This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of such terms or other comparable terminology. This report includes, among others, statements regarding our:
These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Item 1A - Risk Factors appearing in our 2013 10-K.this report.
Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
ITEM 1. BUSINESS.
Company Overview
Inuvo, Inc. is an internet advertising technology and digital publishing company incorporated in the state of Nevada. Our corporate office is located in Little Rock, Arkansas. Our common stock is listed on the NYSE MKT under the symbol “INUV.”
We develop technology that delivers content and advertisements over the internet. We develop direct to consumer marketing technology to acquire consumers for our content. We develop analytics and optimization technologies to align advertisements with consumers. We generate revenue when an end user clicks on or views the advertisements we delivered. We manage our business as two segments, the Partner Network (advertising technology) and the Owned and Operated Network (digital publishing). In 2016 and 2015, the Partner Network represented 36% and 43% of total revenue and the Owned and Operated Network 64% and 57%, respectively.
Within the Partner Network, we recruit online publishers and provide them an advertising delivery service, the primary brands for which are ValidClick and SearchLinks©. This service allows publishers the ability to place Inuvo ad-technology in various locations and configurations within their website or app for either a desktop or mobile implementation. We generate revenue in this segment when an advertisement that is delivered is subsequently clicked on by a consumer. Advertisements can be served by either Inuvo or a third party depending on the needs of the publisher. Typically, we collect revenue from advertisers when an advertisement is clicked and then share a portion of the revenue with the publisher. We deliver well in excess of a billion such advertisements annually.
The Owned and Operated Network designs, builds and markets consumer websites and applications. This segment consists of our main online property marketed under the ALOT brand and a number of other websites targeted at specific demographics like EARNSPENDLIVE and sites designed specifically for generating leads in a specific market vertical like ASKTHIS for automotive. The majority of revenue generated by this segment is derived from advertisements that have been delivered on web pages that include both ALOT content and advertisements. Our ALOT branded websites and applications have a broad appeal focusing on popular topics such as health, finance, careers, local search, travel, living, education and auto.
We have a number of highly differentiated and proprietary strengths that include long standing advertising relationships with Yahoo and Google from whom we source advertising inventory which we distribute through our own online properties or through those of third party publishers;
the ability to serve hundreds of millions of advertisements to any device or browser in milliseconds;
the power to both self-market and self-monetize our own publishing business;
the capability to test advertising technology within our own publishing business;
the power to target advertisements based on website content, past behavior or to redirect users back to Inuvo content when the economics and alignment are optimized;
the capacity to expand to other geographies where appropriate;
the capability to develop and publish content just-in-time to meet demand from advertisers; and
a low cost operation in central Arkansas with access to numerous universities, and a proprietary technology infrastructure developed by, and in some cases patented by Inuvo.
We plan to continue growing our website and mobile application business by expanding the ALOT brand and acquiring new websites where appropriate. We plan to continue to distribute SearchLinks broadly throughout the Internet by growing our network of publishers. Financially, we are focused on growth while maintaining a positive cash flow. We expect to continue to make strategic investments principally in these areas: marketing technology associated with direct to consumer acquisition; the SearchLinks platform, and advertising targeting analytics.
Products and Services
SearchLinks: A proprietary platform to deliver ads to digital publisher webpages and apps using natural language technology to identify a site’s content, subject matter and context. It serves advertisements with text, images or video with a high relevancy to the identified content. The technology decides whether to serve the contextual advertisement or a behavioral advertisement based upon the greater monetization. The platform allows publishers to visualize the performance of advertising on their pages and manages the remuneration associated with that advertising.
ValidClick: A legacy software as a service and delivery platform that is being replaced by the SearchLinks platform. It offers a pay-per-click solution where advertisements are targeted to consumers based on content and behaviors.
MYAP: A proprietary online affiliate management solution that provides advertisers with the ability to sign up, manage and track the activities of publishers through a privately-branded platform with full data transparency. Typically, each MYAP customer is supported by a customized software implementation.
ALOT: Branded web properties with content developed, edited and published by ALOT in categories like health, finance, travel, entertainment, careers, education and automotive.
Key Relationships
We maintain long-standing relationships with Yahoo! and Google that provide access to hundreds of thousands of advertisers from which the revenue we generate originates. When an advertisement within either our Partner Network or Owned and Operated Network is clicked, we effectively sell that click to these partners who then sell it to the advertisers. We maintain multi-year service contracts with both companies. We have extended the Google agreement through February 2017 and the Yahoo! agreement, through May 31, 2018. In 2016, these two customers accounted for 98.3% of our total revenue.
In addition to our key customer relationships, in the Partner Network we maintain important distribution relationships with owners and publishers of websites and mobile applications. Through our relationship with Yahoo! we provide these partners with advertisements through which they monetize their websites and mobile applications. We continuously monitor our partners' traffic with a variety of proprietary and patent protected software tools that can determine the quality of the traffic that is viewing and clicking on served advertisements.
Strategy
We believe we have a competitive advantage due to possessing three essential components of the end-to-end digital advertising ecosystem. Content: Virtually all the content we display on our sites is owned and developed by us. Our in-house team of writers and marketers develop material that attracts traffic to our internet properties. Marketing: The marketing of web properties and apps is a sophisticated, data-driven, statistical endeavor that requires expert analysts and statisticians as well as experienced marketing professionals. We believe our team and our marketing partners are among the best in the industry. Technology: We have state-of-the-art ad serving technology developed over the past ten years by our expert team of IT professionals. The technology assures instant ad serving of targeted ads which we believe yields high returns on investment, or ROIs, for publishers and more sales for advertisers. Owning these three assets gives us better control over our business and higher margins as we do not have the expense of outsourcing.
Our strategy has been to build an audience for our content so we can use our digital publishing business as a factory for sophisticated ad-technology development. By owning our own websites, we can adapt our ad-technology to any configuration while optimizing ad-targeting algorithms. Once we are satisfied that this ad-technology works well in our environment, we then commercialize it, selling it to other website publishers like us. This approach to ad-technology development reduces the time to market and improves the odds of success in-market.
Our ad-technology strategy has been to 1) develop technology that can target ads based on the content of a page; 2) develop technology that can target ads based on a past behavior, and 3) develop technology capable of redirecting ads to our branded digital content.
Sales and Marketing
We drive general awareness of our brands through various marketing channels including our websites, social media, blogs, public relations, trade shows, conferences and similar means. Marketing for our products differs by segment.
The Partner Network employs sales professionals that build and maintain relationships with advertisers and partners. Owners and publishers of websites and mobile applications are recruited into our network, serving as a delivery vehicle for the advertisements within this segment.
The Owned and Operated Network uses various marketing and optimization techniques to drive traffic and build awareness for the sites, engaging with various direct and indirect advertisers whose offers are placed on the sites and within the apps.
Competition
We face significant competition in our industry. Competitors are increasing their suite of offerings across marketing channels as a means to better compete for total advertising dollars.
A significant number of our competitors in both segments have greater name recognition and are better capitalized than we are. Our ability to remain competitive in our market segment depends upon our ability to be innovative and to efficiently provide unique solutions to our customers and vendors. There are no assurances we will be able to remain competitive in our markets in the future.
Partner Network
Success in the Partner Network is dependent on recruiting and retaining owners and publishers of websites and mobile applications who display our advertisements. We believe our proprietary software platform, the ability to quickly implement and provide new services, and the access to thousands of advertisements are significant advantages for us in building our partner base. Our competitors include companies with direct access to advertisers, such as Yahoo! and Google, Criteo SA, Media.net Advertising FZ-LLC, Taboola, Inc., Outbrain Inc. and a number of companies like ours with access to advertisers. Our partners face few barriers to switching advertising technology providers, so to compete effectively we must offer a better service than our competitors with a competitive rate of return for our partners.
Owned and Operated Network
Consumers have many choices in online content, and we believe that our success in the Owned and Operated Network is directly tied to our ability to provide easy access to valuable content and market it effectively. Our experience in search engine marketing, social media advertising and the creation of proprietary content helps us compete in this segment. We have many direct competitors, including Google, Yahoo!, WebMD LLC, Internet Brands, Inc., Leaf Group Ltd. and others, all of which offer online media or entertainment through websites, mobile apps or software products.
Technology Platforms
Our proprietary applications are constructed from established, readily available technologies. Some of the basic elements our products are built on components from leading software and hardware providers such as Oracle, Microsoft, Sun, Dell, EMC, and Cisco, while some components are constructed from leading Open Source software projects such as Apache Web Server, MySQL, Java, Perl, and Linux. By seeking to strike the proper balance between using commercially available software and Open Source software, our technology expenditures are directed toward maintaining our technology platforms while minimizing third-party technology supplier costs.
We strive to build high-performance, availability and reliability into our product offerings. We safeguard against the potential for service interruptions at our third-party technology vendors by engineering controls into our critical components. We deliver our hosted solutions from facilities, geographically disbursed throughout the United States. Our applications are monitored 24 hours a day, 365 days a year by specialized monitoring systems that aggregate alarms to a human-staffed network operations center. If a problem occurs, appropriate engineers are notified and corrective action is taken.
Intellectual Property Rights
We currently rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We have registered a number of trademarks including ValidClick®, ValidClick AdExchange®, MyAP®, Second Bite®, Kowa!Bunga®, Inuvo®, Zubican™, LocalXML™, Yellowise™, SearchLinks™ and trade and service registrations related to our products or services, including U.S. Federal Registration for ALOT® in the United States.
As of the date of this report we own two patents issued by the United States Patent and Trademark Office and have applied for a provisional patent to protect the technology that drives the SearchLinks process and algorithms:
"System and Method for Enabling Information Associations" which was issued on April 1, 2008, and the expiration date of which as determined based on patent term adjustment as calculated by the U.S. Patent and Trademark Office ("USPTO") is September 11, 2021.
"Method for Preventing Real Time Click Fraud Detection, Prevention and Reporting for Online Advertising" which was issued on November 27, 2012, and the expiration date of which is January 22, 2030, as determined based on patent term adjustment as calculated by the USPTO.
The applied for SearchLinks provisional patent relates to pairing relevant advertisements with established web page content and more particularly to processing page content and retrieving relevant advertisements based on optimal comparisons and scoring criteria.
Although patents are only one component of the protection of intellectual property rights, if our patent applications are challenged, it may result in increased competition and the development of products substantially similar to our own. In addition, it is difficult to monitor unauthorized use of technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States, and our competitors may independently develop technology similar to our own. We will continue to assess appropriate occasions for seeking patent and other intellectual property protections for those aspects of our technology that we believe constitute innovations providing significant competitive advantages.
In addition to www.inuvo.com, we own multiple domain names that we may or may not operate in the future. However, as with phone numbers, we do not have and cannot acquire any property rights in an Internet address. The regulation of domain names in the United States and in other countries is also subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or obtain comparable domain names, which could harm our business.
Employees
As of January 31, 2017, we had 61 full-time employees, none of which are covered by a collective bargaining agreement.
Seasonality
Our future results of operations may be subject to fluctuation as a result of seasonality. Historically, in the later part of the fourth quarter and the earlier part of the first quarter we experience lower Revenue Per Click (“RPC”) due to a decline in demand for inventory on websites and apps and the recalibrating of advertiser’s marketing budgets after the holiday selling season. If we are not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on our financial results.
History
We were incorporated under the laws of the state of Nevada in October 1987 and operated within the oil and gas industry. This endeavor was not profitable, and from 1993 to 1997 we had essentially no operations. In 1997 we reorganized and through 2006 we acquired a number of companies involved in advertising and internet marketing. In 2009, following the weakness in the economy, a new team was called in to assess the array of businesses that had been acquired in the preceding years and as a result between 2009 and 2011, we sold or retired eleven businesses.
In March 2012, as part of a long-term strategy, we acquired Vertro, Inc. ("Vertro"), which owns and operates the ALOT product portfolio. This acquisition included the ALOT brand, as well as a long-standing relationship with Google. In 2013, with a grant funded by the State of Arkansas, we moved the headquarters to Arkansas where we have remained.
More Information
Our web site address is www.inuvo.com. We file with, or furnish to, the Securities and Exchange Commission (the "SEC") annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as well as various other information. This information can be found on the SEC website at www.sec.gov. In addition, we make available free of charge through the Investor Relations page of our web site our annual reports, quarterly reports, and current reports, and all amendments to any of those reports, as soon as reasonably practicable after providing such reports to the SEC.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this report before deciding to invest in our common stock. If any of the following risks and uncertainties develops into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company.
We rely on two customers for a significant portion of our revenues. We are reliant upon Yahoo! and Google for most of our revenue. During 2016 they accounted for 68.6% and 29.7% of our revenues, respectively, and during 2015 they accounted for 64.8% and 33.2%, respectively. The amount of revenue we receive from these customers is dependent on a number of factors outside of our control, including the amount they charge for advertisements, the depth of advertisements available from them, and their ability to display relevant ads in response to our end-user queries.
We would likely experience a significant decline in revenue and our business operations could be significantly harmed if these customers do not approve our new websites and applications, or if we violate their guidelines or they change their guidelines. In addition, if any of these preceding circumstances were to occur, we may not be able to find a suitable alternate paid search results provider or otherwise replace the lost revenues. The loss of either of these customers or a material change in the revenue or gross profit they generate would have a material adverse impact on our business, results of operations and financial condition in future periods.
We are dependent upon relationships with and the success of our distribution partners. Our distribution partners are very important to the success of the Partner Network segment. We must recruit and maintain partners who are able to drive traffic successfully to their websites and mobile applications, resulting in clicks on advertisements we have delivered. These partners may experience difficulty in attracting and maintaining users for a number of reasons, including competition, rapidly changing markets and technology, industry consolidation and changing consumer preferences. Further, we may not be able to further develop and maintain relationships with distribution partners. They may be able to make their own deals directly with advertisers, may view us as competitors or may find our competitors offerings more desirable. Any of these potential events could have a material adverse effect on our business, financial position and results of operations.
The success of our Owned and Operated Network business is dependent on our ability to acquire traffic in a profitable manner. The Owned and Operated Network operates our ALOT-branded websites. This segment is dependent on our ability to attract traffic to our sites in a profitable manner. We use a predictive model to calculate the rate of return for marketing campaigns, which includes estimates and assumptions. If these estimates and assumptions are not accurate, we may not be able to effectively manage our marketing decisions and could acquire traffic in an unprofitable manner. In addition, we may not be able to maintain and grow our traffic for a number of reasons, including, but not limited to, acceptance of our websites by consumers, the availability of advertising to promote our websites, competition, and sufficiency of capital to purchase advertising. We advertise on search engine websites to drive traffic to our owned and operated websites. Our keyword advertising is done primarily with Google, but also with Yahoo! and Bing. If we are unable to maintain and grow traffic to our sites in a profitable manner, it could have a material adverse effect on our business, financial condition, and results of operations.
Our business must keep pace with rapid technological change to remain competitive. Our business operates in a market characterized by rapidly changing technology, evolving industry standards, frequent new product and service announcements, enhancements, and changing customer demands. We must adapt to rapidly changing technologies and industry standards and continually improve the speed, performance, features, ease of use and reliability of our services. This includes making our products and services compatible and maintaining compatibility with multiple operating systems, desktop and mobile devices, and evolving network infrastructure. If we fail to do this, our results of operations and financial position could be adversely affected.
Our quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of our common stock. Our quarterly revenues and other operating results have varied in the past and are likely to continue to vary significantly from quarter to quarter. Our agreements with distribution partners and key customers do not require minimum levels of usage or payments, and our revenues therefore fluctuate based on the actual usage of our service each quarter by existing and new distribution partners. Quarterly fluctuations in our operating results also might be due to numerous other factors, including:
our ability to attract new distribution partners, including the length of our sales cycles, or to sell increased usage of our service to existing distribution partners;
technical difficulties or interruptions in our services;
changes in privacy protection and other governmental regulations applicable to our industry;
changes in our pricing policies or the pricing policies of our competitors;
the financial condition and business success of our distribution partners;
purchasing and budgeting cycles of our distribution partners;
acquisitions of businesses and products by us or our competitors;
competition, including entry into the market by new competitors or new offerings by existing competitors;
discounts offered to advertisers by upstream advertising networks;
our history of litigation;
our ability to hire, train and retain sufficient sales, client management and other personnel;
timing of development, introduction and market acceptance of new services or service enhancements by us or our competitors;
concentration of marketing expenses for activities such as trade shows and advertising campaigns;
expenses related to any new or expanded data centers; and
general economic and financial market conditions.
Our services may be interrupted if we experience problems with our network infrastructure. The performance of our network infrastructure is critical to our business and reputation. Because our services are delivered solely through the internet, our network infrastructure could be disrupted by a number of factors, including, but not limited to:
unexpected increases in usage of our services;
computer viruses and other security issues;
interruption or other loss of connectivity provided by third-party internet service providers;
natural disasters or other catastrophic events; and
server failures or other hardware problems.
While we have data centers in multiple, geographically dispersed locations and active back-up and disaster recovery plans, we cannot assure you that serious interruptions will not occur in the future. If our services were to be interrupted, it could cause loss of users, customers and business partners, which could have a material adverse effect on our results of operations and financial position.
We depend on key personnel, the loss of whom could harm our business. Our success depends in part on the retention of personnel critical to our business operations. Loss of key personnel may result in disruption of operations, loss of key business relationships or expertise, additional recruiting and training costs, and diminished anticipated benefits of acquisitions. Our future success is substantially dependent on the continued service of our key senior management. We have experienced difficulty from time to time in attracting or retaining the personnel necessary to support the growth of our business, and we may experience similar difficulties in the future.
Regulatory and legal uncertainties could harm our business. While there are currently relatively few laws or regulations directly applicable to internet-based commerce or commercial search activity, there is increasing awareness of such activity and interest from state and federal lawmakers in regulating these services. New regulation of activities in which we are involved or the extension of existing laws and regulations to internet-based services could have a material adverse effect on our business, results of operations and financial position.
Failure to comply with federal, state and international privacy laws and regulations, or the expansion of current or the enactment of new privacy laws or regulations, could adversely affect our business. A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. For example, recently there have been Congressional hearings and increased attention to the capture and use of location-based information relating to users of smartphones and other mobile devices. We have posted privacy policies and practices concerning the collection, use and disclosure of subscriber data on our websites and applications. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, FTC requirements or orders or other federal, state or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business.
We may face third party intellectual property infringement claims that could be costly to defend and result in the loss of significant rights. From time to time third parties have asserted infringement claims against us including copyright, trademark and patent infringement, among other things. While we believe that we have defenses to these types of claims under appropriate trademark laws, we may not prevail in our defenses to any intellectual property infringement claims. In addition, we may not be adequately insured for any judgments awarded in connection with any litigation. Any such claims and resulting litigation could subject us to significant liability for damages or result in the invalidation of our proprietary rights, which would have a material adverse effect on our business, financial condition, and results of operations. Even if we were to prevail, these claims could be time-consuming, expensive to defend, and could result in the diversion of management's time and attention.
We are subject to risks from publishers who could fabricate clicks either manually or technologically. Our business involves the establishment of relationships with website owners and publishers. In exchange for their consumer traffic, we provide an advertising placement service and share a portion of the revenue we collect with that website publisher. Although we have click fraud detection software in place, we cannot guarantee that we will identify all fraudulent clicks or be able to recover funds distributed for fabricated clicks. This risk could materially impact our ability to borrow, our cash flow and the stability of our business.
Our business is seasonal and our financial results may vary significantly from period to period. Our future results of operations may vary significantly from quarter to quarter and year to year because of numerous factors, including seasonality. Historically, in the later part of the fourth quarter and the earlier part of the first quarter we experience lower Revenue Per Click (“RPC”) due to a decline in demand for inventory on website and app space and the recalibrating of advertiser’s marketing budgets after the holiday selling season. If we are not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on our financial results.
A downturn or uncertainty in global economic conditions may have a significant negative effect on our access to credit and our ability to raise capital and may impact our business, operating results or financial condition. A future downturn or uncertainty in global economic conditions, may result in significant reductions in, and heightened credit quality standards for, available capital and liquidity from banks and other providers of credit and substantial reductions and/or fluctuations in equity and currency values worldwide, which may make it difficult for us to raise additional capital or obtain additional credit, when needed, on acceptable terms or at all. Moreover, deteriorated economic conditions, or the threat of a prolonged recessionary period, may cause disruptions and volatility in global financial markets, increased rates of default and bankruptcy and have a negative impact on the levels of consumer spending. These macroeconomic developments could negatively affect our business, operating results or financial condition in a number of ways. For example, current or potential customers, such as advertisers, may delay or decrease spending with us or may not pay us or may delay paying us for previously performed services. In addition, if consumer spending decreases, this may result in fewer clicks on our advertisers’ ads displayed on our Owned and Operated Network websites or our Partner Network websites.
We must successfully integrate the business of NetSeer.
We have recently purchased substantially all the assets of Silicon Valley based NetSeer, Inc., a provider of visual monetization solutions for advertisers and publishers. The integration of the NetSeer businesses may be difficult, time consuming and costly. The integration may divert our management’s time and resources from the operation of our core businesses. Our integration efforts may not be completed as planned, may take longer to complete or may be more costly than anticipated, or the acquired business may not achieve its expected results, any of which would have a material adverse effect on our business and results of operations. Additionally, if the acquired business is unable to achieve its expected results, there is risk of an impairment of the assets acquired, which in turn could have an adverse effect on our results of operations.
Failure to comply with the covenants and restrictions in our credit facility could impact our ability to access capital as needed. We have a credit facility with Western Alliance Bank ("Western Alliance Bank"), the parent company of Bridge Bank, N.A. our original lender, under which we had zero in debt outstanding as of December 31, 2016. The credit facility contains a number of covenants that requires us and certain of our subsidiaries to, among other things:
pay fees to the lender associated with the credit facility;
meet prescribed financial covenants;
maintain our corporate existence in good standing;
grant the lender a security interest in our assets;
provide financial information to the lender; and
refrain from any transfer of any of our business or property, subject to customary exceptions.
We have historically had difficulties meeting the financial covenants set forth in our credit agreement. Our lender has given us waivers in the past and reset our financial covenants several times. In the event of a breach of our covenants we cannot provide any assurance that our lender would provide a waiver or reset our covenants. A breach in our covenants could result in a default under the credit facility, and in such event Western Alliance Bank could elect to declare all borrowings outstanding, if any, to be due and payable. If this occurs and we have outstanding obligations and are not able to repay, Western Alliance Bank could require us to apply all of our available cash to repay the debt amounts and could then proceed against the underlying collateral. Should this occur, we cannot assure you that our assets would be sufficient to repay our debt in full, we would be able to borrow sufficient funds to refinance the debt, or that we would be able to obtain a waiver to cure any such default. In such an event, our ability to conduct our business as it is currently conducted would be in jeopardy.
Failure to comply with the covenants and restrictions in our grant agreement with the State of Arkansas could result in the repayment of a portion of the grant, which we may not be able to repay or finance on favorable terms. In January 2013, we entered into an agreement with the State of Arkansas whereby we were granted $1,750,000 for the relocation of the Company to Arkansas and for the purchase of equipment. The grant was contingent upon us having at least 50 full-time equivalent permanent positions within four years, maintaining at least 50 full-time equivalent permanent positions for the following six years and paying those positions an average total compensation of $90,000 per year. As of December 31, 2016, the grant required we have 50 employees located in Arkansas and on December 31, 2016 we had 52 employees located in Arkansas.
If we fail to meet the requirements of the grant after the initial four-year period, we may be required to repay a portion of the grant, up to but not to exceed the full amount of the grant. Should this occur, we cannot assure you that our assets would be sufficient to repay our grant in full, we would be able to borrow sufficient funds to refinance the grant, or that we would be able to obtain a waiver to cure any such default. In such an event, our ability to conduct our business as it is currently conducted would be in jeopardy.
Significant dilution will occur if outstanding warrants and options are exercised or restricted stock unit grants vest. As of December 31, 2016, we had warrants and stock options outstanding to purchase a total of 315,970 shares with exercise prices ranging from $0.56 to $3.70 per share, with a weighted average exercise price of $2.52. We also had 755,507 restricted stock units outstanding. If outstanding warrants and stock options are exercised or restricted stock units vest, dilution will occur to our stockholders, which may be significant. See Note 2 to the financial statements for more details.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2. PROPERTIES.
Our corporate headquarters are located in Little Rock, Arkansas. We entered into a five-year agreement to lease office space on October 1, 2015. The lease is for 12,245 square feet.
In addition to our office space, we maintain data center operations in third-party collocation facilities in Little Rock, AR and San Jose, CA.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. Mine Safety Disclosures.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the NYSE MKT under the symbol "INUV." The following table sets forth the reported high and low prices for our common stock for the following periods.
|
| | | | | | | |
| | High | | Low |
| Year Ended December 31, 2016: | |
| | |
|
| First Quarter | $ | 2.77 |
| | $ | 1.67 |
|
| Second Quarter | $ | 2.13 |
| | $ | 1.33 |
|
| Third Quarter | $ | 1.78 |
| | $ | 1.05 |
|
| Fourth Quarter | $ | 2.31 |
| | $ | 1.00 |
|
| Year Ended December 31, 2015 | |
| | |
|
| First Quarter | $ | 2.14 |
| | $ | 1.04 |
|
| Second Quarter | $ | 3.57 |
| | $ | 1.81 |
|
| Third Quarter | $ | 3.29 |
| | $ | 2.19 |
|
| Fourth Quarter | $ | 3.25 |
| | $ | 2.55 |
|
As of February 10, 2017, the last reported sale price of the common stock on NYSE MKT was $1.60 and there were approximately 403 stockholders of record of our common stock.
Dividends
We have not declared or paid cash dividends on our common stock since our inception. Under Nevada law, we are prohibited from paying dividends if the distribution would result in our company not being able to pay its debts as they become due in the normal course of business if our total assets would be less than the sum of our total liabilities plus the amount that would be needed to pay the dividends, or if we were to be dissolved at the time of distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, the frequency, and the amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. While our board of directors will make any future decisions regarding dividends, as circumstances surrounding us change, it currently does not anticipate that we will pay any cash dividends in the foreseeable future.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers(1)
The following tabular summary reflects the Company’s share repurchase activity during the year ended December 31, 2016:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
| December 9 - December 31 | | 15,883 |
| | $ | 1.42 |
| | 15,883 |
| | $ | 477,498 |
|
| Total | | 15,883 |
| |
| | 15,883 |
| | 477,498 |
|
(1)All shares were purchased under the Company’s current share repurchase program, which was announced on December 9, 2016 and authorizes the repurchase of the Company’s common stock totaling $500,000. Under the authorization, the Company may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the SEC. However, the timing and amount of such purchases, if any, would be at the discretion of management and would depend upon market conditions and other considerations.
(2) This amount reflects the dollar value of shares remaining available to repurchase under the previously announced plan.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
Inuvo, Inc. is an internet advertising technology and digital publishing company.
We develop technology that delivers content and advertisements over the internet. We develop direct to consumer marketing technology to acquire consumers for our content. We develop analytics and optimization technologies to align advertisements with consumers. We generate revenue when an end user clicks on the advertisements we delivered. We manage our business as two segments, the Partner Network (advertising technology) and the Owned and Operated Network (digital publishing).
Within the Partner Network, we recruit online publishers and provide them an advertising delivery service, the primary brand for which is SearchLinks©. This service allows publishers the ability to place Inuvo ad-technology in various locations and configurations within their website or app for either a desktop or mobile implementation. We generate revenue in this segment when an advertisement that is delivered is subsequently clicked on by a consumer. Advertisements can be served by either Inuvo or a third party depending on the needs of the publisher. Typically, we collect revenue from advertisers when an advertisement is clicked and then share a portion of the revenue with the publisher. We deliver well in excess of a billion such advertisements annually.
The Owned and Operated Network designs, builds and markets consumer websites and applications. This segment consists of our main online property marketed under the ALOT brand and a number of other websites targeted at specific demographics like EARNSPENDLIVE and sites designed specifically for generating leads in a specific market vertical like ASKTHIS for automotive. The majority of revenue generated by this segment is derived from advertisements that have been delivered on web pages that include both Inuvo content and advertisements. Our ALOT branded websites and applications have a broad appeal focusing on popular topics such as health, finance, careers, local search, travel, living, education and auto.
We have a number of highly differentiated and proprietary strengths that include; long standing advertising relationships with Yahoo and Google from whom we source advertising inventory which we distribute through our own online properties or through those of third party publishers; the ability to serve hundreds of millions of advertisements to any device or browser in milliseconds; the ability to both self-market and self-monetize our own publishing business; the ability to test advertising technology within our own publishing business; the ability to target advertisements based on website content, past behavior or to redirect users back to Inuvo content when the economics and alignment are optimized; the ability to expand to other geographies where appropriate; the ability to develop and publish content just-in-time to meet demand from advertisers; a low cost operation in central Arkansas with access to numerous universities, and a proprietary technology infrastructure developed by, and in some cases patented by Inuvo.
We plan to continue growing our website and mobile application business by expanding the ALOT brand and acquiring new websites where appropriate. We will continue to distribute SearchLinks broadly throughout the Internet by growing our network of publishers. Financially, we are focused on growth while maintaining a positive cash flow. We expect to continue to make strategic investments principally in these areas; marketing technology associated with direct to consumer acquisition; the SearchLinks platform, and advertising targeting analytics.
2016 Overview
After a year of very significant growth in 2015, 42% over the prior year, we experienced a soft second quarter in 2016. Changes in advertiser demand increased in the third quarter and we reported a 12% sequential growth rate in both our third and fourth quarters. During 2016, we:
expanded the technology in our native advertising solution, SearchLinks, by including a behavioral target decision matrix;
launched the performance marketing management platform for merchants, MYAP10;
expanded the ALOT.com brand introducing an auto site; and
renewed our Yahoo agreement.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our audited financial statements for 2016 and 2015 appearing elsewhere in this report.
Results of Operations
Net Revenue
|
| | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
| Partner Network | $ | 26,011,543 |
| | $ | 30,298,532 |
| | $ | (4,286,989 | ) | | (14.1 | %) |
| Owned and Operated Network | 45,518,559 |
| | 40,139,584 |
| | 5,378,975 |
| | 13.4 | % |
| Total net revenue | $ | 71,530,102 |
| | $ | 70,438,116 |
| | $ | 1,091,986 |
| | 1.6 | % |
Net revenue for the year ended December 31, 2016 was $71.5 million compared to $70.4 million for the year ended December 31, 2015. Partner Network decreased 14% to $26.0 million and the Owned and Operated Network increased 13.4% to $45.5 million.
The Partner Network, which represents 36% of our total net revenue, delivers advertisements to our partners' websites and applications. Revenue in this segment is both a function of the total number of transactions processed through the ValidClick platform and the revenue we receive per transaction. At the end of the first quarter, we experienced fluctuations in demand from advertisers, which translated into a reduction in revenue received for ads we delivered. The result was both a lower number of transactions and a lower average RPC ("Revenue Per Click"). This fluctuation persisted into the third quarter 2016 and by the middle of the third quarter, both volume of transactions and RPCs improved. Despite this fluctuation, the Partner Network grew 58% in the fourth quarter over the same quarter last year; and grew sequentially 59% in the fourth quarter over the third quarter of the same year.
The Owned and Operated Network generates revenue through our consumer-facing ALOT branded websites and applications and through acquired websites. Our ALOT web properties include ALOT Health, ALOT Finance, ALOT Careers, ALOT Local, ALOT Travel, ALOT Living, ALOT Education, and ALOT Auto. These websites are content-rich and optimized for mobile and desktop devices, and are designed to capitalize on a growing consumer demand for content, delivered both on the desktop and on mobile devices. The increased revenue in this segment is from additional advertisements served to a growing user base of our owned and operated web properties. The revenue in this segment increased 13% in 2016 over 2015. The increased revenue is due to additional advertisements served to a growing user base of our owned and operated web properties. The increase in advertisements served and users engaged was due in part to increased marketing activity associated with our web properties where we are continuously expanding content. The lower revenue in the fourth quarter 2016 compared to the same quarter in the prior year was due in part to a reduction in advertiser demand we experienced in the ALOT sites. We intend to continue to expand our Owned and Operated Network by enhancing our current websites and mobile applications, launching additional mobile applications under the ALOT brand, expanding the content of the ALOT sites and acquiring additional web properties.
During the first quarter of 2016, the accrued sales allowance was adjusted as a result of not having an advertiser chargeback over the course of the previous year. The adjustment increased net revenue in the first quarter of 2016 by $250,000.
Cost of Revenue
|
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
| Partner Network | $ | 21,277,303 |
| | $ | 23,652,942 |
| | $ | (2,375,639 | ) | | (10.0 | %) |
| Owned and Operated Network | 87,492 |
| | 69,054 |
| | 18,438 |
| | 26.7 | % |
| Cost of revenue | $ | 21,364,795 |
| | $ | 23,721,996 |
| | $ | (2,357,201 | ) | | (9.9 | %) |
Cost of revenue in the Partner Network is generated by payments to website and application publishers who host our advertisements. The decrease in cost of revenue in 2016 compared to 2015 is directly associated with the lower revenue reported in the Partner Network.
Owned and Operated Network cost of revenue consists of charges for web searches and content acquisition.
Operating Expenses
|
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
| Marketing costs | $ | 39,195,653 |
| | $ | 34,324,646 |
| | $ | 4,871,007 |
| | 14.2 | % |
| Compensation | 6,830,338 |
| | 5,598,804 |
| | 1,231,534 |
| | 22.0 | % |
| Selling, general and administrative | 4,996,482 |
| | 4,645,697 |
| | 350,785 |
| | 7.6 | % |
| Operating expenses | $ | 51,022,473 |
| | $ | 44,569,147 |
| | $ | 6,453,326 |
| | 14.5 | % |
Operating expenses increased in the twelve months ended December 31, 2016 as compared to the same period of the prior year. All operating expense categories reported higher expense.
Marketing costs include those expenses required to attract traffic to our owned and operated websites. Marketing costs increased in the twelve months ended December 31, 2016 as a result of the growth within the owned and operated website and application business. We expect marketing costs to continue to increase proportionally as we expand the ALOT branded websites and mobile applications and acquired sites.
Compensation expense increased 22.0 % in the twelve months ended December 31, 2016 to $6.8 million as compared to the same period of 2015 due primarily to an increase in the number of employees. Our total employment, both full-time and part-time was 72 at December 31, 2016 compared to 63 at December 31, 2015. We expect compensation expense to increase in 2017 as we hire additional developers and sales personnel to support the SearchLinks product.
Selling, general and administrative costs were $5.0 million, an increase of 7.6% over 2015. The primary reasons for the higher cost in the twelve months ended December 31, 2016 compared to the same period last year are approximately $402,000 higher amortization and depreciation expense; $70,000 higher facilities cost; $53,000 higher travel and entertainment costs; partially offset by $172,000 lower professional fees. We expect selling, general and administrative costs to remain relatively flat in 2017.
Interest Expense, net
Interest expense, net was $99,965 and $141,311 for the years ended December 31, 2016 and 2015, respectively. This is interest expense on the bank credit facility where average outstanding loan balances were significantly lower in 2016 compared to 2015.
Income tax benefit
In 2016, we recognized an income tax benefit of $29,260.
In 2015, we recognized a tax benefit of approximately $300,000 due to settling a disputed income tax claim with the State of New Jersey. The claim related to the 2007-2009 tax years and was settled for $100,000. As a result, the remaining long-term taxes payable liability was adjusted and resulted in a one-time $406,000 income tax benefit. The tax benefit in 2015 is partially offset by expense of approximately $106,000 for state income tax.
Income (loss) from Discontinued Operations
Certain of our subsidiaries previously operated in the European Union ("EU"). Though operations ceased in 2009, statutory requirements required a continued presence in the EU for varying terms until November 2015. Profits and losses generated from the remaining assets and liabilities are accounted for as discontinued operations.
In the third quarter of 2016, our petition with the UK (United Kingdom) Companies House to strike off and dissolve the remaining subsidiary in the EU was approved. As a result, for the twelve months ended December 31, 2016 and December 31, 2015, we recognized income from discontinued operations of $155,287 and $33,969, respectively, due primarily to the adjustment of certain accrued liabilities originating in 2009 and earlier.
Liquidity and Capital Resources
On September 27, 2016, we renewed our Business Financing Agreement with Western Alliance Bank, the parent company of Bridge Bank, our original lender (see Note 6, "Notes Payable"). The renewal provided continued access to the revolving line of credit up to $10 million through September 2018. As of December 31, 2016, the balance of the revolving line of credit was zero and had approximately $6.0 million in availability.
In May 2015, we acquired websites from a publisher that had previously been a client on our ValidClick network. The purchase was structured as an earn-out payable in up to 500,000 shares of our common stock over a three-year period dependent upon achieving certain minimum levels of volume. The fair value of the transaction was determined to be $715,874. The transaction was recorded as an intangible asset on our balance sheet offset by a contingent liability of the same amount. On May 8, 2016, the seller achieved the specific performance target for the first year and as a result, we distributed 166,667 shares of our common stock. The accrued contingent liability and the related intangible asset, domain websites were adjusted by approximately $46 thousand to reflect the lower price paid as compared to the contingent liability recorded as a result of the change in the price of Inuvo stock from the date of acquisition to the first contingent release of shares.
During the first quarter of 2014, we filed an S-3 registration statement with the Securities and Exchange Commission ("SEC") to replace the existing, expiring S-3 "shelf" registration statement, which permits us to offer and sell up to $15 million of our securities from time to time in one or more offerings. To date, we have not taken down any sales from this shelf registration statement. Though we believe the revolving line of credit and cash generated by operations will provide sufficient cash for operations over the next twelve months, we may still elect to sell securities to the public or to selected investors, or borrow under the current or any replacement line of credit or other debt instruments in order to fund the development of our technologies, make acquisitions, pursue new business opportunities or grow existing businesses.
During December 2016, 15,833 shares of our common stock were repurchased at an average price of $1.42 per shares under the Company’s current share repurchase program, which was announced on December 9, 2016 and authorizes the repurchase of the Company’s common stock totaling $500,000. Under the authorization, the Company may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the SEC.
Cash Flows - Operating
Net cash provided by operating activities was $1,053,019 during 2016. We reported a net loss of $772,584, which included the non-cash expenses of depreciation and amortization of $2,209,738 and stock-based compensation of $1,264,266. The change in operating assets and liabilities was a net use of cash of $1,441,713 primarily due to a decrease in the accounts payable balance by $623,000 and an increase to the accounts receivable balance by $583,000. Our terms are such that we generally collect receivables prior to paying trade payables. The increase in the accounts receivable balance was due to greater revenue in 2016 over 2015. The decrease in the accounts payable balance in 2016 over 2015 was due to lower traffic acquisition costs in the fourth quarter of 2016.
During 2015, we generated cash from operating activities of $6,106,272 and a net income of $2,339,774, which included the non-cash expenses of depreciation and amortization of $1,807,350 and stock-based compensation expenses of $707,544, partially offset by a reduction of an accrued state income tax liability of $406,453. The change in operating assets and liabilities was a net provision of $1,470,560.
Cash Flows - Investing
Net cash used in investing activities was $1,116,371 and $1,525,888 for 2016 and 2015, respectively. Cash used in investing activities in both years has primarily consisted of capitalized internal development costs.
Cash Flows - Financing
Net cash used in financing activities was $247,048 during 2016.
During 2015, we used $4,037,705 to pay off the outstanding balance of the bank term loan and pay down the revolving credit facility to zero.
Off Balance Sheet Arrangements
As of December 31, 2016, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements begin on page F-1 at the end of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management does not expect that our disclosure controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of December 31, 2016, the end of the period covered by this report, our management concluded their evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As of the evaluation date, our Chief Executive Officer and Chief Financial Officer concluded that we
maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Securities Exchange Act of 1934 Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the 2013 Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based upon this assessment, our management concluded that as of December 31, 2016 our internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during the year ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Compensatory Arrangements of Certain Executive Officers
On February 15, 2017, the Nominating, Corporate Governance and Compensation Committee of the Board of Directors, adopted the 2017 Management Incentive Program. The program established a cash incentive pool which may be awarded to executive officers and our employees, including our Chief Executive Officer Richard K. Howe. Up to $700,000 of the cash incentive pool is based our achieving certain revenue and adjusted EBITDA levels as determined by our 2017 financial results and up to an additional $150,000 may be added to the pool at the discretion of the Nominating, Corporate Governance and Compensation Committee. The program provides that the total incentive pool which may be available for distribution will be divided between our executive officers (75% in the aggregate) and other employees (25% in the aggregate), subject to their continued employment with our company. The percentage of pool participation by each of our individual executive officers is fixed by the program and the amount of individual awards to our employees, other than our executive officers, will be determined by Mr. Howe.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
Name | | Age | | Positions |
Richard K. Howe | | 51 | | Class I Director, Executive Chairman of the Board and Chief Executive Officer |
Wallace D. Ruiz | | 62 | | Chief Financial Officer |
John B. Pisaris, Esq. | | 48 | | General Counsel |
Don Walker “Trey” Barrett III | | 49 | | Chief Operating Officer |
Charles D. Morgan | | 71 | | Class III Director |
Charles L. Pope | | 62 | | Class II Director |
Joseph P. Durrett | | 68 | | Class I Director |
Pat Terrell | | 59 | | Class III Director |
Richard K. Howe. Mr. Howe has been a member of our Board of Directors since November 2008, and has served as Executive Chairman of the Board since March 2012 and as our Chief Executive Officer since December 2012. Previously, he served as our President and Chief Executive Officer from November 2008 until March 2012. Prior to joining Inuvo, Mr. Howe served as Chief Marketing, Strategy and M&A Officer at billion dollar multi-channel marketing services leader the Acxiom Corporation (NasdaqGS: ACXM) where, since 2004, he lead the company's transition to online marketing services, the expansion into China and the development of the big data consulting services group. From 2001 to 2004, he served as general manager of Global Marketing Services (GMS) at Fair Isaac & Company (NYSE: FICO), a leading provider of analytics products and services where he drove the company's online initiatives. Between 1999 and 2001, Mr. Howe started, grew and sold private Internet search initiatives, ieWild. Mr. Howe has over his career led the acquisition, merger or divestiture of a dozen companies on 3 continents. Mr. Howe earned a bachelor’s degree with distinction in engineering from Concordia University, Canada, and he earned his master’s degree in engineering from McGill University, Canada.
Wallace D. Ruiz. Mr. Ruiz has served as our Chief Financial Officer since June 2010. From 2005 until April 2009, Mr. Ruiz was Chief Financial Officer and Treasurer of SRI Surgical Express, Inc. (NasdaqGM: STRC), a Tampa, Florida provider of central processing and supply chain management services. From 1995 until 2004 he was Chief Financial Officer of Novadigm, Inc., a Nasdaq-listed developer and worldwide marketer of enterprise infrastructure and software services that was acquired by Hewlett-Packard Company in 2004. Mr. Ruiz received a B.S. in Computer Science from St. John’s University and a M.B.A. in Accounting and Finance from Columbia University. Mr. Ruiz is a Certified Public Accountant.
John B. Pisaris. Mr. Pisaris has served as our General Counsel since March 2012 following our acquisition of Vertro. He served as general counsel of Vertro from October 2004 until March 2012. From February 2004 to September 2004, Mr. Pisaris served as vice president of legal of Vertro, and prior to that was a partner at Porter Wright Morris & Arthur, LLP, a law firm, from January 2002 to January 2004.
Don Walker “Trey” Barrett, III.Mr. Barrett joined Inuvo in February 2010 as Senior Vice President of Corporate Strategy and Business Development, and was promoted to Chief Operating Officer in February 2013. Prior to joining Inuvo, Mr. Barnett served as Acxiom Corporation's Director of Interactive Media Products overseeing the innovation and development of the Relevance-X product line. With over 25 years of data-driven direct marketing experience, he has been involved in several successful business start-ups in the direct and interactive marketing industries. Mr. Barnett earned a bachelor’s degrees in Marketing and Economics from the University of Arkansas at Fayetteville.
Charles D. Morgan. Mr. Morgan has been a member of our Board of Directors since June 2009. He is the Executive Chairman of First Orion Corp., a private company that developed and markets PrivacyStar, an application that helps protect the mobile phone users' privacy. He is an equity owner of Bridgehampton Capital Management LLC, for which he also serves as Chairman of its Advisory Board and co-manager of investments. Mr. Morgan is also on the Board of Directors of Entrust, Inc., a private company that provides solutions to protect digital identities and information for security conscious enterprises and governments. He also serves as a member and is the past Chairman of the Board of Trustees of Hendrix College. Mr. Morgan is also Chairman of the Board of Querencia, a private real estate development and golf course in Cabo San Lucas, Mexico. Mr. Morgan has extensive experience managing and investing in both private and public companies including Acxiom Corporation (NasdaqGS: ACXM), an information services company he helped grow from an early stage company to $1.4 billion in revenues during his tenure as Chief Executive Officer from 1975 to 2008. Mr. Morgan has served on the board and in various leadership roles with the Direct Marketing Association (DMA) throughout his career, serving in 2001 as chairman of the DMA board. Mr. Morgan was employed by IBM as a systems engineer for six years prior to joining Acxiom, and he holds a mechanical engineering degree from the University of Arkansas.
