Inuvo(INUV) - 2020 Q2 - Quarterly Report

Part I Financial Statements Inuvo, Inc.'s unaudited Q2 2020 financial statements show reduced assets, significantly lower liabilities, and a narrowed net loss despite a 46% revenue drop, with cash boosted by financing activities Consolidated Balance Sheets Total assets slightly decreased to $29.3 million, while cash significantly increased to $4.2 million due to financing, and total liabilities decreased to $11.3 million Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash | $4,181,214 | $372,989 | | Accounts receivable, net | $3,256,697 | $7,529,785 | | Total current assets | $7,681,048 | $8,146,662 | | Total assets | $29,342,669 | $30,690,928 | | Liabilities & Equity | | | | Accounts payable | $3,674,697 | $7,520,567 | | Total current liabilities | $8,878,497 | $15,678,327 | | Total liabilities | $11,268,137 | $16,237,378 | | Total stockholders' equity | $18,074,532 | $14,453,550 | Consolidated Statements of Operations Q2 2020 net revenue declined 46% to $7.6 million, but an 81% cost of revenue reduction narrowed the net loss to $1.36 million Statement of Operations Summary (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net revenue | $7,590,187 | $14,047,907 | | Gross profit | $6,520,159 | $8,373,547 | | Operating loss | $(1,236,668) | $(2,103,785) | | Net loss | $(1,359,288) | $(1,954,993) | | Net loss per share (Basic & Diluted) | $(0.02) | $(0.06) | Six-Month Performance Comparison (Unaudited) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net revenue | $22,523,170 | $29,512,476 | | Gross profit | $18,013,641 | $17,157,488 | | Operating loss | $(3,769,086) | $(4,049,470) | | Net loss | $(4,184,524) | $(4,417,386) | Consolidated Statements of Cash Flows Net cash used in operations increased to $2.3 million, while financing activities provided $6.7 million, leading to a $3.8 million net cash increase Cash Flow Summary for Six Months Ended June 30 (Unaudited) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,336,029) | $(709,846) | | Net cash used in investing activities | $(557,818) | $(581,839) | | Net cash provided by financing activities | $6,702,072 | $2,058,196 | | Net change – cash | $3,808,225 | $766,511 | Notes to Consolidated Financial Statements Notes detail the company's AI-driven business, COVID-19 liquidity challenges, revenue concentration with Yahoo! and Google, and a subsequent stock offering - The company's business is centered on its proprietary AI technology, the IntentKey, which predicts consumer intent for marketing purposes. It is protected by 17 issued and eight pending patents[28][29][31] - The company is facing liquidity pressure due to a 23.7% revenue decline in the first six months of 2020. To address this, it raised capital through multiple stock sales in March, April, and June 2020, and obtained a $1.1 million PPP loan[38][40][43] Customer Revenue Concentration | Customer | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Yahoo! | 36.7% | 69.7% | | Google | 25.0% | 11.3% | | Total | 61.7% | 81.0% | - The COVID-19 pandemic caused a significant reduction in marketing budgets from some clients, a decrease in traffic from supply partners, and lower monetization rates, leading to a significant reduction in the company's revenue run rate starting in late April 2020[51] Revenue by Platform (Six Months Ended June 30) | Platform | 2020 Revenue | 2020 % | 2019 Revenue | 2019 % | | :--- | :--- | :--- | :--- | :--- | | ValidClick | $18,726,715 | 83.1% | $26,265,946 | 89.0% | | IntentKey | $3,796,455 | 16.9% | $3,246,530 | 11.0% | | Total | $22,523,170 | 100.0% | $29,512,476 | 100.0% | - Subsequent to the quarter end, on July 27, 2020, the company closed an underwritten public offering of 21.5 million shares at $0.50 per share, for gross proceeds of $10.75 million[113] - The company identified a potential compliance issue with a previous amendment to increase its authorized shares from 60 million to 100 million and is seeking stockholder ratification to resolve any uncertainty[114] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 46% Q2 2020 revenue decline to COVID-19, primarily impacting ValidClick, while IntentKey grew 16% in H1, and gross profit increased 5% due to cost reductions Q2 and H1 2020 vs 2019 Performance | Metric | Q2 2020 vs Q2 2019 Change | H1 2020 vs H1 2019 Change | | :--- | :--- | :--- | | Net Revenue | -46.0% | -23.7% | | Cost of Revenue | -81.1% | -63.5% | | Gross Profit | -22.1% | +5.0% | - The decline in revenue was most pronounced in the ValidClick business, while the higher-margin IntentKey business saw revenue remain flat in Q2 and grow 16% in H1 2020 compared to the prior year[130] - Marketing costs (TAC) decreased 40.9% in Q2 2020 due to lower revenue and renegotiated partner payments. SG&A costs were down 19.5% in Q2, primarily due to the absence of legal fees related to the terminated merger from the previous year[131][134] - The company's liquidity strategy involves focusing resources on growing the AI-powered IntentKey platform. Despite negative working capital of $1.2 million as of June 30, 2020, the company raised approximately $5.7 million from security sales in Q2 and an additional $10.8 million in July 2020[122][138] - In response to COVID-19, the company curtailed expenses, implemented a work-from-home policy, and temporarily reduced compensation for senior officers and employees with salaries over $100,000[124][140] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - The company has not provided this disclosure as it is not applicable to a smaller reporting company[149] Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in deferred tax asset accounting, with remedial actions underway - An error was identified in the accounting for the deferred tax asset valuation allowance, originating in 2012. While deemed not material to previously issued financial statements, it indicated a material weakness in internal controls[154] - As a result of the identified material weakness, the CEO and CFO concluded that disclosure controls and procedures were not effective as of the end of the reporting period[155] - The company has started to undertake remedial actions to ensure future tax provisions are accounted for correctly in accordance with ASC 740[155][156] Part II Legal Proceedings The company reported no legal proceedings during the period - There are no legal proceedings to report[159] Risk Factors Key risks include heavy reliance on Yahoo! and Google for revenue and the potential failure of stockholders to ratify an increase in authorized shares - The company relies heavily on two customers, Yahoo! and Google, which accounted for 36.7% and 25.0% of revenues, respectively, in Q2 2020. The loss of either customer would materially harm the business[161] - A potential defect in the 2019 amendment to increase authorized shares from 60 million to 100 million requires stockholder ratification. Failure to obtain this ratification could invalidate past share issuances and limit future capital raising, posing a significant risk to liquidity[162] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities to report for the period[163] Defaults upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[164] Mine Safety and Disclosures This section is not applicable to the company - This item is not applicable[166] Other Information The company reported no other information - There is no other information to report[167] Exhibits This section lists exhibits filed with the quarterly report, including financing agreements, corporate governance documents, and certifications - Exhibits filed include agreements related to recent financing activities, corporate governance documents, and required SEC certifications[169]