Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Business
Company Overview
Inuvo, Inc. is a technology company that provides data-driven platforms that can automatically identify and message online audiences for any product or service across devices, channels and formats, including video, mobile, connected TV, display, social and native. These capabilities allow Inuvo’s clients to engage with their customers and prospects in a manner that drives engagement from the first contact with the consumer. Inuvo facilitates over a billion marketing messages to consumers every single month and counts among its clients numerous world-renowned names in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance. Inuvo counts among its many contractual relationships,
three
clients who collectively manage over
50%
of all US digital advertising budgets.
Inuvo’s solution incorporates a proprietary form of artificial intelligence, or AI, branded the IntentKey. This sophisticated machine learning technology uses interactions with Internet content as a source of information from which to predict consumer intent. The AI includes a continually updated database of over
500 million
machine profiles which Inuvo utilizes to deliver highly aligned online audiences to its clients. Inuvo earns revenue when consumers view or click on its client’s messages. Inuvo’s business scales through account management activity with existing clients and by adding new clients through sales activity.
As part of Inuvo’s technology strategy, it owns a collection of websites like alot.com and earnspendlive.com, where Inuvo creates content in health, finance, travel, careers, auto, education and living categories. These sites provide the means to test Inuvo’s technologies, while also delivering high quality consumers to clients through the interaction with proprietary content in the form of images, videos, slideshows and articles.
There are many barriers to entry to Inuvo’s business that would require proficiency in large scale data center management, software development, data products, analytics, artificial intelligence, integration to the internet of things, or IOT, the relationships required to execute within the IOT and the ability to process tens of billions of transactions dailyOur intellectual property is protected by
15
issued and
eight
pending patents.
Recent Developments
On November 2, 2018, Inuvo entered into the Merger Agreement with ConversionPoint Technologies ("CPT"), ConversionPoint Holdings, Inc., a wholly-owned subsidiary of CPT (“Parent”), CPT Merger Sub, Inc., a wholly-owned subsidiary of Parent (“CPT Merger Sub”), and CPT Cigar Merger Sub, Inc., a wholly-owned subsidiary of Parent (“Inuvo Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Inuvo will merge with and into Inuvo Merger Sub with Inuvo as the surviving corporation in the Inuvo Merger (the “Inuvo Merger”), and CPT merging with and into CPT Merger Sub with CPT as the surviving corporation in the CPT Merger (the “CPT Merger” and collectively with the Inuvo Merger, the “Merger”). Upon consummation of the Merger, CPT and Inuvo will be wholly-owned subsidiaries of Parent.
Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger our stockholders will be entitled to receive
$0.45
in cash and
0.18877
shares of Parent common stock for each share of common stock of Inuvo, and CPT’s stockholders will be entitled to receive
0.9840
shares of Parent common stock for each share of common stock of CPT. Each outstanding option to acquire a share of our common stock will be converted into an option to acquire
0.2370
shares of Parent’s common stock. In addition, unvested restricted stock units will vest in full immediately prior to consummation of the Merger and will be entitled to receive the merger consideration. No fractional shares of Parent common stock will be issued in the Merger and Parent stockholders and CPT stockholders will receive cash in lieu of any fractional interests.
The Merger Agreement contains customary representations and warranties from each party to the agreement, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of the CPT’s and Inuvo’s businesses during the interim period between the execution of the Merger Agreement and the closing of the Merger, (2) our obligations to facilitate our stockholders’ consideration of, and voting upon, the Merger Agreement and the Inuvo Merger, (3) CPT’s obligations to facilitate its stockholders’ consideration of, and voting upon, the Merger Agreement and the CPT Merger,
(4) the recommendation by our Board of Directors in favor of approval of the Merger Agreement and the Inuvo Merger by our stockholders, and (5) Inuvo’s non-solicitation obligations relating to alternative business combination transactions.
The completion of the Merger is subject to (1) the approval of CPT’s stockholders and Inuvo’s stockholders, (2) regulatory approvals, (3) the closing of financing to the Parent of
$36,000,000
(the “Financing”), (4) the approval of the listing of shares of Parent’s common stock on NASDAQ, (5) the delivery of customary opinions from counsel to the CPT and Inuvo to the effect that the Merger will qualify as a tax-free exchange for federal income tax purposes (6) Parent entering into separation agreements with Mr. Howe, our Chief Executive Officer, Mr. Ruiz, our Chief Financial Officer and Secretary, and Mr. Pisaris, our General Counsel, and (7) other customary closing conditions. Immediately following the Merger, Mr. Howe will serve as non-executive chairman of the Board of Directors of the Parent and an additional individual appointed by Inuvo shall serve on the seven member board of directors of the Parent.
The Merger Agreement contains customary termination rights for both Inuvo and CPT and further provides that (1) a termination payment of approximately
$2.8 million
will be payable by us to CPT in certain circumstances; and (2) a termination payment of approximately
$2.8 million
will be payable by CPT to Inuvo in certain circumstances, including if the Parent fails to consummate the Financing by May 31, 2019.
In addition, on November 1, 2018, Inuvo and ConversionPoint Investments, LLC., an affiliate of CPT (the "Noteholder") entered into a Securities Purchase Agreement for up to
$2 million
pursuant to which Inuvo issued and sold a
$1,000,000
principal amount
10%
senior unsecured subordinated convertible promissory note ("the Subordinated Promissory Note") to the Noteholder which we are using for working capital. The terms of the Subordinated Promissory Note are described in Note 8.
On March 1, 2019, we entered into Amendment No. 1 to the Agreement and Plan of Merger dated November 2, 2018 (the “Amendment”) to (i) due to the delays in the SEC’s ability to review and declare effective securities filings because of the government shutdown, extend the outside date for New Parent to receive funding in a financing from May 31, 2019 to July 12, 2019, and extend the outside termination date for closing of the Mergers from June 30, 2019, to August 5, 2019, (ii) permit the issuances of the above described Notes and permit us to issue up to
3,272,728
shares of common stock or securities convertible into up to
3,272,728
shares of our common stock, and waive any breach of our representations, warranties, or covenants that would be caused by the stock issuance. Our exchange ratio of
0.18877
shares of New Parent common stock for each share of our common stock for the stock portion of the merger consideration is adjusted downward to account for the dilutive effect of the stock issuance, and (iii) permit us to amend our articles of incorporation to increase the amount of its authorized shares of common stock from
40,000,000
to
60,000,000
.
On December 17, 2018 the Parent filed a registration statement on Form S-4 with the SEC for, among other matters, the stockholder meetings to be held by each of Inuvo and CPT. As a result of the recent shutdown of the U.S. government between December 22, 2018 and January 25, 2019, the processing of this registration statement by the SEC was delayed. On April 9, 2019, the S-4 filing became effective.
On May 8, 2019, Inuvo held its Special Meetings of Stockholders. The stockholders approved the Merger and all other proposals.
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.
For the three months ended March 31, 2019, our revenues declined
24.6%
from the same period in the prior year. The lower revenue in the three-month period of 2019 is principally responsible for our
$2.5 million
net loss. Of the loss, approximately
$1.3 million
were the non-cash expenses of depreciation, amortization, derivative liability and stock-based compensation. Further, we had roughly
$501 thousand
of Merger related costs within the three month period ending March 31, 2019. Since our credit facility is dependent upon receivables, and 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 sources, the combination of lower credit availability and recent negative cash flows generated from operating activities introduces potential risk to operation without interruption. As described earlier in this report, on November 2, 2018, we entered into the Merger Agreement. At the closing the Merger, which is subject to a number of conditions precedent,, the Company will become a wholly-owned subsidiary of CPT. In addition, on November 1, 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. In March 2019, we sold an aggregate of
$1,440,000
Original Issue Discount Unsecured Subordinated Convertible Notes due September 1, 2020 in a private placement and received
$1,200,000
in proceeds which we are using for working capital. 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. We may not have sufficient cash and credit to operate until the Merger closes. We may have to find additional sources of credit and/or make substantial reductions in our operating expense. A substantial reduction of operating expense may cause disruption to the business and the generation of future revenue. Given the above conditions, there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared with the realization of assets and the satisfaction of liabilities in the normal course of business.
Customer concentration
We generated the majority of our revenue from
two
Demand side customers, Yahoo! and Google as noted below:
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For the Three Months Ended March 31,
|
|
2019
|
2018
|
Yahoo!
|
73.6%
|
70.5
|
%
|
Google
|
11.7%
|
9.5
|
%
|
Total
|
85.3%
|
80.0
|
%
|
As of
March 31, 2019
, Yahoo! and Google accounted for
76.2%
of our gross accounts receivable balance. As of December 31, 2018, two Demand side customers, Yahoo! and Google, accounted for
71.1%
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.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements presented are for Inuvo, Inc. 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, 2018
, 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, 2018
, which was filed with the SEC on March 15, 2019.
Use of estimates
The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s regular evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, accrued sales reserve, goodwill and purchased intangible asset valuations, lives of intangible assets, deferred income tax asset valuation allowances and stock compensation. 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
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from
Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted this guidance on January 1, 2018 using the modified retrospective approach and elected to apply the new guidance only to contracts that were not complete as of the date of adoption. The cumulative impact to retained earnings was not material.
Most of our revenue is generated through clicks on advertisements presented on our properties or those of our partners. We
recognize revenue from clicks in the period in which the click occurs. Payments to partners who display advertisements on our
behalf are recognized as cost of revenue. Revenue from data sales and commissions is recognized in the period in which the
transaction occurs and the other revenue recognition criteria are met. Effective January 1, 2018, revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We also recognize revenue from serving impressions when we complete all or a part of an order from an advertiser. The revenue is recognized in the period that the impression is served.
The below table is the proportion of revenue that is generated through advertisements on our partners sites and owned sites:
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For the Three Months Ended March 31,
|
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|
2019
|
|
2018
|
Partners
|
|
11,498,457
|
|
|
74.4
|
%
|
|
13,905,932
|
|
|
67.8
|
%
|
O&O
|
|
3,966,112
|
|
|
25.6
|
%
|
|
6,598,053
|
|
|
32.2
|
%
|
Total
|
|
15,464,569
|
|
|
100.0
|
%
|
|
20,503,985
|
|
|
100.0
|
%
|
The following table presents our revenue disaggregated by channel:
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|
|
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|
|
For the Three Months Ended March 31,
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|
2019
|
2018
|
Mobile
|
|
10,546,622
|
|
14,321,669
|
|
Desktop
|
|
4,594,622
|
|
5,963,876
|
|
Other
|
|
323,325
|
|
218,440
|
|
Total
|
|
15,464,569
|
|
20,503,985
|
|
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new standard effective January 1, 2019 on a modified retrospective basis and did not restate comparative periods. We elected the package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The new standard did not have a material impact on our consolidated financial statements.
We determine if an arrangement is a lease at inception. Operating and finance leases are included in Right Of Use ("ROU") assets, and lease liability obligations in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liability obligations represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We have lease agreements with lease and non-lease components and account for such components as a single lease component. As most of our leases do not provide an implicit rate, we estimated our incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Please refer to Note 13 for additional information.
Note 3– Property and Equipment
The net carrying value of property and equipment was as follows as of:
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March 31, 2019
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December 31, 2018
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Furniture and fixtures
|
$
|
293,152
|
|
|
$
|
293,152
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|
Equipment
|
1,004,022
|
|
|
1,527,054
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|
Capitalized internal use and purchased software
|
9,446,689
|
|
|
9,142,075
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Leasehold improvements
|
421,016
|
|
|
421,016
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Subtotal
|
11,164,879
|
|
|
11,383,297
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|
Less: accumulated depreciation and amortization
|
(9,436,407
|
)
|
|
(9,259,625
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)
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Total
|
$
|
1,728,472
|
|
|
$
|
2,123,672
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|
During the
three
months ended
March 31, 2019
and
2018
, depreciation expense was
$441,841
and
$438,185
, respectively.
Note 4 – Other Intangible Assets and Goodwill
The following is a schedule of intangible assets as of
March 31, 2019
:
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Term
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Carrying
Value
|
|
Accumulated Amortization and Impairment
|
|
Net Carrying Value
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Year-to-date Amortization
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Customer list, Google
|
20 years
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|
$
|
8,820,000
|
|
|
$
|
(3,123,750
|
)
|
|
$
|
5,696,250
|
|
|
$
|
110,250
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|
Technology
|
5 years
|
|
3,600,000
|
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|
(1,560,000
|
)
|
|
2,040,000
|
|
|
180,000
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|
Customer list, all other
|
10 years
|
|
1,610,000
|
|
|
(1,140,445
|
)
|
|
469,555
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|
40,251
|
|
Customer relationships
|
20 years
|
|
570,000
|
|
|
(61,750
|
)
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|
508,250
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|
|
7,125
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|
Trade names, web properties (1)
|
-
|
|
390,000
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|
|
—
|
|
|
390,000
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|
|
—
|
|
Intangible assets classified as long-term
|
|
|
$
|
14,990,000
|
|
|
$
|
(5,885,945
|
)
|
|
$
|
9,104,055
|
|
|
$
|
337,626
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|
|
|
|
|
|
|
|
|
|
|
Goodwill, total
|
-
|
|
$
|
9,853,342
|
|
|
$
|
—
|
|
|
$
|
9,853,342
|
|
|
$
|
—
|
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|
(1)
|
The trade names related to our web properties have an indefinite life, and as such are not amortized.
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Amortization expense over the next five years and thereafter is as follows:
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2019
|
$
|
1,012,878
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|
2020
|
1,350,504
|
|
2021
|
1,350,504
|
|
2022
|
556,294
|
|
2023
|
469,500
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|
Thereafter
|
3,974,375
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Total
|
$
|
8,714,055
|
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Note 5 - Bank Debt
The following table summarizes our bank debt as of:
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|
March 31, 2019
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|
December 31, 2018
|
Finance receivables - 6.5 percent at March 31, 2019 (prime plus 1 percent) on invoiced receivables; 7.5 percent at March 31, 2019 (prime plus 2 percent) on uninvoiced receivables
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|
$
|
2,091,365
|
|
|
$
|
1,859,853
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|
Total
|
|
$
|
2,091,365
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|
|
$
|
1,859,853
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|
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 use to help satisfy our working capital needs. On October 11, 2018, we entered into the Amended and Restated Business Financing Agreement with Western Alliance Bank and superseded the Business Financing Agreement, as amended, entered into on March 1, 2012. The Amended and Restated Financing Agreement may be terminated by either party upon notice to the other party. The material terms of the Amended and Restated Financing Agreement include financing eligible invoiced receivables at an advance rate of
85%
and an interest rate of prime plus
1%
and a sub-limit of up to
$2.5 million
of uninvoiced eligible receivables at an advance rate of
75%
and an interest rate of prime plus
2%
. The sub-limit provision expires at the end of April 2019. The Amended and Restated Financing Agreement includes certain fees; a facility fee of
$11,765
due at closing; an annual facility fee of
0.25%
of the account balance due beginning on April 20, 2019; a monthly maintenance fee of
0.125%
of the ending daily account balance; a
$30,000
fee in lieu of a warrant; and
$80,000
due upon termination of the agreement or repayment of our obligations under the agreement. The Amended and Restated Financing Agreement is secured by all of our assets. On April 30, 2019, Western Alliance Bank agreed to extend the
$2.5 million
sub-limit provision of uninvoiced eligible receivables until the earlier of May 31, 2019 or
three
days after the closing of the Merger.
Note 6 - Notes Payable
On November 2, 2018, each of Messrs. Richard K. Howe, the Company’s Chief Executive Officer and member of our board of directors, and Charles D. Morgan, G. Kent Burnett and Gordon Cameron, members of the Company’s board of directors, lent the Company
$62,500
, for an aggregate of
$250,000
, under the terms of
10%
Promissory Notes. The Company used the proceeds from these notes to pay certain costs associated with the pending Merger. The notes are unsecured, bear interest at
10%
per annum and the principal and accrued interest is due on November 2, 2019, subject to acceleration upon an Event of Default or Change of Control (as both terms are defined in the note) (see Note 14 - Related Party Transactions).
Note 7 – Accrued Expenses and Other Current Liabilities
The accrued expenses and other current liabilities consist of the following as of:
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|
|
March 31, 2019
|
|
December 31, 2018
|
Accrued marketing costs (TAC)
|
$
|
1,702,223
|
|
|
$
|
1,509,843
|
|
Accrued expenses and other
|
863,828
|
|
|
461,823
|
|
Lease liability, current portion
|
518,261
|
|
|
198,769
|
|
Accrued payroll and commission liabilities
|
192,302
|
|
|
200,290
|
|
Arkansas grant contingency
|
55,000
|
|
|
55,000
|
|
Accrued sales allowance
|
50,000
|
|
|
50,000
|
|
Accrued taxes
|
17,388
|
|
|
14,109
|
|
|
|
|
|
|
|
Total
|
$
|
3,399,002
|
|
|
$
|
2,489,834
|
|
Note 8 - Convertible Promissory Note
On March 1, 2019, Inuvo, Inc., a Nevada corporation (“Inuvo” or the “Company”), entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
three
accredited investors (the “Purchasers”) 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 “Notes”) to fund working capital and additional expenses resulting from the delay in closing associated
with the government shut down. The initial conversion price of the Notes is
$1.08
per share. On May 13, 2019, the Purchasers received
1,333,333
unregistered shares of Inuvo’s common stock that were converted at
$1.08
per share. The Notes were issued in a private placement and the shares of common stock issuable upon conversion are restricted, subject to resale under Rule 144. Inuvo entered into the Securities Purchase Agreement with the Purchasers for the purchase and sale of the Notes in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on an exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act. 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 Notes and Inuvo utilized the proceeds for working capital. The conversion portion of the Notes was analyzed for derivative accounting and a liability of
$333,333
was recorded for the fair value of the derivative.
On November 1, 2018, the Company and ConversionPoint Investments, LLC., an affiliate of CPT (the "Noteholder") entered into a Securities Purchase Agreement for up to
$2 million
pursuant to which the Company issued and sold a
$1,000,000
principal amount
10%
senior unsecured subordinated convertible promissory note ("the Subordinated Promissory Note") to the Noteholder which we are using for working capital. The Subordinated Promissory Note, which bears interest at the rate of
10%
per annum, and the principal and accrued interest is due on November 1, 2021. In the event Merger Agreement is terminated, and providing that the shares issuable upon the possible conversion of the Subordinated Promissory Note have been approved for listing on the NYSE American, the Noteholder may, upon 15 days written notice to the Company, elect to convert all or any portion of the principal and accrued and unpaid interest due under the Subordinated Promissory Note into shares of the Company’s common stock (see Note 15 - ConversionPoint Merger). The conversion portion of the Subordinated Promissory Note was analyzed for derivative accounting and is deemed immaterial.
Note 9 – Other Long-Term Liabilities
Other long-term liabilities consist of the following as of:
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|
|
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|
|
March 31, 2019
|
|
December 31, 2018
|
Capital leases, less current portion
|
$
|
—
|
|
|
$
|
98,276
|
|
Deferred rent
|
88,952
|
|
|
80,969
|
|
Accrued taxes, less current portion
|
13,762
|
|
|
13,762
|
|
Total
|
$
|
102,714
|
|
|
$
|
193,007
|
|
Note 10 – Income Taxes
We have a deferred tax liability of
$2,339,832
as of
March 31, 2019
and December 31, 2018, related to intangible assets acquired in March 2012 and February 2017.
We also have a net deferred tax asset of approximately
$32,663,706
. 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 for the net deferred tax assets that may not be realized as of
March 31, 2019
and December 31, 2018.
Note 11 - 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. Currently, we grant options and restricted stock units ("RSUs") from the 2010 Equity Compensation Plan (“2010 ECP”) and 2017 Equity Compensation Plan ("2017 ECP"). Option and RSUs vesting periods are generally up to
three
years and/or achieving certain financial targets.
Compensation Expense
For the
three
months ended
March 31, 2019
and
2018
, we recorded stock-based compensation expense for all equity incentive plans of
$96,871
and
$377,847
, respectively. Total compensation cost not yet recognized at
March 31, 2019
was
$810,790
to be recognized over a weighted-average recognition period of
1.5
years.
The following table summarizes the stock grants outstanding under our 2005 Long-Term Incentive Plan ("2005 LTIP"), the 2010 ECP and the 2017 ECP for the three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
RSUs Outstanding
|
|
Options and RSUs Exercised
|
|
Available Shares
|
|
Total
|
2017 ECP
|
—
|
|
|
733,500
|
|
|
41,664
|
|
|
1,524,836
|
|
|
2,300,000
|
|
2010 ECP
|
250,498
|
|
|
611,645
|
|
|
3,566,950
|
|
|
652,925
|
|
|
5,082,018
|
|
2005 LTIP (*)
|
13,748
|
|
|
—
|
|
|
950,085
|
|
|
—
|
|
|
963,833
|
|
Total
|
264,246
|
|
|
1,345,145
|
|
|
4,558,699
|
|
|
2,177,761
|
|
|
8,345,851
|
|
(*) Expired June 2015
The following table summarizes the activities of stock option awards under the 2005 LTIP and the 2010 ECP as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Subject to Options Outstanding
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
|
Balance as of December 31, 2018
|
264,246
|
|
|
$
|
2.84
|
|
|
2.7
|
|
|
$
|
2,019
|
|
Stock options exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of March 31, 2019
|
264,246
|
|
|
$
|
2.84
|
|
|
2.7
|
|
|
$
|
2,019
|
|
Stock options exercisable as of March 31, 2019
|
264,246
|
|
|
$
|
2.84
|
|
|
2.7
|
|
|
$
|
2,019
|
|
The following table summarizes the activities for our unvested RSUs for the three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
Unvested RSUs
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Unvested as of December 31, 2018
|
1,571,864
|
|
|
$
|
0.79
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
186,031
|
|
|
$
|
0.88
|
|
Forfeited
|
40,688
|
|
|
$
|
0.93
|
|
Unvested as of March 31, 2019
|
1,345,145
|
|
|
$
|
0.78
|
|
Note 12 - Earnings per Share
During the
three
periods ended
March 31, 2019
and
March 31, 2018
, we generated a net loss from continuing operations and as a result, all of our shares are anti-dilutive.
Note 13 - Leases
The Company has entered into operating and finance leases primarily for real estate and equipment rental. These leases have terms which range from
two
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 the Company's March 31, 2019 Consolidated Balance Sheet, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's March 31, 2019 Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately
$1.2 million
and finance leases of approximately
$265,000
, respectively, on January 1, 2019. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of March 31, 2019, total right-of-use assets and operating lease liabilities were approximately
$1.1 million
and
$221,000
, respectively. The Company has entered into a short-term finance lease for equipment with a remaining term of twelve months or less and is included in the "Accrued expenses and other current liabilities" section of the Consolidated Balance Sheet. All operating lease expense is recognized
on a straight-line basis over the lease term. In the three months ended March 31, 2019, the Company recognized approximately
$177 thousand
in total lease costs, which was comprised of
$118 thousand
in operating lease costs for right-of-use assets and
$59 thousand
in lease costs related to lease liabilities.
As of March 31, 2019, the Company recorded
$44,298
in amortization expense related to the finance lease.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating right-of-use assets and related lease liabilities were as follows:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
Cash paid for operating lease liabilities
|
$
|
99,986
|
|
Weighted-average remaining lease term
|
2.6 years
|
|
Weighted-average discount rate
|
6.25
|
%
|
|
|
|
|
Minimum future lease payments ended March 31, 2019
|
|
2020
|
408,262
|
|
2021
|
242,558
|
|
2022
|
163,284
|
|
|
814,104
|
|
Less imputed interest
|
(100,879
|
)
|
Total lease liabilities
|
713,225
|
|
Information related to the Company's finance right-of-use assets and related lease liabilities were as follows:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
Cash paid for finance lease liabilities
|
$
|
44,764
|
|
Weighted-average remaining lease term
|
1.1 years
|
|
Weighted-average discount rate
|
6.25
|
%
|
|
|
|
|
Minimum future lease payments ended March 31, 2019
|
|
2020
|
77,480
|
|
Less imputed interest
|
(11,266
|
)
|
Total lease liabilities
|
66,214
|
|
Note 14 - Related Party Transactions
For the
three
months ended
March 31, 2018
the Company received
$10,500
from First Orion Corp., which is partially owned by
two
directors and shareholders of Inuvo, for providing IT services.
On November 2, 2018, each of Messrs. Richard K. Howe, the Company’s Chief Executive Officer and member of our board of directors, and Charles D. Morgan, G. Kent Burnett and Gordon Cameron, members of the Company’s board of directors, lent the Company
$62,500
, for an aggregate of
$250,000
, under the terms of
10%
Promissory Notes. The Company is using the proceeds from these notes to pay certain costs associated with the pending Merger. The notes are unsecured, bear interest at
10%
per annum and the principal and accrued interest is due on November 2, 2019, subject to acceleration upon an Event of Default or Change of Control (as both terms are defined in the note) (see Note 6 - Notes Payable).
Note - 15 ConversionPoint Merger
On November 2, 2018, the Company entered into the Merger Agreement with CPT, ConversionPoint Holdings, Inc., a wholly-owned subsidiary of CPT (“Parent”), CPT Merger Sub, Inc., a wholly-owned subsidiary of Parent (“CPT Merger Sub”), and CPT Cigar Merger Sub, Inc., a wholly-owned subsidiary of Parent (“Inuvo Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Inuvo Merger Sub with the Company as the surviving corporation in the Inuvo Merger (the “Inuvo Merger”), and CPT merging with and into CPT Merger Sub with CPT as the surviving corporation in the CPT Merger (the “CPT Merger” and collectively with the Inuvo Merger, the “Merger”). Upon consummation of the Merger, CPT and Inuvo will be wholly-owned subsidiaries of Parent. The Merger Agreement was unanimously approved by the Board of Directors of each of the Company, CPT, Parent, CPT Merger Sub, and Inuvo Merger Sub.
Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger the Company’s shareholders will be entitled to receive
$0.45
in cash and
0.18877
shares of Parent common stock for each share of common stock of the Company, and CPT’s stockholders will be entitled to receive
0.9840
shares of Parent common stock for each share of common stock of CPT. Each outstanding option to acquire a share of the Company’s common stock will be converted into an option to acquire
0.2370
shares of Parent’s common stock. In addition, unvested restricted stock units will vest in full immediately prior to consummation of the Merger and will be entitled to receive the merger consideration. No fractional shares of Parent common stock will be issued in the Merger and Parent stockholders and CPT stockholders will receive cash in lieu of any fractional interests.
The Merger Agreement contains customary representations and warranties from each party to the agreement, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of the CPT’s and the Company’s businesses during the interim period between the execution of the Merger Agreement and the closing of the Merger, (2) the Company’s obligations to facilitate its shareholders’ consideration of, and voting upon, the Merger Agreement and the Inuvo Merger, (3) CPT’s obligations to facilitate its stockholders’ consideration of, and voting upon, the Merger Agreement and the CPT Merger, (4) the recommendation by the Board of Directors of the Company in favor of approval of the Merger Agreement and the Inuvo Merger by the Company’s shareholders, and (5) the Company’s non-solicitation obligations relating to alternative business combination transactions.
The completion of the Merger is subject to (1) the approval of CPT’s stockholders and the Company’s shareholders, (2) regulatory approvals, (3) the closing of financing to the Parent of
$36,000,000
(the “Financing”), (4) the approval of the listing of shares of Parent’s common stock on NASDAQ, (5) the delivery of customary opinions from counsel to the CPT and the Company to the effect that the Merger will qualify as a tax-free exchange for federal income tax purposes (6) Parent entering into separation agreements with Mr. Howe, the Company Chief Executive Officer, Mr. Ruiz, the Company’s Chief Financial Officer and Secretary, and Mr. Pisaris, the Company’s General Counsel, and (7) other customary closing conditions. Immediately following the Merger, Richard K. Howe will serve as non-executive chairman of the board of directors of the Parent and an additional individual appointed by Inuvo shall serve on the seven member board of directors of the Parent.
The Merger Agreement contains customary termination rights for both the Company and CPT and further provides that (1) a termination payment of approximately
$2.8 million
will be payable by the Company to CPT in certain circumstances; and (2) a termination payment of approximately
$2.8 million
will be payable by CPT to the Company in certain circumstances, including if the Parent fails to consummate the Financing by May 31, 2019.
On November 1, 2018, the Company and CPT Investments, LLC., an affiliate of CPT (the "Noteholder") entered into a Securities Purchase Agreement for up to
$2 million
pursuant to which the Company issued and sold a
$1,000,000
principal amount
10%
senior unsecured subordinated convertible promissory note ("the Subordinated Promissory Note") to the Noteholder which we are using for working capital.
The Subordinated Promissory Note, which bears interest at the rate of
10%
per annum, and the principal and accrued interest is due on November 1, 2021. The maturity date of the Subordinated Promissory Note is subject to acceleration in the event (i) the Closing (as that term is defined in the Merger Agreement) occur pursuant to the Merger Agreement, in which event the maturity date is accelerated to the fifth day after the Closing Date (as that term is defined in the Merger Agreement) and (ii) immediately upon an Event of Default (as that term is defined in the Subordinated Promissory Note). The Company has the right to prepay the amounts due under the Subordinated Promissory Note at any time, upon 15 days prior written notice to the Noteholder, subject to the term of the note and Noteholder consent. The Company’s obligations under the Subordinated Promissory Note are unsecured and subordinate to its obligations to Western Alliance Bank, the Company’s secured lender.
In the event Merger Agreement is terminated, and providing that the shares issuable upon the possible conversion of the Subordinated Promissory Note have been approved for listing on the NYSE American, the Noteholder may, upon 15 days written notice to the Company, elect to convert all or any portion of the principal and accrued and unpaid interest due under the
Subordinated Promissory Note into shares of the Company’s common stock at a conversion price of
$0.44
per share, or
$0.35
per share if the Merger Agreement is terminated for any reason other than in connection with a Superior Proposal (as defined in the Merger Agreement). The conversion prices are subject to proportional adjustment in the event of stock split or adjustments. The Subordinated Promissory Note also contains a provision limiting the Company’s ability to issue any shares of our common stock upon any voluntary conversion by the Noteholder which, when aggregated with all shares of its common stock issued pursuant to a conversion of the Subordinated Promissory Note, would exceed
19.99%
of our issued and outstanding shares of common stock immediately preceding the issuance of the note without first obtaining stockholder approval in accordance with the rules of the NYSE American.
On November 1, 2018 the Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Noteholder covering the shares of its common stock which may be issued upon a conversion of the Subordinated Promissory Note.
On March 1, 2019, we entered into Amendment No. 1 to the Agreement and Plan of Merger dated November 2, 2018 (the “Amendment”) to (i) due to the delays in the SEC’s ability to review and declare effective securities filings because of the government shutdown, extend the outside date for New Parent to receive funding in a financing from May 31, 2019 to July 12, 2019, and extend the outside termination date for closing of the Mergers from June 30, 2019, to August 5, 2019, (ii) permit the issuances of the above described Notes and permit us to issue up to
3,272,728
shares of common stock or securities convertible into up to
3,272,728
shares of our common stock, and waive any breach of our representations, warranties, or covenants that would be caused by the stock issuance. Our exchange ratio of
0.18877
shares of New Parent common stock for each share of our common stock for the stock portion of the merger consideration is adjusted downward to account for the dilutive effect of the stock issuance, and (iii) permit us to amend our articles of incorporation to increase the amount of its authorized shares of common stock from
40,000,000
to
60,000,000
.
Note 16 - Subsequent Events
Bank Amendment
On May 1, 2019, effective April 30, 2019, we entered into the Second Amendment (the “Second Amendment”) to the Amended and Restated Business Financing Agreement dated October 11, 2018, as amended with Western Alliance Bank. The Second Amendment extended the expiration date with respect to the eligible unbilled receivable sublimit of
$2,500,000
to the date that is the earlier to occur of (a) May 31, 2019, or (b)
three
(3) days after consummation of the Merger transactions; amended the definition of “Change of Control” to state that any change of control pursuant to the Merger Transactions will be deemed to occur
three
days after the completion of the Merger Transactions; and imposed an amendment fee of
$1,000
on Inuvo.
Stockholder Meeting
On May 8, 2019, a Special Meeting of Stockholders (the “Special Meeting”) for the purposes of (i) approving and adopting the Agreement and Plan of Merger, dated November 2, 2018 (as it may be amended from time to time)., by and between ConversionPoint Technologies Inc. (“ConversionPoint”), ConversionPoint Holdings, Inc. (“Parent”), CPT Cigar Merger Sub, Inc. (“Inuvo Merger Sub”), CPT Merger Sub, Inc. (“CPT Merger Sub”), and Inuvo (the “Merger Agreement”), pursuant to which, among other things, Inuvo will merge with and into Inuvo Merger Sub with Inuvo as the surviving entity, ConversionPoint will merge with and into CPT Merger Sub with ConversionPoint as the surviving entity, and each of Inuvo and ConversionPoint will become wholly-owned subsidiaries of Parent; (ii) approving, on a non-binding advisory basis, the compensation that may be paid or become payable to the named executive officers of Inuvo that is based on or otherwise relates to the completion of the transactions contemplated by the Merger Agreement; (iii) approving and adopting an amendment to Inuvo’s articles of incorporation permitting Inuvo to increase the amount of authorized shares of its common stock from
40,000,000
to
60,000,000
; and (iv) approving one or more adjournments of the Special Meeting, if necessary, to permit further solicitation of additional proxies in the event there are not sufficient votes present at the Special Meeting in person or by proxy, or at any adjournment or postponement of that Special Meeting, to approve and adopt the Merger Agreement. Stockholders approved the first three items. The fourth item was withdrawn as stockholders approved and adopted the Merger Agreement, as noted above.