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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 September 30, 2021
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-20210930_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.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange 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 ClassNovember 5th
Common Stock118,747,447




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 Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 and declining revenues;
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 advertising suppliers;
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;
our ability to continue to meet the NYSE American listing standards;
the impact of quarterly results on our common stock price;
dilution to our stockholders upon the exercise of outstanding restricted stock unit grants and warrants;
the on-going impact of the COVID-19 pandemic on our Company; and
our ability to identify, finance, complete and successfully integrate future acquisitions.

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, 2020 as filed with the Securities and Exchange Commission ("SEC") on February 11, 2021, as amended on Form 10-K/A as filed with the SEC on March 10, 2021 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, "third quarter 2021" means for the three months ended September 30, 2021, "third quarter 2020" means for the three months ended September 30, 2020, "2020" means the fiscal year ended December 31, 2020 and "2021" means the fiscal year ending December 31, 2021. 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
September 30, 2021 (Unaudited) and December 31, 2020
 September 30, 2021December 31, 2020
Assets
Current assets  
Cash and cash equivalent$11,702,464 $7,890,665 
Marketable securities2,925,785  
Accounts receivable, net of allowance for doubtful accounts of $161,904 and $209,667, respectively
8,920,881 6,227,610 
Prepaid expenses and other current assets496,250 413,435 
Total current assets24,045,380 14,531,710 
Property and equipment, net1,422,422 1,187,061 
Other assets  
Right of use assets - operating lease723,069 606,573 
Right of use assets - finance lease287,225 395,910 
Referral and support services agreement advance1,475,000  
Intangible assets, net of accumulated amortization7,186,961 8,586,089 
Goodwill9,853,342 9,853,342 
Other assets44,236 20,886 
Total other assets19,569,833 19,462,800 
Total assets$45,037,635 $35,181,571 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$4,680,629 $4,048,260 
Accrued expenses and other current liabilities5,861,885 4,216,448 
Lease liability - operating lease334,758 217,671 
Lease liability - finance lease147,661 246,793 
Total current liabilities11,024,933 8,729,172 
Long-term liabilities  
Deferred tax liability107,000 107,000 
Lease liability - operating lease388,310 388,902 
Lease liability - finance lease136,385 93,426 
Other long-term liabilities11,945 573,957 
Total long-term liabilities643,640 1,163,285 
Stockholders’ equity
Preferred stock, $0.001 par value:
Authorized shares 500,000, none issued and outstanding
  
Common stock, $0.001 par value:
Authorized shares 200,000,000 and 100,000,000, respectively; issued and outstanding shares 118,747,447 and 98,035,829, respectively.
118,748 98,036 
Additional paid-in capital175,960,347 161,541,448 
Accumulated deficit(142,710,033)(136,350,370)
Total stockholders' equity33,369,062 25,289,114 
Total liabilities and stockholders' equity$45,037,635 $35,181,571 

5


             See accompanying notes to the consolidated financial statements.
1






INUVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2021202020212020
Net revenue$16,841,035 $9,214,350 $40,094,427 $31,737,520 
Cost of revenue3,757,938 1,645,392 7,466,017 6,154,921 
Gross profit13,083,097 7,568,958 32,628,410 25,582,599 
Operating expenses  
Marketing costs10,163,006 5,668,707 25,681,930 19,148,925 
Compensation2,840,149 2,462,693 8,458,233 6,925,239 
Selling, general and administrative1,824,869 1,870,258 5,226,737 5,710,221 
Total operating expenses14,828,024 10,001,658 39,366,900 31,784,385 
Operating loss(1,744,927)(2,432,700)(6,738,490)(6,201,786)
Interest expense, net(6,261)(26,143)(36,641)(251,335)
Other income (expense), net(79,080)53,763 415,468 (136,483)
Net loss$(1,830,268)$(2,405,080)$(6,359,663)$(6,589,604)
Per common share data  
Basic and diluted:  
Net loss$(0.02)$(0.03)$(0.05)$(0.09)
Weighted average shares
Basic116,645,509 92,110,881 117,230,419 70,652,630 
Diluted116,645,509 92,110,881 117,230,419 70,652,630 
 
See accompanying notes to the consolidated financial statements.
6






INUVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30,
 20212020
Operating activities:
Net loss$(6,359,663)$(6,589,604)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,343,874 2,452,930 
Depreciation-Right of Use Assets237,423 291,100 
Stock based compensation1,566,016 660,615 
Unrealized loss on purchase of marketable securities(54,532) 
Amortization of financing fees8,750 11,092 
Provision for doubtful accounts(47,763)(73,333)
Third party rights agreement termination(420,000) 
Derecognition of contingencies(110,000) 
Contract Cancellation (1,260,978)
Amortization of debt discount 18,286 
Amortization of OID interest expense 13,167 
Mark to market fair value of derivative 102,664 
Loss on extinguishment of convertible debt 65,700 
Change in operating assets and liabilities:
Marketable securities(2,871,253) 
Accounts receivable(2,645,508)3,564,381 
Referral and support services agreement advance(1,500,000) 
Prepaid expenses, unbilled revenue and other current assets(77,503)(225,771)
Accounts payable632,369 (3,031,304)
Accrued expenses and other liabilities1,754,574 (334,576)
Net cash used in operating activities(7,543,216)(4,335,631)
Investing activities:
Purchases of equipment and capitalized development costs(1,180,107)(852,423)
Net cash used in investing activities(1,180,107)(852,423)
Financing activities:
Proceeds from sale of common stock, net13,137,500 16,432,190 
Proceeds from ValidClick licensing agreement 500,000 
Proceeds from PPP and SBA loans 1,258,900 
Net payments on line of credit (3,381,364)
Payments on finance lease obligations(181,998)(412,382)
Proceeds from exercise of options1,569  
SBA loan repayment(149,900) 
Net taxes paid on restricted stock unit grants exercised(272,049)(54,065)
Net cash provided by financing activities12,535,122 14,343,279 
Net change – cash3,811,799 9,155,225 
Cash and cash equivalent, beginning of year7,890,665 372,989 
Cash and cash equivalent, end of period$11,702,464 $9,528,214 
Supplemental information:
Interest paid$42,474 $200,904 
Non cash investing and financing activities:
 Assets purchased under finance lease $125,825 $524,368 
 Assets purchased under operating lease $344,311 $249,595 
Conversion of Debt and derecognition of derivative and discounts to common stock$ $923,810 
 
See accompanying notes to the consolidated financial statements.
7






INUVO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
For the Nine Months Ended September 30,

2021
Common Stock Additional Paid in CapitalAccumulated DeficitTotal
SharesStock
Balance as of December 31, 202098,035,829$98,036$161,541,448 $(136,350,370)$25,289,114 
Net loss(2,147,268)(2,147,268)
Stock-based compensation394,870 394,870 
Stock issued for vested restricted stock awards1,467,4651,467(1,467) 
Shares withheld for taxes on vested restricted stock(161,244)(161,244)
Proceeds from exercise of options1,569 1,569 
Sale of common stock, net19,015,15119,01613,118,484 13,137,500 
Balance as of March 31, 2021118,518,445$118,519$174,893,660 $(138,497,638)$36,514,541 
Net loss(2,382,127)(2,382,127)
Stock-based compensation557,602 557,602 
Balance as of June 30, 2021118,518,445 $118,519 $175,451,262 $(140,879,765)$34,690,016 
Net loss(1,830,268)— (1,830,268)
Stock-based compensation613,544 613,544 
Shares withheld for taxes on vest restricted stock(110,805)(110,805)
Stock issued for vested restricted stock awards229,002 229 (229) 
Stock warrants issued for referral agreement6,575 6,575 
Balance as of September 30, 2021118,747,447 $118,748 $175,960,347 $(142,710,033)$33,369,062 

8






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 compensation208,897 208,897 
Stock issued for vested restricted stock awards260,719261(261) 
Shares withheld for taxes on vested restricted stock(21,184)(21,184)
Convertible Note Conversion1,200,0001,200467,467 468,667 
Sale of common stock, net7,046,4297,0461,199,742 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 
Net loss(2,405,080)— (2,405,080)
Stock-based compensation258,430 258,430 
Shares withheld for taxes on vest restricted stock(32,881)(32,881)
Stock issued for vested restricted stock awards269,281 269 (269) 
Sale of common stock, net21,500,000 21,5009,909,995 9,931,495 
Cancellation of treasury stock(376)(1,396,183)1,396,559  
Balance as of September 30, 202097,544,947 $97,546 $161,364,355 $(135,635,405)$ $25,826,496 



9






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 and advertising. These solutions 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 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 in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance.

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 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 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 various Inuvo technologies, while also delivering high quality consumers to these services clients through consumer interaction with the proprietary content within these sites.

There are many barriers to entry associated with the Inuvo 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 18 issued and seven pending patents.

Liquidity
Throughout 2020 and the first quarter of 2021, we raised capital, reversing a historical net working capital deficit. Our principal sources of liquidity come as a result of the sale of common stock and use of a credit facility through Hitachi Capital America Corp. ("Hitachi") described in Note 6.

On March 20, 2020, we sold an aggregate of 3,931,428 shares of our common stock 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 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 for gross proceeds of $245,050.

On April 10, 2020, we obtained an unsecured $1.1 million loan 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 ("SBA"). In accordance with the requirements of the CARES Act, proceeds from the PPP Loan were used for payroll costs. The PPP Loan was fully forgiven on November 2, 2020. On May 15, 2020, we received a COVID-19 Economic Injury Disaster Loan ("EIDL") from the SBA for $149,900. We repaid the EIDL in full on January 28, 2021.

On June 8, 2020, we closed an additional registered direct offering of an aggregate of 12,222,222 shares of our common stock for gross proceeds of $5.5 million. 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 for gross proceeds of $10.75 million. 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.

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On January 7, 2021, we filed the 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.

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 a money market fund and $10 million in an interest-bearing account. At September 30, 2021, our net deposits with the investment management company were $9 million and were invested in money market funds 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 three months ended September 30, 2021, we did not issue any shares of common stock, we did not receive any aggregate proceeds, 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 Agent upon the occurrence of certain adverse events, (b) 10 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.

On August 11, 2021, our shareholders approved a proposal to amend our articles of incorporation to increase the number of authorized shares of our common stock from 150,000,000 to 200,000,000, and 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 150,000,000 to 200,000,000.

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 product is unsuccessful, we may need to fund operations through private or public
sales of securities, debt financings or partnering/licensing transactions.

Customer concentration

Our three largest customers are Google, Yahoo! and Proper Media and all are clients of the ValidClick platform. The percentages of overall Inuvo revenue associated with these clients is noted below:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2021202020212020
Google36.4%29.1 %38.3 %23.1 %
Yahoo!14.3%22.2 %16.7 %39.4 %
Proper Media13.6% %15.5 % %
Total64.3%51.3 %70.5 %62.5 %

As of September 30, 2021, Google, Yahoo! and Proper Media accounted for 44.0% of our gross accounts receivable balance. As of December 31, 2020, the same three customers accounted for 38.4% of our gross accounts receivable balance.

We still source the majority of our ValidClick revenue through these services relationships where we have access to advertiser media spend 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.

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
11






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 curtailed expenses, including compensation and travel throughout 2020, in addition to other actions. Additionally, in April 2020, we obtained an unsecured PPP Loan under the CARES Act of $1.1 million which we used primarily for payroll costs. The loan was fully forgiven 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, were focusing our resources on areas we believe 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 the year 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.

Our net working capital was a positive $13.1 million as of September 30, 2021. During January 2021, we raised approximately $14.3 million, before expenses, through the sale of our securities in two offerings. During the second and third quarters of 2020, we raised approximately $16.5 million, before expenses, through the sale of our securities and in April 2020, we obtained a $1.1 million PPP Loan. There is no assurance that we will be successful in obtaining additional funding to grow operations, but believe we have sufficient capital to operate during the next twelve months.
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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, 2020, 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, 2020, which was filed with the SEC on February 11, 2021, as amended on Form 10-K/A as filed with the SEC on March 10, 2021.

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 goodwill and purchased intangible asset valuations and income tax 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.

Revenue Recognition

Both of our platforms generate revenue from ad placements and clicks on advertisements on websites, some of which we own. We recognize revenue from ad placements and clicks in the period in which they occur. 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. Payments to publishers who display advertisements on our behalf and payments to ad exchanges are recognized as cost of revenue.

The below table is the proportion of revenue that is generated through advertisements on our ValidClick and IntentKey platforms:
For the Three Months Ended September 30,
For the nine Months Ended September 30,
2021202020212020
ValidClick Platform$11,742,855 69.7 %$6,239,406 67.7 %$29,955,169 74.7 %$24,966,122 78.7 %
IntentKey Platform5,098,180 30.3 %2,974,944 32.3 %10,139,258 25.3 %6,771,398 21.3 %
Total$16,841,035 100.0 %$9,214,350 100.0 %$40,094,427 100.0 %$31,737,520 100.0 %

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board ("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 for 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 - Fair Value Measurements

The following table summarizes our cash equivalents and marketable securities measured at fair value. Certain marketable securities consist of investments in debt and equity securities. Debt securities are classified as trading securities. We classify our cash equivalents and marketable securities within Level 1 because we use quoted market prices models utilizing market observable inputs to determine their fair value.

September 30, 2021
Cash and cash equivalents:
Cash $5,682,780 
Money Market Funds6,019,684 
Total cash and cash equivalents11,702,464 
Marketable securities
Debt securities2,020,563 
Equity securities905,222 
Total marketable securities2,925,785 
Total cash and cash equivalents and marketable securities$14,628,249 

The gross unrealized losses on our marketable securities was approximately $79 thousand and $54 thousand for the three and nine months ended September 30, 2021, respectively.


Note 4 – Property and Equipment
 
The net carrying value of property and equipment was as follows as of:
 September 30, 2021December 31, 2020
Furniture and fixtures$293,152 $293,152 
Equipment1,129,835 1,052,199 
Capitalized internal use and purchased software12,532,394 11,475,683 
Leasehold improvements458,885 421,016 
Subtotal14,414,266 13,242,050 
Less: accumulated depreciation and amortization(12,991,844)(12,054,989)
Total$1,422,422 $1,187,061 

During the three and nine months ended September 30, 2021, depreciation expense was $325,112 and $944,746, respectively. During the three and nine months ended September 30, 2020, depreciation expense was $335,769 and $1,053,802, respectively.













14







Note 5 – Other Intangible Assets and Goodwill
 
The following is a schedule of intangible assets and goodwill as of September 30, 2021:
 TermCarrying
Value
Accumulated Amortization and ImpairmentNet Carrying ValueYear-to-date Amortization
Customer list, Google20 years$8,820,000 $(4,226,250)$4,593,750 $330,750 
Technology5 years3,600,000 (3,360,000)$240,000 540,000 
Customer list, ReTargeter5 years1,931,250 (836,875)$1,094,375 289,688 
Customer list, all other10 years1,610,000 (1,542,956)$67,044 120,753 
Brand name, ReTargeter5 years643,750 (278,958)$364,792 96,563 
Customer relationships20 years570,000 (133,000)$437,000 21,374 
Trade names, web properties (1)— 390,000 — $390,000 — 
Intangible assets classified as long-term$17,565,000 $(10,378,039)$7,186,961 $1,399,128 
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.
Amortization expense over the next five years and thereafter is as follows:
 
Remaining 2021$466,376 
20221,071,294 
2023984,500 
2024769,917 
2025469,500 
Thereafter3,035,374 
Total$6,796,961 

Note 6 – Bank Debt
 
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. All obligations under the Amended and Restated Financing Agreement, as amended, with Western Alliance Bank have been met and all agreements with Western Alliance Bank have been terminated.

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 (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 is 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. 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 exit our relationship with Hitachi before March 1, 2022, we are obligated to pay Hitachi an exit fee of $50,000. On March 12, 2020, we drew $5,000,000 under this agreement, using $2,959,573 of these proceeds to satisfy all of our obligations under the Western Alliance Bank credit agreement and the balance was used for working capital. At December 31, 2020 and September 30, 2021, there were no outstanding balances due under the Loan and Security Agreement with Hitachi.
15







Note 7 – Accrued Expenses and Other Current Liabilities

The accrued expenses and other current liabilities consist of the following as of:
 September 30, 2021December 31, 2020
Accrued marketing costs$4,794,137 $3,234,192 
Accrued payroll and commission liabilities593,419 423,373 
Accrued expenses and other450,633 440,578 
Accrued taxes13,696 8,305 
Arkansas grant contingency10,000 60,000 
Accrued sales allowance 50,000 
Total$5,861,885 $4,216,448 

Note 8 – 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 certain planned, and since terminated, mergers with ConversionPoint Technologies Inc. and ConversionPoint Holdings Inc. 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.

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.

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. On April 21, 2020, a noteholder converted $200,000 principal amount due under the Calvary Notes into 1,142,857 shares of our common stock. On May 5, 2020, a noteholder converted the final $115,000 principal amount due under the Calvary Notes into 657,143 shares of our common stock, thereby satisfying the Calvary Notes in full and completing the extinguishment of the Calvary Notes.


Note 9 – Other Long-Term Liabilities

The lease liabilities and other long-term liabilities consist of the following as of:
 September 30, 2021December 31, 2020
Deferred rent11,945 4,057 
Deferred revenue 420,000 
SBA loan 149,900 
Total$11,945 $573,957 





16






Note 10 – Commitments    

On September 17, 2021, we signed an agreement with a business development partner to provide referral and support services to us for periods ranging from two to five years. The agreement required an advance fee of $1.5 million and was recorded as a long-term asset. As part of the agreement, we granted a warrant exercisable into 300,000 shares of our common stock, which vest over two years upon achieving certain performance metrics (see Note 13 - Stockholder's Equity). Additionally, we agreed to pay quarterly support fees upon reaching certain levels of operational activity.

In March 2020, we entered into an agreement to allow a third party to license and use ValidClick technology. The agreement required a nonrefundable fee of $500,000 in March with subsequent fees as earned in later quarters. The $500,000 fee was recorded as deferred revenue in March 2020. Effective March 1, 2021, the agreement was canceled and the remaining deferred revenue balance of $420,000 was recognized as other income.

Note 11 – Income Taxes

We have a deferred tax assets of $37,693,100. We believe it is more likely than not that essentially none of our deferred tax assets will be realized, and we have recorded a valuation allowance of $35,848,400 for the deferred tax assets that may not be realized as of September 30, 2021 and December 31, 2020. We also have deferred tax liabilities totaling $1,951,700 as of September 30, 2021, related to intangible assets acquired in March 2012. These balances are presented as a net deferred tax liability of $107,000 composed of indefinite lived intangible assets.

Note 12 – Stock-Based Compensation

We maintain a stock-based compensation program intended to attract, retain and provide incentives for talented employees and directors and align stockholder and employee interests. During the 2021 and 2020 periods, we granted restricted stock units ("RSUs") from the 2017 Equity Compensation Plan, as amended (“2017 ECP”). RSU vesting periods are generally up to three years and/or achieving certain financial targets.

On January 1, 2021, in accordance with the plan provisions, the number of shares available for issuance under the 2017 ECP plan was increased by 150,000 shares.

Compensation Expense

During the three and nine months ended September 30, 2021, stock-based compensation expense was $613,544 and $1,566,016, respectively. During the three and nine months ended September 30, 2020, stock-based compensation expense was $258,430 and $660,615, respectively. Total compensation cost not yet recognized at September 30, 2021 was $4,208,496 to be recognized over a weighted-average recognition period of approximately two years.

The following table summarizes the stock grants outstanding under the 2017 ECP and the 2010 Equity Compensation Plan ("2010 ECP"), which expired on its terms in April 2020, for the nine months ended September 30, 2021:

 Options OutstandingRSUs OutstandingOptions and RSUs ExercisedAvailable SharesTotal
2017 ECP 3,960,001 2,734,138 2,705,861 9,400,000 
2010 ECP (*)1,500  5,011,511  5,013,011 
Total1,500 3,960,001 7,745,649 2,705,861 14,413,011 
(*) Expired April 2020

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The following table summarizes the activity of stock option awards under the 2010 ECP for the nine months ended September 30, 2021:
Shares Subject to Options Outstanding
Number of SharesWeighted Average Exercise Price
Balance as of December 31, 20209,500 $0.56 
Stock options exercised4,750 $0.56 
Stock options canceled3,250 $0.56 
Balance as of September 30, 2021
1,500 0.56 
Stock options exercisable as of September 30, 2021
1,500 0.56 


The following table summarizes the activities for our unvested RSUs for the nine months ended September 30, 2021:
Unvested RSUs
Number of SharesWeighted Average Grant Date Fair Value
Unvested as of December 31, 20201,930,526 $0.28 
Granted4,610,000 $1.36 
Vested2,171,331 $0.47 
Forfeited409,194 $1.23 
Unvested as of September 30, 2021
3,960,001 $1.33 

Note 13 – Stockholders Equity

Warrants

On September 17, 2021, we signed an agreement with a marketing platform and consultancy company to provide referral and support services to us for a period of five years (see Note 10 - Commitments). As part of that agreement, we granted a warrant exercisable into 300,000 shares of our common stock, which vests in two tranches when certain performance metrics are achieved. The warrant was valued using the Black Scholes option pricing model at a total of $149,551 based on a seven-year term, an implied volatility of 100%, a risk-free equivalent yield of 1.17%, and a stock price of $0.71. The warrant is classified as equity and will be expensed on a ratable basis over the measurement period of each tranche. For the three months ended September 30, 2021, we recognized approximately $6 thousand in expense and $143 thousand is unrealized.

Earnings per Share

For the three and nine months ended September 30, 2021 and 2020, we generated a net loss from continuing operations and as a result, all of our shares are anti-dilutive.

Note 14 – Leases
We have entered into operating and finance leases primarily for real estate and equipment rental. These leases have terms which range from two years to four years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment. These operating and finance leases are listed as separate line items on our consolidated balance sheets and represent our right to use the underlying asset for the lease term. Our obligations to make lease payments are also listed as separate line items on our consolidated balance sheets. As of September 30, 2021 and December 31, 2020, total operating and financed right-of-use assets were $723,069 and $287,225, and $606,573 and $395,910, respectively.
As of September 30, 2021 and 2020, we recorded $237,423 and $291,100, respectively, in amortization expense related to finance leases.
18







Because the rate implicit in each lease is not readily determinable, we use the incremental borrowing rate to determine the present value of the lease payments.

Information related to our operating lease liabilities are as follows:
For the Nine Months Ended September 30,
Cash paid for operating lease liabilities$433,569 
Weighted-average remaining lease term3.38
Weighted-average discount rate6.25 %
Minimum future lease payments ended September 30, 2021
202195,843 
2022380,482 
2023297,921 
202413,128 
20252,143 
20261,071 
790,588 
Less imputed interest(67,520)
Total lease liabilities$723,068 


Information related to our financed lease liabilities are as follows:
For the Nine Months Ended September 30,
Cash paid for finance lease liabilities$172,459 
Weighted-average remaining lease term2.45
Weighted-average discount rate6.25 %
Minimum future lease payments ended September 30, 2021
2021$106,224 
2022119,452 
202384,127 
20243,856 
313,659 
Less imputed interest(29,613)
Total lease liabilities$284,046 

Note 15 – Related Party Transactions

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. The purchase price of the shares of our common stock sold in the offering exceeded the closing market price of our common stock on March 19, 2020, the trading day immediately preceding the day the binding Insider Subscription Agreements were executed by the purchasers. The purchasers were all accredited investors. We did not pay any commissions or finder’s fees, and we used the proceeds for general working capital.


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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

Company Overview

Inuvo is a technology company that develops and sells information technology solutions for marketing and advertising. These services 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 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 in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance.

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 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 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 various Inuvo technologies, while also delivering high quality consumers to these services clients through consumer interaction with the proprietary content within these sites.

There are many barriers to entry associated with the Inuvo 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 18 issued and seven pending patents.

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 curtailed expenses, including compensation and travel throughout 2020 in addition to other actions. Additionally, in April 2020, we obtained the $1.1 million PPP Loan which we used primarily for payroll costs. The PPP Loan was fully forgiven 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, were focusing our resources on areas we believe 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 the year 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.

Our net working capital was a positive $13.1 million as of September 30, 2021. During January 2021, we raised approximately $14.3 million, before expenses, through the sale of our securities in two offerings. During the second and third quarters of 2020, we raised approximately $16.5 million, before expenses, through the sale of our securities and in April 2020, we obtained a $1.1 million PPP Loan. There is no assurance that we will be successful in obtaining additional funding to grow operations, but believe we have sufficient capital to operate during the next twelve months.

Critical Accounting Policies and Estimates
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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 audited consolidated financial statements for 2020 appearing in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on February 11, 2021, as amended on Form 10-K/A as filed with the SEC on March 10, 2021. 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 income tax 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 September 30,For the Nine Months Ended September 30,
 20212020Change% Change20212020Change% Change
Net Revenue$16,841,035 $9,214,350 $7,626,685 82.8 %$40,094,427 $31,737,520 $8,356,907 26.3 %
Cost of Revenue3,757,938 1,645,392 2,112,546 128.4 %7,466,017 6,154,921 1,311,096 21.3 %
Gross Profit$13,083,097 $7,568,958 $5,514,139 72.9 %$32,628,410 $25,582,599 $7,045,811 27.5 %

Net Revenue
We experienced higher year over year revenue for the three and nine months ended September 30, 2021 as compared to the same periods in 2020. Revenue from both platforms, ValidClick and IntentKey exceeded the prior year. ValidClick revenue exceeded the revenue in the third quarter of last year by 88%. IntentKey revenue for the three months ended September 30, 2021 exceeded the prior year quarter by 71%. Both platforms acquired new customers in the third quarter of this year, benefiting from the agreement with a business development partner discussed in Note 10 and as a result of the economic improvements associated with the COVID-19 pandemic recovery. Revenue in 2020 was affected by the COVID-19 which had a material impact on advertising budgets beginning in April of 2020. The renegotiation of payment terms and conditions as a trade-off for higher gross margins with ValidClick marketing clients in the quarter ended June 30, 2020 also contributed to the lower revenue in the third quarter of 2020.

Cost of Revenue

Cost of revenue for the three- and nine-month periods ended September 30, 2021 was primarily generated by payments to ad 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. Cost of revenue in the same 2020 time-periods was primarily generated by 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 for the three and nine months ended September 30, 2021 as compared to the same quarter in 2020 was largely due to the acquisition of new customers as mentioned in the Net Revenue section above and the renegotiation of payment terms and conditions with a ValidClick marketing partner in the quarter ended June 30, 2020.

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Operating Expenses
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 20212020Change% Change20212020Change% Change
Marketing costs$10,163,006 $5,668,707 $4,494,299 79.3 %$25,681,930 $19,148,925 $6,533,005 34.1 %
Compensation2,840,149 2,462,693 377,456 15.3 %8,458,233 6,925,239 $1,532,994 22.1 %
Selling, general and administrative1,824,869 1,870,258 (45,389)(2.4 %)5,226,737 5,710,221 $(483,484)(8.5)%
Operating expenses$14,828,024 $10,001,658 $4,826,366 48.3 %$39,366,900 $31,784,385 $7,582,515 23.9 %

Marketing costs consists mostly of traffic acquisition costs and includes those expenses required to attract an audience to the ValidClick platform. The increase in the cost of revenue for the three and nine month periods ended September 30, 2021 as compared to the same time periods in 2020 was largely due to the 88% increase in ValidClick revenue discussed above in the Net Revenue section.

Compensation expense was higher for the three and nine-months ended September 30, 2021 compared to the same time periods in 2020 primarily due to higher employee salary expense and stock-based compensation. Our total employment, both full and part-time, was 77 at September 30, 2021 compared to 70 at September 30, 2020. The higher headcount this year over last year was primarily due to hiring additional sales and sales support personnel for the IntentKey platform.

Selling, general and administrative costs were lower for the three and nine-month periods ended September 30, 2021 compared to the same time periods in 2020, primarily due to lower IT costs.

Interest expense, net
 
Interest expense, net, for the three month period ended September 30, 2021 was approximately $6 thousand and was primarily interest expense on finance lease obligations and the Hitachi Loan and Security Agreement partially offset by interest income from our trading securities. Interest expense, net, for the nine months ended September 30, 2021 was approximately $37 thousand and primarily represents interest expense on finance lease obligations and the Hitachi Loan and Security Agreement.

Interest expense, net, for the three months ended September 30, 2020, was approximately $26 thousand and represented interest expense on financed receivables, capital lease obligations and the PPP Loan. Interest expense, net, for the nine months ended September 30, 2020, was approximately $251 thousand and represents interest expense on financed receivables, change of the derivative liability associated with the convertible promissory notes, capital lease obligations and the PPP Loan.

Other income/(expense), net

Other income/expense, net, for the three months ended September 30, 2021 was an expense of approximately $79 thousand and represents unrealized losses on trading securities discussed in Note 3 to our Consolidated Financial Statements. Other income/expense, net, for the nine months ended September 30, 2021 was income of approximately $415 thousand and included the reversal of the deferred revenue from the contract cancellation discussed in Note 10 to our Consolidated Financial Statements and the reversal of an accrued sales reserve of $50 thousand.

Other income/expense, net, for the nine months ended September 30, 2020 was an expense of approximately $136 thousand and was primarily due to the conversion of the Calvary notes (see Note 8 to our Consolidated Financial Statements).

Liquidity and Capital Resources

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. During March 2020 and April 2020, we raised approximately $1.5 million in gross proceeds, before expenses, through sales of our common stock and in April 2020 we received a $1.1 million PPP Loan. On June 8, 2020, we raised an additional $5.5 million in gross proceeds, before expenses, through the sale of our common stock and on July 27, 2020, we raised an additional $10.75 million in gross proceeds, before expenses, through sales of our common stock. On January 19, 2021, we raised an additional $8 million in gross proceeds, before expenses, through the sale of our common stock, and on January 22, 2021, we raised an additional $6.25 million in gross proceeds, before expenses, through sales of our common stock.
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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 a money market fund and $10 million in an interest-bearing account. At September 30, 2021, our net deposits with the investment management company were $9 million and were invested in money market funds, 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 three months ended September 30, 2021, we did not issue any shares of common stock, we did not receive any aggregate proceeds, 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 Agent upon the occurrence of certain adverse events, (b) 10 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 product is unsuccessful, we may need to fund operations through private or public
sales of securities, debt financings or partnering/licensing transactions.

In April 2020, the Company experienced a significant reduction in advertiser marketing budgets across both the ValidClick and IntentKey platforms as a direct consequence of COVID-19. These reductions adversely impacted our overall revenue throughout 2020. As a result, in May 2020 and June 2020 we implemented a temporary compensation change for senior officers and employees. Certain employees with salaries in excess of $100,000 per year had forgone a percentage of their salary. We curtailed expenses, including compensation and travel for the months of May and June, and issued a work from home policy to protect our employees and their families from virus transmission associated with co-workers. As a result of this uncertainty, we continue to focus our resources on areas we believe have immediate revenue potential while concurrently reducing expenses where necessary with an objective to minimize daily operating disruptions.

Cash Flows

The table below sets forth a summary of our cash flows for the nine months ended September 30, 2021 and 2020:

For the Nine Months Ended September 30
20212020
Net cash used in operating activities
$(7,543,216)$(4,335,631)
Net cash used in investing activities
$(1,180,107)$(852,423)
Net cash provided by financing activities
$12,535,122$14,343,279

Cash Flows - Operating

Net cash used in operating activities was $7,543,216 during the nine months ended September 30, 2021. We reported a net loss of $6,359,663, which included non-cash expenses; depreciation and amortization expense of $2,343,874, other depreciation expense of $237,423 and stock-based compensation expense of $1,566,016; partially offset by the $1.5 million referral agreement and the reversal of $420,000 in deferred revenue. The change in operating assets and liabilities during the nine months ended September 30, 2021 resulted in cash used in operations of $4,707,321 primarily due to the purchase of marketable securities of $2,871,253, an increase in the accounts receivable balance by $2,645,508 due to the increased revenue in the third quarter of 2021; partially offset by an increase in accrued expenses and other liabilities of $1,754,574 and accounts payable balance of $632,369. Though much of our terms are such that we generally collect receivables prior to paying trade payables, increasingly, media sales require us to prepay our support partners and our clients typically have longer payment terms.

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During the comparable nine-month period in 2020, cash used operating activities was $4,335,631 from a net loss of $6,589,604, which included several non-cash expenses; depreciation and amortization of $2,452,930 and stock-based compensation of $660,615.

Cash Flows - Investing

Net cash used in investing activities was $1,180,107 and $852,423 for the nine months ended September 30, 2021 and 2020, respectively, and primarily consisted of capitalized internal development costs.

Cash Flows - Financing

Net cash provided by financing activities was $12,535,122 and $14,343,279 during the nine months ended September 30, 2021 and 2020, respectively, and was primarily from proceeds from the sale of common stock.

Off Balance Sheet Arrangements

As of September 30, 2021, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to a smaller reporting company.


ITEM 4.  CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures" as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management does not expect that our disclosure controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of September 30, 2021, the end of the period covered by this report, our management concluded their evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As of the evaluation date, our Chief Executive Officer and Chief Financial Officer concluded that we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed,
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summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the period ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II

Item 1 - LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 11, 2021, as amended on Form 10-K/A filed with the SEC on March 10, 2021 and our subsequent filings with the SEC, subject to the new or modified risk factors appearing below that should be read in conjunction with the risk factors disclosed in such Form 10-K and our subsequent filings.

We rely on three customers for a significant portion of our revenues. We are reliant upon Google, Yahoo! and Proper Media for most of our revenue. During the third quarter of 2021, Google accounted for 36.4%, Yahoo! 14.3% and Proper Media 13.59% of our revenues, respectively, and during the same period in 2020, Yahoo! 22.2% and Google 29.1%, respectively. The amount of revenue we receive from these customers is dependent on a number of factors outside of our control, including the amount they charge for advertisements, the depth of advertisements available from them, and their ability to display relevant ads in response to end-user queries. We would likely experience a significant decline in revenue and our business operations could be significantly harmed if these customers do not approve our new websites and applications, or if we violate their guidelines or they change their guidelines. In addition, if any of these preceding circumstances were to occur, we may not be able to find a suitable alternate paid search results provider or otherwise replace the lost revenues. The loss of any of these customers or a material change in the revenue or gross profit that they generate would have a material adverse impact on our business, results of operations and financial condition in future periods.

Our success is dependent upon our ability to establish and maintain direct relationships with advertisers and advertising agencies. Some of our solutions generate revenue directly from advertisers and advertising agencies. Accordingly, our ability to generate revenue for our solutions is dependent upon our ability to attract new advertisers, maintain relationships with existing advertisers and fulfill our advertisers’ orders. Our programs to attract advertisers include direct sales, agency sales, online promotions, referral agreements and participation in tradeshows. We attempt to maintain relationships with our advertisers through providing quality customer service and delivering on campaign goals. Our advertisers and advertising agency clients can generally terminate their contracts with us at any time and with limited or no advance notice. We believe that advertisers and advertising agencies will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

We are exposed to credit risk on our accounts receivable and this risk is heightened during periods when economic conditions worsen.We sell some of our solutions directly to advertisers and advertising agencies on credit. Our outstanding accounts receivables to advertisers and advertising agencies are not covered by collateral, third-party financing arrangements or credit insurance. Our exposure to credit and collectability risk on our accounts receivables is higher with some customers and our ability to mitigate such risks may be limited. As we continue to add new customers and expand our direct relationships with advertisers and advertising agencies our credit risk increases. Additionally, our credit risk increases during periods when economic conditions worsen. While we have procedures to monitor and limit exposure to credit risk on our accounts receivables there can be no assurance such procedures will effectively limit our credit risk and avoid losses.



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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.