Quarterly report pursuant to Section 13 or 15(d)

Organization and Business

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Organization and Business
9 Months Ended
Sep. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Business Organization and Business
 
Company Overview
 
We develop technology that connects advertisers with consumers through interactions with content across devices. Inuvo provides the means to interact with tens of thousands of advertisers ("Demand") and tens of thousands of online publishers ("Supply"). We interact with Demand/Supply constituents directly and indirectly. We serve ads that associate with images, content, video and slideshows. We generate revenue from buyers of advertising inventory which include media partners, advertisers, agencies, agency trading desks, demand-side platforms and ad networks, collectively “Demand.” Our solution incorporates a proprietary form of artificial intelligence (“AI”) branded the IntentKey. This sophisticated machine learning technology uses interactions with Internet content as a source of information from which to determine Intent. The AI solution includes a continually updated database of over 500 million machine profiles which we utilize to deliver highly targeted online audiences to our Demand customers. We earn revenue when consumers view and/or click on our ads. Our business scales as we add Demand and Supply relationships.

We count among our many contractual relationships, three clients who collectively manage over 50% of all US digital advertising budgets. Included within our Supply portfolio is a collection of owned websites such as alot.com and earnspendlive.com, where we create content in health, finance, travel, careers, auto, education and living categories. These sites provide the means to test advertising technologies, while also delivering high quality consumers to advertisers through interaction with proprietary content in the form of images, videos, slideshows and the written word.
 
There are many barriers to entry to our business including the ability to process billions of transactions daily. Our intellectual property is protected by 15 issued and eight pending patents.

Liquidity

On October 11, 2018, we entered into the Amended and Restated Business Financing Agreement (the “Amended and Restated Financing Agreement”) with Western Alliance Bank. The Amended and Restated Financing Agreement, which is secured by all of our assets, superseded in its entirety the prior the Business Financing Agreement, as amended, that we entered into on March 1, 2012 with Bridge Bank, N.A. which is now owned by Western Alliance Bank. The Amended and Restated Financing Agreement does not have a term and either party may terminate upon notice to the other party. As a result of the amended terms of our lending relationship with Western Alliance Bank, we have additional access to credit (See Note 5 in the Notes to Consolidated Financial Statements).

In May 2018, we completed our underwritten public offering of 2,860,000 shares of our common stock at a public offering price of $0.70 per share and an additional 429,000 shares to cover overallotments in connection with the offering. The net proceeds after deducting the underwriting discounts and commissions and estimated offering expenses payable was approximately $2.1 million.

During the third quarter of 2017, we filed an S-3 registration statement with the Securities and Exchange Commission ("SEC") to replace the existing, expiring S-3 "shelf" registration statement, which permits us to offer and sell up to $15 million of our securities from time to time in one or more offerings. In May 2018, we took down from this shelf registration statement approximately $2.3 million in the underwritten public offering.

For the three months ended September 30, 2018, our revenues declined 17.3% from the same quarter in the prior year. The lower revenue in this year’s quarter is principally responsible for our $1.4 million net loss in the third quarter of 2018. Since our credit facility is dependent upon receivables, the We do not know when, if ever, that our revenues will return to historic levels or if we will be able to replace those lost revenues with revenues from other demand partners. The combination of lower credit availability and negative cash flows generated from operating activities raises concern about our ability to continue without interruption. As described in note 15 to the notes to consolidated financial statements appearing earlier in this report, on November 2, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConversionPoint Technologies, Inc. (“CPT”) and certain related parties which provides that at the closing of this pending transaction (the “Merger”), which is subject to a number of conditions precedent, the Company will become a wholly-owned subsidiary of CPT. There are no assurances the Merger will be consummated. In addition, on November 2, 2018, we borrowed $1 million from an affiliate of CPT which we are using for working capital, and on November 2, 2018, four directors of the Company lent us $62,500 each, for an aggregate of $250,000, to cover certain costs associated with the pending Merger. Subject to the terms of
the Merger Agreement and the credit facility with the additional borrowing, we believe we will have sufficient cash and credit to operate until the Merger closes. There are no assurances we will be successful in our efforts to generate revenues, report profitable operations or close the Merger in which case we would need to find additional sources of credit and make substantial reductions to operating expense.

Customer concentration

We generated the majority of our revenue from two Demand side customers, Yahoo! and Google as noted below:
For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
2018 2017 2018 2017
Yahoo!  75.6%    62.1  % 72.9  % 68.5  %
Google  8.5%    8.9  % 9.0  % 10.8  %
Total  84.1%    71.0  % 81.9  % 79.3  %

As of September 30, 2018, Yahoo! and Google accounted for 70.0% of our gross accounts receivable balance. As of December 31, 2017, two Demand side customers, Yahoo! and OpenX, accounted for 71.3% of our gross accounts receivable balance.
We still source the majority of our Demand 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.