Organization and Business

Company Overview

Inuvo 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 dail. Our intellectual property is protected by 15 issued and eight pending patents.

Recent Developments

On June 20, 2019, Inuvo entered into an Agreement and Plan of Merger Termination Agreement (the “Merger Termination Agreement”) with ConversionPoint Technologies Inc., a Delaware corporation (“CPT”), ConversionPoint Holdings, Inc., a Delaware corporation (“Parent”), CPT Merger Sub, Inc., a Delaware corporation, (“CPT Merger Sub”), and CPT Cigar Merger Sub, Inc., a Nevada corporation (“Inuvo Merger Sub”), which, among other things, (1) terminated the Agreement and Plan of Merger, dated November 2, 2018, by and among Inuvo, CPT, Parent, CPT Merger Sub, and Inuvo Merger Sub, as amended (the “Merger Agreement”), pursuant to which Inuvo would have merged with and into Inuvo Merger Sub and become a wholly-owned subsidiary of Parent, and CPT would have merged with and into CPT Merger Sub and become a wholly-owned subsidiary of Parent (the “Mergers”), and (2) terminated each of the Support Agreements that were entered into by certain officers and directors of Inuvo and the parties to the Merger Agreement. The Merger Agreement was terminated as a result of Parent’s inability to fulfill the closing condition of the Mergers that Parent raise $36,000,000 in gross proceeds from an equity, debt, or equity-linked offering of its securities (the “Financing Condition”) and Inuvo is no longer obligated to consummate the Mergers contemplated by the Merger Agreement.

Concurrently with the execution of the Merger Termination Agreement, CPT Investments, LLC, a California limited liability company and an affiliate of CPT (“CPT Investments”), and Inuvo entered into a certain Inuvo Note Termination Agreement (the “Note Termination Agreement”) and agreed to (1) terminate and cancel the 10% Senior Unsecured Subordinated Convertible Promissory Note, dated November 1, 2018, executed by Inuvo in favor of CPT Investments (the “CPTI Note”), which as of June 20, 2019, had $1,063,288 in accrued principal and interest outstanding (the “Outstanding Indebtedness”) by July 20, 2019, (2) effective immediately, terminate all conversion rights under the CPTI Note to convert amounts outstanding into shares of Inuvo’s common stock, (3) terminate the Securities Purchase Agreement, dated November 1, 2018, by and between Inuvo and CPTI (the “Securities Purchase Agreement”), and (4) terminate the Registration Rights Agreement, dated November 1, 2018, by and between Inuvo and CPTI (the “Registration Rights Agreement”).

The Merger Termination Agreement provides that the termination fee of $2,800,000 to be paid to Inuvo (the “Termination Fee”) for failure to fulfill the Financing Condition would be satisfied as follows:

(1)

$1,063,288 of the Termination Fee (the “Indebtedness Satisfaction Amount”) will be deemed satisfied in consideration of the termination and cancellation of the Outstanding Indebtedness pursuant to the CPTI Note Termination Agreement, contingent upon approval by CPT’s senior lenders, Montage Capital II, L.P. and Partners for Growth IV, L.P. (the “Senior Lenders”) of CPT’s issuance of a replacement note to CPT Investments, and if such approval is not received by July 20, 2019, CPT will wire an amount equal to the Indebtedness Satisfaction Amount to Inuvo in immediately available funds on or prior to July 20, 2019;

(2)

$1,611,712 of the Termination Fee (the “ReTargeter Satisfaction Amount”) will be deemed satisfied by either (A) CPT’s transfer of all of the assets related to CPT’s programmatic and RTB advertising solutions business conducted through managed services and a proprietary SaaS solution (the “ReTargeter Business”), free and clear of all liabilities, encumbrances, or liens, to Inuvo (the “ReTargeter Asset Transfer”), or (B) if such transfer is not completed as further described herein, CPT wiring $1,611,712 in immediately available to Inuvo on or prior to December 31, 2019; and


(3)	CPT will pay $125,000 to Inuvo on or before September 15, 2019 to be contributed to the settlement of ongoing litigation with respect to the Mergers (the “Litigation Fee”).

Upon the earliest to occur of (1) the receipt of the consent of the Senior Lenders to the ReTargeter Asset Transfer, which CPT shall use its best efforts to obtain, (2) five days following the total satisfaction of CPT’s indebtedness to the Senior Lenders, or (3) December 31, 2019, CPT and Inuvo shall consummate the ReTargeter Asset Transfer, pursuant to the terms and conditions of a customary asset transfer agreement to be entered into between CPT, its subsidiary holding the ReTargeter Business, and Inuvo. The parties agreed that the consideration paid for the assets of the ReTargeter Business shall be the ReTargeter Satisfaction Amount. Further, CPT shall cause SellPoints, Inc., to exclusively license the ReTargeter domain name to Inuvo prior to the ReTargeter Asset Transfer, pursuant to a separate license agreement to be entered into between Inuvo and SellPoints, Inc.

If CPT pays the Litigation Fee on a timely basis, Inuvo will either (1) pay its obligations under a confidential settlement agreement that it entered into on June 20, 2019 resolving certain outstanding litigation related to the Mergers no later than September 30, 2019, or (2) elect not to pay any amounts to settle outstanding litigation claims and indemnify, defend, and hold harmless CPT and its related entities from and against litigation claims related to the Mergers.

Under the Merger Termination Agreement, CPT and Inuvo agreed to mutually release all claims that each party had against the other, as well as certain affiliated entities of each. Inuvo, however, will be able to pursue any claims against CPT and its affiliates for breaches of the Merger Termination Agreement. The Company did not recognize a gain for any of the termination fee as discussed above as it deemed them not to have met gain recognition under ASC 450. The indebtedness satisfied amount will be realized in July 2019 when the Company received notification from the lender to cancel the note. See Note 15 - Subsequent Event.

Stockholder Meeting

On May 8, 2019, a Special Meeting of Stockholders (the “Special Meeting”) for the purposes of (i) approving and adopting the Merger Agreement; (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.

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.

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.

On June 6, 2019, we entered into the Third Amendment to the Business Financing Modification Agreement (the “Third Amendment”). The Third Amendment provides that with respect to the eligible unbilled receivable sublimit of $2,500,000, which expired May 31, 2019 under the Amended and Restated Financing Agreement, that: (i) lender has no obligation to finance unbilled receivables but may do so in its discretion; and (ii) lender may terminate financing of unbilled receivables upon written notice. The Third Amendment also imposed an amendment fee of $2,000 on Inuvo.

For the six months ended June 30, 2019, our revenues declined 25.3% from the same period in the prior year. The lower revenue in the six-month period of 2019 is principally responsible for our $4.4 million net loss. Of the loss, approximately $1.8 million were the non-cash expenses of depreciation, amortization, and stock-based compensation. Further, we had roughly $887 thousand of Merger related costs within the six-month period ending June 30, 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 which we terminated in June 2019 due to the acquirer's inability to fulfill the closing conditions. The termination of the Merger Agreement resulted in a termination fee of $2.8 million that was partially satisfied by the termination and cancellation of the CPTI Note in July 2019.

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 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. Subsequently, in July 2019 we raised an additional $4.7 million in a public offering of our common stock.There are no assurances we will be successful in our efforts to generate revenues or report profitable operations in which case we would need to find additional sources of credit and make substantial reductions to operating expense. 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 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 customers, Yahoo! and Google as noted below:



	For the Three Months Ended June 30,			For the Six Months Ended June 30,
	2019	2018		2019		2018
Yahoo!	69.7%	73.1	%	71.8	%	71.7	%
Google	11.3%	9.0	%	11.5	%	9.2	%
Total	81.0%	82.1	%	83.3	%	80.9	%

As of June 30, 2019, Yahoo! and Google accounted for 62.5% of our gross accounts receivable balance. As of December 31, 2018, the same two customers accounted for 71.1% of our gross accounts receivable balance.

We still source the majority of our 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.