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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020
OR

     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to ______________________
 
Commission file number: 001-32442
inuv-20200630_g1.jpg
Inuvo, Inc.
(Exact name of registrant as specified in its charter)

Nevada87-0450450
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
 Identification No.)
500 President Clinton Ave., Suite 300 Little Rock, AR
72201
(Address of principal executive offices)(Zip Code)
(501) 205-8508
Registrant's telephone number, including area code
not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stockINUVNYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.     Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(B) of the Securities Act: 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  





Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Title of ClassAugust 11, 2020
Common Stock97,598,977




TABLE OF CONTENTS

  Page No.
Part I
 
Item 1.Financial Statements.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Item 4.Controls and Procedures.
 
Part II
 
Item 1.Legal Proceedings.
Item 1A.Risk Factors.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.Defaults upon Senior Securities.
Item 4.Mine Safety and Disclosures.
Item 5.Other Information.
Item 6.Exhibits.
Signatures


3


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of such terms or other comparable terminology. This report includes, among others, statements regarding our risks associated with:

our history of losses, declining revenues and working capital deficit;
the on-going impact of the COVID-19 pandemic on our company;
our reliance on revenues from a limited number of customers;
seasonality of our business which impacts our financial results and cash availability;
dependence on our supply partners;
our ability to acquire traffic in a profitable manner;
failure to keep pace with technology changes;
impact of possible interruption in our network infrastructure;
dependence on our key personnel;
regulatory and legal uncertainties;
failure to comply with privacy and data security laws and regulations;
third party infringement claims;
publishers who could fabricate fraudulent clicks;
the impact of quarterly results on our common stock price; and
dilution to our stockholders upon the exercise of outstanding common stock options and restricted stock unit grants

These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing in this report, together with those appearing in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission ("SEC") on May 12, 2020, and our subsequent filings with the SEC.

Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, when used in this report the terms "Inuvo," the “Company,” "we," "us," "our" and similar terms refer to Inuvo, Inc., a Nevada corporation, and its subsidiaries. When used in this report, "second quarter 2020" means for the three months ended June 30, 2020, "second quarter 2019" means for the three months ended June 30, 2019, “2019” means the fiscal year ended December 31, 2019 and "2020" means the fiscal year ending December 31, 2020. The information which appears on our corporate web site at www.inuvo.com and our various social media platforms are not part of this report.

4


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INUVO, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2020 (Unaudited) and December 31, 2019
 June 30, 2020December 31, 2019
Assets
Current assets  
Cash$4,181,214  $372,989  
Accounts receivable, net of allowance for doubtful accounts of $269,000 and $225,000, respectively.
3,256,697  7,529,785  
Prepaid expenses and other current assets243,137  243,888  
Total current assets7,681,048  8,146,662  
Property and equipment, net1,213,937  1,374,152  
Other assets  
Intangible assets, net of accumulated amortization9,518,841  10,451,593  
Goodwill9,853,342  9,853,342  
Right of use assets - operating lease535,870  756,115  
Right of use assets - finance lease518,747  88,178  
Other assets20,884  20,886  
Total other assets20,447,684  21,170,114  
Total assets$29,342,669  $30,690,928  
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$3,674,697  $7,520,567  
Accrued expenses and other current liabilities2,574,580  3,614,433  
Lease liability - operating lease240,580  362,130  
Lease liability - finance lease230,197  80,777  
Line of credit2,158,443    
Financed receivables  3,381,364  
Convertible promissory note  536,806  
Derivative liability  182,250  
Total current liabilities8,878,497  15,678,327  
Long-term liabilities  
Deferred tax liability107,000  107,000  
Lease liability - operating lease295,528  394,889  
Lease liability - finance lease196,267    
Other long-term liabilities1,790,845  57,162  
Total long-term liabilities2,389,640  559,051  
Stockholders’ equity
Preferred stock, $0.001 par value:
Authorized shares 500,000, none issued and outstanding
    
Common stock, $0.001 par value:
Authorized shares 100,000,000; issued shares 76,152,193 and 52,222,538, respectively; outstanding shares 75,775,666 and 51,846,011, respectively
76,153  52,223  
Additional paid-in capital152,625,263  144,843,687  
Accumulated deficit(133,230,325) (129,045,801) 
Treasury stock, at cost - 376,527 shares
(1,396,559) (1,396,559) 
Total stockholders' equity18,074,532  14,453,550  
Total liabilities and stockholders' equity$29,342,669  $30,690,928  
5



    See accompanying notes to the consolidated financial statements.
1










INUVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended June 30,For the Six Months Ended June 30,
 2020201920202019
Net revenue$7,590,187  $14,047,907  $22,523,170  $29,512,476  
Cost of revenue1,070,028  5,674,360  4,509,529  12,354,988  
Gross profit6,520,159  8,373,547  18,013,641  17,157,488  
Operating expenses  
Marketing costs (traffic acquisition costs or TAC)3,857,395  6,528,336  13,480,218  13,072,345  
Compensation2,118,311  1,735,489  4,462,546  3,544,045  
Selling, general and administrative1,781,121  2,213,507  3,839,963  4,590,568  
Total operating expenses7,756,827  10,477,332  21,782,727  21,206,958  
Operating loss(1,236,668) (2,103,785) (3,769,086) (4,049,470) 
Interest (expense) income, net(72,681) 148,792  (225,192) (367,916) 
Other expense, net(49,939)   (190,246)   
Net loss$(1,359,288) $(1,954,993) (4,184,524) (4,417,386) 
Per common share data  
Basic and diluted:  
Net loss$(0.02) $(0.06) $(0.07) $(0.14) 
Weighted average shares
Basic66,023,317  32,570,866  59,835,925  32,484,878  
Diluted66,023,317  32,570,866  59,835,925  32,484,878  
 
See accompanying notes to the consolidated financial statements.
6










INUVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the Six Months Ended June 30,
 20202019
Operating activities:
Net loss$(4,184,524) $(4,417,386) 
Adjustments to reconcile net loss to net cash used in operating activities:
Contract Cancellation(1,260,978)   
Depreciation and amortization1,650,785  1,548,678  
Depreciation-Right of Use Assets215,847  291,676  
Amortization of financing fees11,092  27,247  
Amortization of debt discount18,286    
Amortization of original issue discount on convertible promissory notes13,167    
Stock based compensation402,185  146,693  
Mark to market fair value of derivative102,664    
Loss on extinguishment of convertible debt65,700    
Provision of doubtful accounts44,000  36,273  
Change in operating assets and liabilities:
Accounts receivable4,229,088  1,623,632  
Prepaid expenses, unbilled revenue and other current assets(5,402) 41,074  
Accrued expenses and other liabilities(1,053,047) 170,713  
Accounts payable(2,584,892) (178,446) 
Net cash used in operating activities(2,336,029) (709,846) 
Investing activities:
Purchases of equipment and capitalized development costs(557,818) (581,839) 
Net cash used in investing activities(557,818) (581,839) 
Financing activities:
Proceeds from sale of common stock, net6,500,695    
Prepaid financing fees  (24,529) 
Proceeds from ValidClick licensing agreement500,000    
Proceeds from convertible promissory notes  1,200,000  
Net payments on line of credit(1,222,921)   
Net proceeds from financed receivables  996,575  
Payments on finance lease obligations(313,418) (104,805) 
Proceeds from PPP and SBA loans1,258,900    
Net taxes paid on restricted stock unit grants exercised(21,184) (9,045) 
Net cash provided by financing activities6,702,072  2,058,196  
Net change – cash3,808,225  766,511  
Cash, beginning of year372,989  228,956  
Cash, end of period$4,181,214  $995,467  
Supplemental information:
Interest paid$178,938  $230,900  
Non cash investing and financing activities:
Adoption of ASC 842$  $1,437,526  
Conversion of Debt and derecognition of derivative and discounts to common stock$923,810  $  
Assets purchased under finance lease obligations$495,071  $  
 
See accompanying notes to the consolidated financial statements.
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INUVO, INC.
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
(unaudited)
For the Six Months Ended June 30,

2020
Common Stock Additional Paid in CapitalAccumulated DeficitTreasury StockTotal
SharesStock
Balance as of December 31, 201951,846,011$52,223$144,843,687  $(129,045,801) $(1,396,559) $14,453,550  
Net Loss$(2,825,236) (2,825,236) 
Stock-based compensation$208,897  208,897  
Stock issued for vested restricted stock awards260,719261$(261)   
Shares withheld for taxes on vested restricted stock$(21,184) (21,184) 
Convertible Note Conversion1,200,0001,200$467,467  468,667  
Sale of common stock, net7,046,429$7,046$1,199,742  1,206,788  
Balance as of March 31, 202060,353,159$60,730$146,698,348  $(131,871,037) $(1,396,559) 13,491,482  
Net loss(1,359,288) (1,359,288) 
Stock-based compensation193,288  193,288  
Convertible Note Conversion1,800,000  1,800  453,343  455,143  
Sale of common stock, net13,622,507  13,623  5,280,284  5,293,907  
Balance as of June 30, 202075,775,666  $76,153  $152,625,263  $(133,230,325) $(1,396,559) $18,074,532  


2019
Common Stock Additional Paid in CapitalAccumulated DeficitTreasury StockTotal
SharesStock
Balance as of December 31, 201832,381,290$32,759$138,867,509  $(124,557,694) $(1,396,559) $12,946,015  
Net loss(2,462,393) (2,462,393) 
Stock-based compensation96,871  96,871  
Stock issued for vested restricted stock awards186,031  186  (186)   
Balance as of March 31, 201932,567,321  $32,945  $138,964,194  $(127,020,087) $(1,396,559) $10,580,493  
Net loss(1,954,993) —  (1,954,993) 
Stock-based compensation49,822  49,822  
Stock issued for vested restricted stock awards47,213  47  (47)   
Shares withheld for taxes on vested restricted stock(9,045) (9,045) 
Balance as of June 30, 201932,614,534  $32,992  $139,004,924  $(128,975,080) $(1,396,559) $8,666,277  

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Inuvo, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 – Organization and Business
 
Company Overview
 
Inuvo is a technology company that develops and sells information technology solutions for marketing. These platforms predictively identify and message online audiences for any product or service across devices, channels and formats, including video, mobile, connected TV, display, social and native. These capabilities allow Inuvo’s clients to engage with their customers and prospects in a manner that drives engagement from the first contact with the consumer. 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 in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance.
 
Inuvo’s solution incorporates a proprietary form of artificial intelligence, or AI, branded the IntentKey. This sophisticated machine learning technology uses interactions with Internet content as a source of information from which to predict consumer intent. The AI includes a continually updated database of over 500 million machine profiles which Inuvo utilizes to deliver highly aligned online audiences to its clients. Inuvo earns revenue when consumers view or click on its client’s messages. Inuvo’s business scales through account management activity with existing clients and by adding new clients through sales activity.
 
As part of Inuvo’s technology strategy, it owns a collection of websites including alot.com and earnspendlive.com, where Inuvo creates content in health, finance, travel, careers, auto, education and living categories. These sites provide the means to test Inuvo’s technologies, while also delivering high quality consumers to clients through the interaction with proprietary content in the form of images, videos, slideshows and articles.

There are many barriers to entry associated with Inuvo’s 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. Inuvo’s intellectual property is protected by 17 issued and eight pending patents.

Mergers Termination

On June 20, 2019, Inuvo entered into an Agreement and Plan of Merger Termination Agreement (the “Merger Termination Agreement”) with ConversionPoint Technologies Inc., a Delaware corporation (“CPT”), ConversionPoint Holdings, Inc., a Delaware corporation (“Parent”), CPT Merger Sub, Inc., a Delaware corporation, (“CPT Merger Sub”), and CPT Cigar Merger Sub, Inc., a Nevada corporation (“Inuvo Merger Sub”), which, among other things, (1) terminated the Agreement and Plan of Merger, dated November 2, 2018, by and among Inuvo, CPT, Parent, CPT Merger Sub, and Inuvo Merger Sub, as amended (the “Merger Agreement”), pursuant to which Inuvo would have merged with and into Inuvo Merger Sub and become a wholly-owned subsidiary of Parent, and CPT would have merged with and into CPT Merger Sub and become a wholly-owned subsidiary of Parent (the “Mergers”), and (2) terminated each of the Support Agreements that were entered into by certain officers and directors of Inuvo and the parties to the Merger Agreement. The Merger Agreement was terminated as a result of Parent’s inability to fulfill the closing condition of the Mergers that Parent raise $36,000,000 in gross proceeds from an equity, debt, or equity-linked offering of its securities which no longer obligated Inuvo to consummate the Mergers contemplated by the Merger Agreement.

Concurrently with the execution of the Merger Termination Agreement, CPT Investments, LLC, a California limited liability company and an affiliate of CPT (“CPT Investments”), and Inuvo entered into a certain Inuvo Note Termination Agreement (the “Note Termination Agreement”) and agreed to (1) terminate and cancel the 10% Senior Unsecured Subordinated Convertible Promissory Note, dated November 1, 2018, executed by Inuvo in favor of CPT Investments (the “CPTI Note”), which as of June 20, 2019, had $1,063,288 in accrued principal and interest outstanding (the “Outstanding Indebtedness”) by July 20, 2019, (2) effective immediately, terminate all conversion rights under the CPTI Note to convert amounts outstanding into shares of Inuvo’s common stock, (3) terminate the Securities Purchase Agreement, dated November 1, 2018, by and between Inuvo and CPTI (the “Securities Purchase Agreement”), and (4) terminate the Registration Rights Agreement, dated November 1, 2018, by and between Inuvo and CPTI.

The Merger Termination Agreement provided that the termination fee of $2,800,000 to be paid to Inuvo (the “Termination Fee”) for failure to fulfill the Financing Condition would be satisfied as follows:
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(1) $1,063,288 of the Termination Fee (the “Indebtedness Satisfaction Amount”) was satisfied in consideration of the termination and cancellation of the Outstanding Indebtedness pursuant to the CPTI Note Termination Agreement that was approved by CPT’s senior lenders Montage Capital II, L.P. and Partners for Growth IV, L.P. (the “Senior Lenders”) of CPT’s issuance of a replacement note to CPT Investments that was entered into in July 2019;

(2) $1,611,712 of the Termination Fee (the “ReTargeter Satisfaction Amount”) was satisfied by CPT transferring all of the assets related to CPT’s programmatic and RTB advertising solutions business conducted through managed services and a proprietary SaaS solution (the “ReTargeter Business”), free and clear of all liabilities, encumbrances, or liens, to Inuvo (the “ReTargeter Asset Transfer”). The enterprise valuation of the ReTargeter Business was determined to be $2.57 million; and

(3) CPT paid $125,000 to Inuvo on September 15, 2019 to be contributed to the settlement of ongoing litigation with respect to the Mergers (the “Litigation Fee”).

On September 30, 2019, Inuvo paid its obligation of $250,000 under a confidential settlement agreement that it entered into on June 20, 2019 resolving certain outstanding litigation related to the Mergers. Under the Merger Termination Agreement, CPT and Inuvo agreed to mutually release all claims that each party had against the other, as well as certain affiliated entities of each. Inuvo, however, will be able to pursue any claims against CPT and its affiliates for breaches of the Merger Termination Agreement.

Liquidity
For the six months ended June 30, 2020 our revenues declined 23.7% from the same period in the prior year. The lower revenue in the six-month period of 2020 is principally responsible for our approximately $4.2 million net loss. Of the loss, approximately $2.3 million were the non-cash expenses of depreciation, amortization and stock-based compensation. We do not know when, if ever, our revenues will return to historic levels or if we will be able to replace those lost revenues with revenues from other sources. Our principal sources of liquidity are our borrowings under our credit facility which is described in Note 5, the sale of our common stock and borrowings from non-bank financial institutions (see Note 7). ). During the quarter ended June 30, 2020, we renegotiated the payment terms and conditions with ValidClick marketing partners resulting in an overall credit in the quarter of $1.3 million reducing our cost of revenue and marketing costs expenses and our accounts payable obligations.

On March 20, 2020, we closed a Loan and Security Agreement (the “Loan and Security Agreement”) dated February 28, 2020 by and between our company and our subsidiaries and Hitachi Capital America Corp. (“Hitachi”) replacing the previous credit facility with Western Alliance Bank. Under the terms of the Loan and Security Agreement Hitachi has provided us with a $5,000,000 line of credit commitment. We are permitted to borrow (i) 90% of the aggregate Eligible Accounts Receivable, plus (i) the lesser of 75% of the aggregate Unbilled Accounts Receivable (as those terms are defined in the Loan and Security Agreement) or 50% of the amount available to borrow under (i), up to the maximum credit commitment. On March 12, 2020 we drew $5,000,000 under this agreement, using $2,959,573 of these proceeds to satisfy our obligations to Western Alliance Bank under our credit agreement with it and the balance is being used for working capital. Following the satisfaction of our obligations to Western Alliance Bank, all agreements with that entity have been terminated.

On March 20, 2020, we sold an aggregate of 3,931,428 shares of our common stock at a purchase price of $0.175 per share to the five members of our Board of Directors in a private placement exempt from registration under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act of 1933, as amended. We received proceeds of $688,000 in this offering.

On March 27, 2020, we closed on the first tranche of a registered direct offering in which we sold 3,115,001 shares of our common stock at a price of $0.175 per share for gross proceeds of $545,125.

On April 2, 2020, we closed on a second tranche of the registered direct offering in which we sold 1,400,285 shares of our common stock at a price of $0.175 per share for gross proceeds of $245,050.

On April 10, 2020, we obtained an unsecured $1.1 million loan through Relyance Bank N.A. under the Paycheck Protection Program (the “PPP Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and which is administered by the United States Small Business Administration. In accordance with the requirements of the CARES Act, proceeds from the PPP Loan were used for payroll costs.

On June 8, 2020, we closed an additional registered direct offering of an aggregate of 12,222,222 shares of our common stock at a price of $0.45 per share, for gross proceeds of $5,500,000.
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`
On July 27, 2020, we closed a firm commitment underwritten follow on public offering of an aggregate of 21,500,000 shares of our common stock at a price of $0.50 per share, for gross proceeds of $10,750,000.

We have pooled 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, operating cash flows 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.

Recently, it came to our attention that the effectiveness of the amendment to our articles of incorporation to increase the number of our authorized shares of common stock from 60,000,000 to 100,000,000 may not have complied with certain requirements of our articles of incorporation and/or by-laws as well as Nevada Revised Statutes. See Note 16 - Subsequent Events for additional information.

Customer concentration

We generated the majority of our revenue from two customers, Yahoo! and Google as noted below:
For the Three Months Ended June 30,For the Six Months Ended June 30,
2020201920202019
Yahoo!36.7%69.7 %46.5 %71.8 %
Google25.0%11.3 %20.6 %11.5 %
Total61.7%81.0 %67.1 %83.3 %

As of June 30, 2020, Yahoo! and Google accounted for 34.1% of our gross accounts receivable balance. As of December 31, 2019, the same two customers accounted for 60.2% of our gross accounts receivable balance.

We still source the majority of our revenue through these relationships where we have access to advertiser budgets indirectly. While this strategy creates a concentration risk, we believe that it also provides upside opportunities including; access to hundreds of thousands of advertisers across geographies; the ability to scale our business across verticals; an avoidance of the sales costs associated with a large direct to advertisers’ sales force; access to innovation; overall media budget market insights; attractive payment terms; and low risk on receivables. As our IntentKey business continues to grow and become a larger proportion of our overall revenue, the percentage of Yahoo! and Google revenue to the total revenue is expected to continue to decrease.

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 have experienced a significant reduction in marketing budgets for some IntentKey clients, a decrease in the number of supply partners and quantity of Internet traffic from supply partners within ValidClick, and a decrease in overall monetization rates in ValidClick, the combination of which has resulted in a significant reduction in our revenue run rate.

In response to COVID-19, we have curtailed expenses, including compensation and travel, and we have issued a work from home policy to protect our employees and their families from virus transmission associated with co-workers. Additionally, in April 2020, we obtained an unsecured Paycheck Protection Program loan under the Coronavirus Aid, Relief and Economic Security Act of $1.1 million which we are using primarily for payroll costs.

Beginning mid-June 2020, we began to experience an improvement in daily revenue, but because of the impact of COVID-19 on our business, we are unable at this time to predict with any certainty how the second half of the year will materialize and whether our revenue run rate will continue to improve. As a result of this uncertainty we are focusing our resources on areas we believe have immediate revenue potential and attempting to reduce expenses where necessary with as little disruption on our
11










daily operations as possible. Should revenues continue to turn downwards or fail to return to historical levels, we may not be able to offset expenses quickly enough.

Our net working capital was negative $1.2 million as of June 30, 2020. During the second quarter, we raised approximately $5.7 million, before expenses, through the sale of our securities and in April 2020, we obtained the PPP Loan of $1.1 million. In July 2020, we raised approximately $10.8 million, before expenses, through the sale of our securities. With the reduction in our revenue run rate there is an increased need for working capital to fund our operations. There is no assurance that we will be successful in obtaining additional funding to continue operations, particularly in light of the current impact of COVID-19 on the U.S. capital markets, but believe we have sufficient capital to operate during the next twelve months.

Revisions of Previously Issued Consolidated Financial Statements

During the second quarter of 2020, the Company identified an error in the accounting for deferred tax asset valuation allowance originating in 2012 and continuing in its previously issued 2019 annual consolidated financial statements and the first quarter of 2020. Although the Company assessed the materiality of the error and concluded that the error was not material to the previously issued annual or interim financial statements, the Company is revising its previously issued 2019 annual balance sheet to correct for the error in connection with the filing of its Quarterly Reports on Form 10-Q as of June 30, 2020. Additionally, in connection with the filing of this Quarterly Report on Form 10-Q, the Company has disclosed the impact of the revision to the consolidated balance sheet to correct for the impact of the error. See Note 17, "Revisions of Previously Issued Consolidated Year-end Financial Statements" for reconciliations between as reported and as revised amounts as of and for the periods ended December 31, 2019.
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Note 2 – Summary of Significant Accounting Policies
 
Basis of presentation
 
The consolidated financial statements presented are for Inuvo and its consolidated subsidiaries. The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2019, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). In our opinion, these consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on May 12, 2020, as amended on Form 10-K/A filed with the SEC on June 22, 2020.

Use of estimates

The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements 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 allowances for doubtful accounts, goodwill and purchased intangible asset valuations, valuation of long-lived assets and derivative liability. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.

Revenue Recognition

Most of our revenue is generated through clicks on advertisements presented on our properties or those of our partners. We
recognize revenue from clicks in the period in which the click occurs. Payments to partners who display advertisements on our behalf are recognized as cost of revenue. Revenue from data sales and commissions is recognized in the period in which the
transaction occurs and the other revenue recognition criteria are met. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We also recognize revenue from serving impressions when we complete all or a part of an order from an advertiser. The revenue is recognized in the period that the impression is served.

The below table is the proportion of revenue that is generated through advertisements on our ValidClick and IntentKey platforms:

For the Three Months Ended June 30,For the Six Months Ended June 30,
2020201920202019
ValidClick Platform$5,649,725  74.4 %$12,077,922  86.0 %$18,726,715  83.1 %$26,265,946  89.0 %
IntentKey Platform1,940,462  25.6 %1,969,985  14.0 %3,796,455  16.9 %3,246,530  11.0 %
Total$7,590,187  100.0 %$14,047,907  100.0 %$22,523,170  100.0 %$29,512,476  100.0 %










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The following table presents our revenue disaggregated by channel:

For the Three Months Ended June 30,For the Six Months Ended June 30,
2020201920202019
Mobile$2,751,044  $8,823,577  $10,426,026  $19,370,199  
Desktop4,610,097  4,935,654  11,497,340  9,530,276  
Other229,046  288,676  599,804  612,001  
Total$7,590,187  $14,047,907  $22,523,170  $29,512,476  

Leases
 
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new standard effective January 1, 2019 on a modified retrospective basis and did not restate comparative periods. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $1.2 million and finance leases of approximately $265,000, respectively, on January 1, 2019.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, (FASB) issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. On November 15, 2019, the FASB delayed the effective date certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities.

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Note 3– Property and Equipment
 
The net carrying value of property and equipment was as follows as of:
 June 30, 2020December 31, 2019
Furniture and fixtures$293,152  $293,152  
Equipment1,042,200  1,025,357  
Capitalized internal use and purchased software10,850,273  10,309,298  
Leasehold improvements421,016  421,016  
Subtotal12,606,641  12,048,823  
Less: accumulated depreciation and amortization(11,392,704) (10,674,671) 
Total$1,213,937  $1,374,152  

During the three and six months ended June 30, 2020 depreciation expense was $348,661 and $718,033, respectively. During the three and six months ended June 30, 2019, depreciation expense was $431,585 and $873,426, respectively.


Note 4 – Other Intangible Assets and Goodwill
 
The following is a schedule of intangible assets and goodwill as of June 30, 2020:
 TermCarrying
Value
Accumulated Amortization and ImpairmentNet Carrying ValueYear-to-date Amortization
Customer list, Google20 years$8,820,000  $(3,675,000) $5,145,000  $220,500  
Technology5 years3,600,000  (2,460,000) 1,140,000  360,000  
Customer list, ReTargeter (2)5 years1,931,250  (354,063) 1,577,187  193,125  
Customer list, all other10 years1,610,000  (1,341,700) 268,300  80,502  
Brand name, ReTargeter (2)5 years643,750  (118,021) 525,729  64,375  
Customer relationships20 years570,000  (97,375) 472,625  14,250  
Trade names, web properties (1)-390,000  —  390,000  —  
Intangible assets classified as long-term$17,565,000  $(8,046,159) $9,518,841  $932,752  
Goodwill, total-$9,853,342  $—  $9,853,342  $—  

1.The trade names related to our web properties have an indefinite life, and as such are not amortized.
2.We recorded $2.57 million in intangible assets from the CPT Merger Termination Agreement. An independent valuation of the assets was performed to determine the carrying value of the assets listed above. See Note 1 - Organization and Business.
Amortization expense over the next five years and thereafter is as follows:
 
2020$932,752  
20211,865,504  
20221,071,294  
2023984,500  
2024769,917  
Thereafter3,504,874  
Total$9,128,841  



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Note 5 - Bank Debt
 
The following table summarizes our bank debt as of:

June 30, 2020December 31, 2019
Line of credit - 6.75 percent at June 30, 2020
$2,158,443  $  
Financed receivables - 5.75 percent at December 31, 2019 (prime plus 1 percent) on invoiced receivables; 6.75 percent December 31, 2019 (prime plus 2 percent) on uninvoiced receivables
$  $3,381,364  
Total$2,158,443  $3,381,364  

On March 1, 2012 we entered into a Business Financing Agreement with Bridge Bank, which is now owned by Western Alliance Bank. The agreement provided us with a revolving credit line of up to $10 million which we used to help satisfy our working capital needs. On October 11, 2018, we entered into the Amended and Restated Financing Agreement with Western Alliance Bank which superseded the Business Financing Agreement, as amended. The material terms of the Amended and Restated Financing Agreement included financing eligible invoiced receivables at an advance rate of 85% and an interest rate of prime plus 1% and a sub-limit of up to $2.5 million of uninvoiced eligible receivables at an advance rate of 75% and an interest rate of prime plus 2%. The sub-limit provision expired at the end of April 2019. The Amended and Restated Financing Agreement included certain fees; a facility fee of $11,765 due at closing; an annual facility fee of 0.25% of the account balance due beginning on April 20, 2019; a monthly maintenance fee of 0.125% of the ending daily account balance; a $30,000 fee in lieu of a warrant; and $80,000 due upon termination of the agreement or repayment of our obligations under the agreement. The Amended and Restated Financing Agreement was secured by all of our assets. On April 30, 2019, under the terms of the Second Amendment, Western Alliance Bank agreed to extend the $2.5 million sub-limit provision of uninvoiced eligible receivables until the earlier of May 31, 2019 or three days after the closing of the Mergers, among other terms.

On June 6, 2019, we entered into the Third Amendment to the Amended and Restated Financing. The Third Amendment provided that with respect to the eligible unbilled receivable sublimit of $2,500,000, which expired May 31, 2019 under the Amended and Restated Financing Agreement, that: (i) lender had no obligation to finance unbilled receivables but may do so in its discretion; and (ii) lender may terminate financing of unbilled receivables upon written notice. The Third Amendment also imposed an amendment fee of $2,000. At June 30, 2020 there were no outstanding balances due under the Amended and Restated Financing 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 are permitted to borrow (i) 90% of the aggregate Eligible Accounts Receivable, plus (i) the lesser of 75% of the aggregate Unbilled Accounts Receivable or 50% of the amount available to borrow under (i), up to the maximum credit commitment. On March 12, 2020 we drew $5,000,000 under this agreement, using $2,959,573 of these proceeds to satisfy our obligations to Western Alliance Bank under our credit agreement with it and the balance is being used for working capital. Following the satisfaction of our obligations to Western Alliance Bank, all agreements with that entity have been terminated. We pay Hitachi a monthly interest at the rate of 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 are due on demand.

We agreed to pay Hitachi a commitment fee of $50,000, with one half due upon the execution of the agreement and the balance due six months thereafter. Thereafter, we are obligated to pay Hitachi a commitment fee of $15,000 annually. We are also obligated to pay Hitachi a quarterly service fee of 0.30% on the monthly unused amount of the maximum credit line. In addition to a $2,000 document fee we have paid to Hitachi, if we should repay the amounts due under the Loan and Security Agreement before March 1, 2022, we are obligated to pay Hitachi an exit fee of $50,000. At June 30, 2020 there was an outstanding balances due under the Loan and Security Agreement of $2,158,443.

Note 6 – Accrued Expenses and Other Current Liabilities

The accrued expenses and other current liabilities consist of the following as of:
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 June 30, 2020December 31, 2019
Accrued marketing costs (TAC)$1,612,548  $2,200,014  
Accrued expenses and other428,460  1,152,267  
Accrued payroll and commission liabilities403,455  115,707  
Arkansas grant contingency70,000  85,000  
Accrued sales allowance50,000  50,000  
Accrued taxes10,117  11,445  
Total$2,574,580  $3,614,433  

Note 7 - Convertible Promissory Notes

On March 1, 2019, Inuvo entered into a Securities Purchase Agreement with three accredited investors for the purchase and sale of an aggregate of $1,440,000 of principal of Original Issue Discount Unsecured Subordinated Convertible Notes due September 1, 2020 (the “Calvary Notes”) to fund working capital and additional expenses resulting from the delay in closing of the Mergers associated with the government shut down. The initial conversion price of the Calvary Notes was $1.08 per share which would have made the Calvary Notes then convertible into 1,333,333 unregistered shares of Inuvo’s common stock upon conversion. The Calvary Notes were issued in a private placement and the shares of common stock issuable upon conversion are restricted, subject to resale under Rule 144. The proceeds to Inuvo from the offering were $1,200,000. Inuvo did not pay any commissions or finders fees in connection with the sale of the Calvary Notes and Inuvo utilized the proceeds for working capital. The Calvary Notes are reported net of unamortized original issue discounts and initial value attributed to the bifurcated embedded conversion feature. The balance as of June 30, 2020 was $0.

Effective April 20, 2020, the Company and the holder of the remaining Calvary Notes due September 1, 2020 in the principal amount of $315,000 as modified under that certain Note Modification and Release Agreement effective November 11, 2019, agreed to amend the note to extend the maturity date to December 31, 2020 and reduce the conversion price to $0.175 per share. On April 21,2020, the noteholder converted $200,000 principal amount due under the note into 1,142,857 shares of our common stock. On May 5, 2020, the noteholder converted the final $115,000 principal amount due under the note into 657,143 shares of our common stock, thereby satisfying the note in full.

Consideration of Down Round price adjustment

The Calvary Notes contained certain triggers that created adjustments to the conversion ratio, which provided down round protection to the holders. Because the conversion feature has been bifurcated as an embedded derivative and is marked to fair value at each reporting period, the actual occurrence of a trigger and the resulting adjustment to the conversion rate did not require any additional accounting treatment at the time of the price adjustment. Rather, the next fair value computation reflects the new terms of the conversion feature.

On July 15, 2019, we closed on an underwritten public offering of 13,750,000 shares at an offering price of $0.30 per share. As a result, this triggered a corresponding adjustment to the conversion ratio in the Calvary Notes to $0.30. The fair value of the embedded derivative reflected these terms at December 31, 2019.

Modifications/Extinguishment

On November 11, 2019 we entered into Note Modification and Release Agreements with the holders of $1,080,000 principal amount of the Calvary Notes. Under the terms of the Note Modification and Release Agreement, the parties agreed that in consideration of such noteholder’s agreement to convert a minimum of 50% of the outstanding amount of the note (the “First Conversion Amount”) that the conversion price for the First Conversion Amount would be $0.265 per share and that the conversion price for any remaining amount due under the note would be $0.30 per share, subject to future adjustments under the terms of the note including dilutive issuances at a price below $0.30 per share, subject to a floor of $0.23 per share. The agreement contains mutual general releases. These holders converted an aggregate of $765,000 due under the Calvary Notes into 2,886,792 shares of our common stock. Immediately prior to the conversion, the carrying value of the derivative was marked-to-market. Upon converting, the issued shares were recorded at their fair value of $0.29 per share. This resulted in a loss on extinguishment. Both the loss due to the marking to market and the loss on extinguishment totaling approximately $193,000 were recorded to other income, net.

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In January 2020, a noteholder of a $360,000 principal amount Calvary note converted the note into 1,200,000 shares of our common stock. The carrying value of the bifurcated derivative was marked-to-market immediately prior to the conversion. Upon conversion, the issued shares were recorded at their fair value. Both the loss due to the marked-to-market and loss on extinguishment of approximately $69,000 were recorded to other income, net.

Upon the April 2020 conversion, we relieved a proportional amount ($200,000 of $315,000 or 63.49%) of the adjusted carrying values of bifurcated conversion option and the debt host, and recorded the issued shares at their fair value of $0.22 per share. This resulted in a gain on extinguishment of $9,258 and was recorded to other income, net.

Upon the May 2020 conversion, we relieved the remaining amount ($115,000 of $115,000 or 100%) of the adjusted carrying values of bifurcated conversion option and the debt host, and recorded the issued shares at their fair value of $0.31 per share. This resulted in a loss on extinguishment of $6,201 other income, net.

Note 8 - Derivative Liability

The derivative liability reported in the financial statements represents the embedded conversion feature in the convertible promissory notes described in Note 7, which has been bifurcated for accounting purposes. The derivative is marked-to-market each reporting period at fair value under ASC 820 using significant observable and unobservable inputs, with changes in fair value recorded in the statement of operations. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3—Inputs that are both significant to the fair value measurement and unobservable.

At December 31, 2019, we recorded a derivative liability of $182,250 related to the bifurcated embedded conversion feature of the Calvary Notes discussed in Note 7 - Convertible Promissory Note. In accordance with the guidance above, the fair value of the derivative liability is considered "Level 3."


Note 9 – Other Long-Term Liabilities

The lease liabilities and other long-term liabilities consist of the following as of:
 June 30, 2020December 31, 2019
PPP and SBA loans$1,258,900  $  
Deferred revenue498,763    
Deferred rent33,182  57,162  
Total$1,790,845  $