same period in 2023. The higher revenue was due to increasing demand within both Platforms and Agencies & Brands. Our largest Platform partner, which introduced a new product in 2023, continued to generate strong performance throughout 2024. During 2024 our largest customer accounted for 75% of our revenues. In 2023, the same customer accounted for 60.4% of our revenues.
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 increase in cost of revenue for the year ended December 31, 2024, compared to the same time period in 2023 was related to higher revenue within a Platform client this year. Gross margin of 85.6% for the year ended December 31, 2024 was nearly level as compared to 85.8% in the prior year period.
Operating Expenses
For the Year Ended December 31,
2024
2023
Change
% Change
Marketing costs
$ 59,663,061
$ 51,982,572
$ 7,680,489
14.8 %
Compensation
12,065,783
13,793,309
(1,727,526 )
(12.5
%)
General and administrative
5,545,049
8,050,890
(2,505,841 )
(31.1
%)
Operating expenses
$ 77,273,893
$ 73,826,771
$ 3,447,122
4.7 %
Marketing costs consist mostly of media costs incurred on behalf of clients. Marketing costs for the year ended December 31, 2024 compared to the same period in 2023 was 14.8% higher due primarily to higher revenue from Platform advertisers in the comparable periods. Marketing costs in 2024 include the fully amortized remaining balance of $500,000 of the referral and support services asset (see Note 8 – Commitments to our Consolidated Financial Statements).
Compensation expense was lower for the year ended December 31, 2024 compared to the same time period in 2023 due primarily to lower incentive, commission, and stock-based compensation expense. Our total employment, both full and part-time, was 81 at December 31, 2024 compared to 93 at December 31, 2023.
General and administrative costs were lower for the year ended December 31, 2024 compared to the same time period in 2023 due primarily to an adjustment in the reserve for expected credit losses. During 2024, we made an adjustment to the allowance for expected credit losses for a balance due from a former client in 2022. The client has since paid off their full outstanding balance and no longer has any obligation to us as of December 31, 2024.
Financing expense, net
Finance expense, net of interest income, for the year ended December 31, 2024 was approximately $266,000 expense and was primarily due to interest expense of approximately $221,000 and commitment fee expense of approximately $66,000 offset by interest income of approximately $71,000.
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Finance expense, net of interest income, for the year ended December 31, 2023 was approximately $30,000 expense and was primarily due to interest expense of approximately $77,000 and commitment fee expense of approximately $18,000 offset by interest income of approximately $63,000.
Other income, net
Other income, net, for the year ended December 31, 2024 was income of approximately $26,000 for setup charges to new Platform partners.
Other income, net, for the year ended December 31, 2023 was income of approximately $15,000 from net realized and unrealized gains and losses.
Liquidity and Capital Resources
Our principal sources of liquidity are the sale of our common stock and our credit facility discussed in Note 6 – Bank Debt to our Consolidated Financial Statements.
On May 7, 2024, we entered into an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co. LLC (“Wainwright”), to sell shares of our common stock, par value $0.001 per share, (the “Shares”), having an aggregate sales price of up to $15,000,000, from time to time, through an “at the market offering” program under which Wainwright will act as sales agent. The sales of the Shares made under the ATM Agreement will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company will pay Wainwright a commission rate of up to 3.0% of the aggregate gross proceeds from each sale of Shares. For the year ended December 31, 2024, the Company has not sold any shares of common stock under the ATM Agreement.
On July 31, 2024, we entered into a Financing and Security Agreement (the "Financing Agreement”) with SLR Digital Finance LLC ("SLR”), effective July 30, 2024. Pursuant to the terms of the Financing Agreement, SLR will finance up to $10 million dependent upon eligible receivables. Availability as of December 31, 2024 equaled the maximum credit commitment of $10,000,000. See Note 6 – Bank Debt to our Consolidated Financial Statements.
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 technological advantage and higher margins. If we are successful in implementing our plan, we expect to return to and maintain positive cash flows from operations. However, there is no assurance that we will be able to achieve this objective.
As of December 31, 2024, we have approximately $2.5 million in cash and cash equivalents. Our net working capital deficit was $2.2 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, 2024 we had a net loss of $5.8 million and net cash flow from operations of $0.2 million. Additionally, our investment in investing activities totaled approximately $1.9 million for the year ended December 31, 2024. This amount primarily consists of internally developed software costs, which are largely comprised of fixed labor costs, along with other capitalized expenditures. Through December 31, 2024, our accumulated deficit was $173.2 million.
Management plans to support the Company’s future operations and capital expenditures primarily through cash generated from its credit facility until such time as we reach 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.
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Cash Flows
The table below sets forth a summary of our cash flows for the years ended 2024 and 2023:
2024
2023
Net cash provided by/(used) in operating activities
$ 229,554
$ (2,554,075 )
Net cash provided by/(used in) investing activities
$ (1,857,375 )
$ 606,190
Net cash provided by/(used in) financing activities
$ (353,388 )
$ 3,456,924
Cash Flows - Operating
Net cash provided by operating activities was $229,554 during 2024. We reported a net loss of $5,761,801, which included non-cash expenses: depreciation and amortization of $2,515,177, stock-based compensation of $1,501,444, $800,000 for the impairment and amortization of a referral and support services agreement, and amortization of right of use assets of $54,356; partially offset by an adjustment to expect losses on accounts receivable of $1,442,533. The change in operating assets and liabilities was a net provision of cash of $2,342,255 primarily due to increases in accrued expenses and other liabilities of $2,329,295 and accounts payable balance of $1,990,231 partially offset by an increase in the accounts receivable balance by $1,876,282. 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 2023, cash used in operating activities was $2,554,075. We reported a net loss of $10,389,653 which included the non-cash expenses of depreciation and amortization of $2,655,368, amortization of right of use assets $96,190 and stock-based compensation expenses of $1,986,296. The change in operating assets and liabilities was a net provision of cash of $1,433,655.
Cash Flows - Investing
Net cash used in investing activities was $1,857,375 for 2024 and consisted primarily of capitalized internal development costs. Net cash provided by investing activities in 2023 was $606,190 and consisted primarily of proceeds from the sale of marketable securities partially offset by capitalized internal development costs.
Cash Flows - Financing
Net cash used in financing activities was $353,388 during 2024, primarily due to the election of certain participants to have the Company withhold the issuance of shares pursuant to vesting restricted stock units in consideration of the Company’s payment of taxes on behalf of such participants.
Net cash provided by financing was $3,456,924 during 2023, primarily from the proceeds from the capital raise (see Note 1 – Organization and Business to our Consolidated Financial Statements).
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. We believe the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements: Revenue Recognition, Capitalized Software costs, Intangible Assets, and Goodwill. These policies and others are described in Note 2 — Summary of Significant Accounting Policies, of the Consolidated Financial Statements included elsewhere in this Report.
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Revenue recognition - We generate revenue by identifying audiences and presenting advertisements on behalf of our customers. Our revenue is derived from the placements of advertisements across advertising channels, browsers, applications and devices. Pricing for those advertisement placements is typically either on a cost-per-click or cost per thousand impressions basis.
Our revenue is a function of the number of advertisements placed combined with the price we obtain (using our technologies) for the placements made on behalf of our clients. We assume the risk associated of finding placements at a cost below that for which it had been sold.
We recognize revenue when control of the contracted services or product is transferred to our customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those services or products. We determine revenue recognition through (i) identification of a contract with a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations in the contract, and (v) recognition of revenue when or as the performance obligations are satisfied.
Customer contracts are typically captured in an Insertion Order ("IO") where revenue is recognized upon delivery of services during the period covered by the IO, or in multi-year master service agreements where revenue is recognized based on the number of advertisements placed or clicked on in the period they occur. We settle advertisement placement prices with our customers net of any adjustments for quality. Judgment is required to identify a contract with a customer, identify its performance obligations, determine the transaction price, allocate the transaction price to the performance obligations, and determine whether the performance obligations are satisfied.
Capitalized software costs - We capitalize the cost of internally developed software that has a useful life in excess of one year. These costs consist of the salaries and benefits of employees working on such software development to customize, enhance or develop new product. We assess whether development work creates additional functionality to the software or is a new software product, and qualifies the costs incurred for capitalization.
We annually assess whether triggering events are present to review internal-use software for impairment. The estimated useful life of our software development costs is two years and is amortized using the straight-line method. There is judgment involved in determining the validity of capitalization, estimating the useful life and evaluating whether any impairment occurred. Capitalized software development costs were $1.8 million and $1.7 million, respectively, for the years ended December 31, 2024 and 2023.
Intangible assets, net - 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. We also acquire intangible assets outside of acquisitions and record them at their fair value and amortize them over their estimated useful lives. Judgment is required to determine fair value and the useful life.
Goodwill - We utilize the purchase method of accounting in accordance with ASC 805, Business Combinations. This standard requires that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based on the fair value of the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates and assumptions used in assessing fair value are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date.
We periodically conduct a review of long-lived assets to assess potential triggering events for impairment within the Inuvo reporting unit. We perform an impairment test annually by comparing the fair value of our reporting unit with its carrying amount. We have only one reporting unit and generally determine the fair value of this 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. There is judgment involved in estimating the fair value, useful life and in the evaluation of any impairment.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements begin on page F-1 at the end of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.