INUVO, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
Inuvois 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'sclients to engage with their customers and prospects in a manner that drives responsiveness. Inuvofacilitates 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 Inuvosolution 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. Inuvotechnology can be consumed both as a managed service and software-as-a-service. For clients, Inuvohas also developed a collection of proprietary websites collectively branded as Bonfire Publishingwhere 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 Inuvoadvertising technologies.
There are many barriers to entry associated with
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
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 17 -------------------------------------------------------------------------------- audited consolidated financial statements for 2021 appearing in our Annual Report on Form 10-K for the year ended
December 31, 2021as filed with the SECon 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 $ 7,991,55875.3 % Cost of Revenue 8,661,506 1,444,059 7,217,447 499.8 % Gross Profit $ 9,947,861 $ 9,173,750 $ 774,1118.4 % Net Revenue We experienced 75% higher year over year revenue for the three months ended March 31, 2022as 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, 2022was 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 $ 285,1982.4 % 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, 2022compared 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, 2022compared 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, 2022compared to 77 at March 31, 2021. General and administrative costs for the three months ended March 31, 2022compared 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. 18 --------------------------------------------------------------------------------
Interest expense, net
Interest expense, net, for the three months ended
Interest expense, net, for the three months ended
Other income, net
Other income was approximately
$18 thousandfor the three months ended March 31, 2022and was from the unrealized gain discussed in Note 3 to our Consolidated Financial Statements. Other income, net, for the three months ended March 31, 2021was $470 thousandand 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
March 31, 2022, we have approximately $9 millionin 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 millionin 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 millionin 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 Nevadaincreasing 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 Nevadaincreasing 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 millionin cash equivalent accounts and $10 millionin an interest-bearing account. At March 31, 2022, our funds with the investment management company were approximately $6 millionand 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, 2021and 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. 19 --------------------------------------------------------------------------------
The table below presents a summary of our cash flows for the three months ended
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) $12,768,706Cash Flows - Operating Net cash used in operating activities was $3,580,762during 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 $24,259and stock-based compensation expense of $671,158. The change in operating assets and liabilities during the three months ended March 31, 2022was a net use of cash of $2,782,156primarily due to a decrease in the accrued expenses of $977,599and accounts payable balance of $327,918, partially offset by an increase in the accounts receivable balance by $702,421and 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
Cash flow – Investment
Net cash used in investing activities was
$999,125and $411,400for the three months ended March 31, 2022and 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
Net cash provided by financing activities was
Off-balance sheet arrangements
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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