INUVO, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

Company presentation

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 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 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
software-as-a-service. 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.

There are many barriers to entry associated with Inuvo business model, including proficiency in large-scale information processing, predictive software development, marketing data products, analytics, artificial intelligence, IoT integration (“IOT”) and the relationships necessary to perform within the IOT. Inuvo’s intellectual property is protected by 17 issued patents and eight patents pending.

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 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 have reduced expenses including compensation and travel throughout 2020 in addition to other actions. Moreover, in April 2020we got the $1.1 million PPP loan which we used mainly for staff costs. The PPP loan was fully canceled 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. We,
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. Since the
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.

Significant Accounting Policies and Estimates

The preparation of financial statements in conformity with 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
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audited consolidated financial statements for 2021 appearing in our Annual
Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC
on March 17, 2022. 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
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
goodwill and purchased intangible asset valuations and valuation allowance.
Actual results may differ from the estimates and assumptions used in preparing
the accompanying consolidated financial statements, and such differences could
be material.


Results of Operations
                               For the Three Months Ended March 31,
                       2022              2021            Change         % Change
Net Revenue       $ 18,609,367      $ 10,617,809      $ 7,991,558         75.3  %
Cost of Revenue      8,661,506         1,444,059        7,217,447        499.8  %
Gross Profit      $  9,947,861      $  9,173,750      $   774,111          8.4  %


Net Revenue
We experienced 75% higher year over year revenue for the three months ended
March 31, 2022 as compared to the same period in 2021. Revenue from both
platforms, ValidClick and IntentKey, exceeded the prior year. ValidClick YOY
revenue was up by 24% and IntentKey YOY revenue by 280%. Both platforms acquired
new customers within the year, benefiting from the agreement with a business
development partner discussed in Note 9 to our Consolidated Financial Statements
and because of the economic improvements associated with the COVID-19 pandemic
recovery.

Cost of Revenue

Cost of revenue for the three months ended March 31, 2022 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. 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 due to the acquisition of new
customers as mentioned in the Net Revenue section above.

Operating Expenses
                                          For the Three Months Ended March 31,
                                  2022              2021            Change        % Change
Marketing costs              $  7,169,449      $  7,305,784      $ (136,335)       (1.9  %)
Compensation                    3,157,706         2,737,867         419,839        15.3  %
General and administrative      1,726,672         1,724,978           1,694         0.1  %
Operating expenses           $ 12,053,827      $ 11,768,629      $  285,198         2.4  %



Marketing costs consists mostly of traffic acquisition costs and includes those
expenses required to attract an audience to the ValidClick platform. Marketing
costs as of March 31, 2022 compared to the same period in 2021 decreased as the
result of lower revenue from owned and operated operations.

Compensation expense was higher for the three months ended March 31, 2022
compared to the same time period in 2021 due primarily to higher salary expense,
stock-based compensation expense and incentive expense. Our total employment,
both full and part-time, was 83 at March 31, 2022 compared to 77 at March 31,
2021.

General and administrative costs for the three months ended March 31, 2022
compared to the same time period in 2021 remained relatively flat. These costs
included professional fees, facilities expenses, IT costs, corporate expenses
and depreciation and amortization costs.


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Interest expense, net

Interest expense, net, for the three months ended March 31, 2022 was approximately $1,000primarily due to finance lease obligations and the Hitachi loan and guarantee agreement of approximately $8,000; offset by interest income on marketable securities of approximately $7,000.

Interest expense, net, for the three months ended March 31, 2021 was approximately $22,000 and primarily represents interest expense on finance lease obligations and the Hitachi loan and guarantee agreement.

Other income, net

Other income was approximately $18 thousand for the three months ended March 31,
2022 and was from the unrealized gain discussed in Note 3 to our Consolidated
Financial Statements.

Other income, net, for the three months ended March 31, 2021 was $470 thousand
and included the reversal of the deferred revenue from a contract cancellation
and the reversal of the accrued sales reserve of $50 thousand.


Cash and capital resources

As of March 31, 2022, we have approximately $9 million in cash, cash equivalents
and marketable securities. Our net working capital was $11.2 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, 2022, our accumulated
deficit was $146.0 million.

Our principal sources of liquidity are the sale of our common stock and our
credit facility with Hitachi described in Note 6 to our Consolidated Financial
Statements. On January 19, 2021, we raised $8.0 million in gross proceeds in a
registered direct offering, before expenses, through the sale of an aggregate of
13,333,334 shares of our common stock, and on January 22, 2021, we raised an
additional $6.25 million in gross proceeds in a registered direct offering,
before expenses, through the sale of an aggregate of 5,681,817 shares of our
common stock. On January 7, 2021, we filed Articles of Amendment to our Articles
of Incorporation in the State of Nevada increasing the number of authorized
shares of our common stock from 100,000,000 to 150,000,000. On August 19, 2021,
we filed Articles of Amendment to our Articles of Incorporation in the State of
Nevada increasing the number of authorized shares of our common stock from
150,000 to 200,000.

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 March 31, 2022,
our funds with the investment management company were approximately $6 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 and through March 31, 2022,
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 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) ten 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 technology 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.


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Cash Flows

The table below presents a summary of our cash flows for the three months ended March 31, 2022 and 2021:

                                                         For the Three Months Ended March 31,
                                                     2022                                    2021
Net cash used in operating
activities                                       $(3,580,762)                            $(2,442,647)
Net cash used in investing
activities                                        $(999,125)                              $(411,400)
Net cash (used in)/provided by
financing activities                              $(152,928)                              $12,768,706



Cash Flows - Operating

Net cash used in operating activities was $3,580,762 during the three months
ended March 31, 2022. We reported a net loss of $2,089,263, which included
non-cash expenses of depreciation and amortization expense of $689,712,
depreciation of right of use assets of $24,259 and stock-based compensation
expense of $671,158. The change in operating assets and liabilities during the
three months ended March 31, 2022 was a net use of cash of $2,782,156 primarily
due to a decrease in the accrued expenses of $977,599 and accounts payable
balance of $327,918, partially offset by an increase in the accounts receivable
balance by $702,421 and prepaid expenses, unbilled revenue and other assets of
$849,218. 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.

During the comparable three-month period in 2021, cash flows used in operating activities were $2,442,647 a net loss of $2,147,268which included several non-cash charges for depreciation and amortization of $771,904 and a stock-based compensation expense of $394,870.

Cash flow – Investment

Net cash used in investing activities was $999,125 and $411,400 for the three
months ended March 31, 2022 and 2021, respectively. Cash used in investing
activities in 2022 consisted primarily of the purchase of marketable securities
and to a lesser extent, capitalized internal development costs. Cash used in
investing activities in 2021 consisted of capitalized internal development
costs.

Cash flow – Financing

Net cash used in financing activities was $152,928 in the three months ended
March 31, 2022.

Net cash provided by financing activities was $12,768,706 in the three months ended March 31, 2021 primarily from proceeds from the sale of common shares.

Off-balance sheet arrangements

As of March 31, 2022, 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.

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