Inuvo(US:INUV)2019-03-15 20:32PART I ITEM 1. BUSINESS. Inuvo provides data-driven platforms using proprietary AI, IntentKey, for online audience engagement, with a pending merger and seasonal revenue patterns - Inuvo provides data-driven platforms utilizing proprietary AI, IntentKey, to identify and message online audiences across various channels 1920 - The company's intellectual property is protected by 15 issued and 8 pending patents, creating barriers to entry 22 - On November 2, 2018, Inuvo entered a Merger Agreement with ConversionPoint Technologies (CPT), forming ConversionPoint Holdings, Inc. (Parent) 23 - Merger consideration for Inuvo stockholders includes $0.45 in cash and 0.18877 shares of Parent common stock per share 24 - Key products include ValidClick (pay-per-click), IntentKey (consumer intent recognition), and Digital Publishing (branded web properties) 31 - Inuvo maintains long-standing relationships with Yahoo!, Google, and Microsoft Online, collectively accounting for 92.9% of total revenue in 2018 32 - The business is subject to seasonality, with lower revenue in late Q4 and early Q1 due to declining demand and advertiser budget recalibrations 50 ITEM 1A. RISK FACTORS. Inuvo faces significant risks from merger uncertainties, a history of losses, declining revenues, liquidity issues, customer concentration, and regulatory challenges - The pending Merger is subject to closing conditions, and failure or delay could adversely affect Inuvo's business and stock price 56 - Inuvo reported a net loss of $5.9 million in 2018 and a working capital deficit of $6.9 million at December 31, 2018 57 - A strategic decision to discontinue non-strategic technologies resulted in an estimated revenue loss of $7.2 million in 2018 57 Revenue Concentration by Key Customer (2018 vs. 2017) | Customer | 2018 Revenue % | 2017 Revenue % | | :--------- | :------------- | :------------- | | Yahoo! | 71.8% | 66.7% | | Google | 10.1% | 10.4% | | Microsoft Online | 5.5% | N/A (OpenX 9.4%) | - Failure to comply with credit facility covenants could impact access to capital, potentially leading to default and debt acceleration 63 - As of December 31, 2018, Inuvo had 39 full-time employees in Arkansas, falling short of the 50 required by a grant agreement, resulting in a contingent liability of $55,000 76 ITEM 1B. UNRESOLVED STAFF COMMENTS. This item is not applicable to Inuvo as it is a smaller reporting company - This item is not applicable to Inuvo as it is a smaller reporting company 78 ITEM 2. PROPERTIES. Inuvo's corporate headquarters are in Little Rock, Arkansas, with additional office space in San Jose, California, and third-party data centers - Inuvo's corporate headquarters are in Little Rock, Arkansas, occupying 12,245 sq ft under a 5-year lease from October 1, 2015 79 - The company also leases 4,801 sq ft of office space in San Jose, CA, under a five-year agreement from June 2017 79 - Data center operations are maintained in third-party collocation facilities in Little Rock, AR, and San Jose, CA 79 ITEM 3. LEGAL PROCEEDINGS. Inuvo faces multiple class action lawsuits challenging merger disclosures and alleging fiduciary duty breaches, which the company intends to vigorously contest - Multiple putative class action lawsuits were filed by stockholders in late 2018 and early 2019, challenging merger disclosures and alleging breach of fiduciary duties 808184 - The lawsuits seek injunctions preventing the merger, damages if consummated, and attorneys' fees 8284 - Inuvo believes the claims lack merit and intends to vigorously contest them, having filed motions to dismiss and responded to preliminary injunctions 8285 ITEM 4. MINE SAFETY DISCLOSURES. This item is not applicable to Inuvo - This item is not applicable to Inuvo 86 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Inuvo's common stock is listed on NYSE American, with 32.35 million shares outstanding as of March 2019, and no cash dividends paid or anticipated - Inuvo's common stock is listed on the NYSE American under the symbol "INUV" 88 - As of March 8, 2019, there were 32,350,906 shares of common stock outstanding and approximately 407 stockholders of record 588 - The company has not declared or paid cash dividends since inception and does not anticipate paying any in the foreseeable future 89 - There have been no recent sales of unregistered securities or purchases of equity securities by the issuer or affiliated purchasers 9091 ITEM 6. SELECTED FINANCIAL DATA. This item is not applicable to Inuvo as it is a smaller reporting company - This item is not applicable to Inuvo as it is a smaller reporting company 92 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Inuvo's 2018 operations focused on AI integration, resulting in a $7.2 million revenue loss from discontinued technologies and a $5.9 million net loss, impacting liquidity and requiring capital raises - In 2018, Inuvo focused on integrating artificial intelligence into digital marketing and expanding marketing technology following the NetSeer acquisition 97 - The strategic decision to discontinue non-strategic technologies resulted in an estimated revenue loss of $7.2 million in 2018 and eliminated approximately 20 full-time employees 99 - In January 2019, Inuvo integrated its IntentKey AI into AppNexus, a major digital advertising marketplace, to improve competitive positioning and client results 100 Key Financial Results (2018 vs. 2017) | Metric | 2018 (USD) | 2017 (USD) | Change (USD) | % Change | | :----------------------------------- | :--------- | :--------- | :----------- | :------- | | Net Revenue | 73,330,642 | 79,554,493 | (6,223,851) | (7.8%) | | Cost of Revenue | 29,921,482 | 36,669,543 | (6,748,061) | (18.4%) | | Gross Profit | 43,409,160 | 42,884,950 | 524,210 | 1.2% | | Marketing Cost (TAC) | 31,852,190 | 28,578,401 | 3,273,789 | 11.5% | | Gross Profit adjusted for Marketing Cost (TAC) | 11,556,970 | 14,306,549 | (2,749,579) | (19.2%) | | Operating Loss | (5,470,380)| (4,236,474)| (1,233,906) | 29.1% | | Net Loss | (5,890,832)| (3,057,700)| (2,833,132) | 92.6% | - Net cash used in operating activities was $2.1 million in 2018, an increase from $1.1 million in 2017, primarily due to net loss and changes in operating assets and liabilities 118119 - Inuvo's cash balance decreased significantly to $228,956 at December 31, 2018, from $4.1 million in 2017, and the working capital deficit increased to $6.9 million from $6.2 million 57250 - The company raised approximately $2.0 million (net) from a public offering, borrowed $1 million from a CPT affiliate, and $250,000 from directors in 2018 to fund working capital and merger costs 116117121 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. This item is not applicable to Inuvo as it is a smaller reporting company - This item is not applicable to Inuvo as it is a smaller reporting company 124 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and supplementary data for Inuvo, Inc. are presented starting on page F-1 of this annual report - The consolidated financial statements and Report of Independent Registered Public Accounting Firm are listed in the "Index to Financial Statements and Schedules" beginning on page F-1 229 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inuvo reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure 126 ITEM 9A. CONTROLS AND PROCEDURES. Inuvo's management concluded that its disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes - As of December 31, 2018, Inuvo's management concluded its disclosure controls and procedures were effective for timely and accurate reporting 130 - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO 2013 framework 133 - No material changes in internal control over financial reporting occurred during the year ended December 31, 2018 134 ITEM 9B. OTHER INFORMATION. Inuvo reported no other information required under this item - No other information was reported under this item 135 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. This section details Inuvo's executive officers and directors, corporate governance, board oversight, ethics codes, director compensation, and audit committee functions Directors and Executive Officers | Name | Age | Positions | | :-------------------- | :-- | :--------------------------------------------- | | Richard K. Howe | 56 | Executive Chairman of the Board and CEO | | Wallace D. Ruiz | 67 | Chief Financial Officer, Secretary | | John B. Pisaris, Esq. | 53 | General Counsel | | Don Walker "Trey" Barrett III | 54 | Chief Operating Officer | | Charles D. Morgan | 76 | Class III director | | Gordon J. Cameron | 54 | Class I director | | G. Kent Burnett | 74 | Class II director | | Patrick Terrell | 64 | Class III director | - Inuvo maintains a Code of Conduct and Business Code of Ethics for all directors, officers, and employees, and a Whistleblower Notice for reporting improper activities 147 - The board's leadership structure includes Richard K. Howe as Executive Chairman and CEO, and Charles D. Morgan as Lead Independent Director, providing independent oversight 151152 - The Audit Committee, composed of independent directors, oversees financial statement integrity, regulatory compliance, and auditor independence; Mr. Terrell and Mr. Cameron qualify as "audit committee financial experts" 154 - Independent directors receive a $30,000 annual retainer and $30,000 in restricted stock units 177 2018 Director Compensation | Name | Fees earned or paid in cash ($) | Stock awards ($) | Total ($) | | :-------------- | :------------------------------ | :--------------- | :-------- | | Charles D. Morgan | 30,000 | 27,060 | 57,060 | | Charles L. Pope | 22,500 | 8,557 | 31,057 | | Patrick Terrell | 30,000 | 27,060 | 57,060 | | Gordon J. Cameron | 30,000 | 27,060 | 57,060 | | G. Kent Burnett | 30,000 | 27,060 | 57,060 | - No officer, director, or 10% or greater stockholder failed to file required reports under Section 16(a) of the Exchange Act on a timely basis during 2018 181 ITEM 11. EXECUTIVE COMPENSATION. Inuvo's executive compensation aims to attract and retain officers through base salary, equity awards, and benefits, with no cash bonuses paid in 2018 due to unmet performance targets - The executive compensation program aims to attract, retain, and motivate executives, aligning their interests with stockholders through equity awards and performance-based compensation 182183184 - The 2018 compensation program included base salary, a cash bonus plan, 2010 and 2017 Equity Compensation Plan awards, and other fringe benefits 185 - No cash bonuses were paid to executive officers for 2018 because the targets under the 2018 Management Incentive Program were not met 192 - The company's 401(k) plan employer match, previously up to 4% of annual earnings, was suspended in November 2018 197 Summary Compensation Table (2018 vs. 2017) | Name and principal position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Total ($) | | :-------------------------- | :--- | :--------- | :-------- | :--------------- | :-------- | | Richard K. Howe, Chairman and Chief Executive Officer | 2018 | 425,000 | — | 272,897 | 708,897 | | | 2017 | 420,000 | 245,000 | 442,175 | 1,117,975 | | Wallace D. Ruiz, Chief Financial Officer | 2018 | 275,000 | — | 97,463 | 383,463 | | | 2017 | 275,000 | 105,000 | 157,919 | 548,719 | | Don (Trey) Barrett III, Chief Operating Officer | 2018 | 250,000 | — | 129,951 | 386,171 | | | 2017 | 250,000 | 140,000 | 210,560 | 603,560 | - Employment agreements for Messrs. Howe and Ruiz provide for minimum annual base salaries ($425,000 and $275,000, respectively) and specific compensation/benefits upon termination 201202 Outstanding Equity Awards at December 31, 2018 | Name | Options exercisable () | Stock that have not vested () | Market value of unvested stock ($) | | :-------------------- | :---------------------- | :----------------------------- | :--------------------------------- | | Richard K. Howe | 120,000 | 126,000 | 134,820 | | Wallace D. Ruiz | 43,000 | 45,000 | 48,150 | | Don (Trey) Barrett III | 40,000 | 60,000 | 64,200 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. As of March 1, 2019, Inuvo had 32.76 million shares outstanding, with this section detailing beneficial ownership by principal stockholders, directors, and executive officers, and equity compensation plans - As of March 1, 2019, Inuvo had 32,757,817 shares of common stock issued and outstanding 210 Beneficial Ownership of Common Stock (as of March 1, 2019) | Name of Beneficial Owner | No. of Shares Beneficially Owned | % of Class | | :----------------------- | :------------------------------- | :--------- | | Charles Morgan | 2,061,200 | 6.4% | | Richard K. Howe | 1,094,808 | 3.4% | | Patrick Terrell | 684,694 | 2.1% | | Wallace D. Ruiz | 373,483 | 1.2% | | John B. Pisaris | 320,855 | 1% | | Don Walker "Trey" Barrett III | 359,290 | 1.1% | | G. Kent Burnett | 173,685 | 0.5% | | Gordon J. Cameron | 120,815 | 0.4% | | All named executive officers, directors and director nominees as a group (eight persons) | 5,188,800 | 15.9% | | Onset V L.P. | 2,559,691 | 7.9% | | Ingalls & Snyder, LLC | 2,349,471 | 7.9% | | Renaissance Technologies LLC | 1,633,390 | 5% | Securities Authorized for Issuance under Equity Compensation Plans (as of December 31, 2018) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) (1) | Weighted average exercise price of outstanding options, warrants and rights (a) (2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :---------------------------- | :------------------------------------------------------------------------------------------------ | :---------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------ | | Plans approved by our stockholders: | | | | | 2005 Long-Term Incentive Plan | 13,748 | $ 2.97 | — | | 2010 Equity Compensation Plan | 1,088,862 | $ 2.83 | 612,237 | | 2017 Equity Compensation Plan | 733,500 | $ — | 1,524,836 | | Plans not approved by stockholders | — | $ — | — | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Inuvo engaged in related party transactions, including IT services from First Orion Corp. and $250,000 in loans from directors, while confirming the independence of certain board members - Inuvo received $31,500 in 2018 and $117,385 in 2017 from First Orion Corp. for IT services, a company partially owned by two Inuvo directors and shareholders 217 - On November 2, 2018, four directors lent Inuvo an aggregate of $250,000 through 10% Promissory Notes to cover costs associated with the pending Merger 218 - Messrs. Morgan, Terrell, Cameron, and Burnett are considered independent directors as defined by the NYSE American Company Guide 220 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Fees paid to Mayer Hoffman McCann P.C. for audit and other services decreased from $331,711 in 2017 to $294,000 in 2018, with all fees pre-approved Principal Accounting Fees and Services (2018 vs. 2017) | Category | 2018 (USD) | 2017 (USD) | | :---------------- | :--------- | :--------- | | Audit Fees | 262,000 | 331,711 | | Audit-Related Fees | 32,000 | — | | Tax Fees | — | — | | All Other Fees | — | — | | Total | 294,000 | 331,711 | - The Audit Committee pre-approves all fees charged by the independent registered public accounting firm, and the 2018 audit fees were pre-approved 226 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. This section lists the financial statements, schedules, and exhibits included in the Form 10-K report, with some portions omitted due to confidential treatment - The consolidated financial statements and Report of Independent Registered Public Accounting Firm are listed in the "Index to Financial Statements and Schedules" beginning on page F-1 229 - All financial statement schedules are either not required, not applicable, or their disclosures are contained in the consolidated financial statements 230 - The exhibits include various agreements, corporate documents, and certifications, such as the Merger Agreement and Rule 13a-14(a) certifications 232233234 - Portions of some exhibits have been omitted pursuant to requests for confidential treatment filed with the SEC 231234 Item 16. Form 10-K Summary Inuvo, Inc. has elected not to provide the optional Form 10-K Summary information - The Company has elected not to provide this optional information 236 FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Mayer Hoffman McCann P.C. issued an unqualified opinion on Inuvo's consolidated financial statements for 2018 and 2017, affirming fair presentation in conformity with U.S. GAAP - Mayer Hoffman McCann P.C. audited Inuvo, Inc.'s consolidated financial statements for the years ended December 31, 2018 and 2017 244 - The auditors issued an unqualified opinion, stating the financial statements present fairly Inuvo's financial position, results of operations, and cash flows in conformity with U.S. GAAP 244 - Mayer Hoffman McCann P.C. has served as the Company's auditor since 2009 248 Consolidated Balance Sheets Inuvo's balance sheets show cash declined from $4.1 million to $229,000 and total current assets from $15.2 million to $7.2 million from 2017 to 2018, with total equity decreasing to $11.0 million Consolidated Balance Sheet Highlights (as of December 31) | Metric | 2018 (USD) | 2017 (USD) | | :-------------------------- | :----------- | :----------- | | Cash | 228,956 | 4,084,686 | | Accounts receivable, net | 6,711,595 | 10,759,250 | | Total current assets | 7,212,017 | 15,244,127 | | Total assets | 28,665,882 | 38,247,836 | | Accounts payable | 9,499,541 | 13,614,053 | | Revolving line of credit | — | 4,900,000 | | Total current liabilities | 14,099,228 | 21,401,869 | | Convertible promissory note | 1,000,000 | — | | Total liabilities | 17,632,067 | 24,160,494 | | Total stockholders' equity | 11,033,815 | 14,087,342 | Consolidated Statements of Operations Inuvo's consolidated statements of operations show a 7.8% decrease in net revenue to $73.3 million in 2018, a 1.2% increase in gross profit to $43.4 million, and a wider net loss of $5.9 million in 2018 compared to $3.1 million in 2017 Consolidated Statements of Operations Highlights (Years Ended December 31) | Metric | 2018 (USD) | 2017 (USD) | | :-------------------------- | :----------- | :----------- | | Net revenue | 73,330,642 | 79,554,493 | | Cost of revenue | 29,921,482 | 36,669,543 | | Gross profit | 43,409,160 | 42,884,950 | | Marketing costs (TAC) | 31,852,190 | 28,578,401 | | Compensation | 8,524,476 | 10,200,117 | | Selling, general and administrative | 8,502,874 | 8,342,906 | | Total operating expenses | 48,879,540 | 47,121,424 | | Operating loss | (5,470,380) | (4,236,474) | | Net loss | (5,890,832) | (3,057,700) | | Basic and diluted net loss per share | (0.19) | (0.11) | Consolidated Statements of Stockholders' Equity Inuvo's total stockholders' equity decreased from $14.1 million in 2017 to $11.0 million in 2018, primarily due to a $5.9 million net loss, partially offset by $2.0 million from common stock sales and $915,469 in stock-based compensation Changes in Stockholders' Equity (Years Ended December 31) | Metric | 2018 (USD) | 2017 (USD) | | :-------------------------- | :------------ | :------------ | | Balances as of Dec 31 | 11,033,815 | 14,087,342 | | Net loss | (5,890,832) | (3,057,700) | | Stock-based compensation | 915,469 | 1,279,807 | | Stock issued for vested restricted stock awards | — | 22,509 | | Sale of common stock | 2,000,583 | — | | 2017 asset acquisition | — | 4,459,244 | - The number of common stock shares outstanding increased from 28,618,454 at December 31, 2017, to 32,381,290 at December 31, 2018 254 Consolidated Statements of Cash Flows Inuvo's cash flows show a net outflow from operating activities of $2.1 million in 2018, an increase from $1.1 million in 2017, with overall cash decreasing by $3.8 million in 2018 to $228,956 at year-end Consolidated Statements of Cash Flows Highlights (Years Ended December 31) | Cash Flow Category | 2018 (USD) | 2017 (USD) | | :-------------------------- | :------------ | :------------ | | Net cash used in operating activities | (2,100,167) | (1,148,281) | | Net cash used in investing activities | (1,634,919) | (1,322,930) | | Net cash (used in) provided by financing activities | (120,644) | 2,609,093 | | Net change – cash | (3,855,730) | 137,882 | | Cash, end of year | 228,956 | 4,084,686 | - Key financing activities in 2018 included $2.0 million net proceeds from common stock sale, $1.9 million from financed receivables, $1.0 million from a convertible promissory note, and $250,000 from notes payable, offset by $4.9 million in net repayments on the revolving line of credit 121257 - Interest paid increased to $388,757 in 2018 from $268,960 in 2017 257 Notes to Consolidated Financial Statements The Notes provide detailed information on Inuvo's accounting policies, financial instruments, liquidity challenges, capital raises, the pending merger, and changes in assets and liabilities - Inuvo adopted Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers" on January 1, 2018, using the modified retrospective approach 268 - The company's liquidity is challenged by declining revenues and negative cash flows, necessitating capital raises including a $1 million convertible promissory note from a CPT affiliate and $250,000 from directors in 2018, and an additional $1.2 million from convertible notes in March 2019 265266313314359 - The Amended and Restated Business Financing Agreement with Western Alliance Bank (October 11, 2018) is secured by all assets and includes a sub-limit provision for uninvoiced receivables expiring in April 2019 263312 - Goodwill and intangible assets, including an $8.82 million Google customer list (20-year useful life) and $3.6 million NetSeer technology (5-year useful life), are tested for impairment annually, with no impairment recorded in 2018 or 2017 276278279280281304305 - Inuvo recorded stock-based compensation expense of $915,469 in 2018 (vs. $1,279,807 in 2017), with $944,426 of unrecognized cost remaining at year-end 2018 325 - The Merger Agreement with ConversionPoint Technologies (November 2, 2018) outlines merger consideration, conditions (including $36 million financing), and termination rights, with subsequent amendments extending deadlines and permitting additional share issuances 348349352353360