S-4 1 s114600_s4.htm S-4

    

As filed with the Securities and Exchange Commission on December 17, 2018

Registration No. 333-

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

CONVERSIONPOINT HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

Delaware 7372 83-2687415

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)

840 Newport Center Drive, Suite 450

Newport Beach, California 92660

(888) 706-6764

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Robert Tallack

President and Chief Executive Officer

ConversionPoint Holdings, Inc.

840 Newport Center Drive, Suite 450

Newport Beach, California 92660

(888) 706-6764

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all correspondence to:

 

Larry A. Cerutti, Esq.

Bardia Moayedi, Esq.

Troutman Sanders LLP

5 Park Plaza, 14th Floor

Irvine, California 92614

(949) 622-2700 / (949) 622-2739 (fax)

 

Richard K. Howe

President and Chief Executive Officer

Inuvo, Inc.

500 President Clinton Avenue, Suite 300
Little Rock, Arkansas 72201
(501) 205-8508

 

Jeremy Siegfried, Esq.

Matthew P. Navarre, Esq.

Porter Wright Morris & Arthur LLP

41 South High Street, Suite 2900

Columbus, Ohio 43215

(614) 227-2181 / (614) 227-2100 (fax)

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions under the merger agreement described herein.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ¨ 

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ 

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o Accelerated filer  ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company) Smaller reporting company  x 
  Emerging growth company  x 

 

If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

 

If applicable, please an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13c-4(i) (Cross-Border Issuer Tender Offer)   ¨

 

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)     ¨

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered
  Amount to
be Registered(1)
   Proposed Maximum
Offering Price
per Share
   Proposed Maximum
Aggregate Offering
Price(2)
   Amount of
Registration Fee
 
Common Stock, Par Value $0.0001   24,710,285    N/A   $73,565,535   $8,916.14 

 

(1)  This registration statement relates to shares of common stock, par value $0.0001 per share of the registrant (“registrant common stock”), that may be issued to the securityholders of ConversionPoint Technologies Inc. (“ConversionPoint”) and Inuvo, Inc. (“Inuvo”) in connection with the merger agreement described herein. The amount of registrant common stock to be registered is based on the sum of (i) the product obtained by multiplying (x) 18,627,161 shares (on a fully diluted basis) of ConversionPoint’s common stock (the maximum number of shares of ConversionPoint common stock that may be canceled and exchanged in the ConversionPoint merger) by (y) the exchange ratio of 0.97853 shares of registrant’s common stock for each outstanding share of ConversionPoint common stock, plus (ii) the product obtained by multiplying (a) 34,343,641 shares (on a fully diluted basis) of Inuvo common stock (the maximum amount of shares of Inuvo common stock that may be canceled and exchanged in the Inuvo merger) by (b) the exchange ratio of 0.18877 shares of registrant’s common stock for each outstanding share of Inuvo common stock. In addition, this registration statement relates to an indeterminate amount of shares of common stock that may be issued as a result of stock splits, stock dividends or similar transactions in accordance with Rule 416 under the Securities Act of 1933, as amended (“Securities Act”).

(2)Pursuant to Rule 457(c) and Rule 457(f)(1) and (2) under the Securities Act of 1933, as amended, the proposed maximum aggregate offering price is the sum of (i) the product obtained by multiplying (x) $1.03 (the average of the high and low prices of Inuvo’s common stock as reported by the NYSE American on December 12, 2018, by (y) 34,343,641 shares (on a fully diluted basis) of Inuvo common stock (the maximum amount of shares of Inuvo common stock that may be canceled and exchanged in the Inuvo merger), plus (ii) the product obtained by multiplying (a) $2.88 (the book value per share of ConversionPoint’s common stock as of September 30, 2018), by (b) 18,627,161 shares (on a fully diluted basis) of ConversionPoint’s common stock (the maximum number of shares of ConversionPoint common stock that may be canceled and exchanged in the ConversionPoint merger), minus (iii) $15,454,638 (the estimated amount of cash to be paid by the registrant to Inuvo’s stockholders in the Inuvo merger). The proposed maximum aggregate offering price is estimated solely to determine the registration fee.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.  

 

 

 

 

 

 

The information in this preliminary joint proxy statement/prospectus is not complete and may be changed. ConversionPoint Holdings may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This joint proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer, solicitation or sale is not permitted.

 

PRELIMINARY PROSPECTUS

 

Subject to completion, dated December 17, 2018

 

 

TO THE STOCKHOLDERS OF CONVERSIONPOINT TECHNOLOGIES INC. AND INUVO, INC.

MERGERS PROPOSED—YOUR VOTE IS VERY IMPORTANT

 

[●], 2019

 

Dear Stockholders:

 

ConversionPoint Technologies Inc., referred to as ConversionPoint, and Inuvo, Inc., referred to as Inuvo, have entered into an Agreement and Plan of Merger, dated as of November 2, 2018, referred to as the merger agreement. The merger agreement provides for a proposed business combination transaction between ConversionPoint and Inuvo.

 

Subject to the terms and conditions of the merger agreement, ConversionPoint and Inuvo will be combined under a new holding company currently named ConversionPoint Holdings, Inc., referred to as New Parent. The combination will bring together two e-commerce companies with complementary products and services and valuable intellectual property assets. Robert Tallack will serve as President and Chief Executive Officer and Richard K. Howe will serve as the non-executive Chairman of the Board of the combined organization. New Parent will be renamed ConversionPoint Technologies Inc. following completion of the combination.

 

The combination will be effected by two mergers, between subsidiaries of New Parent, on the one hand, and each of ConversionPoint and Inuvo, on the other hand. Upon completion of the merger between ConversionPoint and a subsidiary of New Parent, each share of ConversionPoint common stock will be converted into the right to receive 0.97853 shares of New Parent common stock, which we refer to as the ConversionPoint exchange ratio. We refer to the consideration that each share of ConversionPoint common stock will be converted into, as the ConversionPoint merger consideration. Upon completion of the merger between Inuvo and a subsidiary of New Parent, each share of Inuvo common stock will be converted into the right to receive $0.45 in cash and 0.18877 shares of New Parent common stock, which we refer to as the Inuvo exchange ratio. We refer to the consideration that each share of Inuvo common stock will be converted into, as the Inuvo merger consideration. We anticipate that ConversionPoint stockholders will own approximately 70.76%, and Inuvo stockholders will own approximately 29.24%, of the shares of New Parent common stock issued and outstanding immediately after consummation of the mergers and prior to the issuance of any stock in connection with a financing that is a condition to closing of the mergers.

 

 

 

 

The value of the shares of New Parent common stock issued in connection with the mergers will depend on the price per share of New Parent common stock at the time the mergers are completed. That price will not be known at the time of the special meetings of the ConversionPoint and Inuvo stockholders due to the contemplated underwritten public offering of New Parent common stock which we anticipate to occur after the time of the special meetings but at or before the closing of the mergers, which we refer to as the New Parent public offering, in order for New Parent to satisfy the material condition contained in the merger agreement that New Parent receive at least $36 million in gross proceeds from the issuance and sale of its equity, debt and/or equity-linked securities on terms reasonably agreeable to ConversionPoint and Inuvo in good faith, which we refer to as the financing condition. See “Questions and Answers About the Mergers and the Special Meetings—What conditions must be satisfied to complete the mergers?” and “How will the financing condition be satisfied?” in this joint proxy statement/prospectus for a discussion of the financing condition and the New Parent public offering.

 

The size of New Parent’s board of directors, which we refer to as the New Parent board, will be set at seven with Robert Tallack and Raghunath “Raghu” Kilambi being appointed by ConversionPoint, Richard K. Howe and Gordon Cameron being appointed by Inuvo, and three individuals being appointed by New Parent, on or after the closing date. As of the date of this joint proxy statement/prospectus, no determination has been made as to the identity of the three directors who will be appointed by the New Parent board on or after the date of closing.

 

Completion of the mergers requires, among other things, the separate adoption and approval of the merger agreement by both ConversionPoint stockholders and Inuvo stockholders. To obtain these required adoptions, and approvals, ConversionPoint and Inuvo will hold special meetings of their respective stockholders on [●], 2019. At the special meeting of ConversionPoint stockholders, ConversionPoint stockholders will be asked to consider and vote on (1) a proposal to adopt the merger agreement, referred to as the ConversionPoint merger proposal, and (2) a proposal to adjourn the ConversionPoint special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to approve the ConversionPoint merger proposal, referred to as the ConversionPoint adjournment proposal. At the special meeting of Inuvo stockholders, Inuvo stockholders will be asked to consider and vote on (1) a proposal to adopt and approve the merger agreement, referred to as the Inuvo merger proposal, (2) a proposal to approve, on a non-binding advisory basis, the compensation that may be paid or become payable to the named executive officers of Inuvo, and (3) a proposal to adjourn the Inuvo special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to approve the Inuvo merger proposal, referred to as the Inuvo adjournment proposal.

 

CONVERSIONPOINT’S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE CONVERSIONPOINT MERGER PROPOSAL AND “FOR” THE CONVERSIONPOINT ADJOURNMENT PROPOSAL

 

INUVO’S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE INUVO MERGER PROPOSAL, “FOR” APPROVAL OF THE MERGER-RELATED COMPENSATION PROPOSAL AND “FOR” THE INUVO ADJOURNMENT PROPOSAL

 

Information about the special meetings, the mergers and the other business to be considered by ConversionPoint stockholders and Inuvo stockholders is contained in this joint proxy statement/prospectus and the documents incorporated by reference in this joint proxy statement/prospectus, which we urge you to read carefully. The obligations of ConversionPoint and Inuvo to complete the mergers are subject to the satisfaction or waiver of several conditions set forth in the merger agreement including, among others, the financing condition. ConversionPoint and Inuvo encourage you to read this entire joint proxy statement/prospectus carefully before voting, including the section entitled “Risk Factors” beginning on page 30 of this joint proxy statement/prospectus.

 

Your vote is very important, regardless of the number of shares of Inuvo common stock or ConversionPoint common stock that you own. Whether or not you plan to attend the special meeting of ConversionPoint stockholders or the special meeting of Inuvo stockholders, as applicable, please mark, sign, date and return all proxy cards that you receive in the postage-paid envelope provided, or complete your proxy by following the instructions supplied on the proxy card for voting by telephone or via the Internet, so that your shares may be represented and voted at the ConversionPoint or Inuvo special meeting, as applicable. Your failure to vote with respect to the ConversionPoint merger proposal or Inuvo merger proposal will have the same effect as voting against such proposal. If you hold your shares in “street name,” you should instruct your broker how to vote your shares in accordance with your voting instruction form.

 

 

 

 

We hope to see you at the special meetings and look forward to the successful completion of the mergers and the other transactions.

 

/s/ Robert Tallack   /s/ Richard K. Howe
Robert Tallack   Richard K. Howe
President and Chief Executive Officer   Chief Executive Officer
ConversionPoint Technologies Inc.   Inuvo, Inc.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities to be issued in connection with the mergers or determined if the accompanying joint proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

The accompanying joint proxy statement/prospectus is dated [●], 2019, and is first being mailed or otherwise delivered to stockholders of ConversionPoint and stockholders of Inuvo on or about [●], 2019.

 

 

 

 

ConversionPoint Technologies Inc.
840 Newport Center Drive, Suite 450
Newport Beach, CA 92660
(888) 706-6764

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [●], 2019

 

To the Stockholders of ConversionPoint Technologies Inc.:

 

A special meeting of all stockholders of ConversionPoint Technologies Inc. will be held at 840 Newport Center Drive, Suite 450, Newport Beach, California, 92660 on [●], 2019 at [●] a.m., local time, for the following purposes:

 

1.To adopt the Agreement and Plan of Merger, dated as of November 2, 2018, as it may be amended from time to time (the “merger agreement”), by and among, ConversionPoint Technologies Inc. (“ConversionPoint”), ConversionPoint Holdings, Inc. (“New Parent”), Inuvo, Inc. (“Inuvo”), CPT Merger Sub, Inc. (“ConversionPoint Merger Sub”), and CPT Cigar Merger Sub, Inc. (“Inuvo Merger Sub”).

 

2.To adjourn the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt the merger agreement.

 

3.To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

If you held shares of ConversionPoint common stock at the close of business on [●], 2019, you are entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof. If a new record date is set, you will be entitled to vote at the special meeting if you held shares in ConversionPoint as of such record date.

 

The ConversionPoint board has unanimously approved the merger agreement, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of ConversionPoint and its stockholders, and unanimously recommends that ConversionPoint stockholders vote “FOR” the ConversionPoint merger proposal and “FOR” the ConversionPoint adjournment proposal.

 

Your vote is very important. If you do not submit your proxy by telephone, the Internet, or return your signed proxy card(s) by mail or vote in person at your special meeting, it will be more difficult for ConversionPoint to obtain the necessary quorum to hold its special meeting.

 

 

 

 

Whether or not you plan to attend the special meeting in person, please complete, sign, date and return the enclosed proxy in the accompanying self-addressed postage pre-paid envelope or complete your proxy by following the instructions supplied on the proxy card for voting by telephone or via the Internet as soon as possible. If you attend the special meeting, you may withdraw your proxy and vote in person.

 

  By Order of the Board of Directors,
   
  /s/ Robert Tallack
Newport Beach, CA Robert Tallack
[●], 2019 President and Chief Executive Officer

 

PLEASE VOTE YOUR SHARES PROMPTLY. YOU CAN FIND INSTRUCTIONS FOR VOTING ON THE ENCLOSED PROXY CARD. IF YOU HAVE QUESTIONS ABOUT THE PROPOSALS OR ABOUT VOTING YOUR SHARES, PLEASE CONTACT CONVERSIONPOINT’S GENERAL COUNSEL, JEFFREY MARKS VIA EMAIL AT JEFF@CONVERSIONPOINT.COM.

 

 

 

 

Inuvo, Inc.
500 President Clinton Avenue, Suite 300
Little Rock, Arkansas 72201
(501) 205-8508

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [●], 2019

 

To the Stockholders of Inuvo, Inc.:

 

A special meeting of all stockholders of Inuvo, Inc. will be held at 500 President Clinton Avenue, Suite 300, Little Rock, Arkansas 72201 on [●], 2019 at [●], local time, for the following purposes:

 

1.To adopt and approve the Agreement and Plan of Merger, dated as of November 2, 2018, as it may be amended from time to time (the “merger agreement”), by and among, ConversionPoint Technologies Inc. (“ConversionPoint”), ConversionPoint Holdings, Inc. (“New Parent”), Inuvo, Inc. (“Inuvo”), CPT Merger Sub, Inc. (“ConversionPoint Merger Sub”), and CPT Cigar Merger Sub, Inc. (“Inuvo Merger Sub”).

 

2.To approve, 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 Inuvo merger.

 

3.To adjourn the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt and approve the merger agreement.

 

4.To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

If you held shares of Inuvo common stock at the close of business on [●], 2019, you are entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof. If a new record date is set, you will be entitled to vote at the special meeting if you held shares in Inuvo as of such record date.

 

The Inuvo board has unanimously approved the merger agreement, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of Inuvo and its stockholders, and unanimously recommends that Inuvo stockholders vote “FOR” the Inuvo merger proposal, “FOR” the Inuvo merger-related compensation proposal and “FOR” the Inuvo adjournment proposal.

 

Your vote is very important. If you do not submit your proxy by telephone, the Internet, or return your signed proxy card(s) by mail or vote in person at your special meeting, it will be more difficult for Inuvo to obtain the necessary quorum to hold its special meeting.

 

 

 

 

Whether or not you plan to attend the special meeting in person, please complete, sign, date and return the enclosed proxy in the accompanying self-addressed postage pre-paid envelope or complete your proxy by following the instructions supplied on the proxy card for voting by telephone or via the Internet (or, if your shares are held in “street name” by a broker, nominee, fiduciary or other custodian, follow the directions given by the broker, nominee, fiduciary or other custodian regarding how to instruct it to vote your shares) as soon as possible. If you attend the special meeting, you may withdraw your proxy and vote in person.

 

  By Order of the Board of Directors,
   
  /s/ Richard K. Howe
Little Rock, Arkansas Richard K. Howe
[●], 2019 Chief Executive Officer

 

PLEASE VOTE YOUR SHARES PROMPTLY. YOU CAN FIND INSTRUCTIONS FOR VOTING ON THE ENCLOSED PROXY CARD. IF YOU HAVE QUESTIONS ABOUT THE PROPOSALS OR ABOUT VOTING YOUR SHARES, PLEASE CALL INUVO’S CHIEF FINANCIAL OFFICER, WALLACE D. RUIZ AT (501) 205-8397 OR VIA EMAIL AT WALLACE.RUIZ@INUVO.COM.

 

 

 

 

ADDITIONAL INFORMATION

 

This joint proxy statement/prospectus incorporates important business and financial information about Inuvo that is not included in or being delivered with this joint proxy statement/prospectus. The incorporated information that is not included in or being delivered with this joint proxy statement/prospectus is available to you without charge upon your written or oral request. You can obtain any document that is incorporated by reference in this joint proxy statement/prospectus, excluding all exhibits that have not been specifically incorporated by reference, on the investor relations page of Inuvo’s website at www.inuvo.com or by requesting it in writing or by telephone from Inuvo at the following address or telephone number:

 

Inuvo, Inc.
500 President Clinton Avenue, Suite 300
Little Rock, Arkansas 72201
(501) 205-8508
Attn.: Corporate Secretary
Website: www.inuvo.com

 

If you would like to request any documents, please do so by [●], 2019 in order to receive them before the Inuvo special meeting. See “Where You Can Find More Information.”

 

You should rely only on the information contained in, or incorporated by reference into, this document. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this document. This document is dated [●], 2019, and you should assume that the information in this document is accurate only as of such date. You should assume that the information incorporated by reference into this document is accurate as of the date of such document. Neither the mailing of this document to ConversionPoint and Inuvo stockholders nor the issuance by New Parent of shares of New Parent common stock in connection with the merger will create any implication to the contrary.

 

This document does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Except where the context otherwise indicates, information contained in this document regarding Inuvo has been provided by Inuvo and information contained in this document regarding ConversionPoint has been provided by ConversionPoint.

 

 

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGERS AND THE SPECIAL MEETINGS 1
   
SUMMARY 15
   
Information about the Companies Involved in the Mergers 15
The Mergers 16
Merger Consideration Received by ConversionPoint Stockholders 17
Merger Consideration Received by Inuvo Stockholders 17
Total New Parent Common Stock to be Issued 17
Comparative Per Share Market Price and Dividend Information 17
Treatment of ConversionPoint Stock Options and Warrants 18
Treatment of ConversionPoint Restricted Stock Units 18
Treatment of Inuvo Stock Options 18
Treatment of Inuvo Restricted Stock Units 19
Directors and Executive Officers of New Parent Following the Mergers 19
Recommendation of the ConversionPoint Board 19
Recommendation of the Inuvo Board 19
Opinion of Canaccord Genuity LLC 20
Interests of Certain ConversionPoint and Inuvo Directors and Executive Officers in the Mergers 20
Material United States Federal Income Tax Consequences of the Mergers 20
Accounting Treatment of the Mergers 21
Conditions to Completion of the Mergers 22
Financing Condition 22
No Solicitation of Other Offers 22
Termination 22
Termination Fees and Expenses 22
Support Agreements 23
Shares Beneficially Owned by Directors and Executive Officers of ConversionPoint and Inuvo 23
Appraisal Rights 24
Comparison of the Rights of ConversionPoint and Inuvo Stockholders 24
Risk Factors 24
   
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CONVERSIONPOINT 25
   
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF INUVO 26
   
SELECTED UNAUDITED PRO FORMA  COMBINED CONDENSED FINANCIAL INFORMATION 27
   
EQUIVALENT AND COMPARATIVE PER SHARE INFORMATION 28
   
RISK FACTORS 30
   
Risks Related to the Mergers 30
Risks Related to ConversionPoint’s Business 35
Risks Related to Inuvo’s Business 46
Risks Related to the Combined Company if the Mergers are Completed 52

 

 

 

 

TABLE OF CONTENTS

(continued)

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 58
   
DESCRIPTION OF CONVERSIONPOINT 59
   
Company Overview 59
Industry Background 59
Key Challenges Facing Retailers and Brands Selling Online 60
ConversionPoint’s Solutions 61
ConversionPoint’s Technology Products 63
Customers 64
Key Relationships 64
ConversionPoint’s Competitive Strengths 64
ConversionPoint’s Growth Strategy 65
ConversionPoint’s Technology Platform 66
Research and Development 66
Intellectual Property 66
Employees 67
Facilities 67
Government Regulation 67
Legal Proceedings 69
Competition 69
Management’s Discussion and Analysis of Financial Condition and Results of Operations 70
Dividends on ConversionPoint Common Stock 80
Management 80
Executive Compensation 84
Certain Relationships and Related Party Transactions 88
Security Ownership of Certain Beneficial Owners and Management 92
   
DESCRIPTION OF INUVO 94
   
Company Overview 94
Products and Services 94
Key Relationships 95
Strategy 95
Sales and Marketing 96
Competition 96
Technology Platforms 96
Intellectual Property Rights 97
Employees 97
Seasonality 97
History 97
More Information 98
Management’s Discussion and Analysis of Financial Condition and Results of Operations 98
Market Prices of and Dividends on Inuvo Common Stock 105
Management 106
Executive Compensation 112
Certain Relationships and Related Party Transactions 119
Security Ownership of Certain Beneficial Owners and Management 120

 

 ii  

 

 

TABLE OF CONTENTS

(continued)

 

DESCRIPTION OF NEW PARENT 121
   
Business Overview 121
New Parent 2018 Plan 121
ConversionPoint Merger Sub 128
Inuvo Merger Sub 128
   
INFORMATION ABOUT THE CONVERSIONPOINT SPECIAL MEETING AND VOTE 129
   
Date, Time and Place of the Special Meeting 129
Purpose of the ConversionPoint Special Meeting 129
Recommendation of the ConversionPoint Board 129
Record Date; Shares Entitled to Vote 129
Quorum and Voting Rights 130
Required Vote 130
Abstentions: Non-Voting 130
Appraisal Rights 130
Shares Beneficially Owned by ConversionPoint Directors and Executive Officers 131
Voting of Shares; Proxies 131
Revocability of Proxies and Changes to a ConversionPoint Stockholder’s Vote 132
Solicitation of Proxies 132
Other Business; Adjournments 132
Attending the Meeting 133
   
INFORMATION ABOUT THE INUVO SPECIAL MEETING AND VOTE 134
   
Date, Time and Place of the Special Meeting 134
Purpose of the Inuvo Special Meeting 134
Recommendation of the Inuvo Board 134
Record Date; Shares Entitled to Vote 135
Quorum and Voting Rights 135
Required Vote 135
Broker Non-Votes 136
Abstentions; Non-Voting 136
Appraisal Rights 136
Shares Beneficially Owned by Inuvo Directors and Executive Officers 136
Voting of Shares; Proxies 136
Revocability of Proxies and Changes to an Inuvo Stockholder’s Vote 137
Solicitation of Proxies 138
Other Business; Adjournments 138
Attending the Meeting 138
   
THE MERGERS 139
   
General 139
Background of the Mergers 140
Recommendation of the ConversionPoint Board and its Reasons for the ConversionPoint Merger 152
Recommendation of the Inuvo Board and its Reasons for the Inuvo Merger 153
Opinion of Financial Advisor to the Inuvo Board 155
Interests of Officers and Directors in the Mergers 164
Merger-Related Compensation 167
Accounting Treatment 168
Appraisal Rights 168
Restrictions on Sales of Shares by Certain Affiliates 168

 

 iii  

 

 

TABLE OF CONTENTS

(continued)

 

THE MERGER AGREEMENT AND RELATED AGREEMENTS 170
   
Structure of the Mergers 171
Closing 171
Effective Times 171
Merger Consideration Received by ConversionPoint Stockholders 171
Merger Consideration Received by Inuvo Stockholders 171
Treatment of ConversionPoint Stock Options and Other Stock-Based Awards 172
Treatment of ConversionPoint Warrants 172
Treatment of Inuvo Stock Options and Other Stock-Based Awards 173
Conversion of Shares; Exchange of Certificates; No Fractional Shares 174
Appraisal Rights 175
Reasonable Best Efforts; Other Agreements 176
Representations and Warranties 176
Covenants and Agreements 179
Termination 191
Termination Fee and Expenses 193
Support Agreements 193
Directors and Executive Officers of New Parent and New Parent Subsidiaries 194
   
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES 195
   
Tax Consequences of the Mergers Generally 196
Tax Consequences to Holders of ConversionPoint Common Stock 197
Tax Consequences to Holders of Inuvo Common Stock 197
Cash In Lieu of Fractional Shares 198
Backup Withholding and Information Reporting 199
   
UNAUDITED PRO FORMA  COMBINED CONDENSED FINANCIAL STATEMENTS 200
   
DESCRIPTION OF NEW PARENT CAPITAL STOCK 209
   
Authorized Capital Stock 209
Common Stock 209
Preferred Stock 210
Anti-Takeover Effects of Delaware Law and New Parent’s Certificate of Incorporation and Bylaws 210
   
COMPARISON OF STOCKHOLDER RIGHTS 213
   
APPRAISAL RIGHTS 223
   
LEGAL MATTERS 227
   
EXPERTS 227
   
FUTURE STOCKHOLDER PROPOSALS 228
   
ConversionPoint 228
Inuvo 228

 

 iv  

 

 

TABLE OF CONTENTS

(continued)

 

WHERE YOU CAN FIND MORE INFORMATION 229
   
INDEX TO FINANCIAL STATEMENTS F-1
   
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS II-1

 

Annex A Agreement and Plan of Merger, dated as of November 2, 2018, by and among ConversionPoint Technologies Inc., Inuvo, Inc., ConversionPoint Holdings, Inc., CPT Merger Sub, Inc. and CPT Cigar Merger Sub, Inc.
   
Annex B Amended and Restated Certificate of Incorporation of ConversionPoint Holdings, Inc.
   
Annex C Bylaws of ConversionPoint Holdings, Inc.
   
Annex D Form of ConversionPoint Support Agreement
   
Annex E Form of Inuvo Support Agreement
   
Annex F Opinion of Canaccord Genuity LLC
   
Annex G Section 262 of the General Corporation Law of the State of Delaware
   
Annex H Amended Certificate of Incorporation of ConversionPoint Technologies Inc.
   
Annex I Bylaws of ConversionPoint Technologies Inc.
   
Annex J Amended Articles of Incorporation of Inuvo, Inc.
   
Annex K Amended and Restated Bylaws of Inuvo, Inc.

 

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QUESTIONS AND ANSWERS ABOUT THE MERGERS AND THE SPECIAL MEETINGS

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the mergers and the special meetings. These questions and answers may not address all questions that may be important to you as a stockholder of ConversionPoint or Inuvo. To better understand these matters, and for a description of the legal terms governing the mergers, you should carefully read this entire joint proxy statement/prospectus, including the annexes, as well as the documents that have been incorporated by reference in this joint proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 229. All references in this joint proxy statement/prospectus to “ConversionPoint” refer to ConversionPoint Technologies Inc., a Delaware corporation. All references in this joint proxy statement/prospectus to “Inuvo” refer to Inuvo, Inc., a Nevada corporation. All references in this joint proxy statement/prospectus to “New Parent” refer to ConversionPoint Holdings, Inc., a Delaware corporation and a direct wholly-owned subsidiary of ConversionPoint, which will be renamed “ConversionPoint Technologies Inc.” following consummation of the mergers. All references in this joint proxy statement/prospectus to “ConversionPoint Merger Sub” refer to CPT Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of New Parent. All references in this joint proxy statement/prospectus to “Inuvo Merger Sub” refer to CPT Cigar Merger Sub, Inc., a Nevada corporation and a direct wholly-owned subsidiary of New Parent. All references in this joint proxy statement/prospectus to the “Merger Subs” refer to the ConversionPoint Merger Sub and the Inuvo Merger Sub, collectively. Unless otherwise indicated or as the context requires, all references in this joint proxy statement/prospectus to “we” refer to ConversionPoint and Inuvo. All references in this joint proxy statement/prospectus to the “merger agreement” refer to the Agreement and Plan of Merger, dated as of November 2, 2018, as it may be amended from time to time, by and among ConversionPoint, Inuvo, New Parent, ConversionPoint Merger Sub and Inuvo Merger Sub, a copy of which is attached as Annex A to this joint proxy statement/prospectus.

 

About the Mergers

 

Q:     Why am I receiving this joint proxy statement/prospectus?

 

A:     ConversionPoint and Inuvo have entered into the merger agreement which provides for the combination of ConversionPoint and Inuvo under ConversionPoint Holdings, Inc., a new holding company which we refer to as, New Parent. Pursuant to the merger agreement, ConversionPoint Merger Sub will be merged with and into ConversionPoint with ConversionPoint as the surviving company, and Inuvo Merger Sub will be merged with and into Inuvo with Inuvo as the surviving company. As a result, ConversionPoint and Inuvo will each become wholly-owned subsidiaries of New Parent. As a result of the transactions contemplated by the merger agreement, former ConversionPoint and Inuvo stockholders will own stock in New Parent. The approval for listing of New Parent’s stock on The NASDAQ Capital Market, which we refer to as NASDAQ, subject to official notice of issuance, and on the Toronto Stock Exchange, which we refer to as the TSX, subject to standard listing conditions, are, among others, conditions to the obligations of Inuvo and ConversionPoint to consummate the mergers. We refer to these mergers as the ConversionPoint merger and the Inuvo merger, respectively, and together as the mergers. We refer to the date upon which the mergers are consummated as the closing date.

 

ConversionPoint is holding a special meeting of stockholders, which we refer to as the ConversionPoint special meeting, in order to obtain the stockholder approval necessary to adopt the merger agreement. We refer to this approval as the ConversionPoint stockholder approval. ConversionPoint stockholders will also be asked to approve the adjournment of the ConversionPoint special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to obtain the ConversionPoint stockholder approval.

 

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Inuvo is holding a special meeting of stockholders, which we refer to as the Inuvo special meeting, in order to obtain the stockholder approval necessary to adopt and approve the merger agreement, which we refer to as the Inuvo stockholder approval. Inuvo stockholders will also be asked to approve (i) a proposal to approve, 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 mergers, which we sometimes refer to as the merger-related compensation, and (ii) the adjournment of the Inuvo special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to obtain the Inuvo stockholder approval.

 

We will be unable to complete the mergers unless both the ConversionPoint stockholder approval and the Inuvo stockholder approval are obtained at the respective special meetings and the other conditions to the mergers have been met. See “What conditions must be satisfied to complete the mergers” below for a discussion of the material conditions including the condition that New Parent receives at least $36 million in gross proceeds from the issuance and sale of its equity, debt and/or equity-linked securities on terms reasonably agreeable to ConversionPoint and Inuvo in good faith, which we refer to as the financing condition. New Parent intends to satisfy the financing condition through an underwritten public offering of New Parent common stock.

 

Q:     How will the financing condition be satisfied?

 

A:     In order to secure the necessary funds to satisfy the financing condition, New Parent intends to undertake an underwritten public offering of its common stock at or prior to the closing of the mergers, and as a condition to the consummation of the mergers, New Parent must receive at least $36 million in gross proceeds from such public offering. A draft registration statement on Form S-1 relating to the New Parent common stock has been submitted on a confidential basis with the Securities and Exchange Commission to register such shares of New Parent common stock. The New Parent common stock may not be sold nor may offers to buy such shares be accepted prior to the time that such registration statement is publicly filed with the Securities and Exchange Commission and becomes effective. This joint proxy statement/prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of New Parent common stock in any state in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

 

Q:     Why are ConversionPoint and Inuvo conducting the mergers?

 

A:     The board of directors of ConversionPoint, which we refer to as the ConversionPoint board, consulted with ConversionPoint’s management and legal and financial advisors to approve the merger agreement and the transactions contemplated thereby, and determined that the terms of the ConversionPoint merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, ConversionPoint and its stockholders. The ConversionPoint board believes that the strategic nature of the transaction is in the best interests of both ConversionPoint and Inuvo and their respective stockholders. The mergers will combine ConversionPoint’s and Inuvo’s respective businesses to create a new company that will sell marketing, data and e-commerce optimization technologies in a single platform serving e-commerce clients. Among other things, the combined company would have a strong balance sheet and the ability to invest in and improve new technology, services and products for customers. In reaching its conclusion, the ConversionPoint board considered a variety of factors, including financial and operating information relating to the two companies. To review the reasons for the mergers considered by ConversionPoint in greater detail, see “The Mergers—Recommendation of the ConversionPoint Board and its Reasons for the ConversionPoint Merger” beginning on page 152.

 

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The board of directors of Inuvo, which we refer to as the Inuvo board, has consulted with Inuvo’s management and legal and financial advisors and periodically reviewed and considered various strategic opportunities available to Inuvo, including whether the continued execution of Inuvo’s strategy as a stand-alone company, or the possible sale of Inuvo to or a combination of Inuvo with a third party offered the best avenue to maximize stockholder value. The Inuvo board concluded that the consummation of the Inuvo merger would maximize value to Inuvo’s stockholders by providing the opportunity to participate in the growth and opportunities of the combined company and to receive cash for a portion of the value of the stockholders’ shares. The Inuvo board believes that the consummation of the mergers and the transactions contemplated by the merger agreement will allow the combined company to achieve strategic and financial benefits, including cost savings and operating synergies, which are expected to create value for the combined company’s stockholders. In reaching its conclusion, the Inuvo board considered a variety of factors, including financial and operating information relating to the two companies. To review Inuvo’s reasons for the Inuvo merger, please see “The Mergers—Recommendation of the Inuvo Board and its Reasons for the Inuvo Merger” beginning on page 153.

 

Q:     What are the positive and negative factors that each of the ConversionPoint board and the Inuvo board considered in connection with the mergers?

 

A:     The ConversionPoint board and the Inuvo board considered a variety of factors, both positive and negative, in connection with the mergers. The reasons in favor of the mergers considered by the ConversionPoint board included, but are not limited to, the fact that the combination of ConversionPoint’s and Inuvo’s respective businesses are expected to create combined annual cost synergies; the fact that ConversionPoint stockholders would have the opportunity to participate in the future performance of the combined company based on their majority ownership of New Parent common stock upon completion of the mergers; and the fact that the combined company would have a strong balance sheet and the ability to add new technology, services and products for customers. The potentially negative factors associated with the mergers considered by the ConversionPoint board include, but are not limited to, the dilution associated with the shares that New Parent is required to issue to satisfy the financing condition; the risk that the mergers might not be consummated in a timely manner; the risk that certain key employees of ConversionPoint or Inuvo might not choose to remain with the combined company; the potential challenges and difficulties relating to integrating the operations of ConversionPoint and Inuvo; and the potential $2,800,000 termination fee that ConversionPoint will be required to pay to Inuvo in certain circumstances if the merger agreement is terminated. To review the potentially positive and negative factors considered by the ConversionPoint board in greater detail, see “The Mergers—Recommendation of the ConversionPoint Board; and its Reasons for the ConversionPoint Merger” beginning on page 152.

 

The Inuvo board considered a number of positive factors, including the facts that the Inuvo merger is expected to result in a company with a stronger balance sheet; that the proposed cash consideration portion alone of the Inuvo merger consideration represented a premium over the market price at which Inuvo’s common stock traded prior to entering into the merger agreement; that by including both cash and stock, the Inuvo stockholders might participate in the future of the combined, publicly traded company; that the combination of technologies from both parties represents an alignment with a market-based consolidation of marketing, data and e-commerce optimization technologies; that certain Inuvo technologies could be immediately sold to certain ConversionPoint clients; that the marketplace that the combined company will operate in possesses significant competitive barriers to entry; and that the combined company would have scale sufficient to attract capital market interest. The Inuvo board also considered a number of negative factors, including the facts that the transaction is not all cash, ConversionPoint is a privately held company without a valuation set by public trading of its common stock, the unknown value of the portion of the consideration to Inuvo’s stockholders to be paid in New Parent common stock and the potential $2,800,000 termination fee that Inuvo will be required to pay to ConversionPoint in certain circumstances if the transactions are terminated. To review the full list of factors, positive and negative, that the Inuvo board considered in connection with the Inuvo merger, see “Recommendation for the Inuvo Board; and its Reasons for the Inuvo Merger” beginning on page 153.

 

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Q:     What will Inuvo stockholders receive in the Inuvo merger?

 

A:     In the Inuvo merger, each share of Inuvo common stock, par value $0.001 per share, which we refer to as Inuvo common stock will be converted into the right to receive $0.45 in cash and 0.18877 shares of New Parent common stock. We refer to the consideration that each share of Inuvo common stock will be converted into as the Inuvo merger consideration. Shares held by Inuvo as treasury stock or that are owned by Inuvo, Inuvo Merger Sub or any other wholly-owned subsidiary of Inuvo, which we refer to as the Inuvo excluded shares, will not be converted into the Inuvo merger consideration and will be canceled.

 

Q:     What will ConversionPoint stockholders receive in the ConversionPoint merger?

 

A:     Upon completion of the ConversionPoint merger, each share of common stock of ConversionPoint, par value $0.0001 per share, which we refer to as ConversionPoint common stock, will be converted into 0.97853 shares of New Parent common stock, which we refer to as the ConversionPoint merger consideration. Shares held by ConversionPoint as treasury stock or that are owned by ConversionPoint, ConversionPoint Merger Sub or any other wholly-owned subsidiary of ConversionPoint, which we refer to as the ConversionPoint excluded shares, will not be converted into the ConversionPoint merger consideration and will be canceled.

 

Q:     Should I send in my stock certificates now for the exchange?

 

A:     ConversionPoint Stockholders: Because all shares of ConversionPoint common stock have been issued in book entry form, ConversionPoint stockholders do not have any certificates to exchange. As of the effective time of the ConversionPoint merger, holders of ConversionPoint common stock will receive from New Parent’s exchange agent, a letter of transmittal and information on how to obtain the ConversionPoint consideration.

 

Inuvo Stockholders: No. Inuvo stockholders should keep any stock certificates they hold at this time. After the mergers are completed, Inuvo stockholders holding Inuvo stock certificates will receive a letter of transmittal and instructions on how to obtain the Inuvo merger consideration from New Parent’s exchange agent.

 

Q:     What equity stake will former ConversionPoint stockholders and Inuvo stockholders hold in New Parent?

 

A:     Upon completion of the mergers, it is anticipated that ConversionPoint stockholders, on the one hand, and Inuvo stockholders, on the other hand, will hold approximately 70.76% and 29.24%, respectively, of the shares of common stock of New Parent issued and outstanding immediately after the consummation of the mergers (on a fully diluted basis, including dilution from stock options (including options to purchase up to 1,300,000 shares of New Parent common stock to be issued by New Parent to certain employees of Inuvo at the closing of the mergers), warrants, and restricted stock units, based on the treasury method) and prior to the issuance by New Parent of any equity securities in connection with the New Parent public offering in order to satisfy the financing condition.

 

Since we do not know the value of the shares of New Parent common stock or the amount of shares of New Parent common stock that will be issued in connection with the New Parent public offering, we do not know the exact percentage of equity former Inuvo stockholders or ConversionPoint stockholders will hold in New Parent after the New Parent public offering. However, assuming and after giving effect to the sale of [●] shares of New Parent common stock in the New Parent public offering at an assumed initial public offering price of $[●], the midpoint of the estimated offering price range set forth on the cover page of the New Parent public offering prospectus, it is estimated that ConversionPoint stockholders, on the one hand, and Inuvo stockholders, on the other hand, will hold approximately [●]% and [●]%, respectively, of the shares of common stock of New Parent issued and outstanding immediately after the consummation of the mergers and the New Parent public offering (on a fully diluted basis, including dilution from stock options (including options to purchase up to 1,300,000 shares of New Parent common stock to be issued by New Parent to certain employees of Inuvo at the closing of the mergers), warrants and restricted stock units, based on the treasury method).

 

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Q:     How do I calculate the value of the ConversionPoint merger consideration?

 

A:     New Parent will issue 0.97853 shares of New Parent common stock in exchange for each share of ConversionPoint common stock. The value of the ConversionPoint merger consideration that ConversionPoint stockholders will receive in the ConversionPoint merger for each share of ConversionPoint common stock will depend on the price per share of New Parent’s common stock at the time the merger is completed. That price will not be known until after the issuance of New Parent common stock in connection with the New Parent public offering which will occur after the ConversionPoint special meeting. See the answer to the question “What equity stake will former ConversionPoint stockholders and Inuvo stockholders hold in New Parent?” for additional information regarding the number of shares of New Parent common stock to be offered in the New Parent public offering and the midpoint of the estimated offering price range set forth on the cover page of the New Parent public offering prospectus.

 

Q:     How do I calculate the value of the Inuvo merger consideration?

 

A:     New Parent will issue $0.45 in cash and 0.18877 shares of New Parent common stock in exchange for each share of Inuvo common stock. The value of the Inuvo merger consideration that Inuvo stockholders will receive in the Inuvo merger for each share of Inuvo common stock will depend, in part, on the price per share of New Parent’s common stock at the time the merger is completed. That price will not be known until after the issuance of New Parent common stock in connection with the New Parent public offering which will occur after the Inuvo special meeting. See the answer to the question “What equity stake will former ConversionPoint stockholders and Inuvo stockholders hold in New Parent?” for additional information regarding the number of shares of New Parent common stock to be offered in the New Parent public offering and the midpoint of the estimated offering price range set forth on the cover page of the New Parent public offering prospectus.

 

Q:     What are the material risks associated with the mergers?

 

A:     There are certain material risks associated with the mergers which you should carefully consider in deciding whether to vote for adoption and approval of the merger agreement. These material risks include the fact that the implied value to Inuvo stockholders of the Inuvo merger consideration and the implied value to ConversionPoint stockholders of the ConversionPoint merger consideration will not be known until after the issuance of New Parent common stock in connection with the New Parent public offering which will occur after the special meetings. For a more complete summary of the material risks associated with the mergers, see “Risk Factors” beginning on page 30.

 

Q:     What will be the composition of New Parent’s Board of Directors after the mergers?

 

A:     After the mergers, the size of New Parent’s board of directors, which we refer to as the New Parent board, will initially be set at no less than five and no more than seven with Robert Tallack and Raghu Kilambi being appointed by ConversionPoint, Richard K. Howe and Gordon Cameron being appointed by Inuvo, and three individuals being appointed by New Parent after the closing date. As of the date of this joint proxy statement/prospectus, no determination has been made as to the identity of the three directors who will be appointed by the New Parent board after the date of closing.

 

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Q:     What conditions must be satisfied to complete the mergers?

 

A:     ConversionPoint and Inuvo are not required to complete the mergers unless a number of conditions are satisfied or waived. These conditions include, among others: (i) receipt of both the ConversionPoint stockholder approval and Inuvo stockholder approval; (ii) that the shares of New Parent common stock have been approved for listing on NASDAQ, subject to official notice of issuance, and the TSX, subject to standard listing conditions; (iii) absence of any injunctions, orders or laws that would prohibit, restrain or make illegal the mergers; (iv) effectiveness of the registration statement on Form S-4, of which this joint proxy statement/prospectus forms a part, and the absence of any stop order or proceedings for that purpose; (v) New Parent, having met the financing condition; and (vi) that ConversionPoint shall not have received demands for appraisal rights from holders of ConversionPoint common stock representing more than 10% of the issued and outstanding shares of ConversionPoint common stock.

 

For a more complete summary of the conditions that must be satisfied or waived prior to completion of the mergers, see “The Merger Agreement and Related Agreements—Covenants and Agreements—Conditions to Completion of the Mergers” beginning on page 179.

 

Q:     Why am I being asked to cast a non-binding advisory vote on the proposal approving the merger-related compensation, sometimes referred to as the merger-related compensation proposal?

 

A:     The Securities and Exchange Commission requires Inuvo to seek a non-binding advisory vote on the merger-related compensation proposal.

 

Q:      What will happen if the Inuvo shareholders do not approve the merger-related compensation proposal at the special meeting?

 

A:      Approval of the merger-related compensation proposal is not a condition to completion of the mergers. The vote with respect to the merger-related compensation proposal is an advisory vote and will not be binding on Inuvo (or New Parent or ConversionPoint following the mergers). Accordingly, as such compensation is contractual, such compensation will become payable if the mergers are completed regardless of the outcome of the advisory vote.

 

Q:     What are the consequences to ConversionPoint and Inuvo if the merger agreement is terminated?

 

A:     The merger agreement may be terminated and the mergers may be abandoned at any time prior to the completion of the mergers (including after stockholder approval) by mutual written consent of ConversionPoint and Inuvo. The merger agreement may also be terminated by either ConversionPoint or Inuvo under certain conditions as described in greater detail in “The Merger Agreement and Related Agreements—Termination” beginning on page 191. If the merger agreement is terminated, a termination fee may be payable. To review the consequences if the merger agreement is terminated in greater detail, see “The Merger Agreement and Related Agreements—Termination Fee and Expenses” beginning on page 193.

 

If the mergers are not completed for any reason, ConversionPoint stockholders will not receive the ConversionPoint merger consideration and Inuvo stockholders will not receive the Inuvo merger consideration. Instead, ConversionPoint will remain a private company and Inuvo will remain an independent public company and its common stock will continue to be listed and traded on the NYSE American.

 

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Q:     What constitutes a quorum?

 

A:     ConversionPoint Special Meeting: Holders of a majority in voting power of the ConversionPoint common stock issued and outstanding and entitled to vote at the ConversionPoint special meeting, present in person or represented by proxy, constitutes a quorum. In the absence of a quorum, stockholders holding a majority of the shares of ConversionPoint common stock, present in person or represented by proxy, will have the power to adjourn the special meeting. As of the record date for the ConversionPoint special meeting, [●] shares of ConversionPoint common stock would be required to achieve a quorum. Proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of shares of ConversionPoint common stock considered to be present at the meeting.

 

Inuvo Special Meeting: Holders of a majority of the outstanding shares of Inuvo common stock entitled to vote at the Inuvo special meeting, present in person or represented by proxy, constitutes a quorum. In the absence of a quorum, the chairman of the meeting or stockholders holding a majority of the shares of Inuvo common stock, present in person or represented by proxy, will have the power to adjourn the special meeting. As of the record date for the Inuvo special meeting, [●] shares of Inuvo common stock would be required to achieve a quorum. Proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of shares of Inuvo common stock considered to be present at the meeting.

 

Q:     What vote is required to approve each ConversionPoint proposal?

 

A:     Proposal to Adopt the Merger Agreement by ConversionPoint Stockholders: Adopting the merger agreement requires the affirmative vote of holders of a majority of the shares of ConversionPoint common stock outstanding and entitled to vote. Accordingly, a ConversionPoint stockholder’s failure to submit a proxy card or to vote in person at the special meeting or an abstention from voting, will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

 

Proposal to Adjourn the ConversionPoint Special Meeting by ConversionPoint Stockholders: At the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement requires the affirmative vote of holders of a majority of the shares of ConversionPoint common stock present, in person or represented by proxy, at the special meeting and entitled to vote on the adjournment proposal, regardless of whether a quorum is present. Accordingly, abstentions will have the same effect as a vote “AGAINST” the proposal to adjourn the special meeting, while shares not in attendance at the special meeting will have no effect on the outcome of any vote to adjourn the special meeting.

 

Q:     What vote is required to approve each Inuvo proposal?

 

A:     Proposal to Adopt the Merger Agreement by Inuvo Stockholders: Adopting the merger agreement requires the affirmative vote of holders of a majority of the shares of Inuvo common stock outstanding and entitled to vote. Accordingly, a Inuvo stockholder’s failure to submit a proxy card or to vote in person at the special meeting, an abstention from voting, or the failure of a Inuvo stockholder who holds his or her shares in “street name” through a broker or other nominee to give voting instructions to such broker or other nominee, which we refer to as a broker non-vote, will have the same effect as a vote “AGAINST” the proposal to adopt and approve the merger agreement.

 

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Merger-Related Compensation Proposal: Approving the advisory merger-related compensation proposal requires the affirmative vote of holders of a majority of the shares of Inuvo common stock present, in person or represented by proxy, at the special meeting and entitled to vote on the merger-related compensation proposal. Accordingly, abstentions will have the same effect as a vote “AGAINST” the merger-related compensation proposal, while broker non-votes and shares not in attendance at the special meeting will have no effect on the outcome of such vote. Approval of the advisory merger-related compensation proposal is not a condition to completion of the mergers. The vote is an advisory (non-binding) vote. If the mergers are completed, Inuvo may pay the specified compensation to its named executive officers in connection with the mergers even if Inuvo stockholders fail to approve the advisory merger-related compensation proposal.

 

Proposal to Adjourn the Inuvo Special Meeting by Inuvo Stockholders: Approving the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt and approve the merger agreement requires the affirmative vote of holders of a majority of the shares of Inuvo common stock present, in person or represented by proxy, at the special meeting and entitled to vote on the adjournment proposal. Accordingly, abstentions will have the same effect as a vote “AGAINST” the proposal to adjourn the special meeting, while broker non-votes and shares not in attendance at the special meeting will have no effect on the outcome of any vote to adjourn the special meeting.

 

Q:     What are the recommendations of the ConversionPoint board of directors?

 

A:     The ConversionPoint board has (i) approved the merger agreement and the consummation of the transactions contemplated by the merger agreement upon the terms and subject to the conditions set forth in the merger agreement, (ii) determined that the terms of the ConversionPoint merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, ConversionPoint and its stockholders, (iii) directed that the merger agreement be submitted to ConversionPoint stockholders for adoption, (iv) recommended that ConversionPoint stockholders adopt the merger agreement and (v) declared that the merger agreement is advisable.

 

The ConversionPoint board recommends that ConversionPoint stockholders vote:

 

“FOR” the proposal to adopt the merger agreement; and

 

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“FOR” the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement.

 

See “The Mergers—Recommendation of the ConversionPoint Board and its Reasons for the ConversionPoint Merger” beginning on page 152.

 

Q:     What are the recommendations of the Inuvo board of directors?

 

A:     The Inuvo board has (i) approved the merger agreement and consummation of the transactions contemplated by the merger agreement upon the terms and subject to the conditions set forth in the merger agreement, (ii) determined that the terms of the merger agreement, the Inuvo merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, Inuvo and its stockholders, (iii) directed that the merger agreement be submitted to Inuvo stockholders for adoption and approval at the Inuvo special meeting, (iv) recommended that Inuvo’s stockholders adopt and approve the merger agreement and (v) declared that the merger agreement is advisable.

 

The Inuvo board recommends that Inuvo stockholders vote:

 

“FOR” the proposal to adopt and approve the merger agreement;

 

“FOR” the proposal to approve, on a non-binding advisory basis, the merger-related compensation; and

 

“FOR” the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to adopt and approve the merger agreement.

 

See “The Mergers—Recommendation of the Inuvo Board and its Reasons for the Inuvo Merger” beginning on page 153.

 

Q:     When do you expect the mergers to be completed?

 

A:     ConversionPoint and Inuvo are working to complete the mergers as quickly as possible, and we anticipate that they will be completed in the first quarter of 2019. However, the mergers are subject to conditions which are described in more detail in this joint proxy statement/prospectus, and it is possible that factors outside the control of both companies could result in the mergers being completed at a later time, or not at all.

 

Q:     What are my U.S. federal income tax consequences as a result of the mergers?

 

A:     For United States federal income tax purposes, it is intended that the ConversionPoint merger, the Inuvo merger, and, to the extent New Parent satisfies the financing condition through the issuance of New Parent equity securities, which we refer to as an equity financing, taken together, will qualify as an “exchange” described in Section 351(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. It is a condition to ConversionPoint’s obligation to complete the ConversionPoint merger that ConversionPoint receive an opinion of its counsel, Troutman Sanders LLP, which we refer to as Troutman Sanders, to the effect that the ConversionPoint merger, the Inuvo merger, and the equity financing, taken together, will qualify as an “exchange” described in Section 351(a) of the Code. It is a condition to Inuvo’s obligation to complete the Inuvo merger that Inuvo receive a written opinion of its counsel, Porter Wright Morris & Arthur LLP, which we refer to as Porter Wright, to the effect that the ConversionPoint merger, the Inuvo merger, and the equity financing, taken together, will qualify as an “exchange” described in Section 351(a) of the Code. If the ConversionPoint merger, the Inuvo merger, and the equity financing, taken together, qualify as an “exchange” within the meaning of Section 351(a) of the Code, then:

 

·U.S. holders (as defined in the section entitled “The Mergers—Material United States Federal Income Tax Consequences of the Mergers”) of ConversionPoint common stock will not recognize gain or loss for U.S. federal income tax purposes as a result of the exchange of ConversionPoint common stock for New Parent common stock, except with respect to cash received in lieu of fractional shares of New Parent common stock; and

 

·U.S. holders of Inuvo common stock generally will recognize gain, but not loss, on the exchange of Inuvo common stock for a combination of New Parent common stock and cash equal to the lesser of:

 

(1)the excess, if any, of (i) the sum of the fair market value of New Parent common stock received in the Inuvo merger and the amount of cash received in the Inuvo merger over (ii) such U.S. holder’s tax basis in the Inuvo common stock surrendered in the Inuvo merger, and

 

(2)the amount of cash received by such stockholder in the Inuvo merger.

 

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Tax matters can be complicated, and the tax consequences of the transactions to a particular stockholder will depend on such stockholder’s particular facts and circumstances. You are strongly urged to consult with a tax advisor to determine the U.S. federal, state or local or foreign income or other tax consequences of the mergers to you. See “The Mergers—Material United States Federal Income Tax Consequences of the Mergers” on page 195.

 

Q:     Are ConversionPoint stockholders entitled to appraisal rights?

 

A:     Pursuant to Section 262, which we refer to as Section 262, of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, holders of shares of ConversionPoint common stock that meet certain requirements will have the right to obtain payment in cash for the fair value of their shares of ConversionPoint common stock, as determined by the Delaware Court of Chancery, rather than the ConversionPoint merger consideration. Appraisal rights are only available to ConversionPoint stockholders who do not vote in favor of adopting the merger agreement and a vote in favor of adopting the merger agreement will constitute a waiver of the stockholders’ appraisal rights. To exercise appraisal rights, ConversionPoint stockholders must strictly follow the procedures prescribed by Section 262. These procedures are summarized under the section entitled “The Mergers—Appraisal Rights” beginning on page 168. In addition, the text of Section 262 is included as Annex G to this joint proxy statement/prospectus.

 

Q:     Are Inuvo stockholders entitled to appraisal rights?

 

A:     No. Under the Nevada Revised Statutes, which we refer to as the NRS, appraisal rights shall not apply and holders of shares of Inuvo common stock will not have the right to obtain payment in cash for the fair value of their shares of Inuvo common stock.

 

Q:     If the mergers are completed, when can I expect to receive the New Parent common stock for my shares of ConversionPoint common stock?

 

A:     Each holder of record of one or more shares of ConversionPoint common stock whose shares will be converted into the right to receive the ConversionPoint merger consideration will automatically, upon the effective time of the ConversionPoint merger, be entitled to receive, and New Parent will cause the exchange agent to deliver to such holder as promptly as practicable after the effective time, the New Parent common stock to which such holder is entitled under the merger agreement. Because ConversionPoint has not issued any stock certificates, none of ConversionPoint’s stockholders will be required to deliver a certificate or an executed letter of transmittal to the exchange agent in order to receive the ConversionPoint merger consideration.

 

Q:     If the mergers are completed, when can I expect to receive the Inuvo merger consideration for my shares of Inuvo common stock?

 

A:     Certificated Shares: As soon as reasonably practicable after the effective time of the mergers, New Parent will cause an exchange agent to mail to each holder of certificated shares of Inuvo common stock a form of letter of transmittal and instructions for use in effecting the exchange of Inuvo common stock for the Inuvo merger consideration. After receiving the proper documentation from a holder of Inuvo common stock, the exchange agent will deliver to such holder the cash and New Parent common stock to which such holder is entitled under the merger agreement. More information on the documentation a holder of Inuvo common stock is required to deliver to the exchange agent may be found under the section entitled “The Merger Agreement and Related Agreements—Conversion of Shares; Exchange of Certificates; No Fractional Shares” beginning on page 174.

 

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Book Entry Shares: Each holder of record of one or more book entry shares of Inuvo common stock whose shares will be converted into the right to receive the Inuvo merger consideration will automatically, upon the effective time of the mergers, be entitled to receive, and New Parent will cause the exchange agent to deliver to such holder as promptly as practicable after the effective time, the cash and New Parent common stock to which such holder is entitled under the merger agreement. Holders of book entry shares will not be required to deliver a certificate or an executed letter of transmittal to the exchange agent in order to receive the Inuvo merger consideration.

 

Q:     What happens if I sell my shares of ConversionPoint common stock or Inuvo common stock after the record date but before the applicable special meeting?

 

A:     The record dates for the ConversionPoint special meeting, which we refer to as the ConversionPoint record date and for the Inuvo special meeting, which we refer to as the Inuvo record date, are earlier than the date of the special meetings and the date that the mergers are expected to be completed. If you transfer your shares after the applicable record date, but before the applicable special meeting, unless you grant the transferee a proxy, you will retain your right to vote at such special meeting, but will have transferred the right to receive the ConversionPoint merger consideration or the Inuvo merger consideration, as applicable, in the mergers. In order to receive the ConversionPoint merger consideration or the Inuvo merger consideration, as applicable, you must hold your shares through completion of the mergers.

 

Q:     What happens if I sell my shares of ConversionPoint common stock or Inuvo common stock after the applicable special meeting, but before the applicable effective time of the mergers?

 

A:     If you transfer your shares after the applicable special meeting, but before the effective time of the mergers, you will have transferred the right to receive ConversionPoint merger consideration or Inuvo merger consideration, as applicable, in the mergers. In order to receive the ConversionPoint merger consideration or the Inuvo merger consideration, you must hold your shares of ConversionPoint or Inuvo, as applicable, through completion of the mergers (i.e., through the effective times of the mergers).

 

About the Special Meetings

 

Q:     When and where will the ConversionPoint and Inuvo special meetings be held?

 

A:     ConversionPoint: The ConversionPoint special meeting will be held at the principal executive offices of ConversionPoint, 840 Newport Center Drive, Suite 450, Newport Beach, California 92660, on [●], 2019 at [●] a.m., local time, unless the special meeting is adjourned or postponed.

 

Inuvo: The Inuvo special meeting will be held at 500 President Clinton Avenue, Suite 300, Little Rock, Arkansas 72201, on [●], 2019 at [●] local time, unless the special meeting is adjourned or postponed.

 

Q:     Who is entitled to vote at the ConversionPoint and Inuvo special meetings?

 

A:     ConversionPoint Special Meeting: ConversionPoint has fixed [●], 2019 as the ConversionPoint record date. If you were a ConversionPoint stockholder at the close of business on the ConversionPoint record date, you are entitled to vote on matters that come before the ConversionPoint special meeting. However, a ConversionPoint stockholder may only vote his or her shares if he or she is present in person or is represented by proxy at the ConversionPoint special meeting.

 

Inuvo Special Meeting: Inuvo has fixed [●], 2019 as the Inuvo record date. If you were a Inuvo stockholder at the close of business on the Inuvo record date, you are entitled to vote on matters that come before the Inuvo special meeting. However, a Inuvo stockholder may only vote his or her shares if he or she is present in person or is represented by proxy at the Inuvo special meeting.

 

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Q:     How many votes do I have?

 

A:     ConversionPoint: ConversionPoint stockholders are entitled to one vote at the ConversionPoint special meeting for each share of ConversionPoint common stock held of record as of the ConversionPoint record date. As of the close of business on the ConversionPoint record date, there were [●] outstanding shares of ConversionPoint common stock.

 

Inuvo: Inuvo stockholders are entitled to one vote at the Inuvo special meeting for each share of Inuvo common stock held of record as of the Inuvo record date. As of the close of business on the Inuvo record date, there were [●] outstanding shares of Inuvo common stock.

 

Q:     What if I hold shares in both ConversionPoint and Inuvo?

 

A:     If you are a stockholder of both ConversionPoint and Inuvo, you will receive two separate packages of proxy materials. A vote as a Inuvo stockholder for the proposal to adopt and approve the merger agreement will not constitute a vote as a ConversionPoint stockholder for the proposal to adopt the merger agreement, or vice versa. THEREFORE, PLEASE MARK, SIGN, DATE AND RETURN ALL PROXY CARDS THAT YOU RECEIVE, WHETHER FROM CONVERSIONPOINT OR INUVO, OR SUBMIT A PROXY AS BOTH A CONVERSIONPOINT AND INUVO STOCKHOLDER OVER THE INTERNET OR BY TELEPHONE.

 

Q:     My shares of Inuvo common stock are held in “street name” by my broker. Will my broker automatically vote my shares for me?

 

A:     No. If your shares of Inuvo common stock are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial holder” of the shares held for you in what is known as “street name.” If this is the case, this joint proxy statement/prospectus has been forwarded to you by your brokerage firm, bank or other nominee, or its agent. As the beneficial holder, you have the right to direct your broker, bank or other nominee as to how to vote your shares. If you do not provide voting instructions to your broker on a particular proposal on which your broker does not have discretionary authority to vote, your shares will not be voted on that proposal. This is called a “broker non-vote.”

 

We believe that (i) under the NRS, broker non-votes will be counted for purposes of determining the presence or absence of a quorum at the Inuvo special meeting and (ii) under the rules that govern brokers who have record ownership of shares that are held in street name for their clients, brokers do not have discretionary authority to vote on any of the Inuvo proposals. To the extent that there are any broker non-votes, a broker non-vote will have the same effect as a vote “AGAINST” the proposal to adopt and approve the merger agreement but will have no effect on the other proposals.

 

Q:     What do I need to do now?

 

A:     Read and consider the information contained in this joint proxy statement/prospectus carefully, and then please vote your shares as soon as possible so that your shares may be represented at your company’s special meeting.

 

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Q:     How do I vote?

 

A:     You can vote in person by completing a ballot at the special meeting, or you can vote by proxy before the special meeting. Even if you plan to attend your company’s special meeting, we encourage you to vote your shares by proxy as soon as possible. After carefully reading and considering the information contained in this joint proxy statement/prospectus, please submit your proxy by telephone or over the Internet in accordance with the instructions set forth on the enclosed proxy card, or mark, sign and date the proxy card, and return it in the enclosed postage-paid envelope as soon as possible so that your shares may be voted at your company’s special meeting. For detailed information, see “Information About the ConversionPoint Special Meeting and Vote—Voting of Shares; Proxies” beginning on page 131 and “Information About the Inuvo Special Meeting and Vote—Voting of Shares; Proxies” beginning on page 136. YOUR VOTE IS VERY IMPORTANT.

 

Q:     Can I change my vote after I have submitted a proxy by telephone or over the Internet or submitted my completed proxy card?

 

A:     Yes. You can change your vote by revoking your proxy at any time before it is voted at the ConversionPoint or Inuvo special meeting, as applicable. You can do this in one of four ways: (1) submit a proxy again by telephone or over the Internet prior to midnight on the night before the special meeting; (2) sign another proxy card with a later date and return it prior to midnight on the night before the special meeting; (3) attend the applicable special meeting and complete a ballot; or (4) send a written notice of revocation to the secretary of ConversionPoint or Inuvo, as applicable, so that it is received prior to midnight on the night before the special meeting.

 

If you have instructed a broker to vote your shares, you must follow directions received from your broker to change your vote.

 

Q:     What should stockholders do if they receive more than one set of voting materials for a special meeting?

 

A:     You may receive more than one set of voting materials for a special meeting, including multiple copies of this joint proxy statement/prospectus and multiple proxy cards or voting instruction cards. Please complete, sign, date and return each proxy card and voting instruction card that you receive. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card.

 

Q:     Who should I call if I have questions about the proxy materials or voting procedures?

 

A:     If you have questions about the mergers, or if you need assistance in submitting your proxy or voting your shares or need additional copies of this joint proxy statement/prospectus or the enclosed proxy card, you should contact the proxy solicitation agent for the company in which you hold shares.

 

If you are a ConversionPoint stockholder, you should contact Jeffrey Marks, General Counsel, by mail at 840 Newport Center Drive, Suite 450, Newport Beach, CA. 92660, or by email at jeff@conversionpoint.com.

 

If you are an Inuvo stockholder, you should contact Georgeson LLC, the proxy solicitation agent for Inuvo, by telephone at (800) 509-1312 (toll free) or by email at Inuvo@georgeson.com.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you should contact your broker, bank or other nominee for additional information.

 

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Q:     Will any fractional shares be issued in connection with the mergers?

 

A:      No fractional shares of New Parent common stock will be issued. Holders of ConversionPoint common stock and Inuvo common stock to whom fractional shares would have otherwise been issued will be entitled to receive, subject to applicable withholding, a cash payment equal to the same fraction of the market value of a full share of New Parent common stock, computed on the basis of the mean of the high and low sales price of one share of New Parent common stock, as reported on NASDAQ on the first full day on which the New Parent common stock is traded on NASDAQ after the effective time of the mergers.

 

Q:      Are there any ConversionPoint or Inuvo stockholders already committed to vote in favor of the merger-related proposals? 

 

A:      Yes. ConversionPoint, New Parent, Inuvo, and the Merger Subs have entered into support agreements with certain stockholders of ConversionPoint and Inuvo pursuant to which each such stockholder has agreed to vote the number of shares of ConversionPoint common stock or Inuvo common stock, as the case may be, beneficially owned by them as of the record date in favor of the adoption of the merger agreement and, with respect to the stockholders of Inuvo, against any alternative transaction with respect to Inuvo. For more information, please see copies of the forms of support agreements attached as Annex D and Annex E to this joint proxy statement/prospectus and the section titled “The Merger Agreement and Related Agreements—Support Agreements” beginning on page 193 of this joint proxy statement/prospectus.

 

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SUMMARY

 

This summary highlights selected information contained in this joint proxy statement/prospectus and does not contain all the information that may be important to you. ConversionPoint and Inuvo urge you to read carefully this joint proxy statement/prospectus in its entirety, including the annexes. Unless stated otherwise, all references in this joint proxy statement/prospectus to ConversionPoint refer to ConversionPoint Technologies Inc., a Delaware corporation, all references to Inuvo refer to Inuvo, Inc., a Nevada corporation, all references to ConversionPoint Merger Sub refer to CPT Merger Sub, Inc., a Delaware corporation, all references to Inuvo Merger Sub refer to CPT Cigar Merger Sub, Inc., a Nevada corporation, all references to New Parent refer to ConversionPoint Holdings, Inc., a Delaware corporation, and all references to the merger agreement refer to the Agreement and Plan of Merger, dated as of November 2, 2018, by and among ConversionPoint, New Parent, Inuvo, ConversionPoint Merger Sub, and Inuvo Merger Sub, a copy of which is attached as Annex A to this joint proxy statement/prospectus and is incorporated by reference into this joint proxy statement/prospectus. See “Where you Can Find More Information” beginning on page 229.

 

Information about the Companies Involved in the Mergers

 

ConversionPoint

 

ConversionPoint, through its wholly-owned subsidiaries, helps e-commerce companies and brands target, convert, manage and re-engage their customers using sophisticated online tracking and data analytics. ConversionPoint’s suite of technologies manages and optimizes multiple aspects of e-commerce including: rich media content creation, product information management and syndication, audience targeting, conversion optimization, remarketing, logistics and customer management. ConversionPoint both delivers its technologies to its customers through software-as-a-service, or SaaS, and uses its technologies to provide managed digital marketing and e-commerce technology services to brands and advertisers, which we refer to as managed services. ConversionPoint also uses its own technologies to sell various products directly to consumers, which we refer to as e-commerce products. ConversionPoint’s vision is to simplify the entire e-commerce experience by integrating its technologies and offering a broad range of e-commerce solutions on a single, easy-to-use platform. ConversionPoint’s principal executive offices are located at 840 Newport Center Drive, Suite 450, Newport Beach, California 92660. ConversionPoint’s phone number is (888) 706-6764 and its website is www.conversionpoint.com.

 

For additional information about ConversionPoint and its subsidiaries, see “Description of ConversionPoint” beginning on page 59.

 

Inuvo

 

Inuvo develops data, analytics and artificial intelligence technology that empowers its clients to execute their business-to-business and business-to-consumer strategies. These capabilities allow Inuvo’s clients to engage with customers and prospects in a manner that drives closer collaboration through knowledge. These unique and patented technologies have been used to serve numerous world-renowned customers in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance. Inuvo’s principal executive offices are located at 500 President Clinton Avenue, Suite 300, Little Rock, Arkansas 72201. Inuvo’s phone number is (501) 205-8508 and its website is www.inuvo.com.

 

For additional information about Inuvo and its subsidiaries, see “Description of Inuvo” beginning on page 94.

 

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ConversionPoint Holdings, Inc.

 

New Parent is a Delaware corporation and a direct wholly-owned subsidiary of ConversionPoint. New Parent was organized on November 1, 2018 solely for the purpose of effecting the mergers and, following consummation of the mergers, New Parent intends to change its name to “ConversionPoint Technologies Inc.” Pursuant to the merger agreement, ConversionPoint Merger Sub will be merged with and into ConversionPoint, and Inuvo Merger Sub will be merged with and into Inuvo. As a result, Inuvo and ConversionPoint will each become wholly-owned subsidiaries of New Parent. As a result of the transactions contemplated by the merger agreement, New Parent will become a publicly traded corporation, and former ConversionPoint and Inuvo stockholders will own stock in New Parent. New Parent has not carried on any activities other than in connection with the mergers and the establishment of an equity incentive plan. New Parent’s principal executive offices are located at 840 Newport Center Drive, Suite 450, Newport Beach, California 92660. For additional information about New Parent, see “Description of New Parent” beginning on page 121.

 

ConversionPoint Merger Sub

 

ConversionPoint Merger Sub, a wholly-owned subsidiary of New Parent, is a Delaware corporation formed on November 1, 2018 for the sole purpose of effecting the ConversionPoint merger. Upon completion of the ConversionPoint merger, ConversionPoint Merger Sub will merge with and into ConversionPoint, with ConversionPoint surviving as a wholly-owned subsidiary of New Parent after the ConversionPoint merger. Upon completion of the ConversionPoint merger, ConversionPoint intends to change its name to “CPT, Inc.”

 

Inuvo Merger Sub

 

Inuvo Merger Sub, a wholly-owned subsidiary of New Parent, is a Nevada corporation formed on November 1, 2018 for the sole purpose of effecting the Inuvo merger. Upon completion of the Inuvo merger, Inuvo Merger Sub will merge with and into Inuvo, with Inuvo surviving as a wholly-owned subsidiary of New Parent after the Inuvo merger.

 

The Mergers

 

ConversionPoint and Inuvo have entered into the merger agreement providing for the combination of ConversionPoint and Inuvo under a new holding company we refer to as New Parent. As a result of the transactions contemplated by the merger agreement, former Inuvo stockholders and ConversionPoint stockholders will own stock in New Parent. It is a condition to the mergers that New Parent common stock be approved for listing on NASDAQ, subject to official notice of issuance, and the TSX, subject to standard listing conditions. Pursuant to the merger agreement, Inuvo Merger Sub will be merged with and into Inuvo, and ConversionPoint Merger Sub will be merged with and into ConversionPoint. As a result, Inuvo and ConversionPoint will each become wholly-owned subsidiaries of New Parent.

 

A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus. ConversionPoint and Inuvo encourage you to read the entire merger agreement carefully because it is the principal document governing the merger. For more information on the merger agreement, see “The Merger Agreement and Related Agreements” beginning on page 170.

 

The mergers are expected to be completed during the first quarter of 2019, subject to the satisfaction or waiver of the closing conditions.

 

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Merger Consideration Received by ConversionPoint Stockholders

 

At the effective time of the mergers, each outstanding share of ConversionPoint common stock, other than ConversionPoint excluded shares, will be converted into 0.97853 shares of New Parent common stock, par value $0.0001 per share, which we refer to as New Parent common stock. ConversionPoint stockholders will not receive any fractional shares of New Parent common stock pursuant to the ConversionPoint merger. Instead of receiving any fractional shares, after aggregating all fractional New Parent common stock shares that otherwise would be received by such ConversionPoint stockholder as ConversionPoint merger consideration, each holder of ConversionPoint common stock will be paid an amount in cash, without interest, equal to the same fraction of the market value of a full share of New Parent common stock, computed on the basis of the mean of the high and low sales price of one share of New Parent common stock, as reported on NASDAQ on the first full day on which the New Parent common stock is traded on NASDAQ after the effective time of the mergers. A description of the New Parent common stock to be issued in connection with the ConversionPoint merger is set forth in the section entitled “Description of New Parent Capital Stock” beginning on page 209.

 

Merger Consideration Received by Inuvo Stockholders

 

At the effective time of the mergers, each outstanding share of Inuvo common stock, other than Inuvo excluded shares, will be converted into, subject to the right to receive $0.45 per share in cash, without interest, and 0.18877 of a share of validly issued, fully paid and non-assessable New Parent common stock. Inuvo stockholders will not receive any fractional shares of New Parent common stock pursuant to the Inuvo merger. Instead of receiving any fractional shares, after aggregating all fractional New Parent common stock shares that otherwise would be received by such Inuvo stockholder as Inuvo merger consideration, each holder of Inuvo common stock will be paid an amount in cash, without interest, equal to the same fraction of the market value of a full share of New Parent common stock, computed on the basis of the mean of the high and low sales price of one share of New Parent common stock, as reported on NASDAQ on the first full day on which the New Parent common stock is traded on NASDAQ after the effective time of the mergers. A description of the New Parent common stock to be issued in connection with the Inuvo merger is set forth under the section entitled “Description of New Parent Capital Stock” beginning on page 209.

 

Total New Parent Common Stock to be Issued

 

It is expected that a maximum of approximately 24,709,966 shares of New Parent will be issued at the closing of the mergers, prior to the issuance of any shares of common stock to meet the financing conditions of the merger agreement.

 

Comparative Per Share Market Price and Dividend Information

 

There is no public market for ConversionPoint common stock. Inuvo common stock is listed on the NYSE American under the symbol “INUV.” The following table shows the closing prices of Inuvo common stock as reported on November 2, 2018, the last trading day before the merger agreement was publicly announced and on [●], 2019, the latest practicable date prior to the date of this joint proxy statement/prospectus.

 

   Inuvo
Common
Stock
 
November 2, 2018  $0.41 
[●], 2019  $[●] 

 

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The market prices of Inuvo common stock will fluctuate prior to the consummation of the mergers. You should obtain current market quotations for the shares.

 

Neither ConversionPoint nor Inuvo currently pays a quarterly dividend on its common stock. Under the terms of the merger agreement, during the period before the effective times of the mergers, ConversionPoint is prohibited from paying any dividends on its common stock and Inuvo is prohibited from paying any dividends on its common stock, unless ConversionPoint or Inuvo has received written consent from the other party.

 

For a detailed description of equivalent and comparative per share information see, “Equivalent and Comparative Per Share Information” beginning on page 28.

 

Treatment of ConversionPoint Stock Options and Warrants

 

New Parent will assume outstanding options and warrants to purchase shares of ConversionPoint common stock in the ConversionPoint merger. Each outstanding option and warrant to acquire ConversionPoint common stock will be converted automatically at the effective time of the merger into an option or warrant to acquire New Parent common stock, and will be governed by the terms of the ConversionPoint Holdings, Inc. 2018 Omnibus Incentive Plan, which we refer to as the New Parent 2018 Plan, except that the number of shares of ConversionPoint common stock for which each option or warrant is exercisable and the exercise price of each option or warrant will be adjusted based on the ConversionPoint exchange ratio in the ConversionPoint merger. For a more complete discussion of the treatment of ConversionPoint options and other stock-based awards, see “The Merger Agreement and Related Agreements—Treatment of ConversionPoint Stock Options and Other Stock-Based Awards” beginning on page 172 and “The Merger Agreement and Related Agreements—Treatment of ConversionPoint Warrants” beginning on page 172. For a discussion of the New Parent 2018 Plan, see “Description of New Parent” beginning on page 121.

 

Treatment of ConversionPoint Restricted Stock Units

 

To the extent ConversionPoint’s restricted stock units have not been terminated in accordance with their terms, at the effective time of the mergers, all ConversionPoint restricted stock units will vest in full and all such shares of ConversionPoint common stock will be considered outstanding shares for all purposes of the merger agreement including the right to receive the ConversionPoint merger consideration. For a more complete discussion of the treatment of ConversionPoint restricted stock units, see “The Merger Agreement and Related Agreements—Treatment of ConversionPoint Stock Options and Other Stock-Based Awards” beginning on page 172 and “Description of New Parent—2018 Omnibus Incentive Plan” beginning on page 121.

 

Treatment of Inuvo Stock Options

 

New Parent will assume outstanding options to purchase shares of Inuvo common stock in the Inuvo merger. Each outstanding option to acquire Inuvo common stock will be converted automatically at the effective time of the merger into an option to acquire New Parent common stock, and will be governed by the terms of New Parent’s 2018 Omnibus Incentive Plan, except that the number of shares of Inuvo common stock for which each option is exercisable will be adjusted to receive 0.2370 shares of New Parent common stock for each one share of Inuvo common stock issuable upon exercise of such option and the exercise price will be adjusted based on the 0.2370 option exchange ratio. For a more complete discussion of the treatment of Inuvo options and other stock-based awards, see “The Merger Agreement and Related Agreements—Treatment of Inuvo Stock Options and Other Stock-Based Awards” beginning on page 173.

 

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Treatment of Inuvo Restricted Stock Units

 

To the extent Inuvo’s restricted stock units have not been terminated in accordance with their terms, at the effective time of the mergers, all Inuvo restricted stock units will vest in full and all such shares of Inuvo common stock will be considered outstanding shares for all purposes of the merger agreement including the right to receive the Inuvo merger consideration. For a more complete discussion of the treatment of Inuvo restricted stock units, see “The Merger Agreement and Related Agreements—Treatment of Inuvo Equity Compensation” beginning on page 170.

 

Directors and Executive Officers of New Parent Following the Mergers

 

As of the effective time of the mergers, the board of directors of New Parent will be comprised of Robert Tallack, Raghu Kilambi, Richard K. Howe and Gordon Cameron, with three vacancies, and the executive officers of New Parent will be comprised of Robert Tallack as Chief Executive Officer and Raghu Kilambi as Vice Chairman and Chief Financial Officer. See “The Merger Agreement and Related Agreements—Directors and Executive Officers of New Parent and New Parent Subsidiaries” beginning on page 194 for additional information on the composition of board of directors and executive officers of New Parent.

 

Recommendation of the ConversionPoint Board

 

After careful consideration, the board of directors of ConversionPoint, which we refer to as the ConversionPoint board, unanimously recommends that holders of ConversionPoint common stock vote “FOR” the adoption of the merger agreement and approval of the merger, and vote “FOR” the adjournment of the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt the merger agreement and approve the ConversionPoint merger.

 

For a more complete description of ConversionPoint’s reasons for the ConversionPoint merger and the recommendations of the ConversionPoint board, see “The Mergers—Recommendation of the ConversionPoint Board and its Reasons for the ConversionPoint Merger” beginning on page 152.

 

Recommendation of the Inuvo Board

 

After careful consideration, the board of directors of Inuvo, which we refer to as the Inuvo board, unanimously recommends that holders of Inuvo common stock vote “FOR” the adoption and approval of the merger agreement and approval of the merger and vote “FOR” the adjournment of the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt and approve the merger agreement and approve the Inuvo merger.

 

For a more complete description of Inuvo’s reasons for the merger and the recommendation of the Inuvo board, see “The Mergers—Recommendation of the Inuvo Board and its Reasons for the Inuvo Merger” beginning on page 153.

 

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Opinion of Canaccord Genuity LLC

 

In connection with the transaction, the Inuvo board received a written opinion from Canaccord Genuity LLC, which we refer to as Canaccord, as to the fairness, from a financial point of view and as of the date of its opinion, of the Inuvo merger consideration to be paid to the holders of Inuvo common stock (other than ConversionPoint, New Parent and ConversionPoint Merger Sub and their respective affiliates). The full text of Canaccord’s written opinion, dated November 1, 2018, is attached to this joint proxy statement/prospectus as Annex F. Holders of Inuvo common stock are encouraged to read this opinion carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken. Canaccord’s opinion was provided to the Inuvo board in connection with its evaluation of the Inuvo merger consideration in the transaction from a financial perspective, does not address the merits of the underlying decision by Inuvo to engage in the transaction or the relative merits of any alternatives discussed by the Inuvo board, does not constitute an opinion with respect to Inuvo’s underlying business decision to effect the transaction, any legal, tax, regulatory or accounting issues concerning the transaction, or any terms of the transaction (other than the Inuvo merger consideration) and does not constitute advice or a recommendation to any holder of Inuvo common stock as to how such stockholder should vote with respect to the mergers or any other aspect of the transaction or how such stockholders should otherwise act on any matter relating to the transaction.

 

For a more complete description of Canaccord’s opinion, see “The Mergers—Opinion of Financial Advisor to the Inuvo Board” beginning on page 155. See also Annex F to this joint proxy statement/prospectus.

 

Interests of Certain ConversionPoint and Inuvo Directors and Executive Officers in the Mergers

 

You should be aware that some ConversionPoint and Inuvo directors and executive officers may have interests in the mergers that may be different from, or in addition to, the interests of stockholders of ConversionPoint and Inuvo. For a discussion of interests of certain ConversionPoint and Inuvo directors and executive officers in the mergers, see “The Mergers—Interests of Officers and Directors in the Mergers” beginning on page 164.

 

Material United States Federal Income Tax Consequences of the Mergers

 

For United States federal income tax purposes, it is intended that the ConversionPoint merger, the Inuvo merger, and the equity financing, taken together, will qualify as an “exchange” described in Section 351(a) of the Code. It is a condition to ConversionPoint’s obligation to complete the ConversionPoint merger that ConversionPoint receive an opinion of its counsel, Troutman Sanders, to the effect that the ConversionPoint merger, the Inuvo merger, and the equity financing, taken together, will qualify as an “exchange” described in Section 351(a) of the Code. It is a condition to Inuvo’s obligation to complete the Inuvo merger that Inuvo receive a written opinion of its counsel, Porter Wright, to the effect that the ConversionPoint merger, the Inuvo merger, and the equity financing, taken together, will qualify as an “exchange” described in Section 351(a) of the Code. If the ConversionPoint merger, the Inuvo merger, and the equity financing, taken together, qualify as an “exchange” within the meaning of Section 351(a) of the Code, then:

 

·U.S. holders (as defined in the section entitled “The Mergers—Material United States Federal Income Tax Consequences of the Mergers”) of ConversionPoint common stock will not recognize gain or loss for U.S. federal income tax purposes as a result of the exchange of ConversionPoint common stock for New Parent common stock, except with respect to cash received in lieu of fractional shares of New Parent common stock; and

 

·U.S. holders of Inuvo common stock generally will recognize gain, but not loss, on the exchange of Inuvo common stock for a combination of New Parent common stock and cash equal to the lesser of:

 

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(1)the excess, if any, of (i) the sum of the fair market value of New Parent common stock received in the Inuvo merger and the amount of cash received in the Inuvo merger over (ii) such U.S. holder’s tax basis in the Inuvo common stock surrendered in the Inuvo merger, and

 

(2)the amount of cash received by such stockholder in the Inuvo merger.

 

Tax matters can be complicated, and the tax consequences of the transactions to a particular holder will depend on such holder’s particular facts and circumstances. You are strongly urged to consult with a tax advisor to determine the U.S. federal, state or local or foreign income or other tax consequences of the mergers to you. For a more complete description of the material United States federal income tax consequences of the mergers, see “Material United States Federal Income Tax Consequences” beginning on page 20.

 

Accounting Treatment of the Mergers

 

The business combination will be accounted for as an acquisition by ConversionPoint of Inuvo, as that term is used under United States generally accepted accounting principles, for accounting and financial reporting purposes. In identifying ConversionPoint as the acquiring entity, the companies took into account the relative outstanding share ownership, the composition of the governing body of the combined entity and the designation of certain senior management positions. As a result, the historical financial statements of ConversionPoint will become the historical financial statements of New Parent. The assets acquired (including identifiable intangible assets) and liabilities assumed (including executory contracts and other commitments) of Inuvo will be recorded at their respective fair values at the acquisition date and be added to those of ConversionPoint. Any excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. In the rare event there is any excess of the fair value of the assets acquired and liabilities assumed over the purchase price, such excess will be recognized as a gain in earnings on the acquisition date by New Parent. Financial statements of New Parent issued after the mergers will reflect such fair values and will not be restated retroactively to reflect the historical financial position or results of operations of Inuvo. The results of operations of Inuvo will be included in the results of operations of New Parent beginning on the effective date of the mergers. See “Selected Unaudited Pro Forma Combined Condensed Financial Information” beginning on page 27 for more information.

 

Conditions to Completion of the Mergers

 

ConversionPoint and Inuvo expect to complete the mergers after all the conditions to the mergers in the merger agreement are satisfied or waived, including after the receipt of stockholder approvals at their respective stockholder meetings. In addition to obtaining such stockholder approvals, each of the other closing conditions set forth in the merger agreement must be satisfied. ConversionPoint and Inuvo currently expect to complete the mergers during the first quarter of 2019. However, it is possible that factors outside of either company’s control could cause the mergers to be completed at a later time or not at all.

 

The merger agreement provides that certain of these conditions may be waived, in whole or in part, by ConversionPoint or Inuvo, to the extent legally allowed. Neither ConversionPoint nor Inuvo currently expects to waive any material condition to the completion of the mergers. If either ConversionPoint or Inuvo determines to waive any condition to the mergers that would result in a material and adverse change in the terms of the mergers to ConversionPoint or Inuvo stockholders (including any change in the tax consequences of the transaction to Inuvo stockholders), proxies would be resolicited from the ConversionPoint or Inuvo stockholders, as applicable.

 

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Financing Condition

 

One of the conditions to closing the mergers is that New Parent receives at least $36 million in gross proceeds from the issuance and sale of its equity, debt and/or equity-linked securities on terms mutually reasonably agreeable to Inuvo and ConversionPoint in good faith. New Parent intends to satisfy the financing condition through an underwritten public offering of New Parent common stock, and New Parent has submitted on a confidential basis a draft registration statement on Form S-1 with the Securities Exchange Commission with respect to this New Parent public offering.

 

ConversionPoint, New Parent and the Merger Subs shall cause the financing to occur as promptly as practicable and in no event later than May 31, 2019, which date may be extended by thirty (30) day increments with the consent of Inuvo, which consent may be withheld in the sole discretion of Inuvo. If the financing does not occur by May 31, 2019, subject to Inuvo’s right to extend such time period, ConversionPoint shall be in material breach of the merger agreement.

 

For a more complete discussion of the conditions to the mergers, see “The Merger Agreement and Related Agreements—Covenants and Agreements—Conditions to Completion of the Mergers” beginning on page 179.

 

No Solicitation of Other Offers

 

The merger agreement contains certain restrictions on the ability of Inuvo to solicit or engage in discussions or negotiations with a third party with respect to a proposal to acquire Inuvo’s equity or assets. Notwithstanding these restrictions, the merger agreement provides that under specified circumstances, if Inuvo receives an unsolicited bona fide proposal from a third party to acquire a significant interest in it that the Inuvo board determines in good faith is reasonably likely to lead to a proposal that is superior to the terms and conditions of the merger agreement, Inuvo may furnish nonpublic information to that third party and engage in negotiations regarding an acquisition proposal with that third party.

 

For a discussion of the prohibition on solicitation of acquisition proposals from third parties, see “The Merger Agreement and Related Agreements—Covenants and Agreements—No Solicitation; Change in Recommendation” beginning on page 179.

 

Termination

 

ConversionPoint and Inuvo may mutually agree at any time prior to the completion of the mergers (including after stockholder approval) to terminate the merger agreement and abandon the mergers. In addition, the merger agreement may be terminated by either ConversionPoint or Inuvo under certain circumstances or upon the occurrence of certain events.

 

For a discussion of termination provisions of the merger agreement, see “The Merger Agreement and Related Agreements—Termination” beginning on page 191.

 

Termination Fees and Expenses

 

Inuvo is required to pay a termination fee of $2,800,000 to ConversionPoint in the event (A) the merger agreement is terminated by Inuvo in connection with the entry into an agreement for a superior proposal or (B) the merger agreement is terminated by ConversionPoint if, prior to the time that the Inuvo stockholder vote approving the merger has been obtained, (i) Inuvo’s board of directors makes a change in recommendation in favor of the merger with ConversionPoint, (ii) Inuvo’s board of directors approves or recommends to its stockholders a takeover proposal from someone other than ConversionPoint, (iii) a tender offer or exchange offer for shares of Inuvo’s common stock that constitutes a takeover proposal is commenced by someone other than ConversionPoint and the Inuvo board recommends that holders of Inuvo common stock tender their shares in such tender offer or exchange offer or the Inuvo board fails to recommend that holders of Inuvo common stock reject such tender offer or exchange offer, or (iv) there has been a material breach by Inuvo of its obligations under the merger agreement to call a special meeting of the Inuvo stockholders for the purpose of adopting the merger agreement and recommending that all Inuvo stockholders vote to approve the merger or the non-solicitation provisions of the merger agreement.

 

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ConversionPoint is required to pay a termination fee of $2,800,000 to Inuvo in the event the merger agreement is terminated by Inuvo as a result of (i)  the failure to satisfy the financing condition by May 31, 2019, among other conditions related to the failure of the financing condition, or (ii) ConversionPoint’s or New Parent’s failure to close the mergers within three days of Inuvo having satisfied all of Inuvo’s conditions to closing.

 

See “The Merger Agreement and Related Agreements—Termination Fee and Expenses” beginning on pages 193.

 

Support Agreements

 

As an inducement for ConversionPoint and Inuvo to enter into the merger agreement, on November 2, 2018, several Inuvo stockholders and ConversionPoint stockholders entered into support agreements with Inuvo, ConversionPoint, New Parent and the Merger Subs pursuant to which, among other things, each of these stockholders agreed, solely in its capacity as a stockholder, to vote all securities of Inuvo or ConversionPoint, as the case may be, (i) in favor of the merger and the adoption of the merger agreement, (ii) in favor of any proposal to adjourn or postpone the applicable stockholders’ meeting to a later date if there are not sufficient votes to adopt the merger agreement and/or if there are not sufficient shares present in person or by proxy at the applicable stockholders’ meeting to constitute a quorum, (iii) in favor of any other matter necessary to consummate the transactions contemplated by the merger agreement, and, in the case of Inuvo stockholders only, and (iv) against the following actions: (1) any merger, tender offer, exchange offer, sale of all or substantially all assets, recapitalization, reorganization, consolidation, share exchange, business combination, liquidation, dissolution or similar transaction or series of transactions involving Inuvo, any of its subsidiaries and any other person (including any takeover proposal), other than the mergers and (2) any other action or agreement that would reasonably be expected to impede, frustrate, interfere with, delay, postpone or adversely affect the mergers or any other transaction contemplated by the merger agreement, including the consummation thereof. In addition, the ConversionPoint stockholders agreed to waive their appraisal rights under Section 262 of the DGCL.

 

Nothing in the support agreements limits or restricts any of the stockholders who are party to the agreements or any of their affiliates from acting in its capacity as an officer, director or employee of ConversionPoint or Inuvo, as the case may be.

 

Copies of forms of the support agreements are attached to this joint proxy statement/prospectus as Annex D and Annex E. See “The Merger Agreement and Related Agreements—Support Agreements” beginning on page 193.

 

Shares Beneficially Owned by Directors and Executive Officers of ConversionPoint and Inuvo

 

ConversionPoint’s directors and executive officers beneficially owned [●] shares of ConversionPoint common stock on [●], 2019, the record date for the special meeting. These shares represent in total [●]% of the total voting power of ConversionPoint’s voting securities outstanding and entitled to vote as of the record date. ConversionPoint currently expects that ConversionPoint’s directors and executive officers will vote their shares “FOR” all the proposals to be voted on at the special meeting, although none of them, other than those directors and executive officers who have executed the support agreements discussed above, has entered into any agreements obligating them to do so.

 

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Inuvo’s directors and executive officers beneficially owned [●] shares of Inuvo common stock on [●], 2019, the record date for the special meeting. These shares represent in total [●]% of the total voting power of Inuvo’s voting securities outstanding and entitled to vote as of the record date. Inuvo currently expects that Inuvo’s directors and executive officers will vote their shares “FOR” all the proposals to be voted on at the special meeting, although none of them, other than those directors and executive officers who have executed the support agreements discussed above, has entered into any agreements obligating them to do so.

 

Appraisal Rights

 

Under Delaware law, ConversionPoint stockholders of record have appraisal rights under the DGCL in connection with the ConversionPoint merger. Under Nevada law, Inuvo stockholders are not entitled to appraisal rights in connection with the issuance of shares of New Parent common stock as contemplated by the merger agreement. For further discussion of appraisal rights, see “The Mergers—Appraisal Rights” beginning on page 168.

 

Comparison of the Rights of ConversionPoint and Inuvo Stockholders

 

The rights of ConversionPoint stockholders and Inuvo stockholders after the mergers will be governed by New Parent’s certificate of incorporation and bylaws and the laws of the State of Delaware. Those rights differ from the rights of ConversionPoint stockholders under ConversionPoint’s certificate of incorporation and bylaws and of Inuvo stockholders under Inuvo’s articles of incorporation and bylaws. See “Comparison of Stockholder Rights” beginning on page 213.

 

Risk Factors

 

THE PROPOSED REORGANIZATION OF CONVERSIONPOINT AND INUVO IS A COMPLEX TRANSACTION AND INVOLVES SIGNIFICANT RISKS. STOCKHOLDERS OF CONVERSIONPOINT AND INUVO ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERENCED TO UNDER “RISK FACTORS” BEGINNING ON PAGE 30.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CONVERSIONPOINT

 

The selected historical consolidated financial data of ConversionPoint for the years ended December 31, 2017 and for the period from May 20, 2016 (Inception) through December 31, 2016 have been derived from ConversionPoint’s audited consolidated financial statements and related notes, included herein beginning at page F-1. The selected historical consolidated financial data of ConversionPoint for the nine months ended September 30, 2018 and 2017 and as of September 30, 2018 have been derived from ConversionPoint’s unaudited condensed consolidated financial statements and related notes. The information set forth below is only a summary and is not necessarily indicative of the results of future operations of ConversionPoint or the combined company, and you should read the following information together with ConversionPoint’s audited consolidated financial statements, the related notes and the section entitled “Description of ConversionPoint—Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 70.

 

   As of and for the Nine Months
Ended September 30
   As of and for the Year Ended
December 31, 2017 and for
the period from May 20
(Inception) Through
December 31, 2016
 
   2018   2017   2017   2016 
Consolidated Statements of Operations Data:                
Net revenues  $28,609,440   $39,171,484   $49,920,621   $8,819,927 
Cost of revenues  $19,735,938   $29,757,791   $37,776,678   $7,949,212 
Gross profit  $8,873,502   $9,413,693   $12,143,943   $870,715 
Operating expenses  $24,855,688   $6,386,944   $11,353,088   $2,286,736 
Interest expense, net  $1,065,825   $230,361   $829,169   $109,576 
Income tax expense (benefit)  $(274,180)  $(289,624)  $(434,974)  $ 
Income (loss) available to common stock holders  $(16,773,831)  $3,086,012   $396,660   $(1,525,597)
Net income (loss) per share Basic and Diluted  $(1.25)  $0.34   $0.04   $(0.21)
Shares used in per share calculation                    
Basic and Diluted   13,433,250    9,121,666    9,670,302    7,367,500 
                     
Consolidated Balance Sheet Data:                    
Cash and cash equivalents  $5,281,584   $3,939,708   $4,695,803   $644,930 
Total assets  $54,806,025   $30,964,433   $55,435,947   $1,756,058 
Long-term debt (current and non-current)  $8,540,044   $4,291,850   $11,221,123   $1,615,000 
Total liabilities  $14,765,346   $11,763,547   $17,577,717   $3,282,655 
Total stockholders’ equity  $40,040,679   $19,964,433   $37,858,230   $(1,525,597)

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF INUVO

 

The selected historical consolidated financial data of Inuvo for each of the years ended December 31, 2017 and 2016, and as of December 31, 2017 and 2016 have been derived from Inuvo’s audited consolidated financial statements and related notes included herein beginning on page F-115. The selected historical consolidated financial data for the years ended December 31, 2015, 2014 and 2013 and as of December 31, 2016, 2015, 2014, and 2013 have been derived from Inuvo’s audited consolidated financial statements and related notes, which have not been incorporated by reference in this joint proxy statement/prospectus. The selected historical consolidated financial data of Inuvo for the nine months ended September 30, 2018 and 2017 and as of September 30, 2018 have been derived from Inuvo’s unaudited consolidated financial statements and related notes included herein beginning on page F-132. The information set forth below is only a summary and is not necessarily indicative of the results of future operations of Inuvo or the combined company, and you should read the following information together with Inuvo’s audited consolidated financial statements, the related notes and the section entitled “Description of Inuvo—Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 98.

 

   As of and for the Nine Months
Ended September 30,
   As of and for the Years Ended December 31, 
   2018   2017   2017   2016   2015   2014   2013 
Consolidated Statements of Operations Data:                            
Net revenues  $56,315,006   $55,798,545   $79,554,493   $71,530,102   $70,438,116   $49,599,486   $54,990,340 
Cost of revenues.  $21,965,955   $25,161,761   $36,669,543   $21,364,795   $23,721,996   $20,424,561   $28,784,887 
Gross profit  $34,349,051   $30,636,784   $42,884,950   $50,165,307   $46,716,120   $29,174,925   $26,205,453 
Operating expenses  $37,743,435   $34,484,349   $47,121,424   $51,022,473   $44,569,147   $26,677,916   $26,188,548 
Interest expense, net  $269,612   $212,922   $318,193   $99,965   $141,311   $351,225   $356,956 
Net (loss) income from discontinued operations  $-   $(1,109)  $(1,109)  $155,287   $33,969   $(40,670)  $503,622 
Foreign currency revaluation  $-   $-   $-   $-   $-   $-   $(418)
Income (loss) available to common stock holders  $(3,682,371)  $(4,061,596)  $(3,057,700)  $(772,584)  $2,339,774   $2,105,114   $476,798 
Net income (loss) from continuing operations per share Basic  $(0.12)  $(0.14)  $(0.11)  $(0.04)  $0.10   $0.09   $ 
Net income (loss) from discontinued operations per share Basic  $   $   $   $0.01   $   $   $0.02 
Net income (loss) per share Basic  $(0.12)  $(0.14)  $(0.11)  $(0.03)  $0.10   $0.09   $0.02 
Shares used in per share calculation                                    
Basic  $30,540,796   $28,030,902   $28,155,320   $24,660,995   $24,249,852   $23,527,872   $23,281,439 
Diluted  $30,540,796   $28,030,902   $28,155,320   $24,660,995   $24,539,555   $24,145.823   $23,281,439 
                                    
Consolidated Balance Sheet Data:                                   
Cash and cash equivalents  $4,190,274   $2,901,965   $4,084,686   $3,946,804   $4,257,204   $3,714.525   $3,137,153 
Total assets  $32,040,348   $36,648,714   $38,247,836   $27,561,139   $28,732,526   $25,606,677   $24,935,631 
Long term debt (current and noncurrent)  $4,825,000   $5,000,000   $4,900,000   $   $   $3,626,609   $6,143,633 
Total liabilities  $18,885,945   $23,922,004   $24,160,494   $16,035.347   $17,772,082   $17,332,942   $19,593,765 
Total stockholders’ equity  $13,154,403   $12,726,710   $14,087,342   $11,525,792   $10,960,444   $8,273,735   $5,341,866 

 

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SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION

 

The following selected unaudited pro forma combined condensed financial information has been prepared to illustrate the effect of the mergers. The unaudited pro forma combined condensed balance sheet information gives effect to the mergers as if it occurred on September 30, 2018. The unaudited pro forma combined condensed statements of operations information for the nine months ended September 30, 2018 and the year ended December 31, 2017 gives effect to the mergers as if it occurred on January 1, 2017.

 

This unaudited pro forma combined condensed financial information is for informational purposes only. It does not purport to indicate the results that would actually have been obtained had the mergers been completed on the assumed date or for the periods presented. A final determination of the fair value of Inuvo’s assets and liabilities will be based on the actual net tangible and intangible assets and liabilities that exist as of the date of closing of the mergers and, therefore, cannot be made prior to that date. Additionally, the value of the portion of the merger consideration to be paid in shares of ConversionPoint common stock will be determined based on the trading price of New Parent’s common stock at the time of the closing of the mergers.

 

This unaudited pro forma combined condensed financial information should not be considered predictive of results that may be realized in the future. For a discussion of the factors the ConversionPoint board considered in evaluating Inuvo’s historical financial information, see “The Mergers—Recommendation of the ConversionPoint Board and its Reasons for the ConversionPoint Merger” beginning on page 152. For a discussion of the factors the Inuvo board considered in evaluating ConversionPoint’s historical financial information, see “The Mergers—Recommendation of the Inuvo Board and its Reason for the Inuvo Merger,” beginning on page 153.

 

   Nine Months
Ended
September 30,
2018
   Year Ended
December 31, 2017
 
Pro Forma Statements of Operations Information          
Revenue  $84,924,446   $129,475,114 
Operating income (loss)   (19,376,570)   (9,839,979)
Net Income (loss)   (20,163,541)   (8,063,791)
Net Income (loss) per share - Basic and diluted  $(0.92)  $(0.37)

 

   September 30, 2018     
Pro Forma Balance Sheet Information          
Total current assets  $31,252,330      
Property and equipment, net   2,705,641      
Total assets   158,637,679      
Total liabilities   24,815,868      
Total stockholders’ equity  $133,821,811      

 

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EQUIVALENT AND COMPARATIVE PER SHARE INFORMATION

 

Inuvo. Inuvo common stock is traded on the NYSE American under the symbol “INUV.” The table below lists the high and low quarterly sales prices for the Inuvo common stock as reported in published financial sources for each fiscal quarter during the periods presented below.

 

   High   Low 
Year Ending December 31, 2018:          
First Quarter  $1.05   $0.78 
Second Quarter  $1.03   $0.68 
Third Quarter  $0.78   $0.36 
Fourth Quarter (as of December 13, 2018)  $1.55   $0.38 
Year Ended December 31, 2017:          
First Quarter  $1.74   $1.21 
Second Quarter  $1.39   $0.96 
Third Quarter  $1.24   $0.88 
Fourth Quarter  $1.12   $0.70 
Year Ended December 31, 2016          
First Quarter  $2.77   $1.67 
Second Quarter  $2.13   $1.33 
Third Quarter  $1.78   $1.13 
Fourth Quarter  $2.31   $1.00 

 

On November 2, 2018, the last full trading day before the joint public announcement by ConversionPoint and Inuvo of the signing of the merger agreement, the closing sale price per share of Inuvo common stock as reported by the NYSE American was $0.41. On [●], 2019, the closing sale price per share of Inuvo common stock as reported by the NYSE American was $[●].

 

Inuvo has not declared or paid any cash dividends on its common stock during the last five completed fiscal years or during the current fiscal year to date. Inuvo currently intends to retain future earnings, if any, to fund the development and growth of its businesses and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Any future decision concerning the payment of dividends on common stock of New Parent will depend upon the results of operations, financial condition and capital expenditure plans of New Parent, as well as such other factors as the New Parent board, in its sole discretion, may consider relevant.

 

The number of Inuvo stockholders of record, as of November 30, 2018 is approximately 408.

 

ConversionPoint. There is no public market for ConversionPoint common stock.

 

ConversionPoint has never declared or paid any cash dividends on its common stock. ConversionPoint currently intends to retain all of its earnings, if any, for the future operation and expansion of its business and does not contemplate distributing any dividends to stockholders. Any future decision concerning the payment of dividends on the common stock of ConversionPoint will depend upon the results of operations, financial condition and capital expenditure plans of New Parent, as well as such other factors as the New Parent board, in its sole discretion, may consider relevant.

 

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New Parent. There is not yet a public market for New Parent common stock. However, following the mergers, it is intended that New Parent common stock will trade on NASDAQ and the TSX, and Inuvo common stock will no longer trade on the NYSE American and will represent only the right to receive the Inuvo merger consideration under the merger agreement.

 

New Parent intends to apply with NASDAQ to be traded on The NASDAQ Capital Market under the symbol “CPTI” and with the TSX to be traded on the TSX under the symbol “CPTI.”

 

New Parent currently intends to retain all of its earnings, if any, for the future operation and expansion of its business and does not contemplate distributing any dividends to stockholders. Any future decision concerning the payment of dividends on the common stock of New Parent will depend upon the results of operations, financial condition and capital expenditure plans of New Parent, as well as such other factors as the New Parent board, in its sole discretion, may consider relevant.

 

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RISK FACTORS

 

In addition to the other information included or incorporated by reference in this joint proxy statement/prospectus, including the matters addressed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 58, you should carefully consider the following risks associated with the mergers, the businesses of ConversionPoint and Inuvo and New Parent if the mergers are completed before deciding how to vote. You should also read and consider the other information in this joint proxy statement/prospectus and the other documents incorporated by reference in this joint proxy statement/prospectus. See the section entitled “Where You Can Find More Information” beginning on page 229. 

 

Risks Related to the Mergers

 

Because the market price of New Parent common stock is uncertain and will fluctuate, ConversionPoint stockholders cannot be sure of the market value of the New Parent common stock that they will receive in the mergers. 

 

Upon consummation of the mergers, each share of ConversionPoint common stock will be converted into the right to receive 0.97853 shares of New Parent common stock, and each share of Inuvo common stock will be converted into the right to receive 0.18877 shares of New Parent common stock and $0.45 in cash. Since we do not know the value of the shares of New Parent common stock that will be issued in connection with the New Parent public offering, we do not know the exact value of shares of New Parent common stock that ConversionPoint and Inuvo stockholders will receive in the mergers. However, assuming and after giving effect to the sale of [●] shares of New Parent common stock in the New Parent public offering at an assumed initial public offering price of $[●], the midpoint of the estimated offering price range set forth on the cover page of the New Parent public offering prospectus, it is estimated that ConversionPoint stockholders, on the one hand, and Inuvo stockholders, on the other hand, will hold approximately [●]% and [●]%, respectively, of the shares of common stock of New Parent issued and outstanding immediately after the consummation of the mergers and the New Parent public offering (on a fully diluted basis, including dilution from stock options (including options to purchase up to 1,300,000 shares of New Parent common stock to be issued by New Parent to certain employees of Inuvo at the closing of the mergers), warrants and restricted stock units, based on the treasury method).

 

The market price of Inuvo common stock will continue to fluctuate until the completion of the merger. For example, during the second and third quarters of 2018, the closing sales price of Inuvo common stock ranged from a low of $0.41 to a high of $0.96, as reported on the NYSE American. The merger agreement does not provide for any price-based termination right for either party. Accordingly, the market value of the shares of New Parent common stock that New Parent issues and ConversionPoint stockholders and Inuvo shareholders will be entitled to receive when the parties complete the mergers will depend on the market value of shares of New Parent common stock at the time that the parties complete the mergers and could vary significantly from the value of ConversionPoint common stock or the market price of Inuvo common stock on the date of this joint proxy statement/prospectus or the date of the ConversionPoint or Inuvo special meetings. 

 

The announcement and pendency of the mergers could have an adverse effect on the value of ConversionPoint’s stock and the market price of Inuvo’s common stock, as well as New Parent’s business, financial condition, results of operations or business prospects. 

 

While neither ConversionPoint nor Inuvo is aware of any significant adverse effects to date, the announcement and pendency of the mergers could disrupt ConversionPoint’s and/or Inuvo’s businesses in the following ways, among others:

 

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·customers and other third-party business partners of ConversionPoint or Inuvo may seek to terminate and/or renegotiate their relationships with ConversionPoint or Inuvo as a result of the mergers, whether pursuant to the terms of their existing agreements with ConversionPoint or Inuvo or otherwise;

 

·the attention of ConversionPoint and/or Inuvo management may be directed toward the completion of the mergers and related matters and may be diverted from the day-to-day business operations of their respective companies, including from other opportunities that might otherwise be beneficial to ConversionPoint or Inuvo; and

 

·current and prospective employees may experience uncertainty regarding their future roles with the combined company, which might adversely affect ConversionPoint’s and/or Inuvo’s ability to retain, recruit and motivate key personnel.

 

Should they occur, any of these matters could adversely affect the value of ConversionPoint’s shares, the market price of Inuvo’s common stock, or harm the financial condition, results of operations or business prospects of, ConversionPoint, Inuvo and New Parent.

 

The market price of New Parent common stock after the mergers may be affected by factors different from those currently affecting the value of ConversionPoint common stock or the market price of Inuvo common stock. 

 

Upon completion of the mergers, holders of ConversionPoint common stock and Inuvo common stock will become holders of New Parent common stock. The results of operations of New Parent and the market price of New Parent common stock after the completion of the mergers may be affected by factors different from those currently affecting the independent results of operations of ConversionPoint or Inuvo. For a discussion of the businesses of ConversionPoint and Inuvo and of certain factors to consider in connection with those businesses, see the risk factors included in this joint proxy statement/prospectus under the section entitled “Risk Factors—Risks Related to ConversionPoint’s Business” beginning on page 35, “Risk Factors—Risks Related to Inuvo’s Business” beginning on page 46, “Risk Factors—Risks Related to the Combined Company if the Mergers Are Completed,” the description of ConversionPoint’s business under the section entitled “Description of ConversionPoint” beginning on page 59, and the description of Inuvo’s business under the section entitled “Description of Inuvo” beginning on page 94.

 

ConversionPoint and Inuvo will be subject to business uncertainties and contractual restrictions while the mergers are pending.

 

Uncertainty about the effect of the mergers on employees and customers may have an adverse effect on ConversionPoint and/or Inuvo and consequently on the combined company. These uncertainties may impair ConversionPoint’s or Inuvo’s ability to retain and motivate key personnel and could cause customers and others that conduct business with ConversionPoint or Inuvo to defer entering into contracts with ConversionPoint or Inuvo or making other decisions concerning ConversionPoint or Inuvo, or seek to change existing business relationships with ConversionPoint or Inuvo. Certain of Inuvo’s customer contracts contain change of control restrictions that may give rise to a right of termination or cancellation in connection with the mergers. In addition, if key employees depart because of uncertainty about their future roles and the potential complexities of the mergers, Inuvo’s and ConversionPoint’s businesses could be harmed. In addition, the merger agreement restricts ConversionPoint and Inuvo from making certain acquisitions and taking other specified actions until the mergers occur without the consent of the other party. These restrictions may prevent ConversionPoint and Inuvo from pursuing attractive business opportunities that may arise prior to the completion of the mergers. See the section entitled “The Merger Agreement and the Related Agreements—Covenants and Agreements” beginning on page 179 for a description of the restrictive covenants applicable to ConversionPoint and Inuvo.

 

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The merger agreement limits Inuvo’s ability to pursue alternatives to the mergers.

 

Inuvo has agreed that it will not solicit, initiate, knowingly encourage or take any other action designed to facilitate inquiries or the making of any proposals which may reasonably be expected to lead to any takeover proposal, engage in discussions or negotiations regarding takeover proposals, provide any confidential information or data in relation to a takeover proposal, approve or recommend (or propose publicly to do the same) any takeover proposal or any letter of intent, merger agreement or similar agreement related to any takeover proposal, subject to limited exceptions, including Inuvo’s right to take certain actions if it receives an unsolicited takeover proposal that constitutes a superior proposal or is reasonably expected to lead to a superior proposal, and the Inuvo board determines in good faith, after consultation with its outside legal counsel, that a failure to take action with respect to such takeover proposal would be inconsistent with its fiduciary duties. Inuvo has also agreed that the Inuvo board will not change its recommendation to its stockholders or approve any alternative agreement, subject to limited exceptions, including that, at any time prior to the applicable stockholder approval, the Inuvo board may make a change in recommendation in response to a superior proposal, if the Inuvo board concludes that a failure to change its recommendation would be inconsistent with the exercise of its fiduciary duties to its stockholders under applicable laws and, if requested by the other party, its representatives shall have negotiated in good faith with the other party for five business days regarding any revisions to the terms of the transactions contemplated by the merger agreement proposed by the other party in response to such superior proposal. The merger agreement also requires each party to call, give notice of and hold a meeting of its stockholders for the purposes of obtaining the applicable stockholder approval. This special meeting requirement does not apply to a party in the event that the merger agreement is terminated in accordance with its terms. See “The Merger Agreement and Related Agreements—Termination.” In addition, under specified circumstances, ConversionPoint or Inuvo may be required to pay a termination fee of $2,800,000 to the other party if certain termination rights are triggered. See the section entitled “The Merger Agreement and Related Agreements—Termination Fee and Expenses” beginning on page 193 for a description of the circumstances under which such termination fees are payable. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of Inuvo from considering or proposing an acquisition, or might result in a potential competing acquiror proposing to pay a lower price per share to acquire Inuvo than it might otherwise have been willing to pay.

 

Because certain directors and executive officers of ConversionPoint and Inuvo, as the case may be, are parties to agreements or are participants in other arrangements that give them interests that may be different from, or in addition to, your interests as a stockholder of ConversionPoint or Inuvo, these persons may have conflicts of interest in recommending that ConversionPoint and Inuvo stockholders vote to adopt the merger agreement and approve the mergers. 

  

The directors and executive officers of ConversionPoint and Inuvo, as the case may be, are parties to certain agreements or are participants in other arrangements that give them interests that may be different from, or in addition to, your interests as a stockholder of ConversionPoint or Inuvo. This difference of interests stems from employment agreements covering certain executive officers under which such officers are entitled to severance payments, change of control payments and other benefits related to their employment resulting from the mergers. In addition, New Parent has an obligation under the merger agreement to indemnify ConversionPoint’s and Inuvo’s directors and executive officers for acts or omission occurring prior to the effective time of the merger. The merger agreement also provides that New Parent will purchase “tail” officers’ and directors’ liability insurance policies. The interests of the directors and executive officers of ConversionPoint and Inuvo in the mergers that are different than those of the ConversionPoint and Inuvo stockholders are described under “The Mergers—Interests of Officers and Directors in the Mergers” beginning on page 164. 

 

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The shares of New Parent common stock to be received by ConversionPoint and Inuvo stockholders as a result of the mergers will have different rights from shares of ConversionPoint common stock and Inuvo common stock.

 

Following completion of the mergers, ConversionPoint stockholders and Inuvo stockholders will no longer be stockholders of ConversionPoint and Inuvo, but will instead be stockholders of New Parent. There will be important differences between your current rights as a ConversionPoint stockholder or Inuvo stockholder and your rights as a New Parent stockholder. See “Comparison of Stockholder Rights” beginning on page 213 for a discussion of the different rights associated with ConversionPoint common stock, Inuvo common stock and New Parent common stock.

 

Both ConversionPoint stockholders and Inuvo stockholders will have a reduced ownership and voting interest after the mergers and will exercise less influence over management.

 

After the completion of the mergers, the ConversionPoint stockholders and Inuvo stockholders, as a group, will own a smaller percentage of New Parent than they currently own of ConversionPoint and Inuvo, respectively. Upon completion of the mergers, it is anticipated that ConversionPoint stockholders, on the one hand, and Inuvo stockholders, on the other hand, will hold approximately 70.76% and 29.24%, respectively, of the shares of common stock of New Parent issued and outstanding immediately after the consummation of the mergers (on a fully diluted basis, including dilution from stock options (including options to purchase up to 1,300,000 shares of New Parent common stock to be issued by New Parent to certain employees of Inuvo at the closing of the mergers),warrants and restricted stock units, based on the treasury method), and before the issuance of any equity or equity-based securities of New Parent to satisfy the financing condition contained in the merger agreement.

 

Failure to complete the mergers could negatively impact the value of ConversionPoint common stock, the market price of Inuvo common stock and/or the businesses and financial results of ConversionPoint and Inuvo.

 

If the mergers are not completed, the ongoing businesses of ConversionPoint and Inuvo may be adversely affected and ConversionPoint and Inuvo will be subject to several risks and consequences, including the following:

 

·ConversionPoint may be required, under certain circumstances, to pay Inuvo a termination fee of $2,800,000;

 

·Inuvo may be required, under certain circumstances, to pay ConversionPoint a termination fee of $2,800,000;

 

·ConversionPoint and Inuvo will be required to pay their own costs relating to the mergers, whether or not the mergers are completed, such as significant fees and expenses relating to legal, accounting, financial advisor, and printing fees;

 

·under the merger agreement, each of ConversionPoint and Inuvo is subject to certain restrictions on the conduct of its business prior to completing the mergers which may adversely affect its ability to execute certain of its business strategies;

 

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·the conversion of a certain Convertible Promissory Note, in the principal amount of $1,000,000, executed by Inuvo in favor of CPT Investments, LLC, at a rate of $0.35 per share of Inuvo common stock in the event that the merger agreement is terminated could negatively affect the market price of Inuvo common stock; and

 

·matters relating to the mergers may require substantial commitments of time and resources by ConversionPoint and Inuvo management, which could otherwise have been devoted to other opportunities that may have been beneficial to ConversionPoint and Inuvo as independent companies, as the case may be.

 

In addition, if the mergers are not completed, ConversionPoint and/or Inuvo may experience negative reactions from the financial markets and from their respective customers and employees. ConversionPoint and Inuvo also could be subject to litigation related to a failure to complete the mergers or to enforce their respective obligations under the merger agreement. If the mergers are not consummated, ConversionPoint and Inuvo cannot assure their respective stockholders that the risks described above, will not materially adversely affect the value of ConversionPoint common stock, the market price of Inuvo common stock and/or the business and financial results of ConversionPoint or Inuvo.

 

ConversionPoint, Inuvo and New Parent will incur significant transaction and merger-related transition costs in connection with the mergers.

 

ConversionPoint and Inuvo expect that they, and New Parent, will incur significant, non-recurring costs in connection with consummating the mergers and integrating the operations of the two companies. ConversionPoint and Inuvo may incur additional costs to maintain employee morale and to retain key employees. ConversionPoint and Inuvo will also incur significant fees and expenses relating to legal, accounting and other transaction fees and other costs associated with the mergers. Some of these costs are payable regardless of whether the mergers are completed. Moreover, under specified circumstances, ConversionPoint or Inuvo may be required to pay a termination fee of $2,800,000 if the mergers are not consummated. See “The Merger Agreement and Related Agreements—Termination Fee and Expenses” beginning on page 193.

 

The fairness opinion received by the Inuvo board from Canaccord does not reflect changes in circumstances subsequent to the date of the fairness opinion.

 

Canaccord delivered to the Inuvo board its fairness opinion dated November 1, 2018. The opinion does not speak as of the time the Inuvo merger will be completed or any date other than the date of such opinion. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of Inuvo or ConversionPoint, changes in general market and economic conditions or regulatory or other factors including. Any such changes may materially alter or affect the relative values of Inuvo and ConversionPoint.

 

New Parent intends to apply for listing of New Parent common stock issued in connection with the mergers on NASDAQ and the TSX. There is no guarantee that New Parent common stock will be listed on either or both NASDAQ or the TSX.

 

New Parent intends to apply to have shares of New Parent common stock issued in connection with the mergers listed for trading on NASDAQ and the TSX. On the date of this joint proxy statement/prospectus, New Parent believes that it will satisfy the listing requirements and expects that New Parent common stock it plans to issue in connection with the mergers will be listed on NASDAQ and the TSX. These listings, which are conditions to the closing of the mergers, however, are not guaranteed. Even if such listings are approved, there can be no assurance any broker will be interested in trading New Parent’s common stock issued in connection with the mergers. Therefore, it may be difficult to sell any shares of New Parent common stock you receive in connection with the mergers if you desire or need to sell them. No person will be obligated to make a market in New Parent common stock, and even after making a market, any such person can discontinue market making at any time without notice. New Parent cannot provide any assurance that an active and liquid trading market in New Parent common stock will develop or, if developed, that the market will continue.

 

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Risks Related to ConversionPoint’s Business

 

ConversionPoint has substantial debt.

 

ConversionPoint and its subsidiaries are parties to a Loan and Security Agreement with Montage Capital II, L.P., and Partners for Capital Growth IV, L.P. As of December 12, 2018, $2,757,770, in principal and interest was outstanding under the loan. In addition, as of December 12, 2018, (i) ConversionPoint had outstanding convertible promissory notes in the principal amount of $198,829 and an outstanding promissory note in the principal amount of $225,000, all of which are due and payable on April 30, 2019, and (ii) SellPoints, a wholly-owned subsidiary of ConversionPoint, has outstanding unsecured subordinated promissory notes in the principal and interest amount of $2,811,679 which are due and payable on February 28, 2019, however, such notes are subject to two automatic 90-day extensions. A default under any loan agreement or note could result in a charging order, or in the case of its secured lenders, a foreclosure on all of ConversionPoint’s assets, which, in either case, would have a material adverse effect on its business, results of operations or financial condition.

 

If an event of default is declared under ConversionPoint’s secured loan agreement, ConversionPoint could lose possession of its assets, which would have a material adverse effect on its business.

 

ConversionPoint’s loan with Montage and Partners for Growth, is secured by all of ConversionPoint’s assets. The loan includes certain debt covenants which require ConversionPoint to maintain a minimum cash reserve and minimum EBITDA. As of September 31, 2018, ConversionPoint had certain technical defaults and an anticipated financial covenant default under the loan agreement, and on November 1, 2018, entered into an amendment pursuant to which the lenders agreed to forbear from exercising remedies arising out of the existing defaults and the anticipated default until the earlier to occur of (i) ConversionPoint’s timely compliance with certain non-financial covenants under the loan agreement, upon which time the existing defaults and anticipated default shall automatically be waived, (ii) the occurrence of another event of default, or (iii) February 15, 2019. The lenders have also agreed to decrease certain minimum cash covenants and eliminate certain revenue and EBITDA covenants until February 15, 2019. If ConversionPoint defaults on the loan, or is unable to repay the debt upon any default, the lenders could take control of ConversionPoint’s bank accounts, and/or seek to foreclose on ConversionPoint’s assets in an effort to seek repayment under the loan. If successful, ConversionPoint would be unable to conduct its business as it is presently conducted and its ability to generate revenues and fund its ongoing operations would be materially adversely affected.

 

ConversionPoint operates in a rapidly developing and changing industry, which makes it difficult to evaluate its current business and future prospects.

 

ConversionPoint has encountered and will continue to encounter risks and difficulties frequently experienced by companies in rapidly developing and changing industries, including challenges in hiring and retaining qualified employees, determining appropriate investments of its limited resources, market acceptance of its existing and future solutions, effectively integrating acquired software platforms, competition from established companies with greater financial and technical resources, acquiring and retaining customers, making improvements to its existing solutions and developing new solutions. ConversionPoint’s current operations infrastructure may require changes for ConversionPoint to achieve profitability and scale its operations efficiently. If ConversionPoint fails to implement these changes in a timely manner or is unable to implement them due to factors beyond its control, its business may suffer, its revenue may decline, and it may not be able to achieve further growth or profitability. It cannot be assured that ConversionPoint will be successful in addressing these and other challenges it may face in the future.

 

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If the market for ConversionPoint’s solutions slows or declines, its business, growth prospects, and financial condition would be adversely affected.

 

The future growth of digital marketing and e-commerce could be constrained by the level of acceptance and expansion of digital marketing and e-commerce SaaS solutions and managed services.  Even if these services become widely adopted, brands, product companies, advertisers and agencies may not make significant investments in such solutions.  It is difficult to predict customer adoption rates, customer demand for ConversionPoint’s technologies, the future growth rate and size of the digital marketing solutions or the entry of competitive solutions. The continued expansion of the market for digital marketing solutions depends on a number of factors, including the continued growth of e-commerce, the online advertising market, and social and mobile advertising, and the cost, performance and perceived value associated with online marketing solutions, as well as ConversionPoint’s ability to address security and privacy concerns and comply with applicable legal requirements which are continually evolving.

 

ConversionPoint expects to derive, in the future, a substantial portion of its revenue from the sale of its solutions delivered under a SaaS model. As a result, widespread use and acceptance of this business model is critical to its future growth and success. Under the more traditional license model for software procurement, users of software typically run the applications in-house on their own hardware. Because many companies are generally predisposed to maintaining control of their information technology systems and infrastructure, there may be resistance to the concept of accessing software functionality as a service provided by a third party. In addition, the market for SaaS solutions is still evolving, and existing and new market participants may introduce new types of solutions and different approaches to enable organizations to address their needs. If the market for SaaS solutions fails to grow or grows slower than ConversionPoint currently anticipates, demand for its solutions and its revenue, gross margin and other operating results could be negatively impacted.

 

ConversionPoint’s growth depends in part on the success of its strategic relationships with third parties.

 

ConversionPoint anticipates that it will continue to depend on its relationships with various third parties, including online retailers, ad networks, affiliate marketing companies, fulfillment companies, credit card processors, and technology and content providers, in order to grow its business. Identifying, negotiating and documenting relationships with these third parties may require significant time and resources as does integrating their content and technology with ConversionPoint’s solutions. If the third-party content or technology integrated with ConversionPoint’s solutions is not well received by its customers, ConversionPoint’s brand and reputation could be negatively affected. ConversionPoint’s agreements with third-party business partners such as Walmart and Costco, are typically non-exclusive and do not prohibit them from working with ConversionPoint’s competitors or from offering competing services. If and to the extent that any of these third parties compete with ConversionPoint or cease to do business with ConversionPoint, it could hurt ConversionPoint’s growth prospects.

 

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If ConversionPoint does not retain its senior management team and key employees, or if it fails to attract and retain additional highly skilled sales talent, ConversionPoint may not be able to sustain its growth or achieve its business objectives.

 

ConversionPoint’s future success is substantially dependent on the continued service of its senior management team including, among others, Robert Tallack, President and Chief Executive Officer and Raghu Kilambi, Vice Chair and Chief Financial Officer. ConversionPoint’s future success also depends on its ability to continue to attract, retain, integrate and motivate highly skilled technical, sales and administrative employees. Competition for these employees in ConversionPoint’s industry is intense. As a result, ConversionPoint may be unable to attract or retain management executives and other key personnel that are critical to ConversionPoint’s success, resulting in harm to ConversionPoint’s key client relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. The loss of the services of ConversionPoint’s senior management or other key employees could make it more difficult to successfully operate ConversionPoint’s business and pursue its business goals.

 

ConversionPoint may not realize all of the anticipated benefits of its acquisitions, or these benefits may take longer to realize than expected.

 

ConversionPoint completed its acquisitions of Branded Response and Push Holdings in April 2017, and of SellPoints in December 2017. Even if ConversionPoint is successful in integrating these acquisitions and their related technologies into ConversionPoint’s existing operations, and into an end-to-end e-commerce platform, ConversionPoint may not derive the benefits, such as administrative or operational synergy or anticipated earnings increases, that were expected from such acquisitions, which may result in the commitment of capital resources without the expected returns on the capital.

 

ConversionPoint stores personally identifiable information of its customers and consumers which is subject to vast regulation.

 

ConversionPoint stores personally identifiable information such as credit card information, addresses, phone numbers and other confidential information of its customers and consumers who purchase products and services from it to enable payment for such products and services and for shipping such products. ConversionPoint also captures and stores non-personally identifiable information from consumers and customers such as IP addresses, online behavioral information and geographic information through ConversionPoint’s web analytics tracking solutions, that enable ConversionPoint to display digital advertisements to targeted population segments, as well as collect, manage and store data regarding the measurement and valuation of their digital advertising and marketing campaigns. As such, ConversionPoint is subject to federal, state, provincial and foreign laws regarding privacy and protection of data. Some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data and ConversionPoint’s agreements with certain merchants require ConversionPoint to notify them in the event of a security incident. Evolving regulations regarding personal data and personal information, in the European Union and elsewhere, including, but not limited to, the General Data Protection Regulation, which we refer to as GDPR, and the California Consumer Privacy Act of 2018, especially relating to classification of IP addresses, machine identification, location data and other information, may limit or inhibit ConversionPoint’s ability to operate or expand its business. Such laws and regulations require or may require ConversionPoint or its customers to implement privacy and security policies, permit consumers to access, correct or delete personal information stored or maintained by ConversionPoint or its customers, inform individuals of security incidents that affect their personal information, and, in some cases, obtain consent to use personal information for specified purposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of specific technologies, such as those that track individuals’ activities on web pages or record when individuals click on a link contained in an email message. Such laws and regulations could restrict ConversionPoint’s ability and its customers’ ability to collect and use web browsing data and personal information, which may reduce ConversionPoint’s customers’ demand for its solutions.

 

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Changing industry standards and industry self-regulation regarding the collection, use and disclosure of data may have similar effects. Existing and future privacy and data protection laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may also negatively affect the public’s perception of ConversionPoint’s sales and marketing practices. If ConversionPoint’s solutions are perceived to cause, or are otherwise unfavorably associated with, invasions of privacy, whether or not illegal, ConversionPoint or its customers may be subject to public criticism.

 

Any failure on ConversionPoint’s part to comply with applicable privacy and data protection laws, regulations, policies and standards or any inability to adequately address privacy concerns associated with ConversionPoint’s solutions, even if unfounded, could subject ConversionPoint to liability, damage ConversionPoint’s reputation, impair its sales and harm its business. Furthermore, the costs of compliance with, and other burdens imposed by, such laws, regulations, policies and standards may result in a decrease in ConversionPoint’s profitability and/or limit adoption of and demand for its solutions.

 

Domestic and foreign government regulation and enforcement of data tracking technologies is expansive, not clearly defined and rapidly evolving. Such regulation could directly restrict portions of ConversionPoint’s business or indirectly affect its business by constraining its customers’ use of ConversionPoint’s platform.

 

ConversionPoint’s services, through the use of cookies and tracking pixel technologies, enable ConversionPoint and its customers to track consumer online behavior and display digital advertisements to targeted population segments at opportune times. Federal, state, municipal and/or foreign governments and agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies, and regulations covering technologies such as cookies and tracking pixels, that are used to collect, store and/or process data. The uncertainty and inconsistency among these laws, coupled with a lack of guidance as to how these laws will be applied to current and emerging Internet and mobile technologies, creates a risk that regulators, lawmakers or other third parties, may assert claims, pursue investigations or audits, or engage in civil or criminal enforcement. These actions could limit the market for ConversionPoint’s services or impose burdensome requirements on its services and/or customers’ use of its services, thereby rendering ConversionPoint’s business unprofitable.

 

This area of the law is currently under intense government scrutiny and many governments, including the U.S. government, are considering a variety of proposed regulations that would restrict or impact the conditions under which data obtained from or through the activities of visitors could be collected, processed or stored. ConversionPoint may have to develop alternative systems to collect, store and manage user data if users block cookies, tracking pixels or regulations introduce barriers to collecting cookie data or using tracking pixels. In addition, third parties may develop technology or policies to track consumer online behavior, including through next-generation web browsers or other means, which could subsequently prevent ConversionPoint from directly importing data to ConversionPoint’s systems. ConversionPoint may not be able to develop adequate alternatives to cookie data and pixel data collection, which could negatively impact ConversionPoint’s revenue and operating results.

 

Cybersecurity incidents could harm ConversionPoint’s business and negatively impact its financial results.

 

ConversionPoint stores personally identifiable information, credit card information and other confidential information of its customers and consumers. ConversionPoint may experience successful attempts by third parties to obtain unauthorized access to such personally identifiable information. This information could also be otherwise exposed through human error or malfeasance. The unauthorized access or compromise of this personally identifiable information could have an adverse effect on ConversionPoint’s business, financial condition and results of operations. 

 

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Cybersecurity incidents could endanger the confidentiality, integrity and availability of ConversionPoint’s information resources and the information it collects, uses, stores and discloses. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to ConversionPoint’s information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. ConversionPoint believes that it takes reasonable steps to protect the security, integrity and confidentiality of the information ConversionPoint collects, uses, stores, and discloses, and is continuously taking steps to strengthen its security protocols and infrastructure, but there is no guarantee that inadvertent or unauthorized data access will not occur despite its efforts. For example, ConversionPoint could be negatively impacted by software bugs or other technical malfunctions, as well as employee error or malfeasance. Any unauthorized access or use of information, virus or similar breach or disruption to ConversionPoint’s, its customers’, or its partners’ systems could result in disrupted operations, loss of information, damage to ConversionPoint’s reputation and customer relationships, early termination of ConversionPoint’s contracts and other business losses, indemnification of its customers, liability for stolen assets or information, increased cybersecurity protection and insurance costs, financial penalties, litigation, regulatory investigations, and other significant liabilities, any of which could materially harm ConversionPoint’s business. 

 

If ConversionPoint cannot efficiently implement its solutions for customers, ConversionPoint may lose customers.

 

ConversionPoint’s customers have a variety of different data formats, enterprise applications and infrastructure and ConversionPoint’s platform must support its customers’ data formats and integrate with complex enterprise applications and infrastructures. If ConversionPoint’s platform does not support a customer’s required data format or appropriately integrate with a customer’s applications and infrastructure, then ConversionPoint may choose to configure its platform to do so, which would increase ConversionPoint’s expenses. Additionally, ConversionPoint does not control its customers’ implementation schedules. As a result, as ConversionPoint has experienced in the past, if ConversionPoint’s customers do not allocate internal resources necessary to meet their implementation responsibilities or if ConversionPoint faces unanticipated implementation difficulties, the implementation may be delayed. If the customer implementation process is not executed successfully or if execution is delayed, ConversionPoint could incur significant costs, customers could become dissatisfied and decide not to increase usage of ConversionPoint’s platform, not to use ConversionPoint’s platform beyond an initial period prior to their term commitment and revenue recognition could be delayed. In addition, competitors with more efficient operating models that have lower implementation costs, could penetrate ConversionPoint’s customer relationships.

 

Additionally, large customers may request or require specific features or functions unique to their particular business processes, which increase ConversionPoint’s upfront investment in sales and deployment efforts and the revenues resulting from the customers under ConversionPoint’s typical contract term may not cover ConversionPoint’s upfront investments. If prospective large customers require specific features or functions that ConversionPoint does not offer, then the market for ConversionPoint’s solutions will be more limited and ConversionPoint’s business could suffer. If ConversionPoint is unable to address the needs of these customers in a timely fashion or further develop and enhance ConversionPoint’s solutions, these customers may not renew their subscriptions, seek to terminate their relationship with ConversionPoint, renew on less favorable terms, or reduce their marketing spend on ConversionPoint’s platform. If any of these were to occur, ConversionPoint’s revenues may decline and its operating results could be adversely affected.

 

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If ConversionPoint fails to manage and increase the capacity of its hosted infrastructure, ConversionPoint’s customers may be unable to use ConversionPoint’s platform, which could harm ConversionPoint’s reputation and demand for its solutions.

 

ConversionPoint has experienced significant growth in the number of users, transactions and data that ConversionPoint’s hosting infrastructure supports. ConversionPoint seeks to maintain sufficient excess capacity in its third party hosted infrastructure to be sufficiently flexible and scalable to meet the needs of all of its customers. However, the provision of new hosting infrastructure requires significant lead time. If ConversionPoint does not accurately predict its infrastructure capacity requirements, its customers could experience service outages that may subject ConversionPoint to financial penalties or other liabilities, result in customer losses, harm ConversionPoint’s reputation and adversely affect its ability to grow its revenue.

 

Mobile and other devices are increasingly being used to conduct e-commerce, and if ConversionPoint’s solutions do not operate as effectively, when accessed through these devices, or in different formats and resolutions, ConversionPoint’s customers may not be satisfied with ConversionPoint’s services, which could harm ConversionPoint’s business. 

 

Effective functionality on mobile and other devices, and across multiple platforms and using different resolutions, is integral to ConversionPoint’s long-term development and growth strategy. In the event that ConversionPoint’s customers have difficulty accessing and using ConversionPoint’s platform on mobile and other devices, ConversionPoint’s business and operating results could be adversely affected.  In addition, ConversionPoint is taking steps to comply with the Twenty-First Century Communications and Video Accessibility Act and similar accessibilities laws that require making the internet fully accessible to people with disabilities.

 

ConversionPoint must develop and introduce enhancements and new features that achieve market acceptance or that keep pace with technological developments to remain competitive in the evolving online marketing industry.

 

ConversionPoint operates in a dynamic market characterized by rapidly changing technologies and industry and legal standards. The introduction of new digital marketing solutions by ConversionPoint’s competitors, the market acceptance of solutions based on new or alternative technologies, or the emergence of new industry standards could render ConversionPoint’s platforms obsolete. ConversionPoint’s ability to compete successfully, attract new customers and increase revenues from existing customers depends in large part on its ability to enhance and improve its existing digital marketing solutions and to continually introduce or acquire new features that are in demand by the markets ConversionPoint serves. ConversionPoint is in the process of a significant upgrade to its software platform infrastructure, and the success of this project or any other enhancement or new solution depends on several factors, including timely completion, adequate quality testing, and appropriate introduction and market acceptance. Any new platform or feature that ConversionPoint develops or acquires may not be introduced in a timely manner, may contain defects, may be costlier to complete than ConversionPoint anticipates or may not achieve the broad market acceptance necessary to generate significant revenues. If ConversionPoint is unable to complete the upgrade to its software platform infrastructure and integrate its various service offerings effectively or in a timely manner, or to anticipate or timely and successfully develop or acquire new offerings or features or enhance ConversionPoint’s existing platform to meet customer requirements, ConversionPoint’s business and operating results will be adversely affected.

 

ConversionPoint’s business and prospects would be harmed if changes to technologies used in its platform or new versions or upgrades of operating systems and internet browsers adversely impact the process by which merchants, brands and consumers interface with ConversionPoint’s platform.

 

In the future, providers of internet browsers could introduce new features that would make it difficult for ConversionPoint to provide certain of its services such as retargeter, or for ConversionPoint’s customers to use ConversionPoint’s platform. In addition, internet browsers for desktop or mobile devices could introduce new features, change existing browser specifications such that they would be incompatible with ConversionPoint’s platform, or prevent customers from accessing ConversionPoint’s platform. In addition, the growing use of ad blockers in internet browsers could impact ConversionPoint’s ability to serve ads. Any changes to technologies used in ConversionPoint’s platform, to existing features that ConversionPoint relies on, or to operating systems or internet browsers that make it difficult for customers to access or use ConversionPoint’s platform, may make it more difficult for ConversionPoint to maintain or increase its revenues and could adversely impact its business and prospects.

 

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ConversionPoint derives a portion of its revenue from monthly subscription agreements, and intends to increase the proportion of its revenue which is generated through monthly subscription agreements.

 

ConversionPoint derives a portion of its revenue from subscription agreements and intends to increase the portion of its revenue which is generated through subscription agreements. Subscription agreements are typically month-to-month or one year in length, and often terminable on 30 days’ notice. As a result, a portion of the revenue ConversionPoint reports in each quarter is generated from customer agreements entered into during previous periods. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in ConversionPoint’s financial performance in that quarter but might negatively affect ConversionPoint’s revenue in future quarters. Accordingly, the effect of significant declines in sales and market acceptance of ConversionPoint’s solutions may not be reflected in ConversionPoint’s short-term results of operations.

 

ConversionPoint derives some of its revenue from usage-based pricing models, which makes it difficult to forecast revenues from its current customers and future prospects.

 

Some of ConversionPoint’s services are offered on a usage-based pricing model in which ConversionPoint’s fees are calculated based on the customer’s use of aspects of ConversionPoint’s services. This pricing model makes it difficult to accurately forecast revenues because ConversionPoint’s customers’ activities on ConversionPoint’s platform may vary from month to month based on the variety of industries in which ConversionPoint’s advertisers operate, the seasonality of those industries and fluctuations in ConversionPoint’s customers’ marketing budgets or other factors. If ConversionPoint incorrectly forecasts revenues for these customers and the amount of revenue is less than projections ConversionPoint provides to investors, the price of ConversionPoint’s common stock could decline substantially. Additionally, if ConversionPoint overestimates usage, ConversionPoint may incur additional expenses in adding infrastructure, without a commensurate increase in revenues, which would harm ConversionPoint’s gross margins and other operating results.

 

If ConversionPoint fails to maintain a consistently high level of customer service, its brand, business and financial results may be harmed. 

 

ConversionPoint believes its focus on customer service and support is critical to onboarding new customers, retaining existing customers and growing ConversionPoint’s business. If ConversionPoint is unable to maintain a consistently high level of customer service and technical support, ConversionPoint may lose existing customers. In addition, ConversionPoint’s ability to attract new customers is highly dependent on ConversionPoint’s reputation and on positive recommendations from its existing customers. Any failure to maintain a consistently high level of customer service, or a market perception that ConversionPoint does not maintain high-quality customer service, could adversely affect its reputation and the number of positive customer referrals that ConversionPoint receives.

 

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ConversionPoint obtains certain products it sells from third parties.

 

ConversionPoint derives a portion of its revenue from direct online product sales, and sources certain products it sells from third-parties and relies on them to meet its sales needs. ConversionPoint plans to continue to rely upon such third parties to supply products it sells. If these suppliers fail to maintain high manufacturing standards and processes, it could harm ConversionPoint’s business. In the event of a natural disaster or business failure, including due to bankruptcy of a supplier, ConversionPoint may not be able to secure replacement products on a timely or cost-effective basis, which could result in delays, additional costs and reduced revenues. In addition, price increases from a supplier would directly affect ConversionPoint’s profitability if it is not able to pass price increases on to customers.

 

As a direct-to-consumer marketer, ConversionPoint is subject to vast regulation. If ConversionPoint is required to pay damages or expenses in connection with legal claims, ConversionPoint’s business, financial condition and results of operations may be harmed.

 

As a direct to consumer marketer, ConversionPoint is subject to various federal, state and foreign laws and regulations such as the Restore Online Shoppers Confidence Act, which we refer to as ROSCA, and the Dot Com Disclosure Guidance published by the United States Federal Trade Commission, which requires certain disclosures to prevent unfair, deceptive or misleading online advertisements. Although ConversionPoint’s business plan contemplates phasing out this portion of ConversionPoint’s business, historically, a substantial portion of ConversionPoint’s revenue has been derived from negative option marketing, in which consumers sign up to receive a free trial product and to be billed monthly for continued delivery of such product until such consumer affirmatively cancels his or her subscription. ConversionPoint’s failure to comply with these regulations could, among other things, result in consumer lawsuits, federal investigations, or State Attorney General actions or inquiries. Such claims or inquiries, regardless of their merit, could divert management time and attention away from ConversionPoint’s business, result in significant costs to investigate and defend, harm ConversionPoint’s reputation and result in the cessation of certain portions of ConversionPoint’s business. If ConversionPoint or its subsidiaries become subject to these or similar types of claims or investigations, and are not successful in their defense, ConversionPoint or its subsidiaries may be forced to pay damages, some of which may be substantial, or to cease parts of their business.

 

ConversionPoint could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs its clients would have to pay for its offering and adversely affect its operating results.

 

In general, in connection with the sale of products, ConversionPoint has not historically collected state or local sales, use or other similar taxes in any jurisdictions in which ConversionPoint does not have a tax nexus, in reliance on court decisions or applicable exemptions that restrict or preclude the imposition of obligations to collect such taxes with respect to online sales of products. In addition, ConversionPoint has not historically collected state or local sales, use or other similar taxes in certain jurisdictions in which ConversionPoint does have a physical presence, in reliance on applicable exemptions. On June 21, 2018, the U.S. Supreme Court decided, in South Dakota v. Wayfair, Inc., that state and local jurisdictions may, at least in certain circumstances, enforce a sales and use tax collection obligation on remote vendors that have no physical presence in such jurisdiction. A number of states have already begun, or have positioned themselves to begin, requiring sales and use tax collection by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements vary from state to state. It is possible that one or more jurisdictions may assert that ConversionPoint has liability for periods for which ConversionPoint has not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could result in substantial tax liabilities, including for past sales taxes and penalties and interest, which could materially adversely affect ConversionPoint’s business, financial condition and operating results.

 

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ConversionPoint or its subsidiaries may be exposed to material product liability claims, which could increase their costs and adversely affect ConversionPoint’s reputation and business.

 

As a marketer and distributor of products designed for human consumption or use, ConversionPoint or its subsidiaries could be subject to product liability claims if the use of products they market or distribute, is alleged to have resulted in injury or undesired results. Products marketed include vitamins that are classified as dietary supplements and skin care products, and in most cases are not subject to pre-market regulatory approval in the United States. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur.

 

ConversionPoint has not had any product liability claims filed against it or its subsidiaries, but in the future ConversionPoint or its subsidiaries may be subject to various product liability claims, including, due to tampering by unauthorized third parties, product contamination, and claims that these products had inadequate instructions for use, or inadequate warnings concerning possible side effects and interactions with other substances. The cost of defense can be substantially higher than the cost of settlement even when claims are without merit. The high cost to defend or settle product liability claims could have a material adverse effect on ConversionPoint’s business and operating results and ConversionPoint’s insurance, if any, may not be adequate.

 

ConversionPoint’s business is exposed to a multitude of risks based on its acceptance of credit cards and their reliance on third party credit card processors.

 

ConversionPoint’s customers typically pay for their orders with debit cards or credit cards, and ConversionPoint depends on third party credit card processing in connection with online product sales. There are many risks related to ConversionPoint’s acceptance of credit cards, the collection and storage of credit card data, and ConversionPoint’s dependence on third party credit card processors to process payments.

 

ConversionPoint’s failure to limit fraudulent transactions conducted on its websites or through its platform, such as through use of stolen credit card numbers, could subject ConversionPoint to liability and adversely impact its reputation. Under credit card association rules, penalties may be imposed at the discretion of the association for inadequate fraud protection. Any such potential penalties would be imposed on ConversionPoint’s credit card processor by the association. Under ConversionPoint’s contracts with ConversionPoint’s payment processors, ConversionPoint is required to reimburse them for such penalties. ConversionPoint faces the risk that it may fail to maintain an adequate level of fraud protection and that one or more credit card associations or other processors may, at any time, assess penalties against ConversionPoint or terminate ConversionPoint’s ability to accept credit card payments or other form of online payments from customers, which would have a material adverse effect on ConversionPoint’s business, financial condition and operating results. Although ConversionPoint does not believe there has been a compromise of customer information, it is possible that either ConversionPoint or its subsidiaries may not be in full compliance with these standards. Accordingly, ConversionPoint could be fined, which could impact its financial condition, or certain of ConversionPoint’s products could be suspended, which would cause ConversionPoint to be unable to process payments using credit cards. If ConversionPoint is unable to accept credit card payments, ConversionPoint’s business, financial condition and operating results may be adversely affected.

 

In addition, many of ConversionPoint’s transactions are deemed high risk, and there often exists a shortage of merchant processors able or willing to process such online transactions. In the past, ConversionPoint has had to decrease the volume of sales as a result of the shortage of available merchant processing. The future shortage of merchant processing available to process payments for ConversionPoint’s product sales and the sales of ConversionPoint’s customers’ products, could result a decrease in the volume of products ConversionPoint is able to sell and could have a material adverse effect on ConversionPoint’s revenue. Further, such credit card processors require ConversionPoint to maintain significant reserves (often up to 10% of the sale) to cover refunds, chargebacks and fraud, which results in delays of up to 6 months in receipt of such revenue. If ConversionPoint’s refunds or chargebacks increase, ConversionPoint’s processors could require ConversionPoint to increase such reserves, increase fees or terminate their contracts with ConversionPoint, which would have an adverse effect on ConversionPoint’s financial condition.

 

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In addition, ConversionPoint could be liable if there is a breach of the payment information it stores. Online commerce and communications depend on the secure transmission of confidential information over public networks. ConversionPoint relies on encryption and authentication technology to authenticate and secure the transmission of confidential information, including customer credit card numbers. However, ConversionPoint cannot ensure this technology will prevent breaches of the systems it uses to protect customer payment data.

 

In the future ConversionPoint may explore accepting various forms of payment that may have higher fees and costs than ConversionPoint’s current payment methods. If ConversionPoint’s customers utilize alternative payment methods, ConversionPoint’s payment costs could increase and ConversionPoint’s operating results could be adversely impacted.

 

ConversionPoint operates in an industry with extensive intellectual property litigation. Claims of infringement against ConversionPoint may harm ConversionPoint’s business.

 

ConversionPoint’s success depends, in part, upon its non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures or adverse consequences. The internet-related software field generally is characterized by extensive intellectual property litigation. Although ConversionPoint’s industry is rapidly evolving, many companies that own, or claim to own, intellectual property have aggressively asserted their rights. From time to time, ConversionPoint may be subject to legal proceedings and claims relating to the intellectual property rights of others, including, but not limited to, patents and trademarks, and ConversionPoint expects that third parties will assert intellectual property claims against ConversionPoint, particularly as ConversionPoint expands the complexity and scope of its business. In addition, many of ConversionPoint’s subscription agreements require ConversionPoint to indemnify its customers against claims that its solutions infringe the intellectual property rights of third parties.

 

Future litigation may be necessary to defend ConversionPoint or its customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish ConversionPoint’s proprietary rights. Some of ConversionPoint’s competitors have substantially greater resources than ConversionPoint does and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than ConversionPoint could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target ConversionPoint. Regardless of whether claims that ConversionPoint is infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could, harm ConversionPoint’s reputation, adversely affect its relationship with customers and partners, cause delays or stoppages in its services, divert management’s attention and resources, require changes to its software that would cause it to incur substantial costs and/or subject it to significant liability.

 

In addition to liability for monetary damages against ConversionPoint, which may be tripled and may include attorneys’ fees, or, in some circumstances, damages against ConversionPoint’s customers, ConversionPoint may be prohibited from developing, commercializing or continuing to provide some or all of ConversionPoint’s software solutions unless ConversionPoint obtains licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.

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Activities of ConversionPoint’s customers and affiliates or the content of their marketing messages, could damage ConversionPoint’s brand, subject it to liability and harm its business and financial results.

 

ConversionPoint’s terms of service prohibit ConversionPoint’s customers and affiliates from using ConversionPoint’s platform to engage in illegal activities, including, fraudulent marketing activities, and its employment and marketing policies prohibit its employees from engaging in fraudulent marketing activities. Customers, affiliate marketers or employees may nonetheless engage in prohibited or illegal activities in violation of applicable laws, which could subject ConversionPoint to liability. For example, from time to time, certain of ConversionPoint’s affiliate marketing companies use content that infringes on the rights of others, including, but not limited to, unauthorized celebrity endorsements, that have resulted in the receipt of cease and desist letters and claims for damages. In addition, there have been limited instances in which ConversionPoint’s employees have used infringing content in certain marketing materials, that have resulted in the receipt of cease and desist letters and claims for damages. ConversionPoint’s brand may be negatively impacted by the actions of customers, affiliates or employees, that are deemed to be hostile, offensive, inappropriate or illegal. Although ConversionPoint attempts to monitor the appropriateness of the content of its customers, affiliates and employees, ConversionPoint does not have control over their activities. The safeguards ConversionPoint has in place may not be sufficient for ConversionPoint to avoid liability or avoid harm to ConversionPoint’s brand, especially if such hostile, offensive, inappropriate or illegal use is high profile, which could adversely affect its business and financial results.

 

ConversionPoint’s failure to protect its intellectual property rights could diminish the value of its services, weaken its competitive position and reduce its revenue.

 

ConversionPoint regards the protection of its intellectual property, which includes trade secrets, copyrights, trademarks and domain names, as critical to ConversionPoint’s success. ConversionPoint strives to protect ConversionPoint’s intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. ConversionPoint enters into confidentiality and invention assignment agreements with its employees and contractors, and confidentiality agreements with parties with whom it conducts business in order to limit access to, and disclosure and use of, its proprietary information. However, these contractual arrangements and the other steps ConversionPoint has taken to protect ConversionPoint’s intellectual property may not prevent the misappropriation of ConversionPoint’s proprietary information or deter independent development of similar technologies by others.

 

ConversionPoint has four provisional patent applications and is investigating seeking patent protection for other aspects of ConversionPoint’s technologies, but there can be no assurance that ConversionPoint will file for any additional patent protection, or any patents will ultimately be issued, or that, if issued, they will not be challenged. ConversionPoint has registered domain names, trademarks and service marks in the United States and may also pursue additional registrations both in and outside the United States. Effective trade secret, copyright, trademark, domain name and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending ConversionPoint’s rights. ConversionPoint may be required to protect its intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which ConversionPoint may not pursue in every location.

 

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Monitoring unauthorized use of ConversionPoint’s intellectual property is difficult and costly. ConversionPoint’s efforts to protect its proprietary rights may not be adequate to prevent misappropriation of its intellectual property. Further, ConversionPoint may not be able to detect unauthorized use of, or take appropriate steps to enforce, its intellectual property rights. In addition, ConversionPoint’s competitors may independently develop similar technology. The laws of many countries, such as China and India, do not protect its proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could adversely affect ConversionPoint and its intellectual property. ConversionPoint’s failure to meaningfully protect its intellectual property could result in competitors offering services that incorporate ConversionPoint’s most technologically advanced features, which could seriously reduce demand for its software solutions. In addition, ConversionPoint may in the future need to initiate infringement claims or litigation. Litigation, whether ConversionPoint is a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of ConversionPoint’s technical staff and managerial personnel, which could harm ConversionPoint’s business, whether or not such litigation results in a determination that is unfavorable to ConversionPoint. In addition, litigation is inherently uncertain, and thus ConversionPoint may not be able to stop its competitors from infringing upon ConversionPoint’s intellectual property rights.

 

ConversionPoint’s use of “open source” software could negatively affect its ability to sell its solutions and could subject ConversionPoint to litigation.

 

A portion of ConversionPoint’s technology platform and solutions incorporate so-called “open source” software, and ConversionPoint may incorporate additional open source software in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. If ConversionPoint fails to comply with these licenses, it may be subject to specified conditions, including requirements that ConversionPoint offer its solutions that incorporate the open source software for no cost, that ConversionPoint make available source code for modifications or derivative works it creates based upon, incorporating or using the open source software and that ConversionPoint license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that distributes open source software that ConversionPoint uses were to allege that ConversionPoint has not complied with the conditions of one or more of these licenses, ConversionPoint could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, including being enjoined from the sale of ConversionPoint’s solutions that contain the open source software. ConversionPoint could be subject to suits by parties claiming ownership of what ConversionPoint believes to be open source software. Litigation could be costly for ConversionPoint to defend, have a negative effect on ConversionPoint’s operating results and financial condition and require ConversionPoint to devote additional research and development resources to change ConversionPoint’s solutions.

 

Risks Related to Inuvo’s Business

 

Inuvo relies on two customers for a significant portion of its revenues.

 

Inuvo is reliant upon Yahoo! and Google for most of its revenue. During the third quarter of 2018, Yahoo! accounted for 75.6% and Google accounted for 8.5% of its revenues, respectively, and during the same period in 2017, 62.1% and 8.9%, respectively. The amount of revenue Inuvo receives from these customers is dependent on a number of factors outside of Inuvo’s 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 end-user queries. Inuvo’s revenue in the third quarter 2018 was 17.3% lower than the same quarter of 2017 due to demand and pricing changes by Inuvo’s largest customer, Yahoo!. The result was approximately a 40% decrease in RPCs. Inuvo has not seen an appreciable change in remote procedure calls, or RPCs, and Inuvo does not know whether RPCs will return to their former levels.

 

Inuvo would likely experience a significant decline in revenue and its business operations could be significantly harmed if these customers do not approve Inuvo’s new websites and applications, or if Inuvo violates their guidelines or they change their guidelines. In addition, if any of these preceding circumstances were to occur, Inuvo may not be able to find a suitable alternate paid search results provider or otherwise replace the lost revenues. The loss of any of these customers or a material change in the revenue or gross profit they generate would have a material adverse impact on Inuvo’s business, results of operations and financial condition in future periods.

 

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Failure to comply with the covenants and restrictions in Inuvo’s credit facility could impact Inuvo’s ability to access capital as needed.

 

Inuvo has a credit facility with Western Alliance Bank under which Inuvo had $4.8 million in debt outstanding and no availability as of September 30, 2018. The facility expired in September 2018 and was extended to October 2018. Inuvo signed a new facility agreement with Western Alliance Bank on October 11, 2018. The new agreement has no financial covenants. The credit facility contains a number of requirements, among other things:

 

·payment of fees to the lender associated with the credit facility;

 

·maintenance of Inuvo’s corporate existence in good standing;

 

·granting the lender a security interest in Inuvo’s assets;

 

·providing financial information to the lender; and

 

·refrain from any transfer of any of Inuvo’s business or property, subject to customary exceptions.

 

Inuvo has historically had difficulties meeting the financial covenants set forth in its credit agreement. During the third quarter of 2018, Inuvo failed to comply with the minimum revenue and adjusted EBITDA requirement. Inuvo’s lender has given Inuvo waivers in the past, including in connection with Inuvo’s failure to meet the covenants during the third quarter of 2018, and reset Inuvo’s financial covenants several times. A breach in Inuvo’s 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 Inuvo has outstanding obligations and is not able to repay, Western Alliance Bank could require Inuvo to apply all of its available cash to repay the debt amounts and could then proceed against the underlying collateral. Should this occur, Inuvo cannot assure you that its assets would be sufficient to repay its debt in full, Inuvo would be able to borrow sufficient funds to refinance the debt, or that Inuvo would be able to obtain a waiver to cure any such default. In such an event, Inuvo’s ability to conduct its business as it is currently conducted would be in jeopardy.

 

Failure to comply with the covenants and restrictions in Inuvo’s grant agreement with the State of Arkansas could result in the repayment of a portion of the grant, which Inuvo may not be able to repay or finance on favorable terms.

 

In January 2013, Inuvo entered into an agreement with the State of Arkansas whereby Inuvo was granted $1,750,000 for the relocation of Inuvo to Arkansas and for the purchase of equipment. The grant was contingent upon Inuvo 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.

 

If Inuvo fails to meet the requirements of the grant after the initial four-year period, it 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, Inuvo cannot assure you that its assets would be sufficient to repay its grant in full, Inuvo would be able to borrow sufficient funds to refinance the grant, or that Inuvo would be able to obtain a waiver to cure any such default. In such an event, Inuvo’s ability to conduct its business as it is currently conducted would be in jeopardy. As of September 30, 2018, Inuvo had 39 full-time, permanent positions in Arkansas.

 

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Inuvo’s business is seasonal and its financial results and cash availability may vary significantly from period to period.

 

Historically, the last half of the year has stronger demand and therefore greater revenue than the first half of the year. Inuvo experiences lower RPCs 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 Inuvo is not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on its financial results. A material percentage of Inuvo’s operating expense is fixed and does not vary significantly with revenue. When revenue is seasonally lower cash availability is constrained. The bank credit facility and cash generated by operations may be insufficient to continue normal operations. Inuvo may 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 which may cause dilution.

 

Inuvo depends on relationships with and the success of its supply partners. 

 

Inuvo’s supply partners are very important to its success. Inuvo must recruit and maintain partners who are able to drive traffic successfully to their websites and mobile applications, resulting in clicks on advertisements Inuvo has 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, Inuvo 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 Inuvo as a competitor or may find Inuvo’s competitors’ offerings more desirable. Any of these potential events could have a material adverse effect on Inuvo’s business, financial position and results of operations.

 

The success of Inuvo’s owned sites depend on Inuvo’s ability to acquire traffic in a profitable manner. 

 

Inuvo’s ALOT-branded websites depend on Inuvo’s ability to attract traffic in a profitable manner. Inuvo uses 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, Inuvo may not be able to effectively manage its marketing decisions and could acquire traffic in an unprofitable manner. In addition, Inuvo may not be able to maintain and grow its traffic for a number of reasons, including, but not limited to, acceptance of its websites by consumers, the availability of advertising to promote its websites, competition, and sufficiency of capital to purchase advertising. Inuvo advertises on search engine websites to drive traffic to its owned and operated websites. Inuvo’s keyword advertising is done primarily with Google and Facebook, but also with Yahoo! and Bing. If Inuvo is unable to maintain and grow traffic to its sites in a profitable manner, it could have a material adverse effect on Inuvo’s business, financial condition, and results of operations.

 

Inuvo’s business must keep pace with rapid technological change to remain competitive. 

 

Inuvo’s business operates in a market characterized by rapidly changing technology, evolving industry standards, frequent new product and service announcements, enhancements, and changing customer demands. Inuvo must adapt to rapidly changing technologies and industry standards and continually improve the speed, performance, features, ease of use and reliability of Inuvo’s services. This includes making Inuvo’s products and services compatible and maintaining compatibility with multiple operating systems, desktop and mobile devices, and evolving network infrastructure. If Inuvo fails to do this, its results of operations and financial position could be adversely affected.

 

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Inuvo’s services may be interrupted if Inuvo experiences problems with its network infrastructure.

 

The performance of Inuvo’s network infrastructure is critical to its business and reputation. Because Inuvo’s services are delivered solely through the internet, Inuvo’s network infrastructure could be disrupted by a number of factors, including, but not limited to:

 

·unexpected increases in usage of Inuvo’s 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 Inuvo has data centers in multiple, geographically dispersed locations and active back-up and disaster recovery plans, Inuvo cannot assure you that serious interruptions will not occur in the future. If Inuvo’s services were to be interrupted, it could cause loss of users, customers and business partners, which could have a material adverse effect on Inuvo’s results of operations and financial position.

 

Inuvo depends on key personnel, the loss of whom could harm Inuvo’s business. 

 

Inuvo’s success depends in part on the retention of personnel critical to its 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. Inuvo’s future success is substantially dependent on the continued service of its key senior management. Inuvo has experienced difficulty from time to time in attracting or retaining the personnel necessary to support the growth of its business, and Inuvo may experience similar difficulties in the future.

 

Regulatory and legal uncertainties could harm Inuvo’s 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 Inuvo is involved or the extension of existing laws and regulations to internet-based services could have a material adverse effect on Inuvo’s business, results of operations and financial position.

 

Failure to comply with federal, state and international privacy and data security laws and regulations, or the expansion of current or the enactment of new privacy and data security laws or regulations, could adversely affect Inuvo’s business. 

 

A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. 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, and internationally the European Union’s new GDPR went into effect in May 2018. Inuvo has posted privacy policies and practices concerning the collection, use and disclosure of subscriber data on Inuvo’s websites and applications. The existing and soon to be enacted privacy and data security related laws and regulations are evolving and subject to potentially differing interpretations. 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 Inuvo to comply with its 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, including the GDPR, regulations or industry self-regulatory principles could result in claims, proceedings or actions against Inuvo by governmental entities or others or other liabilities, which could adversely affect Inuvo’s business.

 

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Inuvo 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 Inuvo, including copyright, trademark and patent infringement, among other things. While Inuvo believes that it has defenses to these types of claims under appropriate trademark laws, Inuvo may not prevail in its defenses to any intellectual property infringement claims. In addition, Inuvo may not be adequately insured for any judgments awarded in connection with any litigation. Any such claims and resulting litigation could subject Inuvo to significant liability for damages or result in the invalidation of Inuvo’s proprietary rights, which would have a material adverse effect on its business, financial condition, and results of operations. Even if Inuvo were to prevail, these claims could be time-consuming, expensive to defend, and could result in the diversion of management’s time and attention.

 

Inuvo is subject to risks from publishers who could fabricate clicks either manually or technologically. 

 

Inuvo’s business involves the establishment of relationships with website owners and publishers. In exchange for their consumer traffic, Inuvo provides an advertising placement service and shares a portion of the revenue it collects with that website publisher. Although Inuvo has click fraud detection software in place, Inuvo cannot guarantee that it will identify all fraudulent clicks or be able to recover funds distributed for fabricated clicks. This risk could materially impact Inuvo’s ability to borrow, its cash flow and the stability of its business.

 

A downturn or uncertainty in global economic conditions may have a significant negative effect on Inuvo’s access to credit and its ability to raise capital and may impact its 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 Inuvo 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 Inuvo’s 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 Inuvo or may not pay Inuvo or may delay paying Inuvo for previously performed services. In addition, if consumer spending decreases, this may result in fewer clicks on Inuvo’s advertisers’ ads displayed on Inuvo’s or its partner websites.

 

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Inuvo’s quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of its common stock.

 

Inuvo’s quarterly revenues and other operating results have varied in the past and are likely to continue to vary significantly from quarter to quarter. Inuvo’s agreements with distribution partners and key customers do not require minimum levels of usage or payments, and its revenues therefore fluctuate based on the actual usage of its service each quarter by existing and new distribution partners. Quarterly fluctuations in Inuvo’s operating results also might be due to numerous other factors, including:

 

·its ability to attract new distribution partners, including the length of its sales cycles, or to sell increased usage of its service to existing distribution partners;

 

·technical difficulties or interruptions in its services;

 

·changes in privacy protection and other governmental regulations applicable to its industry;

 

·changes in its pricing policies or the pricing policies of its competitors;

 

·the financial condition and business success of its distribution partners;

 

·purchasing and budgeting cycles of its distribution partners;

 

·acquisitions of businesses and products by Inuvo or its competitors;

 

·competition, including entry into the market by new competitors or new offerings by existing competitors;

 

·discounts offered to advertisers by upstream advertising networks;

 

·its history of litigation;

 

·its 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 Inuvo or its 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.

 

Inuvo has historically had difficulties meeting the financial covenants set forth in its credit agreement.

 

During the third quarter of 2018, Inuvo failed to comply with the minimum revenue and adjusted EBITDA requirement. Inuvo’s lender has given it waivers in the past, including in connection with its failure to meet the covenants during the third quarter of 2018, and reset Inuvo’s financial covenants several times. A breach in its 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 Inuvo has outstanding obligations and are not able to repay, Western Alliance Bank could require Inuvo to apply all of its available cash to repay the debt amounts and could then proceed against the underlying collateral. Should this occur, Inuvo cannot assure you that its assets would be sufficient to repay its debt in full, Inuvo would be able to borrow sufficient funds to refinance the debt, or that Inuvo would be able to obtain a waiver to cure any such default. In such an event, Inuvo’s ability to conduct its business as it is currently conducted would be in jeopardy.

 

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Risks Related to the Combined Company if the Mergers are Completed

 

Failure to successfully combine the businesses of ConversionPoint and Inuvo, or to achieve integration in the expected time frame, may adversely affect New Parent’s future results.

 

The success of the mergers will depend, in part, on New Parent’s ability to realize the anticipated benefits from combining the businesses of ConversionPoint and Inuvo as further described in the section titled “The Mergers—Recommendation of the ConversionPoint Board and its Reasons for the ConversionPoint Merger” beginning on page 152 and “The Mergers—Recommendation of the Inuvo Board and its Reasons for the Inuvo Merger” beginning on page 153. To realize these anticipated benefits, including the cost synergies being forecast, the businesses of ConversionPoint and Inuvo must be successfully integrated. Historically, ConversionPoint and Inuvo have been independent companies, and they will continue to be operated as such until the completion of the mergers. Management of New Parent may face significant challenges in consolidating the functions of Inuvo and ConversionPoint, integrating the technologies, organizations, procedures, policies and operations, as well as addressing the different business cultures of the two companies, and retaining key personnel. If the combined company is not successfully integrated or such integration is delayed, the anticipated benefits of the mergers may not be realized fully or at all, or may take longer to realize than expected. The integration may also be complex and time consuming, and require substantial resources and effort. The integration process and other disruptions resulting from the mergers may also disrupt each company’s ongoing businesses and/or adversely affect their relationships with employees, customers, regulators and others with whom they have business or other dealings.

 

The combined company’s future results will suffer if the combined company does not effectively manage its expanded operations following the mergers.

 

Following the mergers, the size of the combined company’s business will be significantly larger than the current businesses of Inuvo and ConversionPoint. New Parent’s future success depends, in part, upon its ability to manage this expanded business, which will pose substantial challenges for the combined company’s management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. Neither Inuvo nor ConversionPoint can assure you that the combined company will be successful or that the combined company will realize the expected operating efficiencies, annual net operating synergies, revenue enhancements and other benefits currently anticipated to result from the merger.

 

Failure to adequately manage New Parent’s growth could impair its ability to deliver high-quality solutions to its customers, hurt its reputation and compromise its ability to become profitable.

 

New Parent expects to experience significant growth in its business. If New Parent does not effectively manage its growth, the quality of service of its solutions may suffer, which could negatively affect its reputation, demand for its solutions or compromise its ability to become profitable. New Parent’s growth is expected to place a significant strain on its managerial, operational and financial resources and its infrastructure. New Parent’s future success will depend, in part, upon the ability of its senior management to manage growth effectively. This will require New Parent to, among other things, hire additional personnel, implement additional management information systems and maintain close coordination among its engineering, operations, legal, finance, sales and marketing and client service and support organizations.

 

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The loss of key personnel could have a material adverse effect on the combined company’s business, financial condition or results of operations.

 

The success of the mergers will depend in part on the combined company’s ability to retain key employees who continue employment with the combined company after the merger is completed. In addition, certain key executives of Inuvo, including Richard Howe, its CEO, intend to cease an operational role with the combined company within six months following the consummation of the merger. It is possible that other key employees might decide not to remain with the combined company after the merger is completed. The loss of the day-to-day involvement of these executives could have a material adverse effect on the combined company, and if other key employees terminate their employment, the combined company’s business activities might be adversely affected, management’s attention might be diverted from integrating ConversionPoint’s and Inuvo’s operations to recruiting suitable replacements and the combined company’s business, financial condition or results of operations could be adversely affected. In addition, the combined company might not be able to locate suitable replacements for any such key employees who leave the combined company or offer employment to potential replacements on reasonable terms.

 

Most of the senior management team of New Parent will have limited experience managing a publicly traded company, and regulatory compliance may divert their attention from the day-to-day management of New Parent’s business. 

 

Most of the individuals who will constitute New Parent’s senior management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. The senior management team may not successfully or efficiently manage the transition to a public company that is subject to significant regulatory oversight and reporting obligations under United States securities laws. In particular, these new obligations will require substantial attention from the management and could divert their attention away from the day-to-day management of New Parent’s business.

 

 The success of the combined company will depend on relationships with third parties and pre-existing customers of ConversionPoint and Inuvo, which relationships may be affected by customer preferences or public attitudes about the merger. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition or results of operations. 

 

The combined company’s success will be dependent on the ability to maintain and renew business relationships, including relationships with pre-existing customers and partners of both ConversionPoint and Inuvo, and to establish new business relationships. There can be no assurance that the business of the combined company will be able to maintain pre-existing customer contracts, partnership relationships and other business relationships, or enter into or maintain new customer contracts and other partnership and business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on the business, financial condition or results of operations of the combined company.

 

The combined company will incur significant transaction and merger-related costs in connection with the mergers. 

 

ConversionPoint and Inuvo expect to incur significant costs associated with completing the mergers and combining the operations of the two companies. Although the exact amount of these costs is not yet known, ConversionPoint and Inuvo estimate that these costs will be significant. In addition, there may be unanticipated costs associated with the integration. Although ConversionPoint and Inuvo expect that the elimination of duplicative costs and other efficiencies may offset incremental transaction and merger-related costs over time, these benefits may not be achieved in the near term or at all.

 

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The combined company will record goodwill that could become impaired and adversely affect the combined company’s operating results. 

 

The mergers will be accounted for as an acquisition of Inuvo by ConversionPoint, in accordance with accounting principles generally accepted in the United States. Under the acquisition method of accounting, the assets and liabilities of ConversionPoint and Inuvo will be recorded, as of completion, at their respective fair values and added to those of ConversionPoint and Inuvo, respectively. The reported financial condition and results of operations of New Parent issued after completion of the mergers will reflect ConversionPoint and Inuvo balances and results after completion of the mergers, but will not be restated retroactively to reflect the historical financial position or results of operations of ConversionPoint and Inuvo for periods prior to the mergers. Following completion of the mergers, the earnings of the combined company will reflect acquisition accounting adjustments. See “Unaudited Pro Forma Combined Condensed Financial Statements” beginning on page 200.

 

Under the acquisition method of accounting, the total purchase price will be allocated to the tangible assets and liabilities and identifiable intangible assets acquired in the mergers based on their fair values as of the date of completion of the mergers. The excess of the purchase price over those fair values will be recorded as goodwill. Inuvo and ConversionPoint expect that the mergers will result in the creation of goodwill based upon the application of the acquisition method of accounting. To the extent the value of goodwill or intangibles becomes impaired, the combined company may be required to incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on the combined company’s operating results.

 

New Parent’s ability to utilize net operating loss carryforwards and certain other tax attributes may be limited. 

 

Federal and state income tax laws impose restrictions on the utilization of net operating losses, which we refer to as NOL, and tax credit carryforwards in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Code. In general, an ownership change occurs when stockholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOL or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year period. The annual base limitation under Section 382 of the Code is calculated by multiplying the loss corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the IRS in the month of the ownership change or the two preceding months.

 

As of September 30, 2018, ConversionPoint and Inuvo had $33.8 million and $82.5 million, respectively, of federal NOLs that are currently limited in their annual use. As a result of the mergers, it is possible that either or both ConversionPoint and Inuvo will be deemed to have undergone an “ownership change” for purposes of Section 382 of the Code. Accordingly, the combined company’s ability to utilize ConversionPoint’s and/or Inuvo’s NOL carryforwards may be substantially limited. These limitations could in turn result in increased future tax payments for the combined company, which could have a material adverse effect on the business, financial condition or results of operations of the combined company. 

 

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The combined company’s indebtedness following the merger will be significant. It may be difficult for the combined company to pay or refinance its debts and the combined company may need to divert its cash flow from operations to debt service payments. Such indebtedness could limit the combined company’s ability to pursue other strategic opportunities and increase its vulnerability to adverse economic and industry conditions.

 

In connection with the mergers, the combined company will be responsible for ConversionPoint and Inuvo’s outstanding debt. Inuvo’s total indebtedness as of November 30, 2018, was approximately $3.6 million, including $2.0 million due under a loan agreement with Western Alliance Bank, and ConversionPoint’s indebtedness as of December 12, 2018, was approximately $6.2 million. The combined company’s debt service obligations with respect to this increased indebtedness could have an adverse impact on its earnings and cash flows, which after the mergers would include the earnings and cash flows of ConversionPoint, for as long as the indebtedness is outstanding. 

 

The combined company’s increased indebtedness could also have important consequences to holders of New Parent common stock. For example, it could:

 

·make it more difficult for the combined company to pay or refinance its debts as they become due during adverse economic and industry conditions because any decrease in revenues could cause the combined company to not have sufficient cash flows from operations to make its scheduled debt payments;

 

·limit the combined company’s flexibility to pursue other strategic opportunities or react to changes in its business and the industry in which it operates and, consequently, place the combined company at a competitive disadvantage to its competitors with less debt; or

 

·require a substantial portion of the combined company’s cash flows from operations to be used for debt service payments, thereby reducing the availability of its cash flow to fund working capital, capital expenditures, acquisitions, dividend payments and other general corporate purposes.

 

Based upon current levels of operations, management of ConversionPoint and Inuvo expect the combined company to be able to generate sufficient cash on a consolidated basis to make all of the principal and interest payments when such payments are due under its existing credit facilities, indentures and other instruments governing their outstanding indebtedness, and the indebtedness of ConversionPoint and Inuvo that may remain outstanding after the merger, but there can be no assurance that the combined company will be able to repay or refinance such borrowings and obligations.

 

The mergers may not be accretive, and may be dilutive, to ConversionPoint’s and Inuvo’s earnings per share, which may negatively affect the market price of New Parent common stock.

 

Although the mergers are expected to be accretive to earnings per share, the mergers may not be accretive, and may be dilutive, to ConversionPoint’s and Inuvo’s earnings per share. The expectation that the mergers will be accretive is based on preliminary estimates that may materially change. In addition, future events and conditions could decrease or delay any accretion, result in dilution or cause greater dilution than may be expected, including:

 

·adverse changes in market conditions;

 

·the market for e-commerce marketing solutions;

 

·operating results;

 

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·competitive conditions;

 

·laws and regulations affecting e-commerce and online marketing

 

·inability to effectively integrate ConversionPoint’s and Inuvo’s operations and technology solutions;

 

·capital expenditure obligations; and

 

·general economic conditions.

 

Any dilution of, or decrease or delay of any accretion to, ConversionPoint’s or Inuvo’s earnings per share could cause the price of New Parent’s common stock to decline.

 

Business issues currently faced by one company may be imputed to the operations of the other company or the combined company. 

 

To the extent that either ConversionPoint or Inuvo currently has or is perceived by customers to have operational challenges, those challenges may raise concerns by existing customers of the other company following the merger which may limit or impede New Parent’s future ability to maintain relationships with those customers.

 

The certificate of incorporation of New Parent provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between New Parent and its stockholders, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with New Parent or its directors, officers or employees.

 

The certificate of incorporation of New Parent provides that unless New Parent consents in writing to the selection of an alternative forum, the State of Delaware is the sole and exclusive forum for: (a) any derivative action or proceeding brought on behalf of New Parent; (b) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of New Parent to New Parent or its stockholders; (c) any action or proceeding asserting a claim arising pursuant to any provision of the General Corporation Law of Delaware, certificate of incorporation or bylaws of New Parent; or (d) any action or proceeding asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with New Parent or its directors, officers or other employees, which may discourage such lawsuits against New Parent and its directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in the certificate of incorporation to be inapplicable or unenforceable in an action, New Parent may incur additional costs associated with resolving such action in other jurisdictions, which could harm its business, results of operations, and financial condition.

 

The unaudited pro forma combined condensed financial information included in this document may not be indicative of what New Parent’s actual financial position or results of operations would have been.

 

The unaudited pro forma combined condensed financial information in this joint proxy statement/prospectus is presented for illustrative purposes only and is not necessarily indicative of what New Parent’s actual financial position or results of operations would have been had the mergers been completed on the dates indicated. The unaudited pro forma combined condensed financial information reflects adjustments, which are based upon preliminary estimates, to allocate the purchase price to the assets acquired and liabilities assumed of Inuvo based on their fair value. The purchase price allocation reflected in this document is preliminary, and final allocation of the purchase price will be based upon the actual purchase price and the fair value of the assets acquired and liabilities assumed of Inuvo as of the date of the completion of the mergers. In addition, subsequent to the closing date, there may be refinements to the purchase price allocation as additional information becomes available. Accordingly, the final purchase price allocation may differ materially from the pro forma adjustments reflected in this document. See “Selected Unaudited Pro Forma Combined Condensed Financial Information,” beginning on page 27 and “Unaudited Pro Forma Combined Condensed Financial Statements,” beginning on page 200, for more information.

 

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ConversionPoint, Inuvo and, after the mergers, the combined company, must continue to retain, motivate and recruit executives and other key employees, which may be difficult in light of uncertainty regarding the mergers, and failure to do so could negatively affect the combined company.

 

For the mergers to be successful, during the period before the mergers are completed, both ConversionPoint and Inuvo must continue to recruit, retain and motivate executives and other key employees. Moreover, the combined company must be successful at retaining and motivating key employees following the completion of the mergers. Experienced employees in the industries in which ConversionPoint and Inuvo operate are in high demand and competition for their talents can be intense. Employees of both ConversionPoint and Inuvo, and potential recruits to the companies, may experience uncertainty about their future role with the combined company until, or even after, strategies with regard to the combined company are announced or executed. The potential distractions of the mergers may adversely affect the ability of ConversionPoint, Inuvo or, following completion of the mergers, the combined company, to retain, motivate and recruit executives and other key employees and keep them focused on applicable strategies and goals. A failure by ConversionPoint, Inuvo or, following the completion of the mergers, the combined company, to attract, retain and motivate executives and other key employees during the period prior to or after the completion of the mergers could have a negative impact on the business of ConversionPoint, Inuvo or the combined company.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

The statements in this joint proxy statement/prospectus and the documents incorporated by reference herein that are not historical statements, including statements regarding the expected timetable for completing the mergers, benefits and synergies of the mergers, future opportunities for the combined company and products, future financial performance and any other statements regarding ConversionPoint’s and Inuvo’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts, are forward-looking statements within the meaning of the federal securities laws. These statements are subject to numerous risks and uncertainties, many of which are beyond the companies’ control, which could cause actual results to differ materially from the results expressed or implied by the statements. These risks and uncertainties include, but are not limited to: failure to obtain the required votes of ConversionPoint’s or Inuvo’s stockholders; the timing to consummate the mergers; the risk that conditions to closing of the mergers may not be satisfied or the closing of the mergers may otherwise not occur; the diversion of management time from operations to transaction-related issues; the ultimate timing, outcome and results of integrating the operations and technology solutions of ConversionPoint and Inuvo; the effects of the business combination of ConversionPoint and Inuvo, including New Parent’s future financial condition, results of operations, strategy and plans; expected synergies and other benefits from the mergers and the ability of New Parent to realize such synergies and other benefits; the possibility that ConversionPoint and Inuvo may not be able to maintain relationships with their employees, partners, suppliers or customers as a result of the uncertainty surrounding the mergers; results of litigation, settlements and investigations; actions by third parties, including governmental agencies; consequences of audits and investigations by government agencies and legislative bodies and related publicity and potential adverse proceedings by such agencies; protection of intellectual property rights and against cyber-attacks; compliance with laws related to income taxes and assumptions regarding the generation of future taxable income; structural changes in the e-commerce industry and maintaining a highly skilled workforce.

 

Any forward-looking statements should be considered in light of such important factors. ConversionPoint and Inuvo undertake no obligation to revise or update publicly any forward-looking statements for any reason. Readers are cautioned not to place undue reliance on any forward-looking statement, which speaks only as of the date on which such statement is made or in the case of Inuvo documents incorporated by reference, as of the date of the document incorporated by reference.

 

All subsequent written and oral forward-looking statements concerning the mergers or other matters addressed in this joint proxy statement/prospectus and attributable to ConversionPoint, Inuvo, New Parent or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this joint proxy statement/prospectus.

 

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DESCRIPTION OF CONVERSIONPOINT

 

Company Overview

 

ConversionPoint, through its wholly-owned subsidiaries, helps e-commerce companies and brands target, convert, manage and re-engage their customers using sophisticated online tracking and data analytics. ConversionPoint’s suite of technologies manages and optimizes multiple aspects of e-commerce including: rich media content creation and syndication, audience targeting, conversion optimization, remarketing, logistics and customer management. ConversionPoint both delivers its technologies to its customers through software-as-a-service, which we refer to as SaaS, and uses its technologies to provide managed digital marketing and e-commerce technology services to brands and advertisers, which we refer to as managed services. ConversionPoint also uses its own technologies to sell various products directly to consumers, which we refer to as e-commerce sales. ConversionPoint’s vision is to simplify the entire e-commerce experience by integrating its technologies and offering a broad range of e-commerce solutions on a single, easy-to-use platform.

 

ConversionPoint was formed as a Delaware corporation on November 2, 2016, by the founders of Branded Response Inc., a California corporation, which was formed in May 2016. Branded Response began as an e-commerce seller of health, wellness and beauty products. Branded Response’s management team had significant prior successes in creating direct-to-consumer e-commerce product campaigns. As Branded Response’s sales began to grow, its management began evaluating e-commerce technologies to become more efficient and cost effective at acquiring customers and maximizing customer life-time value with respect to the sale of its own products. Branded Response began collaborating with Push Interactive, LLC, a direct-to-consumer marketing company based in Minneapolis, Minnesota, formed in May 2010, which had developed a suite of online marketing technologies to increase the efficiency of their own product sales. Push and Branded Response realized that the e-commerce market lacked an end-to-end solution to manage the entire e-commerce marketing, sales, customer service and logistics process. In April 2017, ConversionPoint acquired both Push and Branded Response, with the vision of using Push’s technology platform as the foundation to develop both organically and through strategic acquisition, a unified e-commerce solution to (a) more efficiently manage the companies’ own internal e-commerce product campaigns, (b) manage campaigns for third parties, on a managed services basis, and (c) license to third parties on a self-serve SaaS subscription basis. In 2017, ConversionPoint began generating managed service revenues.

 

In December 2017, ConversionPoint acquired SellPoints, Inc., a venture-backed Delaware corporation, formed in May 2000, which had developed a suite of software solutions enabling brands to create and syndicate rich media content to a network of online retailers, track online consumer behavior, retarget consumers based on their online behavior, and deliver robust data analytics and reporting. ConversionPoint believed that SellPoints’ technologies, coupled with its large brand customers and partners, would add significant capabilities to the end-to-end e-commerce platform ConversionPoint was creating.

 

Industry Background

 

Growing e-commerce market

 

The U.S. e-commerce market is evolving and continues to be a high growth market as retailers and brands increase their online sales. According to an article published by e-Marketer.com on September 17, 2018, in the U.S. alone, over $525 billion in e-commerce sales will be consummated in 2018, with Amazon.com controlling approximately 50% of the U.S. market.

 

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ConversionPoint believes that Amazon.com has developed its leading market position, in part, due to its technology foundation across the entire consumer online retail lifecycle which enables Amazon to leverage customer shopping data as predictors of future purchase behavior. While Amazon.com dominates the online retail market in the U.S. and has positioned itself as strategically aligned with small and medium sized retailers, ConversionPoint believes Amazon.com’s dominance is making it increasingly difficult for non-Amazon online sellers to access shoppers. ConversionPoint believes this leaves retailers in a difficult situation with Amazon.com, because although retailers can reach large audiences through Amazon.com, participation in the Amazon.com marketplace comes with large fees and minimal access to customer data.

 

ConversionPoint believes this creates an increasingly large market opportunity for data driven e-commerce solutions to assist brands and retailers selling through non-Amazon.com channels. E-commerce platforms such as Shopify and Big Commerce, as well as leading retailers such as Walmart and Office Depot, continue to drive innovation through disparate technologies to lower customer acquisition costs while increasing the yield on e-commerce media spend.

 

Increasing complexity of e-commerce

 

ConversionPoint believes that several significant trends have contributed to an increasing complexity and fragmentation of digital marketing and sales, including:

 

·Multiple digital marketing channels. There are numerous digital marketing channels including, but not limited to, search, display, video, native, email, text and social advertising which are available to retailers, advertisers and brands as a conduit to the consumers who purchase their products. These channels are fragmented, each with their own platforms the lack of integration from which limits their ability to holistically serve those consumers.

 

·Third-party marketplaces.   Third-party marketplaces such as Amazon.com, Etsy.com and eBay, aggregate multiple sellers of similar products, thus creating control over marketplaces for themselves while offering little technical differentiation for consumer acquisition between sellers.

 

·Increased use of mobile devices for e-commerce.  The rapid adoption of mobile internet-enabled devices, such as smartphones and tablets, has resulted in an increase in mobile commerce, which is transforming the way consumers shop and make purchase decisions.

 

·Growth of additional online consumer touch points.   As consumers have moved more of their shopping online, search engines, social networks, content rich advertorials, and brand websites, have emerged as key influencers and important points of product research for consumers making purchase decisions.

 

·Consolidation of Customer Relationship Management and Marketing / Advertising. ConversionPoint believes that a convergence of business-to-business and business-to-consumer customer data, actionable on a single platform is a necessary requirement to delivering on the promise of consumer engagement. The implication of this belief inevitably leads to a consolidation of technologies from first contact through fulfillment with the consumer.

 

Key Challenges Facing Retailers and Brands Selling Online

 

As online shopping increases, ConversionPoint believes it is becoming critical for brands, advertisers and retailers to leverage data and technology for reach, efficiency and return on e-commerce investment. According to AdMaster’s 2018 Digital Marketing Trends report, advertisers and brands are allocating a larger portion of their advertising budgets to digital marketing and are seeking a more efficient and measurable way to reach their target audience. ConversionPoint believes its solutions address the challenges the industry faces today, which include:

 

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·In-house solutions are costly and slow to innovate.   Retailers and brands that rely on in-house capabilities may have to invest in and maintain significant technological infrastructure, human resources and industry relationships, which requires significant capital and long periods of time to set up. This presents a challenge for many small to medium businesses ranging from $2 million to $150 million in revenue, which we refer to as SMBs.

 

·Fragmented solutions. ConversionPoint’s competitors offer a single-point solution, rather than a suite of e-commerce technologies for content creation, content management, customer acquisition, customer relationship management, data analytics, fulfillment, delivery and remarketing. Point solutions do not address the needs of retailers and brands seeking an integrated solution to manage multiple aspects of online marketing. Furthermore, ConversionPoint believes retailers or brands stitching multiple point solutions together generally results in technology and data integrity challenges.

 

·Lack of visibility.   To measure success and maximize return on investments, advertisers need to access, correlate and analyze large amounts of data across multiple technology platforms in real-time. The lack of access to, and integration of customer data between, multiple technology platforms makes it difficult for brands and retailers to gain accurate insights into consumer behavior necessary to adapt their e-commerce strategies to improve return on e-commerce investment.

 

·Inefficient content management. Brands selling products through multiple online retailers generally must upload and update rich media content separately on each retailer’s website. Without a rich media content syndication platform integrated with major retailers, brands must upload and update rich media product content on multiple online retailer websites, which is inefficient and may require significant human capital.

 

ConversionPoint’s Solutions

 

ConversionPoint’s technologies optimize many aspects of the e-commerce ecosystem.

 

Ultimately, through its SaaS and managed service offerings, ConversionPoint’s technology platforms make it easy for brands to more cost effectively generate and manage online sales. For example, ConversionPoint provides manufacturer brands with tools to create and syndicate rich media product content across ConversionPoint’s network of online retailers. Additionally, manufacturer brands, leveraging ConversionPoint’s technologies, can retarget shoppers, launch CRM acquisition programs, optimize acquisition media spend, improve add-to-cart rates, and manage shipping logistics and fulfillment.

 

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ConversionPoint is in the process of unifying its current technology solutions into an integrated platform to provide manufacturer brands and retailers with an end-to-end SaaS offering.

 

ConversionPoint believes its solutions offer the following benefits:

 

·End-to-end technology solution.  ConversionPoint provides technology solutions for managing most aspects of the e-commerce process, including, digital ad buying with real-time optimization, online retailer marketing, customer relationship management, remarketing and logistics.

 

·Reduced integration costs, time to market and dependence on in-house resources.   Customers can more efficiently market their products through existing and new online channels without the costs related to installing and maintaining their own hardware and software infrastructure, while minimizing in-house head count. ConversionPoint manages or hosts its solutions on behalf of its customers, thereby reducing the customer’s cost and dependency on dedicated IT staff, offsite hosting and on-premises systems.

 

·Unified content creation and product information management.  ConversionPoint’s multi-channel rich media content creation and syndication platform provides customers with one interface to create, syndicate and manage interactive content experiences across ConversionPoint’s network of online retailers.

 

·Highly relevant, targeted ads. Through ConversionPoint’s sophisticated consumer online behavioral tracking technology, ConversionPoint delivers highly relevant and targeted digital ads at opportune times.

 

·Media optimization.  ConversionPoint’s real-time multivariate testing technology optimizes to the highest converting advertising yield to maximize return on investment for manufacturer brands.

 

·Extension of lifetime customer value. Brands can use ConversionPoint’s technology to control and optimize the offering of additional items for purchase upon checkout, and offer customized membership programs, both of which can increase the lifetime value of customers.

 

·Robust data and analytics reporting.  ConversionPoint captures meaningful consumer behavioral data, which it uses to continually optimize the performance of its solutions. The scale and breadth of this data is continually growing as more interactive content experiences are published and consumers interact with such experiences. Through ConversionPoint’s robust data and analytics reporting, ConversionPoint provides brands and advertisers with valuable insights into the performance of digital marketing campaigns, including campaign delivery data (such as impressions, views and clicks), performance data (such as cost-per-click, earnings per-click, conversion rates and cost per acquisition), and anonymous buyer data (such as geography, device type and referral source). These reports provide brands and advertisers with actionable insights that allow them to evaluate and improve the efficiency of their e-commerce campaigns.

 

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ConversionPoint’s Technology Products

 

ConversionPoint offers a suite of solutions applicable to the pre-sale, sale and post-sale moments of the shopper journey.

 

Pre-Sale: ConversionPoint’s suite of media buying and online sales and marketing management tools allow ConversionPoint and its advertisers and brands to target consumers based on their online behavior, and engage in and optimize media buying and campaign management in real time. ConversionPoint’s multi-variate testing technology helps manufacturer brands increase the yield of their digital marketing spend.

 

ConversionPoint’s pre-sale products include:

 

·Digital media optimization: ConversionPoint’s digital media optimization platform creates customized landing pages and engages in real-time testing to determine the highest converting ads and landing pages, together with the best multi-variate online placement to maximize return on investment.

 

·Retargeting: ConversionPoint’s retargeting platform uses algorithmic audience segmentation and aggregates anonymous consumer data related to the timing and nature of their interaction with product content to construct high-value audience segments for display advertising campaigns. The technology associates these segments with relevant ad units, enabling the delivery of impactful ads to consumers at the most opportune times.

 

Sale: ConversionPoint’s online sales solutions enable manufacturer brands to create and syndicate rich media content to ConversionPoint’s network of online retailers and improve the buying experience across online retailers. ConversionPoint’s data analytics and reporting capabilities provide engagement insights that can be used to optimize marketing efforts.

 

·Interactive content builder: ConversionPoint’s interactive content building platform is a programmatic, user friendly platform which enables brands to construct highly engaging product experiences, including, videos, images, 360 degree animated views, documents, and comparison charts. Content can be custom designed to appear native to the target website and delivered inline, overlaid on top of existing elements, or as a call to action or button.

 

·Content syndicator: ConversionPoint’s content syndication platform allows brands to organize and publish the rich media experiences constructed using the interactive content builder, to retailer websites within ConversionPoint’s retailer network.

 

·Reporting dashboard: Anonymous data collected from consumer interactions with brand content is curated into a suite of customizable reports and dashboards providing brands and advertisers with valuable marketing and data analytics, enabling them to leverage engagement insights to optimize their digital marketing efforts.

 

·Retargeting: ConversionPoint’s retargeting technology tracks various shopping behaviors, builds audience segments according to those behaviors and can then deliver more effective advertising to those segments at opportune times.

 

·Secure payments processing platform: By integrating with major payment gateways, ConversionPoint’s technologies provide high level data security, fraud protection and dispute resolution.

 

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Post-Sale: ConversionPoint’s post-sale solutions manage shipping and fulfillment, customer communications, upsells and remarketing. ConversionPoint’s post-sale solutions include:

 

·Shipping management platform: ConversionPoint’s shipping and logistics solutions manage, among other things, product shipments and can deliver shipping notifications to consumers, on brand.

 

·Customer communications: ConversionPoint’s platform provides brands and advertisers with multiple post-sale customer touchpoints, including, on brand order confirmations and reorder reminder triggers. ConversionPoint’s platform also includes email and SMS capabilities that allows brands to communicate with consumers following a sale.

 

·Remarketing: ConversionPoint’s retargeting technology tracks consumer post-sale behavior and can re-engage prior customers with relevant offers.

 

·Recurring membership programs: Through ConversionPoint’s platforms, brands can create customized membership programs to keep consumers engaged and increase lifetime customer value.

 

·Dashboard and reporting: ConversionPoint unifies sales data from various e-commerce storefronts, providing a dashboard of marketing expenses and sales, for profit and loss performance reporting.

 

Customers

 

ConversionPoint serves customers across a wide range of industries and geographies. ConversionPoint’s customers include both traditional and online retailers, and small and large brands, such as Canon USA, Intel, Brother, FujiFilm and Nikon.

 

Key Relationships

 

ConversionPoint has long-standing relationships with Walmart, Lowes, Costco and other major online retailers, which integrate ConversionPoint’s JavaScript tags on their online retail store web pages, allowing ConversionPoint’s brand customers to directly publish interactive experiences and product information to such retail websites.

 

ConversionPoint’s Competitive Strengths

 

ConversionPoint believes it has the following competitive strengths:

 

·Full suite of solutions.   ConversionPoint provides a full suite of solutions to create and publish product experiences, target, convert and re-engage consumers, and manage payments and logistics. ConversionPoint’s interactive content builder, content syndication, and digital media optimization platforms are currently available as SaaS solutions and through managed services. ConversionPoint’s retargeting and customer relationship management platforms are currently offered through managed services, however, both are actively being developed into SaaS solutions. ConversionPoint is unifying all of its current technology solutions into an integrated platform to provide brands a fully integrated self-serve SaaS offering.

 

·Unified content creation and product management.  ConversionPoint’s content builder and syndication technology provides customers with one interface to create interactive rich media product experiences, and publish such rich media content across ConversionPoint’s network of online retailers.

 

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·Highly relevant and targeted ads. Through algorithmic audience segmentation technology, ConversionPoint delivers targeted ads to high value audiences at opportune times. These audiences can be segmented across a broad spectrum of behavioral and demographic attributes.

 

·Experienced management team.   ConversionPoint has a management team with deep operational experience in technology, software development, e-commerce, digital marketing, media buying, customer conversion and retail strategy.

 

·Cutting edge engineering. ConversionPoint engineering leverages modern technologies to solve complex problems using its proprietary development framework, including its full stack, continuous development ecosystem that enables it to accelerate new application and iterative development.

 

·Robust and flexible integration.  ConversionPoint’s platform is designed to enable its customers to easily integrate with business information systems, other service providers and ConversionPoint’s partners.

 

·Deep data analytics. ConversionPoint gathers vast amounts of data related to consumer online behavior and curates such data into customizable reports and dashboards that provide valuable and actionable insights. These reports improve visibility into a seamless and connected consumer purchase journey, enabling brands and advertisers to measure and optimize their digital marketing spend while increasing their customer life time value.

 

ConversionPoint’s Growth Strategy

 

The following are key elements of ConversionPoint’s growth strategy:

 

·Expand salesforce to acquire new customers and online advertisers.  ConversionPoint intends to increase its salesforce to expand its existing partnerships with leading online retailers and brands and to aggressively activate new online retail partnerships and new brand advertiser relationships.

 

·Development of end-to-end unified SaaS offering. ConversionPoint is actively unifying all of its technology platforms into one framework to provide a streamlined user experience for customers to leverage all of ConversionPoint’s applications through a SaaS model.

 

·Focus on SMBs. ConversionPoint believes that there is a significant opportunity for an end-to-end e-commerce technology solution for small and mid-size businesses, or SMBs, seeking to grow their online sales without dealing with the many challenges of integrating multiple point solutions. ConversionPoint intends to heavily market its platforms to SMBs.

 

·Maintain innovation. ConversionPoint continues to develop and introduce new features and improved functionality to its platforms. Key initiatives include development of easy to use self-serve platforms for SMBs, and continued development of AI-enhanced marketing technologies, including, but not limited to, technology for syndicating customized rich media content and product page layouts based on consumer profiles and behavior.

 

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·Expand the number of retailers supported by ConversionPoint’s content syndication platform.  ConversionPoint’s network already includes a multitude of online retailers such as Walmart, Costco and Office Depot. ConversionPoint intends to expand its network of online retailers, which ConversionPoint believes will result in meaningful growth of both its manufacturer brand customer base and the sales they can process through ConversionPoint’s technology platforms.

 

·Opportunistically pursue strategic acquisitions.  ConversionPoint intends to opportunistically pursue acquisitions of complementary businesses and technologies that are consistent with its overall e-commerce technology growth strategy. ConversionPoint believes that a selective acquisition strategy will enable ConversionPoint to enhance its technology capabilities, gain new customers and accelerate its expansion into new markets.

 

ConversionPoint’s Technology Platform

 

ConversionPoint has developed its proprietary technology platform with a focus on delivering industry-leading breadth, scalability, reliability and flexibility. A portion of ConversionPoint’s platform is cloud-based and SaaS, with a single code base and multi-tenant software architecture. Because of this architecture, there is no need for its customers to download, install or upgrade software.

 

ConversionPoint developed its software using agile software development methodologies, which allow ConversionPoint to rapidly iterate by developing small, incremental changes that are continuously integrated into its code base.

 

ConversionPoint hosts its platform on secure third party hosting platforms, using servers, networking systems and storage systems it leases from its hosting providers. ConversionPoint employs system security, including firewalls, load balancers, threat protection layers, encryption technology and antivirus software, and conducts regular system tests and vulnerability and intrusion assessments. In the event of failure, ConversionPoint has engineered its systems with backup and recovery capabilities designed to provide for business continuity.

 

Research and Development

 

ConversionPoint’s research and development efforts are focused on the following:

 

·integrating and enhancing the architecture of its various technology platforms;

 

·creating additional functionality for its customers, including developing AI-enhanced marketing technologies;

 

·maintaining and extending its integration with the online channels it supports; and

 

·developing an integrated self-serve SaaS platform for SMBs.

 

Intellectual Property

 

ConversionPoint’s ability to protect its intellectual property, including its technology, will be an important factor in the success and continued growth of its business. ConversionPoint protects its intellectual property through trade secrets law, copyrights, trademarks and contracts. ConversionPoint has filed four provisional U.S. patent applications related to its content creation, syndication and online tracking technologies. Some of ConversionPoint’s technologies rely on third-party licensed intellectual property. ConversionPoint also protects details about its processes, products, and strategies as trade secrets, keeping confidential the information that it believes provides it with a competitive advantage.

 

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In addition, ConversionPoint has established business procedures designed to maintain the confidentiality of its proprietary information, including the use of confidentiality agreements and assignment-of-inventions agreements with employees, independent contractors, consultants and companies with which ConversionPoint conducts business.

 

Employees

 

As of December 14, 2018, ConversionPoint had 96 full-time employees, none of which are covered by a collective bargaining agreement.

 

Facilities

 

ConversionPoint’s corporate headquarters are located in Newport Beach, California, where it leases 9,209 square feet of office space. The lease has a term of five years, and expires in July 2023. It also conducts operations from 26,558 square feet of office and warehouse space in Minneapolis, Minnesota, which consists of 3 interconnected buildings, pursuant to a lease that has a term of 60 months and expires in December 2021. It also operates from 15,096 square feet of office space in Emeryville, California pursuant to a lease that expires in May 2021.

 

Government Regulation

 

The legal environment of the Internet is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations will be applied to the internet in general, and how they will relate to ConversionPoint’s business in particular, both in the United States and internationally, are often unclear. For example, ConversionPoint often cannot be certain how existing laws will apply in the e-commerce and online context, including with respect to such topics as privacy, pricing, credit card fraud, advertising, taxation, content regulation, quality of products and services and intellectual property ownership and infringement. Furthermore, it is not clear how existing laws governing issues such as sales and other taxes and personal privacy will apply to the internet, as many of these laws were adopted prior to the advent of the internet and do not contemplate or address the unique issues raised by the internet or e-commerce. It is also unclear how the laws that do reference the internet will be interpreted by courts, which may impact their applicability and scope. Compliance may be costly and may require ConversionPoint to modify its business practices and product offerings. In addition, it is possible that governments of one or more countries may seek to censor content available on ConversionPoint’s or its customer’s websites or may even attempt to completely block access to those websites. Noncompliance or perceived noncompliance could also subject ConversionPoint to significant penalties and negative publicity. Accordingly, adverse legal or regulatory developments could substantially harm ConversionPoint’s business.

 

Customers load product information and other content onto ConversionPoint’s platform, generally without any control or oversight by ConversionPoint, at which point ConversionPoint may legally be considered to be the distributor of that content. This presents legal challenges to ConversionPoint’s business and operations, such as rights of privacy or intellectual property rights related to the content loaded onto ConversionPoint’s platform. Both in the United States and internationally, ConversionPoint must monitor and comply with a host of legal concerns regarding the content loaded onto its platform. The scope of ConversionPoint’s liability for third-party content loaded onto its platform for delivery to various online e-commerce channels may vary from jurisdiction to jurisdiction and may vary depending on the type of claim, such as privacy, infringement or defamation claims. ConversionPoint’s ability to employ processes to quickly remove infringing or offending content from its platform, for example, is an important tool in protecting ConversionPoint from exposure for the potentially infringing activities of its customers. ConversionPoint also incorporates protections in customer contracts that allows ConversionPoint to take steps, if needed, to limit its risk regarding much of the content loaded onto, and collected by, ConversionPoint’s platform and solutions.

 

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Numerous laws and regulatory schemes have been adopted at the national and state level in the United States and internationally that have a direct impact on ConversionPoint’s business and operations. These laws include, but are not limited to, the following:

 

Copyright and trademark.    The Copyright Act of 1976 and the statutes and regulations associated with copyrights and trademarks and enforced by the United States Patent and Trademark Office are intended to protect the rights of third parties from infringement. Using certain of ConversionPoint’s services, customers can upload any content they desire for use with ConversionPoint’s solutions. ConversionPoint maintains an active copyright and trademark infringement policy and responds to take-down requests by third-party intellectual property right owners that might result from content posted by ConversionPoint’s customers using ConversionPoint’s solutions. As ConversionPoint’s business expands to other countries, ConversionPoint must also respond to regional and country-specific intellectual property considerations, including take-down and cease and desist notices in foreign languages, and ConversionPoint must build infrastructure to support these processes. The Digital Millennium Copyright Act, or DMCA, also applies to ConversionPoint’s business. This statute provides relief for claims of circumvention of copyright-protected technologies but includes a safe harbor that is intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others.

 

Data privacy and security.    Data privacy and security with respect to the collection of personally identifiable information continues to be a focus of worldwide legislation and compliance review. Examples include statutes adopted by the State of California that require online services to report breaches of the security of personal data, and to report to California customers when their personal data might be disclosed to direct marketers. In the European Union, where U.S. companies must meet specified privacy and security standards, the Data Protection Directive requires comprehensive information privacy and security protections for consumers with respect to information collected about them. Compliance requirements include disclosures, consents, transfer restrictions, notice and access provisions for which ConversionPoint may in the future need to build further infrastructure to support. ConversionPoint attempts to adhere to the Data Protection Directive’s Safe Harbor Privacy Principles and comply with the U.S.-E.U. Safe Harbor Framework as agreed to and set forth by the U.S. Department of Commerce and the European Union concerning U.S. companies doing business in Europe and collecting personal information from European citizens. Under the Safe Harbor Framework, ConversionPoint posts on its website, privacy policies and practices concerning the use and disclosure of user data. Any failure by ConversionPoint to comply with its posted privacy policies, the Safe Harbor Framework, U.S. Federal Trade Commission, or FTC, requirements or other privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies that could potentially harm its business, results of operations and financial condition.

 

In this regard, there are a large number of legislative proposals before the U.S. Congress and various state legislative bodies regarding privacy issues that could affect ConversionPoint’s business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm ConversionPoint’s business through a decrease in customers and revenue. These decreases could be caused by, among other possible provisions, the required use of disclaimers or other requirements before prospective buyers can interact with ConversionPoint’s customers. ConversionPoint uses tracking technology to track purchases and consumer online behavior to enable ConversionPoint to serve relevant ads to consumers based on their online behavior. Laws prohibiting or inhibiting such tracking could make it difficult to effectively provide certain of ConversionPoint’s services. The interpretation and implementation of processes to comply with cookie laws continues to evolve, and ConversionPoint cannot predict how any new laws will apply to ConversionPoint or its business.

 

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Credit card protections.  ConversionPoint collects credit card data in processing the fees paid to ConversionPoint by its customers, as well as consumer credit card information when ConversionPoint’s customers use some of its solutions. Several major credit card companies have formed the Payment Card Industry Council, or PCI Council, in order to establish and implement security standards for companies that transmit, store or process credit card data. The PCI Council has created the Payment Card Industry Data Security Standard, or PCI DSS. Although the PCI DSS is not law, merchants using PCI Council members to process transactions are required to comply with the PCI DSS, with associated fines and penalties for non-compliance. Elements of the PCI DSS have begun to emerge as law in some states, however, and ConversionPoint expects the trend to continue as to further laws and restrictions in collecting and using credit card information.

 

Legal Proceedings

 

From time to time, ConversionPoint is subject to claims arising in the ordinary course of business. ConversionPoint is not currently a party to any legal proceedings and is not aware of any material pending or threatened legal proceeding against ConversionPoint.

 

Competition

 

The overall market for e-commerce solutions is rapidly evolving, highly competitive, complex, fragmented with numerous single point solutions, and is subject to changing technology and shifting customer needs. ConversionPoint faces significant competition. To maintain and improve ConversionPoint’s competitive position, ConversionPoint must keep pace with the evolving needs of its customers and continue to develop and introduce new modules, features and services in a timely and efficient manner, and complete the development of its unified end-to-end e-commerce SaaS platform. 

 

ConversionPoint currently competes with established companies, such as Optimizely and Volume in the digital media optimization space, Salsify and WebCollage in the rich content creation and product information syndication space, Limelight and Click Funnels in the sales conversion space, AdRoll and Criteo in the remarketing space, and Narvar and ShipStation in the shipping and logistics space.

 

ConversionPoint believes the principal competitive factors in its market include the following: 

 

·solution quality, breadth, flexibility and functionality; 

 

·level of customer satisfaction and the ability to respond to customer needs rapidly; 

 

·ability to innovate and develop new or improved products and modules; and

 

·brand awareness and reputation.

 

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ConversionPoint believes that it competes favorably with respect to the factors described above, however, competitors continue to increase their suite of offerings across e-commerce channels to better compete. A number of competitors have greater name recognition and are better capitalized than ConversionPoint. ConversionPoint’s ability to remain competitive in its market segment depends upon its ability to innovate and to efficiently provide unique solutions to its demand and supply customers.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Company Overview

 

ConversionPoint, through its wholly-owned subsidiaries, helps e-commerce companies and brands target, convert, manage and re-engage their customers using sophisticated online tracking and data analytics. ConversionPoint’s suite of technologies manages and optimizes multiple aspects of e-commerce including: rich media content creation and syndication, audience targeting, conversion optimization, remarketing, logistics and customer management. ConversionPoint both delivers its technologies to its customers through software-as-a-service, which we refer to as SaaS, and uses its technologies to provide managed digital marketing and e-commerce technology services to brands and advertisers, which we refer to as managed services. ConversionPoint also uses its own technologies to sell various products directly to consumers, which we refer to as e-commerce sales. ConversionPoint’s vision is to simplify the entire e-commerce experience by integrating its technologies and offering a broad range of e-commerce solutions on a single, easy-to-use platform.

 

ConversionPoint was formed as a Delaware corporation on November 2, 2016, by the founders of Branded Response Inc., a California corporation, which was formed in May 2016. Branded Response began as an e-commerce seller of health, wellness and beauty products. Branded Response’s management team had significant prior successes in creating direct-to-consumer e-commerce product campaigns. As Branded Response’s sales began to grow, its management began evaluating e-commerce technologies to become more efficient and cost effective at acquiring customers and maximizing customer life-time value with respect to the sale of its own products. Branded Response began collaborating with Push Interactive, LLC, a direct-to-consumer marketing company based in Minneapolis, Minnesota, formed in May 2010, which had developed a suite of online marketing technologies to increase the efficiency of their own product sales. Push and Branded Response realized that the e-commerce market lacked an end-to-end solution to manage the entire e-commerce marketing, sales, customer service and logistics process. In April 2017, ConversionPoint acquired both Push and Branded Response through share exchange agreements, with the vision of using Push’s technology platform as the foundation to develop both organically and through strategic acquisition, a unified e-commerce solution to (a) more efficiently manage the companies’ own internal e-commerce product campaigns, (b) manage campaigns for third parties, on a managed services basis, and (c) license to third parties on a self-serve SaaS subscription basis. In 2017, ConversionPoint began generating managed service revenues. The share exchange agreements resulted in the owners of Push and Branded Response exchanging their common stock in their respective entities for shares of common stock in ConversionPoint. The transfer of the assets and the assumptions of all obligations were recorded at historical basis of the assets and obligations as the entities were under common control. Pursuant to the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 850-50-45-2, Business Combinations—Related Issues, ConversionPoint reported the results of operations of Branded Response as though the transfer had occurred at the beginning of the earliest period presented (May 20, 2016).

 

In December 2017, ConversionPoint acquired SellPoints, Inc., a venture-backed Delaware corporation, formed in May 2000, which had developed a suite of software solutions enabling brands to create and syndicate interactive rich media content experiences to a network of online retailers, track online consumer behavior, retarget consumers based on their online behavior, and deliver robust data analytics and reporting. ConversionPoint believed that SellPoints’ technologies, coupled with its large brand customers and partners, would add significant capabilities to the end-to-end e-commerce platform ConversionPoint was creating.

 

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Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with 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. ConversionPoint also has other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding ConversionPoint’s results, which are described in Note 2 to ConversionPoint’s December 31, 2017 audited consolidated financial statements beginning on page F-3.

 

Segment Reporting

 

ConversionPoint and its subsidiaries operate in three business segments – e-commerce products, managed services, and SaaS. The following financial information presents ConversionPoint’s consolidated statements of income (loss) and certain operating data for each of the periods indicated. The results of operations by segment are also discussed as part of a discussion of the consolidated overview.

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Results of Operations for the Nine Months ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017

 

   For the Nine Months Ended
September 30,
     
   2018   2017   Change   % Change 
NET REVENUES  $28,609,440   $39,171,484   $(10,562,044)   (27.0)%
COST OF REVENUES   19,735,938    29,757,791    (10,021,853)   (33.7)%
GROSS PROFIT   8,873,502    9,413,693    (540,191)   (5.7)%
GROSS PROFIT PERCENTAGE   31.0%   24.0%          
OPERATING EXPENSES:                    
Sales and marketing   2,255,238    3,508,154    (1,252,916)   (35.7)%
General and administrative   19,286,983    2,224,087    17,062,896    767.2%
Amortization of intangibles assets   3,313,467    654,703    2,658,764    406.1%
Total operating expenses   24,855,688    6,386,944    18,468,744    289.2%
(LOSS) INCOME FROM OPERATIONS   (15,982,186)   3,026,749    (19,008,935)   (628.0)%
INTEREST EXPENSE, NET   1,065,825    230,361    835,464    362.7%
(LOSS) INCOME BEFORE INCOME TAX BENEFIT   (17,048,011)   2,796,388    (19,844,399)   (709.6)%
INCOME TAX BENEFIT   (274,180)   (289,624)   15,444    (5.3)%
NET (LOSS) INCOME  $(16,773,831)  $3,086,012   $(19,859,843)   (643.5)%

 

Operating Data for the Nine Months ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017

 

   For the Nine Months Ended
September 30,
         
   2018   2017   Change   % Change 
E-commerce Products                    
Revenue  $16,068,479   $35,826,169   $(19,757,690)   (55.1)%
Cost of revenues   12,555,072    27,455,060    (14,899,988)   (54.3)%
Segment gross profit   3,513,407    8,371,109    (4,857,702)   (58.0)%
Gross profit percentage   21.9%   23.4%   N/A    (1.5)%
                     
Managed Services                    
Revenue  $9,835,758   $3,345,315   $6,490,443    194.0%
Cost of revenues   6,730,694    2,302,731    4,427,963    192.3%
Segment gross profit   3,105,064    1,042,584    2,062,480    197.8%
Gross profit percentage   31.6%   31.2%   N/A    0.4%
                     
Software as a Service (SaaS)                    
Revenue  $2,705,203    -    N/A    N/A 
Cost of revenues   450,172    -    N/A    N/A 
Segment gross profit   2,255,031    -    N/A    N/A 
Gross profit percentage   83.4%   N/A    N/A    N/A 

 

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Net Revenues

 

Revenues were $28.6 million for the nine months ended September 30, 2018, compared to $39.2 million for the same period in 2017, a decrease of $10.6 million, or 27%. The decline in revenues was primarily driven by a strategic effort by ConversionPoint to transition its business model from e-commerce products revenues to technology managed services and SaaS, which have higher gross margins.

 

Revenues in the e-commerce product segment decreased from $35.8 million to $16.1 million for the nine months ended September 30, 2018 and 2017, respectively. The $19.7 million decrease is due to ConversionPoint’s transition from e-commerce products to managed services and SaaS revenues, which started in the second quarter of 2018, together with a more stringent merchant processing environment.

 

Revenues from managed services increased from $3.3 million to $9.8 million for the nine months ended September 30, 2018 and 2017, respectively. The $6.5 million increase is due to the transition of the business model from e-commerce products to managed services and the addition of Sellpoints’ managed services revenues of $2.6 million during the nine months ended September 30, 2018, which ConversionPoint did not own until December 2017. ConversionPoint started to transition its resources from e-commerce products to managed services in the second quarter of 2018.

 

Revenues from SaaS increased from $0 to $2.7 million for the nine months ended September 30, 2018 and 2017, respectively. The $2.7 million increase is due to the Sellpoints acquisition in December 2017 and the revenues derived from its technology platforms.

 

Cost of Revenues and Gross Profit

 

Cost of revenues is primarily generated by product cost and fulfillment expense and customer acquisition costs. Cost of revenues was $19.7 million for the nine months ended September 30, 2018 compared to $29.8 million for the nine months ended September 30, 2017, a decrease of $10.1 million or 34%. The decrease is due primarily to the decrease in e-commerce product revenues which had a corresponding decrease in customer acquisition costs that are not incurred in ConversionPoint’s other revenue segments.

 

Cost of revenues for the e-commerce products segment were $12.6 million for the nine months ended September 30, 2018, compared to $27.5 million for the same period in 2017, a decrease of $14.9 million, or 54%. Cost of revenues for the e-commerce products segment as a percentage of overall e-commerce products revenues for the nine months ended September 30, 2018 and 2017 was 78% and 77%, respectively.

 

Cost of revenues for the managed services segment were $6.7 million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively an increase of 4.4 million. Cost of revenues for the managed services segment as a percentage of overall managed services revenues was consistent at 68% and 69% for the nine months ended September 30, 2018 and 2017, respectively.

 

The SaaS revenue segment, which is derived from Sellpoints and did not exist for the nine months ended September 30, 2017, contributed an additional $0.5 million to cost of revenues in 2018.

 

Consolidated gross profit was $8.9 million for the nine months ended September 30, 2018 compared to $9.4 million for the same period in 2017, a decrease of $0.5 million or 5.7%. The decrease in gross profit is due in part to shifts in ConversionPoint’s strategic revenue model which resulted an increase in our gross profit percentage from 24% to 31% for the nine months ended September 30, 2018 and 2017, respectively.

 

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Gross profit in the e-commerce products segment was $3.5 million for the nine months ended September 30, 2018, compared to $8.4 million for the same period in 2017, a decrease of $4.9 million. This is due to ConversionPoint’s strategic shift away from the e-commerce products segment. Costs of revenue related to e-commerce products are variable and as a result, as a percentage of sales, gross profit was relatively constant at 22% and 23% for the nine months ended September 30, 2018 and 2017, respectively.

 

Gross profit in the managed services segment was $3.1 million for the nine months ended September 30, 2018, compared to $1.0 million for the nine months ended September 30, 2017, an increase of $2.1 million. This is due to ConversionPoint’s strategic shift towards this segment of revenue. The managed services segment gross profit percentage was 32% and 31% for the nine months ended September 30, 2018 and 2017, respectively.

 

Gross profit in the SaaS segment was $2.3 million, or 83%, for the nine months ended September 30, 2017. This segment of revenue was new in 2018 as a result of the acquisition of Sellpoints.

 

Operating Expenses

 

Sales and marketing - Sales and marketing costs include those expenses required to support the e-commerce products segment as well as marketing efforts. Sales and marketing expenses for the nine months ended September 30, 2018 and 2017 were $2.3 million and $3.5 million, respectively. The decrease in sales and marketing costs of $1.2 million for the nine months ended September 30, 2018, compared to the same period in the prior year is mainly due to decrease in e-commerce product revenues and the related sales and marketing expenses. The variable third party sales and marketing costs include: call center expenses, chargeback management, and other software and web related costs.

 

General and administrative - General and administrative expenses were $19.3 million for the nine months ended September 30, 2018, and $2.2 million for the same period in 2017, an increase of $17.1 million. The increase is primarily due to the inclusion of a full 9-month period of operating costs in 2018 in the Company’s Push and Sellpoints subsidiaries which were acquired in 2017, compared to a partial period in 2017 since Push was acquired in April 2017 and Sellpoints was not included in operations until December 2017. In addition, $7.3 million of additional general and administrative expenses in 2018 are due to stock-based compensation plans put in place in 2018, and $1.3 million are due to increased headcount and additional compensation costs.

 

General and administrative expenses for Push, which was acquired in April of 2017, for the nine months ended September 30, 2018 and 2017, were $3.4 million and $0.2 million, respectively. The $3.2 million increase reflects the acquisition of Push taking place in April 2017 and the additional headcount to scale up the business.

 

General and administrative expenses for Sellpoints, which was acquired in December 2017, for the nine months ended September 30, 2018 and 2017 were $4.6 million and $0, respectively. The $4.6 million increase is strictly due to the acquisition of Sellpoints in December 2017.

 

Amortization of intangible assets - Amortization of intangible assets was $3.3 million for the nine month period ended September 30, 2018 compared to $0.7 million in the prior year period. The increase is related to the intangible assets acquired as part of the acquisition of subsidiaries. ConversionPoint is amortizing the intangible assets acquired and any new purchases or capitalization over a five-year period.

 

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Interest expense, net - Interest expense, net, which represents interest expense on all the notes payable including the convertible notes, increased $0.9 million from $0.2 million to $1.1 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to the notes acquired as part of the Sellpoints’ acquisition.

 

Income tax benefit - Income tax benefit is primarily driven by the change in the valuation allowance resulting from the changes in the Tax Cuts and Jobs Act which included a rate reduction which took effect on January 1, 2018.

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Results of Operations for The Year Ended December 31, 2017 Compared with the Period from May 20, 2016 (Inception) Through December 31, 2016

 

   For the Year Ended December
31, 2017 and the Period from
May 20, 2016 (Inception)
through December 31, 2016
         
   2017   2016   Change   % Change 
NET REVENUES  $49,920,621   $8,819,927   $41,100,694    466.0%
COST OF REVENUES   37,776,678    7,949,212    29,827,466    375.2%
GROSS PROFIT   12,143,943    870,715    11,273,228    1294.7%
GROSS PROFIT PERCENTAGE   24.3%   9.9%          
OPERATING EXPENSES:                    
Sales and marketing   4,298,412    1,112,256    3,186,156    286.5%
General and administrative   5,776,332    1,174,480    4,601,852    391.8%
Amortization of intangibles assets   1,278,344    -    1,278,344    N/A 
Total operating expenses   11,353,088    2,286,736    9,066,352    396.5%
(LOSS) INCOME FROM OPERATIONS   790,855    (1,416,021)   2,206,876    (155.9)%
INTEREST EXPENSE, NET   829,169    109,576    719,593    656.7%
(LOSS) INCOME BEFORE INCOME TAX BENEFIT   (38,314)   (1,525,597)   1,487,283    (97.5)%
INCOME TAX BENEFIT   (434,974)   -    (434,974)   N/A 
NET (LOSS) INCOME  $396,660   $(1,525,597)  $1,922,257    (126.0)%

 

Operating Data for The Year Ended December 31, 2017 Compared with the Period from May 20, 2016 (Inception) Through December 31, 2016

 

   For the Year Ended December 31,
2017 and the Period from May 20,
2016 (Inception) through
December 31, 2016
         
   2017   2016   Change   % Change 
E-commerce Products                    
Revenue  $41,651,146   $8,819,927   $32,831,219    372.2%
Cost of revenues   32,958,100    7,949,212    25,008,888    314.6%
Segment gross profit   8,693,046    870,715    7,822,331    898.4%
Gross profit percentage   20.9%   9.9%   N/A    11.0%
                     
Managed Services                    
Revenue  $7,950,890    -    N/A    N/A 
Cost of revenues   4,766,526    -    N/A    N/A 
Segment gross profit   3,184,364    -    N/A    N/A 
Gross profit percentage   40.1%   N/A    N/A    N/A 
                     
Software as a Service (SaaS)                    
Revenue  $318,585    -    N/A    N/A 
Cost of revenues   52,052    -    N/A    N/A 
Segment gross profit   266,533    -    N/A    N/A 
Gross profit percentage   83.7%   N/A    N/A    N/A 

 

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Net Revenues

 

Revenues for the year ended December 31, 2017 were $49.9 million compared to $8.8 million for the period May 20, 2016 (Inception) through December 31, 2016 (the “2016 Period”), an increase of $41.1 million. The increase in revenues for the year ended December 31, 2017, compared to the 2016 Period is primarily due to a full year of operations. Additionally, in 2017, ConversionPoint acquired Push and SellPoints. ConversionPoint started as an e-commerce products business in 2016.

 

Revenues from e-commerce products were $41.7 million for the year ended December 31, 2017 compared to $8.8 million for the 2016 Period, an increase of $32.9 million. The increase is mainly due to ConversionPoint’s acquisition of Push, which allowed Branded Response to scale its e-commerce products revenues through the use of Push’s technology to optimize customer acquisition, which significantly increased revenues in 2017 and having a full year of net revenues.

 

Revenues from managed services were $8.0 million and $0 million for the year ended December 31, 2017 compared to the 2016 Period, respectively. The $8.0 million increase is due to the acquisition of Push in April 2017, which contributed $7.1 million of managed services revenues post-acquisition, and Sellpoints in December 2017, which contributed $0.6 million of managed services revenues post-acquisition.

 

Revenues from SaaS increased from $0 to $0.3 million for the 2016 Period and the year ended December 31, 2017, respectively. The $0.3 million increase is due to the Sellpoints acquisition in December 2017 and the revenues derived from its technology platforms.

 

Cost of Revenues and Gross Profit

 

Cost of revenues is primarily generated by product cost and fulfillment expense and customer acquisition costs. The increase in the cost of revenue for year ended December 31, 2017, compared to the 2016 Period, is due primarily to the increase in revenue described above.

 

Gross profit for the year ended December 31, 2017 was $12.1 million compared to $0.9 million for the 2016 Period, an increase of $11.2 million. The increase in gross profit for the year ended December 31, 2017, compared to the 2016 Period, is primarily due to a full year of operations. ConversionPoint started its operations in May 2016 and therefore, the revenues in 2016 were much lower. Additionally, ConversionPoint acquired two subsidiaries in 2017: Push and Sellpoints, each of which operate in the managed services and SaaS segments which have higher margins than the e-commerce products segment, which was the only segment of revenue in 2016.

 

Operating Expenses

 

Sales and marketing - Sales and marketing costs include those expenses required to support the e-commerce products segment as well as any marketing efforts. The increase in sales and marketing costs to $4.3 million in the year ended December 31, 2017, compared to $1.1 million in the 2016 Period, is due to an increase in e-commerce products revenues and the related sales and marketing support expenses. The variable third party sales and marketing costs include: call center expenses, chargeback management, and other software and web related costs.

 

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General and administrative - General and administrative expenses were $5.8 million for the year ended December 31, 2017, and $1.2 million for the 2016 Period. The increase is primarily due to the acquisition of two subsidiaries in 2017 and a full year of operations. ConversionPoint expects general and administrative expense to continue to increase as ConversionPoint continues to grow. Branded Response’s general and administrative expenses for the year ended December 31, 2017 and for the 2016 Period were $2.6 million and $1.1 million, respectively. The $1.5 million increase is due to having a full year in 2017 whereas 2016 was a partial year. Push’s general and administrative expenses for the year ended December 31, 2017 and for the 2016 Period were $1.7 million and $0, respectively. The $1.7 million increase is entirely due to the acquisition of Push in April 2017. Sellpoints’ general and administrative expenses for the year ended December 31, 2017 and for the 2016 Period were $0.4 million and $0 million, respectively. The $0.4 million increase is entirely due to the acquisition of Sellpoints in December 2017. ConversionPoint’s general and administrative expenses for the year ended December 31, 2017 and for the 2016 Period were $1.1 million and $0.1 million. The $1.0 million increase is due bonuses paid to certain employees, travel expenses related to the capital raising activities, and increased professional fees.

 

Amortization of intangible assets - Amortization of intangible assets was $1.3 million for the year ended December 31, 2017 compared to $0 in the 2016 Period. The increase is related to the intangible assets acquired as part of the acquisition of subsidiaries. ConversionPoint is amortizing the intangible assets acquired and any new purchases or capitalization over a five-year period.

 

Interest expense, net - Interest expense, net, which represents interest expense on all the notes payable including the convertible notes, increased approximately from $0.1 million for the year ended December 31, 2017 to $0.8 million the 2016 Period primarily due a full year of operations and the issuance of various convertible notes payable throughout both periods.

 

Income tax benefit - Income tax benefit is primarily driven by the change in the valuation allowance resulting from the changes in the Tax Cuts and Jobs Act which included a rate reduction which took effect on January 1, 2018.

 

Liquidity and Capital Resources

 

During the nine months ended September 30, 2018, ConversionPoint funded its operations primarily from cash on hand, cash generated by operations and private placements of equity securities. As of September 30, 2018, ConversionPoint’s cash and cash equivalents had a balance of $5,281,584, as compared to $4,695,803 at December 31, 2017.

 

ConversionPoint and all of its subsidiaries are parties to a Loan and Security Agreement with Montage Capital II, L.P. and Partners for Capital Growth IV, L.P. As of December 12, 2018, $2,757,770, in principal and interest was outstanding under the loan. On November 2, 2018, ConversionPoint and its subsidiaries had certain technical defaults and an anticipated financial covenant default under the Loan and Security Agreement, and entered into an amendment to the Loan and Security Agreement, pursuant to which the lenders agreed to forbear from exercising remedies arising out of the existing defaults and the anticipated default until the earlier to occur of (i) their timely compliance with certain non-financial covenants under the Loan and Security Agreement as amended, upon which time the existing defaults and anticipated default shall automatically be waived, (ii) the occurrence of another event of default, or (iii) February 15, 2019. Pursuant to such amendment, the lenders have also agreed to decrease certain minimum cash covenants and eliminate certain revenue and EBITDA covenants until February 15, 2019. In connection with the Loan and Security Agreement, ConversionPoint has entered into deposit control agreements with all of its banking institutions in favor of the lenders pursuant to which the lenders can assume control of ConversionPoint’s bank accounts in the event ConversionPoint defaults under the Loan and Security Agreement.

 

During the nine-month period ended September 30, 2018, ConversionPoint raised $10,918,868, net of issuance costs of $1,279,816 through the sale of 1,393,913 shares of common stock at $9.21 per share.

 

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For the nine months ended September 30, 2018, ConversionPoint’s revenues declined 27.0% from the same period in the prior year. The lower revenue, combined with increased operating expenses, is principally responsible for ConversionPoint’s $16.7 million net loss during the nine-month period ending 2018. ConversionPoint believes that its current and future available capital resources, revenues from operations and other sources of liquidity will enable it to fund its operating expenses and capital expenditure requirements for at least the next twelve months.

 

Cash Flows

 

The table below sets forth a summary of ConversionPoint’s cash flows for the nine months ended September 30, 2018 and 2017:

 

   Nine Months Ended 
  

September 30

2018

  

September 30

2017

 
Net cash provided by (used in)          
Operating activities  $(7,351,837)  $318,527 
Investing Activities   (1,877,341)   299,401 
Financing Activities   9,814,959    2,676,850 

 

Cash Flows - Operating

 

Net cash used in operating activities was $7.4 million during the nine months ended September 30, 2018. During that period, ConversionPoint reported a net loss of $16.7 million, which included non-cash expenses: depreciation and amortization expense of $3.3 million and stock-based compensation expense of $7.3 million. The change in operating assets and liabilities during the nine months ended September 30, 2018 was primarily due to an increase in accounts receivable and a decrease in accounts payable.

 

During the comparable period in 2017, cash provided by operating activities was $0.3 million from a net income of $3.1 million, which included non-cash expense: depreciation and amortization of $0.7 million. The cash provided was decreased by a $4.0 million increase in accounts receivable as the business was ramping up in 2017.

 

Cash Flows - Investing

 

Net cash used in investing activities was $1.9 million during 2018, which primarily consisted of capitalized internal software development costs and purchase of property and equipment.

 

Net cash provided by investing activities was $0.3 million during 2017, which primarily consisted of cash acquired in business acquisitions, offset by the issuance of notes receivable.

 

Cash Flows - Financing

 

Net cash provided by financing activities was $9.8 million during 2018, which primarily resulted from net proceeds of the sale of common stock of $11.3 million, offset by the repayments on ConversionPoint’s notes payable of $1.5 million.

 

In 2017, net cash provided by financing activities was $2.7 million which largely consisted of proceeds from the issuance of convertible promissory notes of $2.6 million.

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For information concerning our term and convertible notes payable, see Note 8 to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Form S-4.

 

Off Balance Sheet Arrangements

 

As of September 30, 2018, ConversionPoint does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on ConversionPoint’s 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 ConversionPoint has 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.

 

Dividends on ConversionPoint Common Stock

 

ConversionPoint has never declared or paid cash dividends on its capital stock. ConversionPoint currently intends to retain all available funds and future earnings, if any, to fund the development and growth of its business and to repay indebtedness. Therefore, ConversionPoint does not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of its board of directors, and will depend upon its results of operations, financial condition, capital requirements and other factors including contractual obligations that its board of directors deems relevant.

 

Management

 

The following table sets forth the names, ages and positions of ConversionPoint’s executive officers and directors as of the date of this joint proxy statement/prospectus.

 

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Executive Officers and Directors

 

Name   Age   Positions Held
Robert Tallack   39   Chief Executive Officer and Chairman of the Board
Raghu Kilambi   53   Chief Financial Officer, Vice Chair and Director
Haig Newton   42   Chief Technology Officer and Director
Christopher Jahnke   32   Chief Marketing Officer and Director
Andre Peschong   51   Chief Strategy Officer and Director
Jack Thomsen   57   Treasurer
Jeffrey Marks   49   General Counsel, Senior Vice President of Corporate Development
Jonathan Gregg   45   President of SellPoints, Inc.

 

There are no family relationships between any of the directors.

 

Executive officers of ConversionPoint are appointed by the board of directors and serve at the pleasure of the board.

 

Robert Tallack, has served as ConversionPoint’s Chief Executive Officer and as a director since its inception in April 2017, where he completed two major acquisitions of two technology companies, Push Holdings, Inc., and SellPoints Inc. Between May 2016 and the present date, Mr. Tallack has served as Chief Executive Officer, Treasurer and as a director of Branded Response, Inc. Since January 2009, Mr. Tallack has served as Chairman of Karate Kids Canada, where he has driven the mission of this organization, to provide free fitness programs to disadvantaged youth in Canada. Between January 2011 and December 2015, Mr. Tallack served as Chief Executive Officer of Revive Bioscience, Inc., where he successfully secured a global license with a leading sports brand and developed products which were distributed across North America. Mr. Tallack is a former three-time world martial arts champion, nine-time Canadian national martial arts champion, a former Professional Mixed Martial Arts fighter and holds a board breaking world record. Mr. Tallack attended Queens University between September 2001 and June 2004, where he received a bachelor’s degree in health science, with a minor in commerce.

 

Raghunath “Raghu” Kilambi, has served as ConversionPoint’s Chief Financial Officer since December 2017, and as Vice Chair and a director since January 2018. Mr. Kilambi has also been the principal of Kirarv Capital, a technology investment firm, since June 2009. Mr. Kilambi has raised over $1 billion of equity and debt capital for growth private and public companies in his career and has also been a senior officer and director of companies that were awarded Barron’s ASAP Magazine Top Ramp Champ awards and Profit Magazine’s Top 3 Growth Company awards. Previously, from 1998 to 2001 Raghu was the Co-Founder, CFO and Chief Strategy Officer of FutureLink Corp., a leading first-generation VC-backed cloud computing technology company that grew from startup to over $100 million in annualized revenues and a peak NASDAQ valuation of over $2 billion. Raghu has also been an investor in companies that were subsequently acquired by companies including Yahoo! (1998), eBay (2005) and CGI Group (2006). Raghu graduated with Great Distinction with a Bachelor of Commerce (University Scholar) and a Graduate Diploma in Public Accounting from McGill University and qualified as a Canadian Chartered Accountant in 1989.

 

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Haig Newton, has served as ConversionPoint’s Chief Technology Officer and as a director since ConversionPoint’s inception in April 2017, and oversees the technology development of ConversionPoint’s platforms. Mr. Newton has also served as President, Chief Executive Officer, Treasurer and as a director of Push and its various subsidiaries since their inception in July 2012. Mr. Newton brings skills and knowledge in a variety of areas, including design, finance, web development, accounting, technical development, and branding. With more than 15 years of experience in the internet marketing space, Mr. Newton has a proven track record in enterprise-level custom architecture, working with teams large and small. Mr. Newton holds a B.S. in Business and Advertising, with a minor in Computer Science from University of Kansas.

 

Christopher Jahnke, has served as ConversionPoint’s Chief Marketing Officer and as a director since ConversionPoint’s inception in April 2017, and oversees all aspects of online marketing of ConversionPoint. Mr. Jahnke has also served as Vice President, Chief Marketing Officer, Secretary and as a director of Push and its various subsidiaries since their inception in July 2012. Mr. Jahnke is an expert on media buying strategies, and has developed and launched thousands of successful digital marketing campaigns resulting in millions per month in product sales. Mr. Jahnke received his undergraduate degree from Saint John’s University.

 

Andre Peschong, has served as ConversionPoint’s Chief Strategy Officer since its inception in April 2017, and as a director since July 2018. As Chief Strategy Officer, Peschong is responsible for driving ConversionPoint’s long-term growth strategy, which includes strategic acquisitions and capital markets navigation, as well as transitioning the company toward greater adoption of its fully integrated SaaS e-commerce solution. Between January 2011 and February 2014, Mr. Peschong served as CEO of Oxygen Plus, Inc., and has served as a director since January 2011. Between January 1995 and the present date, Mr. Peschong has served as President and a director of Bridgewater Capital Corporation which provides advisory services to small growth companies. Mr. Peschong brings more than 25 years of experience in the capital markets, having previously structured and closed more than $300 million in capital formation. Since joining ConversionPoint, Mr. Peschong has been instrumental to ConversionPoint’s transition from marketing consumer products to commercialization of its uniquely-capable e-commerce technology stack.

 

Jack Thomsen, has served as ConversionPoint’s Treasurer since December 2017 and served as ConversionPoint’s Chief Financial Officer between April 2017 and December 2017. He has been the CFO of Branded Response, a subsidiary of ConversionPoint, since September 2016. Between 1995 and the present date, Mr. Thomsen has served as Chief Financial Officer and a partner of Bridgewater Capital Corporation, a corporate advisory firm. Mr. Thomsen has been a licensed CPA since 1983, and has worked at international, national, and local firms in both Iowa and California.

 

Jeffrey Marks, has served as SVP of Corporate Development and General Counsel for ConversionPoint Technologies Inc., since June 2017. In his role as SVP of Corporate Development, Mr. Marks works with senior management on identifying, structuring and consummating acquisitions and strategic partnerships, and in identifying potential investors. In his role as General Counsel, he oversees mergers and acquisitions, private placements, financings and the day to day legal affairs of ConversionPoint. Mr. Marks has served as principal of Alliance Legal Partners, Inc., in Newport Beach, California, since 2001, and as Of Counsel for Fortis LLP since May 2017. Prior thereto, he served as General Counsel for FutureLink Corp., a leading VC-backed cloud computing technology company that grew from startup to over $100 million in annual revenues and a peak NASDAQ National market capitalization of over $2 billion, and was a corporate and securities attorney at the Orange County offices of Paul Hastings. During his career, Mr. Marks has represented a wide variety of companies ranging from start-ups to Fortune 500 companies, in various industries, including, but not limited to, technology, e-commerce, consumer products, real estate development, gaming, apparel, and food and beverage. Mr. Marks has a broad range of experience, having practiced both as an attorney for a major law firm and as in-house counsel for a publicly traded NASDAQ high technology company. Mr. Marks is also an entrepreneur having, among other things, founded Titan Nightlife Group, Inc., a successful restaurant development company based in Las Vegas, Nevada, for which he serves as Chairman. Mr. Marks received his Bachelor of Arts from the University of California, Santa Barbara, and his Juris Doctor from Loyola Law School.

 

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Jonathan Gregg, has served as President of Sellpoints since March 2018 and served as its Chief Revenue Officer between August 2017and March 2018. Between October 2015 and May 2017, Mr. Gregg served as Chief Revenue Officer for Sqor, Inc., where he was responsible for revenue strategy and partnerships. Between October 2013 and August 2015, he served as Chief Revenue Officer for Share This, Inc., where he was responsible for revenue strategy, operations and partnerships. Between August 2012 and October 2013, he served as Vice President of Sales at inPowered, where he was responsible for sales strategy and operations. Previously, Mr. Gregg served as a Vice President of Business Development at Blinkx, and a Manager of Global Alliances at Yahoo!, where he set in motion major alliances aligned with corporate initiatives. Prior thereto, he was a leading contributor for Yahoo!’s Media Sales team in both New York City, New York and Sunnyvale, California. Mr. Gregg started his career in New York City in media planning for Ogilvy & Mather and in account services for Wunderman, Cato Johnson, and has a degree in English from LeMoyne College in Syracuse, New York.

 

Corporate Governance

 

ConversionPoint is committed to maintaining the highest standards of honest and ethical conduct in running ConversionPoint’s business efficiently, serving ConversionPoint’s stockholders’ interests and maintaining ConversionPoint’s integrity in the marketplace. To further this commitment, ConversionPoint has adopted a Code of Ethics and an Insider Trading Policy, which applies to all ConversionPoint’s directors, officers and employees. ConversionPoint’s bylaws, Code of Ethics and Insider Trading Policy provide the framework for ConversionPoint’s corporate governance.

 

Board of Directors

 

The ConversionPoint board oversees ConversionPoint’s business affairs and monitors the performance of management. ConversionPoint’s directors hold office until their successors have been elected and duly qualified unless the director is removed, resigns or by reason of death or otherwise, is unable to serve in the capacity of director. If any director resigns, dies, removes, or is otherwise unable to serve out his or her term, or if the board increases the number of directors, the board may fill any vacancy by a vote of a majority of the directors then in office, although less than a quorum exists.

 

Board Leadership Structure and Board’s Role in Risk Oversight

 

Mr. Robert Tallack serves as both the Executive Chairman of ConversionPoint’s board of directors and Chief Executive Officer, and Mr. Raghu Kilambi serves as both the Vice Chairman of ConversionPoint’s board of directors and Chief Financial Officer.

 

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. ConversionPoint faces a number of risks, including credit risk, interest rate risk, liquidity risk, operational risk, strategic risk and reputation risk. Management is responsible for the day-to-day management of the risks ConversionPoint faces, while the board, as a whole, has responsibility for the oversight of risk management. In its risk oversight role, the ConversionPoint board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, the ConversionPoint board meets regularly with management, as well as independently, to review ConversionPoint’s risks. ConversionPoint’s General Counsel attends all of the board meetings and is available to address any questions or concerns raised by any member of the ConversionPoint board on risk management and any other matter.

 

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Board Committees

 

The ConversionPoint board does not currently have any committees.

 

Executive Compensation

 

Compensation Philosophy

 

The fundamental objectives of ConversionPoint’s executive compensation program is to attract and retain highly qualified executive officers, motivate these executive officers to materially contribute to ConversionPoint’s long-term business success, and align the interests of ConversionPoint’s executive officers and stockholders.

 

2017 Compensation Determination Process

 

In 2017, the compensation program for ConversionPoint’s executive officers consisted of the following components:

 

·base salary; and
·cash bonuses.

 

ConversionPoint believes that its executive compensation package consists of elements of compensation that are typically used to incentivize and reward executive management at other private companies of ConversionPoint’s size, in its geographic area or in ConversionPoint’s industry.

 

Base Salary

 

Base salary is an important component of executive compensation because it provides executives with an assured-level of income, assists ConversionPoint in attracting executives and recognizes different levels of responsibility and authority among executives. The determination of base salaries is based upon the executive’s qualifications and experience, scope of responsibility and potential to achieve the goals and objectives established for the executive. Additionally, contractual provisions in executive employment agreements, past performance, internal pay equity and comparison to competitive salary practices are also considered.

 

Plan Awards

 

The objective of ConversionPoint’s long-term incentive program is to provide a long-term retention incentive for the named executive officers and others and to align their interests directly with those of ConversionPoint’s stockholders by way of stock ownership. Under ConversionPoint’s 2018 Omnibus Incentive Plan, which we refer to as the ConversionPoint 2018 Plan, the ConversionPoint board has the discretion to determine whether equity awards will be granted to named executive officers and if so, the number of shares subject to each award. To date, the named executive officers have been granted restricted stock units as a reward for prior performance, which vest upon termination without “Cause,” a change of control or a public company event, and have been awarded restricted stock units.

 

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The ConversionPoint board determines the recipients of long-term incentive awards based upon such factors as performance, the length of continuous employment, managerial level, any prior awards, and recruiting and retention demands, expectations and needs. All of ConversionPoint’s employees are eligible for awards. The ConversionPoint board grants such awards by formal action, which awards are not final until a stock option agreement or restricted stock unit agreement is delivered by ConversionPoint and executed by both the company and the employee. There is no set schedule for the ConversionPoint board to consider and grant awards. The ConversionPoint board has the discretion to make grants whenever it deems it appropriate in ConversionPoint’s best interests.

 

ConversionPoint does not have any program, plan or practice in place to time option or other award grants with the release of material, non-public information and does not release such information for the purpose of affecting the value of executive compensation. The exercise price of stock subject to options awarded under the ConversionPoint 2018 Plan is the fair market value of the stock on the date the grant is approved by the ConversionPoint board. Under the terms of each plan, the fair market value of the stock is determined by the ConversionPoint board.

 

Cash Bonus Plan

 

To date, there is no formal cash bonus plan for named executive officers. Rather, ConversionPoint has granted named executives cash bonuses based on overall company performance.

 

Retirement and Other Post-Termination Benefits

 

Other than 401(k) plans established by SellPoint and Push described below, employment agreements with ConversionPoint’s executive officers and certain other employment agreements which provide for severance for termination without cause or by the executive for good reason, ConversionPoint has not entered into any employment agreements that provide for a continuation of post-employment benefits. ConversionPoint’s benefits plans are generally the same for all employees, and so as of the date hereof, the ConversionPoint board does not believe that any such plans in their present forms would continue post-employment, except as required by law (including with respect to COBRA), in connection with separation agreements entered into with certain terminated employees, or otherwise set forth herein. ConversionPoint does not currently maintain any other retirement or post-termination benefits plans.

 

Change in Control Severance Policy

 

ConversionPoint does not currently maintain any change in control severance plans or severance policies. Therefore, none of ConversionPoint’s named executive officers will receive any cash severance payments in the event ConversionPoint undergoes a change in control, unless their employment agreement otherwise provides.

 

Insurance

 

All full-time employees of Branded Response, including the named executive officers who are employees of Branded Response, which include Messrs. Tallack and Blazick, are eligible to participate in standard medical, dental and vision insurance plans. Branded Response pays 50% of health insurance premiums, and 75% of dental and vision insurance premiums, with employees paying the balance through payroll deductions. All full-time employees of SellPoints are eligible to participate in standard medical, dental, vision and long-term and short-term disability insurance plans, with their dependents being covered by the medical and dental insurance plans. SellPoints pays 90% of the employees’, and 40% of their dependents’, annual health, dental and vision insurance premiums, and 100% of the employees’ disability insurance premiums, with employees paying the balance through payroll deductions. All full-time employees of Push, including the named executive officers who are employees of Push, which include Messrs. Newton and Jahnke, are eligible to participate in standard medical, dental, and long-term and short-term disability insurance plans, with their dependents being covered by the medical and dental plans. Push pays 100% of the annual insurance premiums for employees and their dependents.

 

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401(k) Plans

 

Employees of Push and SellPoints can participate in 401(k) plans established by each of Push and SellPoints, which are qualified defined contribution retirement plans, sponsored by Principal Financial and ADP Retirement Services, respectively. Participants are provided the opportunity to make salary reduction contributions to the plan on a pre-tax basis. SellPoints and Push have the ability to make discretionary matching contributions and discretionary profit sharing contributions to such plans, however, currently do not make any matching contributions.

 

Other Benefits

 

ConversionPoint seeks to maintain an open and inclusive culture in its facilities and operations among executives and other company employees. Thus, ConversionPoint does not provide executives with separate dining or other facilities, nor does ConversionPoint have programs for providing personal-benefit perquisites to executives, such as defraying the cost of personal entertainment or family travel.

 

Summary Compensation Table

 

The tables and discussion below present compensation information for ConversionPoint’s chief executive officer, chief financial officer and its two other most highly compensated executive officers for the years ended December 31, 2016 and 2017, whom ConversionPoint refers to as its named executive officers. Amounts set forth below reflect compensation received by the named executive officer while such named executive officer was employed by ConversionPoint or its subsidiaries.

 

Name and Function  Year  Salary ($)    Bonus ($)    Total 
Robert Tallack  2017  $144,000 (1)  $162,500 (2)  $306,500 
Chief Executive Officer  2016  $84,000 (3)  $5,000 (3)  $89,000 
                     
Raghu Kilambi  2017  $35,000    $50,000    $85,000 
Chief Financial Officer  2016  $    $      
                     
Christopher Jahnke  2017  $135,000    $182,727    $317,727 
Chief Marketing Officer  2016  $108,000    $    $108,000 
                     
Haig Newton  2017  $135,000    $182,727    $317,727 
Chief Technology Officer  2016  $108,000    $    $108,000 

 

 

(1) All amounts were paid to MJB Fitness, Inc., an entity in which Mr. Tallack has an economic interest.
(2) All amounts were paid to MJB Fitness, Inc., an entity in which Mr. Tallack has an economic interest.
(3) Payments made to Shogun Health, Inc., an entity controlled by Mr. Tallack.

 

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Executive Employment Agreements

 

On November 1, 2018, ConversionPoint entered into employment agreements with each of Messrs. Tallack, Kilambi, Jahnke and Newton.

 

The employment agreements entered with Messrs. Tallack, Kilambi, Newton and Jahnke, have an initial term of three years, after which each executive’s employment agreement automatically renews for additional one-year periods on the same terms and conditions, unless either party to the agreement exercises their respective termination rights available to such party in the agreement. The employment agreements currently provide for a minimum annual base salary of $350,000 for Mr. Tallack, $300,000 for Mr. Kilambi, and $335,000 for each of Messrs. Newton and Jahnke. The employment agreements provide for target bonuses of $200,000 for each executive. The employment agreements require ConversionPoint to compensate the executives and provide them with certain benefits if their employment is terminated. The compensation and benefits the executives are entitled to receive upon termination of employment vary depending on whether their employment is terminated:

 

·by ConversionPoint for cause (as defined in the employment agreements);

 

·by ConversionPoint without cause, or by the executive for good reason (as defined in the employment agreements);

 

·due to death or disability; or

 

·by the executive without good reason.

 

In the event of a termination by ConversionPoint without cause or a termination by the executive for good reason, the executive would be entitled to receive the following:

 

·his earned but unpaid base salary and all bonuses earned for services provided through the termination date;

 

·an amount payable on the effective termination date equal to, in the case of Mr. Tallack and Mr. Kilambi, 18 months of base salary, and in the case of Messrs. Newton and Jahnke, 12 months of base salary;

 

·an amount payable on the effective termination date equal to, in the case of Mr. Tallack and Mr. Kilambi, the greater of 150% of the cash bonus paid to him during the prior 18 months, and 150% of the target cash bonus set forth in his employment agreement, and in the case of Messrs. Newton and Jahnke, the greater of 100% of the cash bonus paid to them during the prior 18 months, and 100% of the target cash bonus set forth in their employment agreement;

 

·benefits (including health and disability) as if the executive was still an employee during the 18-month period following termination for Mr. Tallack and Mr. Kilambi, and during the 12-month period following termination for Messrs. Newton and Jahnke; and

 

·any equity awards held by the executive will immediately and fully vest and become exercisable throughout the full term of such award as if the executive were still employed by ConversionPoint.

 

In the event of a termination by ConversionPoint of Messrs. Tallack, Kilambi, Newton or Jahnke upon their death or permanent disability, they would be entitled to receive the earned but unpaid portion of their base salary through the date of termination, and any equity award held by them will immediately and fully vest and become exercisable throughout the full term of such award as if they were still employed by ConversionPoint.

 

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Messrs. Tallack, Kilambi, Newton or Jahnke may terminate their employment for any reason (other than good reason) upon giving 10 days’ advance written notice to ConversionPoint, in which case ConversionPoint will pay the executive the earned but unpaid portion of their base salary through the termination date.

 

Outstanding Equity Awards at Fiscal Year End

 

The following table provides information concerning unexercised warrants, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2017.

 

   Outstanding Equity Awards at Year End 
     
   Warrant Awards   Stock Awards
  

Number of
Securities
Underlying
Unexercised
Warrants

(#)

Exercisable(1)

  

Number of
Securities
Underlying

Unexercised
Warrants

(#)

Unexercisable

  

Equity

Incentive
Plan
Awards

Number of
Securities
Underlying
Unexercised
Unearned
Warrants

  

Warrant

Exercise

Price

  

Warrant

Expiration

Date

 

Number

of

Shares or

Units of

Stock
that

Have not

Vested (#)

  

Market

Value of

shares or

units of
stock

that have

not vested

($)

  

Number
of

Shares or
units

of stock
that

have

vested

(#)

  

Market
value

of shares,

units or
other

rights that

have
vested

(#)

 
Robert Tallack   0    0    0    NA   NA   0    0       $ 
Christopher Jahnke   250,000    0    0   $9.21   12/31/22   0    0    250,000   $949,750 
Haig Newton   250,000    0    0   $9.21   12/31/22   0    0    250,000   $949,750 

 

(1)The above warrants were voluntarily cancelled by agreement between ConversionPoint and the named executive officer on October 31, 2018.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

As of December 31, 2017, ConversionPoint did not have any outstanding equity compensation plans.

 

Compensation of Directors

 

The directors do not receive any compensation for service as directors.

 

Certain Relationships and Related Party Transactions  

 

The following is a summary of transactions since May 20, 2016 (the date of inception) to which ConversionPoint has been a participant, in which:

 

  · the amount involved exceeded or will exceed $120,000; and

 

  · any of ConversionPoint’s directors, executive officers, or holders of more than 5% of its voting securities, or immediate family member or affiliate of such persons, had or will have a direct or indirect material interest, other than compensation and other arrangements that are described under “Description of ConversionPoint—Executive Compensation—Executive Employment Agreements” beginning on page 84.

 

All of the related party transactions described below have been approved by a majority of the disinterested members of the ConversionPoint board. ConversionPoint believes that each of the transactions described below were on terms no less favorable to ConversionPoint than terms ConversionPoint would have obtained from unaffiliated third parties.

 

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Agreements with Branded Response and Push Holdings

 

On May 19, 2016 Branded Response issued Shock Media Group, Inc., a company controlled by Peter Nguyen, a significant stockholder and former director of ConversionPoint, a non-interest bearing Promissory Note in the principal amount of $100,000, which note was repaid on July 5, 2018.

 

On June 22, 2016, Branded Response entered into a Bill of Sale and Assignment and Assumption Agreement with FigJam Media, Inc., a Florida corporation, pursuant to which Branded Response purchased various beauty product inventory and domain names in exchange for a $540,000 Promissory Note issued to Spoya Pty Ltd., and an agreement to pay a royalty to Figjam equal to 5% of the net sales generated by the assets purchased. At the time of the transaction, Stephen Blazick, who was a director, officer and shareholder of Branded Response, owned 33% of Figjam Media, Inc. On August 7, 2017, Branded Response transferred the assets of FigJam to an equity holder in Figjam Media, Inc., in exchange for a mutual release of claims.

 

On July 18, 2016, Branded Response issued Shock Media Group, Inc., a non-interest bearing Promissory Note in the amount of $225,000, which was due and payable on July 13, 2018. On May 1, 2017, Branded Response and Shock Media Group, Inc., amended the note to extend the maturity date to April 30, 2019. As of October 31, 2018, $225,000 was outstanding under the note.

 

Pursuant to a CFO Consulting Agreement dated October 1, 2016, between Branded Response and Thomsen & Associates Consulting Corporation, which is wholly-owned by Jack Thomsen, the Chief Financial Officer of Branded Responses, Inc., and ConversionPoint’s current Treasurer, Branded Response paid Thomsen & Associates $27,000 during 2016 and $98,000 during 2017, for CFO consulting services provided to Branded Response and ConversionPoint.

 

On January 11, 2017, in exchange for a loan in the amount of $100,000, Branded Response issued a non-interest-bearing $100,000 Promissory Note to Shogun Health Inc., a company controlled by Robert Tallack, which note was repaid in May 2018.

 

On April 25, 2017, in connection with ConversionPoint’s acquisition of Push Holdings, ConversionPoint assumed a Lease Agreement dated June 1, 2017, between Tamble, Inc., as tenant, and Glenwood, LLC, as landlord, for the premises located at 225 Thomas Avenue North, Minneapolis, Minnesota, at which Push and its subsidiaries conduct their operations. The original rent was $14,000 per month and the lease expired on June 30, 2019. On September 15, 2018, in connection with the landlord’s further build out of the premises for use by ConversionPoint, ConversionPoint amended the lease to increase the rent to $27,000 per month and extend the term of the lease to December 31, 2021. Messrs. Newton and Jahnke, are officers and directors, and each hold over 5% of ConversionPoint’s voting securities, are members and managers of Glenwood, LLC.

 

On April 25, 2017, in connection with ConversionPoint’s acquisition of Push Holdings, ConversionPoint and its wholly-owned subsidiaries, Branded Response and Push Holdings, entered into a two-year Source Code License Agreement with Haig Newton and Christopher Jahnke pursuant to which Messrs. Newton and Jahnke granted ConversionPoint and its wholly-owned subsidiaries a worldwide, exclusive, royalty free license to use the source code developed by the subsidiaries of Push Holdings, which underlies certain of ConversionPoint’s software solutions. Under the license agreement, Messrs. Newton and Jahnke agreed to transfer and assign ConversionPoint the source code at no additional cost, immediately upon the earlier of the consummation of a public offering, or receipt of an independent third party valuation of the shares of ConversionPoint’s common stock held by Messrs. Newton and Jahnke of at least $18,000,000. On November 22, 2017, although such transfer conditions had not yet been satisfied, Messrs. Jahnke and Newton transferred the source code to ConversionPoint pursuant to an Intellectual Property Assignment, in exchange for the issuance to each of Messrs. Jahnke and Newton, of a warrant to purchase 250,000 shares of common stock, having exercise prices of $9.21 per share. On October 31, 2018, ConversionPoint, Mr. Jahnke and Mr. Newton agreed to cancel the warrants.

 

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On April 25, 2017, pursuant to an Exchange Agreement, ConversionPoint acquired of all of the outstanding shares of common stock of Branded Response Inc., from Peter Nguyen, Stephen Blazick and Robert Tallack in exchange for an aggregate of 6,824,500 shares of ConversionPoint’s common stock. At the time of the acquisition, Messrs. Nguyen, Blazick and Tallack were ConversionPoint’s sole officers, directors and stockholders, and each held over 5% of ConversionPoint’s voting securities.

 

Pursuant to a Services Agreement entered into in or about June 2016, between Branded Response and Push Innovation Live LLC, a California limited liability company which is controlled by Peter Nguyen, ConversionPoint’s former chairman and the holder of over 5% of ConversionPoint’s voting securities, between July 2016 and March 2017, and between June 4, 2017 and August 25, 2018, Push Innovations Live provided Branded Response with call center services. Pursuant to the agreement, for the fiscal years ended December 31, 2016, and December 31, 2017, Branded Response paid $411,282 and $940,353, respectively, to Push Innovations Live LLC, and for the nine months ended September 30, 2018, Branded Response paid $84,192 to Push Innovations Live LLC. On August 25, 2018, ConversionPoint terminated its agreement with Push Innovations Live LLC.

 

Pursuant to a Services Agreement dated in or about June 2016, between Branded Response and Chargeback 360, LLC, a California limited liability company, which is controlled by Mr. Nguyen, Chargeback 360, LLC, provided certain chargeback services to Branded Response. Pursuant to the agreement, for the fiscal years ended December 31, 2016, and December 31, 2017, Branded Response paid $398,053 and $1,607,107, respectively, to Chargeback 360, LLC, and for the nine months ended September 30, 2018, Branded Response paid $94,715 to Chargeback 360, LLC. On September 30, 2018, ConversionPoint terminated its agreement with Chargeback 360, LLC.

 

Pursuant to a Master Services Agreement dated June 2, 2016, between Branded Response and Ad Exchange Group, LLC, a California limited liability company, which is controlled by Mr. Nguyen, Ad Exchange Group, LLC provides Branded Response with certain order fulfillment services. Under the agreement, for the fiscal years ended December 31, 2016, and December 31, 2017, Branded Response paid $1,184,873 and $2,534,250, respectively, to Push Innovations, LLC, which is wholly-owned by Ad Exchange Group, LLC, and for the nine months ended September 30, 2018, Branded Response paid $394,126 to Push Innovations Live, LLC.

 

Between May 2016 and July 2018, Branded Response and ConversionPoint shared office space, equipment, furniture and fixtures with Shock Media Group, Inc., which is controlled by Mr. Nguyen, and between May 2016 and April 2017, Branded Response’s employees were on Shock Media Group, Inc.’s payroll. For the fiscal years ended December 31, 2016, and December 31, 2017, ConversionPoint paid $401,094 and $52,934, respectively, to Shock Media Group, Inc., for rent and reimbursement of expenses, including, but not limited to payroll and related expenses, and for the nine months ended September 30, 2018, ConversionPoint paid $110,879 to Shock Media Group, Inc., for rent and expense reimbursements.

 

During 2016 and 2017, Branded Response purchased $43,461, and $72,844, respectively, in web traffic from Ad Exchange Group, LLC. During 2017, Branded Response sold $53,514 in web traffic to Ad Exchange Group, LLC. Mr. Nguyen owns and controls Ad Exchange Group, LLC.

 

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For the year ended December 31, 2016, Branded Response paid $89,000 to Shogun Health, Inc., a Canadian corporation, which is wholly-owned by Robert Tallack, as compensation for consulting services provided to Branded Response. During the year ended December 31, 2017, Branded Response paid $108,000 to Shogun Health, Inc., a Canadian corporation, which is wholly-owned by Robert Tallack, as compensation for consulting services provided to Branded Response and ConversionPoint.

 

For the fiscal year ended December 31, 2017, Branded Response paid MJB Fitness, Inc., an entity in which Mr. Tallack holds an economic interest, $158,500 for consulting services provided to Branded Response and ConversionPoint.

 

On September 1, 2017, Branded Response entered into an Intellectual Property License Agreement with MJB Fitness, Inc., pursuant to which MJB Fitness licensed to Branded Response, the right to sell certain eBooks created and owned by MJB Fitness. Pursuant to the license agreement, for the fiscal year ended December 31, 2017, Branded Response paid MJB Fitness $486,923, and for the nine months ended September 30, 2018, Branded Response paid MJB Fitness $165,109. Robert Tallack has an economic interest in MJB Fitness.

 

CPT Investments, LLC

 

On October 31, 2018, ConversionPoint loaned $25,000 to CPT Investments, LLC, a California limited liability company, owned by Bridgewater Capital Corporation, Mr. Marks and Mr. Kilambi. Bridgewater Capital is controlled by Messrs. Peschong and Thomsen and CPT Investments, LLC, is managed by Mr. Kilambi. In exchange for the loan, CPT Investments, LLC issued ConversionPoint a Promissory Note that accrues interest at a rate of 10% per annum and is due and payable on or before June 30, 2019.

 

On November 1, 2018, CPT Investments, LLC, agreed to loan up to $2,000,000 to Inuvo and in connection with the same, CPT Investments, LLC loaned $1,000,000 to Inuvo, in exchange for a Convertible Promissory Note in the principal amount of $1,000,000 which accrues interest at a rate of 10% per annum and is due and payable on or before the earlier of November 1, 2021 and the closing of the mergers.

 

Acquisitions

 

On April 25, 2017, pursuant to an Exchange Agreement, ConversionPoint acquired of all of the outstanding shares of common stock of Branded Response Inc., a California corporation, from Peter Nguyen, Stephen Blazick and Robert Tallack in exchange for an aggregate of 6,824,500 shares of ConversionPoint’s common stock.

 

On April 28, 2017, pursuant to an Exchange Agreement, ConversionPoint acquired all of the outstanding shares of common stock of Push Holdings, Inc., a Delaware corporation, from Christopher Jahnke and Haig Newton, in exchange for an aggregate of 3,157,500 shares of ConversionPoint’s common stock. Push Holdings wholly owns Push Interactive, LLC, a Delaware limited liability company, Comiseo LLC, a Minnesota limited liability company, and Tamble Inc., a Delaware corporation. Push Interactive, LLC, wholly owns Push Properties, LLC, a Minnesota limited liability company and Tremeta LLC, a Minnesota limited liability company. In connection with the Share Exchange Agreement, Branded Response and Push Holdings entered into a two-year Source Code License Agreement with Haig Newton and Christopher Jahnke pursuant to which Messrs. Newton and Jahnke granted ConversionPoint a worldwide, exclusive, fully-paid royalty free license for the source code developed by the subsidiaries of Push Holdings, Inc., which underlies certain of ConversionPoint’s software solutions.

 

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On December 1, 2017, ConversionPoint acquired SellPoints, a Delaware corporation, through a reverse triangular merger, pursuant to which SellPoints became ConversionPoint’s wholly-owned subsidiary, and the stockholders of SellPoints became stockholders of ConversionPoint. The purchase price was $17,291,818, calculated based on the fair value of the ConversionPoint common stock delivered in connection with the purchase. As a result of the closing of the merger, ConversionPoint issued (1) 1,302,230 shares of common stock to the former stockholders of SellPoints, (2) 260,051 shares of common stock to certain bridge note holders of SellPoints, (3) 19,111 shares of common stock to the secured lenders of SellPoints, and (4) 296,133 shares of common stock was placed in escrow to satisfy certain indemnification claims and other obligations under the merger agreement, of which 162,071 remains in escrow.

 

Warrant Cancellations

 

On October 31, 2018, ConversionPoint entered into agreements with each of Messrs. Newton, Jahnke, Peschong and Kilambi and with Hybrid Theory Capital, Ltd., a company controlled by Mr. Tallack, whereby warrants to purchase an aggregate of 2,200,000 shares of ConversionPoint common stock held by such warrant holders were voluntarily cancelled in order to obtain an acceptable capitalization of ConversionPoint in connection with the mergers.

 

RSU Grants

 

On August 30, 2018, ConversionPoint issued restricted stock units covering an aggregate of 234,000 shares of ConversionPoint common stock to certain executive officers. On October 31, 2018, ConversionPoint issued an aggregate of 694,893 RSUs to certain executive officers and employees.

 

Employment Agreements

 

ConversionPoint has entered into an employment agreement with each of Messrs. Tallack, Janke, Kilambi, Marks and Newton, providing for, without limitation, certain payments upon termination. See “Description of ConversionPoint–Executive Compensation–Executive Employment Agreements” in this joint proxy statement/prospectus for a further discussion of these agreements.

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information regarding beneficial ownership of ConversionPoint’s common stock as of December 14, 2018 by:

 

·each person, or group of affiliated persons, known by ConversionPoint to beneficially own more than 5% of its shares of common stock;

 

·each of its directors;

 

·each of its executive officers; and

 

·all of its directors and executive officers as a group.

 

The table is based on information provided to ConversionPoint by its directors, executive officers and principal stockholders. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, including stock options and warrants that are exercisable within 60 days of December 14, 2018 and restricted stock units, or RSUs, that are scheduled to vest within 60 days of December 14, 2018. To ConversionPoint’s knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Shares of common stock underlying derivative securities, if any, that are currently exercisable or exercisable within 60 days after December 14, 2018 are deemed to be outstanding in calculating the percentage ownership of the applicable person or group, but are not deemed to be outstanding as to any other person or group.

 

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Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o ConversionPoint, 840 Newport Center Drive, Suite 450, Newport Beach, California 92660

 

Beneficial Ownership Table
            
Name of Beneficial Owner(1)  Title of Class  Amount and Nature
of Beneficial
Ownership
   Percent of Class 
Robert Tallack  Common Stock   1,268,276(2)   8.42%
Raghu Kilambi  Common Stock   609,610(3)   4.06%
Haig Newton  Common Stock   1,510,390(4)   9.99%
Chris Jahnke  Common Stock   1,510,390(5)   9.99%
Andre Peschong  Common Stock   531,611(6)   3.54%
Jeffrey S. Marks  Common Stock   412,599(7)   2.72%
Jack Thomsen  Common Stock   509,554(8)   3.40%
Jon Gregg  Common Stock   150,000(9)   * 
Stephen Blazick  Common Stock   1,817,297(10)   12.04%
Peter Ngyuen  Common Stock   1,581,685(11)   10.56%
All executive officers and directors as a group (8 persons)  Common Stock   6,302,430(12)   39.75%

 

* Less than 1.00%.

 

(1)Messrs. Tallack, Kilambi, Newton, Jahnke and Peschong are directors of ConversionPoint.  Messrs. Tallack, Kilambi, Newton, Jahnke, Peschong, Gregg, Thomsen and Marks are executive officers of ConversionPoint.   The address of each of these persons is c/o ConversionPoint Technologies, Inc., 650 Newport Center Drive, Newport Beach, CA.  92660.
(2)Amount represents 1,189,774 shares of common stock held by Hybrid Theory Capital, Ltd., which is controlled by Mr. Tallack, and 78,502 RSUs held by Mr. Tallack.
(3)Includes 52,443 RSUs.
(4)Includes 131,640 RSUs.
(5)Includes 131,640 RSUs.
(6)Amount represents  474,282 shares of common stock and 57,329 RSUs.
(7)Includes 207,932 RSUs.
(8)Amount represents 461,475 shares of common stock held by Mr. Thomsen, 12,809 shares of common stock held by Thomsen & Associates Consulting Corporation, which is controlled by Mr. Thomsen, and 24,040 RSUs held by Mr. Thomsen.
(9)Amount represents 125,000 shares underlying warrants and 25,000 RSUs.
(10)Includes 118,735 RSUs.  The address of Mr. Blazick is c/o ConversionPoint Technologies, Inc., 650 Newport Center Drive, Suite 450, Newport Beach, CA.  92660.
(11)The address of Peter Nguyen is 18400 Von Karman, Suite 1000, Irvine, CA.  92612.
(12)Includes 5,453,006 shares of common stock, 125,000 shares of common stock underlying warrants and 708,526 RSUs.
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DESCRIPTION OF INUVO

 

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 U.S. digital media 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 daily. Inuvo’s intellectual property is protected by 15 issued and 8 pending patents.

 

Products and Services

 

The Inuvo Exchange is a digital marketplace that allows advertisers and publishers the opportunity to buy and sell advertising space in real time. The Exchange includes the following products and services:

 

·ValidClick: A software as a service and delivery platform for publishers that offers a pay-per-click solution where advertisements are targeted to consumers based on content and behaviors.

 

·IntentKey: A consumer intent recognition system designed to reach highly targeted mobile and desktop In-Market audiences with precision.

 

·Digital Publishing: Branded web properties like alot.com, earnspendlive.com, search4answers.com and many more with content developed, edited and published by Inuvo in categories like health, finance, travel, entertainment, careers, education, lifestyle and automotive.

 

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Key Relationships

 

Inuvo maintains long-standing relationships with Yahoo! and Google that provide access to hundreds of thousands of advertisers from which most of its ValidClick and Digital Publishing revenue originates. When an advertisement is clicked, Inuvo effectively sells that click to these partners who then sell it to the advertisers. Inuvo maintains multi-year service contracts with both companies. The Yahoo! Agreement continues through November 20, 2020 and the Google agreement through February 28, 2019. In 2017, Yahoo!, Google and OpenX accounted for 86.5% of its total revenue.

 

In addition to its key customer relationships, Inuvo maintains important distribution relationships with owners and publishers of websites and mobile applications. Through its relationship with Yahoo! Inuvo provides these partners with advertisements through which they monetize their websites and mobile applications. Inuvo continuously monitors its 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

 

Inuvo’s business strategy has been to develop technologies that displace intermediaries while cultivating relationships that provide access to media spend and media inventory. In this regard, Inuvo has proprietary demand and supply side technologies, consumer targeting technologies, on-page or in-app ad-unit technologies, unique data, and advertising fraud detection technologies. Inuvo has both direct and indirect relationships at some of the largest media buyers and/or consolidators in the industry. For Inuvo’s core business, this strategy implies a more direct line of site to advertisers and consumers.

 

Inuvo’s competitive position requires a strategy that allows Inuvo to provide the absolute best solutions to publishers for monetization of their content. To accelerate the time to market for technology that accomplishes this goal and to gain competitive reconnaissance, Inuvo has developed a set of owned and operated digital properties. These websites provide the means to test advertising technology in a controlled environment which in turn reduces the time to market for the introduction of those technologies. The strategy has the added benefit of providing a high quality directly controlled source of advertising inventory which can be adapted to meet demand and supply changes in near real time.

 

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Inuvo’s industry is currently in a consolidation phase. Inuvo’s business strategy aligns with this trend as it is by design an end-to-end complete approach to the value chain. Inuvo evaluates acquisition candidates as opportunities arise that have either advertisers or advertising relationships Inuvo does not possess or publishers or publishing partners with whom Inuvo does not currently have a relationship.

 

Inuvo’s device strategy is to become screen agnostic. Inuvo will continue to develop technologies that allow it to distribute ads across any medium.

 

Sales and Marketing

 

Inuvo drives general awareness of its brands through various marketing channels including its websites, social media, blogs, public relations, trade shows, conferences and similar means. Sales and marketing for its products differs based on whether they are demand or supply facing.

 

The demand side of Inuvo’s business includes sales executives who create demand from agencies, trading desks and brands directly. Leveraging Inuvo’s IntentKey technology to highlight its differentiation, Inuvo’s sales executives explain how Inuvo identifies the most relevant content and audiences, allowing Inuvo to target these consumers when they are most prone to engage / respond / subscribe / tune-in and watch. Inuvo’s product organization fulfills the business development initiatives that cement profitable relationships with programmatic demand partners, who are incorporated into Inuvo’s stack to drive monetization for its publishing partners.

 

The supply side of Inuvo’s business includes sales executives who sell to publishers directly. Creating differentiation, they explain Inuvo’s unique ability to create incremental revenue streams for publishers through Inuvo’s custom placements and unique approach to maximizing yield while preserving user experience.

 

Both demand and supply relationships require account management/campaign management, plus operations teams, who ensure that publisher implementations are successful, advertising campaigns deliver anticipated results and clients’ expectations are exceeded.

 

Competition

 

Inuvo faces significant competition in its industry. Competitors continue to increase their suite of offerings across marketing channels to better compete for total advertising dollars.

 

A significant number of competitors have greater name recognition and are better capitalized than Inuvo. Inuvo’s ability to remain competitive in its market segment depends upon Inuvo’s ability to be innovative and to efficiently provide unique solutions to its demand and supply customers. There are no assurances Inuvo will be able to remain competitive in its markets in the future.

 

Technology Platforms

 

Inuvo’s proprietary applications are constructed from established, readily available technologies. Some of the basic elements Inuvo’s products are built on are 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, Java and Linux. By seeking to strike the proper balance between using commercially available software and open source software, Inuvo’s technology expenditures are directed toward maintaining its technology platforms while minimizing third-party technology supplier costs.

 

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Inuvo strives to build high-performance, availability and reliability into its product offerings. Inuvo safeguards against the potential for service interruptions at its third-party technology vendors by engineering controls into its critical components. Inuvo delivers its hosted solutions from facilities, geographically disbursed throughout the United States and maintains ready, on-demand services through third-party cloud providers Microsoft Azure and Amazon Web Services to enhance Inuvo’s business continuity. Inuvo’s 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

 

Inuvo owns intellectual property, or IP, and related IP rights that relate to its products, services and assets. Inuvo’s IP portfolio includes patents, trade secrets and trademarks. Inuvo actively seeks to protect its IP rights and to deter unauthorized use of its IP and other assets.  While Inuvo’s IP rights are important to its success, its business as a whole is not significantly dependent on any single patent, trademark, or other IP right.

 

Inuvo’s trademarks include the U.S. Federal Registration for its consumer facing brand ALOT® in the United States.  Inuvo’s patents include fifteen patents issued by the United States Patent and Trademark Office and eight pending patent applications.

 

To distinguish Inuvo’s products and services from its competitors’ products, Inuvo has obtained trademarks and trade names for its products. Inuvo also protects details about its processes, products, and strategies as trade secrets, keeping confidential the information that Inuvo believes provides it with a competitive advantage.

 

Employees

 

As of September 30, 2018, Inuvo had 68 full-time and part-time employees, none of which are covered by a collective bargaining agreement.

 

Seasonality

 

Inuvo’s future results of operations may be subject to fluctuation because of seasonality. Historically, in the later part of the fourth quarter and the earlier part of the first quarter Inuvo experiences lower revenue 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 Inuvo is not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on Inuvo’s financial results.

 

History

 

Inuvo was 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 Inuvo had essentially no operations. In 1997, Inuvo reorganized and through 2006 Inuvo 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, Inuvo sold or retired eleven businesses.

 

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In March 2012, as part of a long-term strategy, Inuvo 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, Inuvo moved the headquarters to Arkansas where it has remained.

 

In February 2017, Inuvo entered into an Asset Purchase Agreement with NetSeer, Inc. (“NetSeer”) which allowed Inuvo to advance its technology strategy while increasing both the number of advertisers and publishers within the Inuvo Exchange. Inuvo exchanged 3,529,000 shares of Inuvo common stock and assumed approximately $6.8 million of specified liabilities in this business combination.

 

More Information

 

Inuvo’s web site address is www.inuvo.com. Inuvo files with, or furnishes 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, Inuvo makes available free of charge through the Investor Relations page of its web site, its 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.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Company Overview

 

Inuvo develops data, analytics and artificial intelligence technology that empowers its clients to execute their business-to-business and business-to-consumer strategies. These capabilities allow Inuvo’s clients to engage with customers and prospects in a manner that drives closer collaboration through knowledge. These unique and patented technologies have been used to serve numerous world-renowned customers in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance.

 

To action these technologies, Inuvo has also developed software and information processing technologies that allows it to place over one billion marketing messages online every single month. Inuvo generates revenue both directly and indirectly from merchants whose messages it delivers across mobile, tablet and desktop within content, image or video.

 

Inuvo’s solution incorporates a proprietary form of artificial intelligence (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 adding new clients with sales activity.

 

Inuvo counts among its many contractual relationships, three clients who collectively manage over 50% of all U.S. digital media budgets. As part of Inuvo’s technology strategy, it also owns a collection of websites such as alot.com and earnspendlive.com, where it 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 (IOT), the relationships required to execute within the IOT and the ability to process tens of billions of transactions daily. Inuvo’s intellectual property is protected by 15 issued and 8 pending patents.

 

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Comparison of the Nine Months Ended September 30, 2018 and 2017

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2018   2017   Change   %
Change
   2018   2017   Change   %
Change
 
Net Revenue  $16,806,170   $20,311,502   $(3,505,332)   (17.3)%  $56,315,006   $55,798,545   $516,461    0.9%
Cost of Revenue   6,196,057    9,649,295    (3,453,238)   (35.8)%   21,965,955    25,161,761    (3,195,806)   (12.7)%
Gross Profit  $10,610,113   $10,662,207    (52,094)   (0.5)%  $34,349,051   $30,636,784   $3,712,267    12.1%

 

Net Revenue

 

Net revenue for the third quarter of 2018 was $16.8 million, 17% lower than the same quarter of 2017 and $56.3 million for the first nine months of the year, 1% higher compared to the same period in 2017. The decline in net revenue in the current quarter was primarily due to Inuvo’s decision earlier this year to reduce support of its proprietary Supply Side Platform (SSP) and focus on the Demand side of its business where its IntentKey technology provides maximum competitive differentiation. This realignment caused a 74% reduction in revenue generated from the SSP as compared to the prior year with a rate of decline faster than Inuvo had expected. In addition, during the last half of the third quarter of 2018 Inuvo experienced lower monetization for its inventory from its largest demand partner. Inuvo has not seen an appreciable change in monetization for its inventory subsequent to the third quarter of 2018 and Inuvo does not know whether monetization will return to former levels. Although net revenue was 12% higher in the first six months of 2018 over 2017, lower third quarter revenue in 2018 reduced the increase to 1% for first nine months of 2018.

 

Cost of Revenue

 

Cost of revenue is primarily generated by payments to website publishers and app developers that host advertisements Inuvo serves and payments to ad exchanges that provide access to supply inventory where Inuvo serves advertisements. The decrease in the cost of revenue in the third quarter of 2018 compared to the third quarter of 2017 and for the nine months ended September 30, 2018 compared to the same time period in 2017 is due primarily to lower revenue and to the lower demand for clicks mentioned above in Net Revenue.

 

Operating Expenses

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2018   2017   Change   %
Change
   2018   2017   Change   %
Change
 
Marketing costs  $8,285,465   $7,161,905   $1,123,560    15.7%  $25,025,922   $21,122,489   $3,903,433    18.5%
Compensation   1,806,111    2,363,901    (557,790)   (23.6)%   6,749,280    7,053,308   $(304,028)   (4.3)%
Selling, general and administrative   1,859,020    2,025,254    (166,234)   (8.2)%   5,968,233    6,308,552   $(340,319)   (5.4)%
Operating expenses  $11,950,596   $11,551,060   $399,536    3.5%  $37,743,435   $34,484,349   $3,259,086    9.5%

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Overall, Inuvo’s operating expenses for the three and nine months ended September 30, 2018, increased 3.5% and 9.5%, respectively, compared to the same periods in 2017.

 

Marketing costs include those expenses required to attract an audience to Inuvo’s owned web properties. The increase in marketing costs in the three and nine months ended September 30, 2018 compared to the same periods in the prior year was partially due to adjusting traffic acquisition campaigns to the lower monetization as described above in Net Revenue that the marketplace experienced in the third quarter.

 

Compensation expense decreased for the three and nine month periods ended September 30, 2018 as compared to the same periods in 2017 primarily due to lower headcount. The average headcount, both full-time and part-time, at September 30, 2018 was 68 compared to 90 for the same quarter last year. Inuvo expects a stable compensation expense in the coming quarters as Inuvo has shifted its focus to the Demand side of the business.

 

Selling, general and administrative expenses were $1.9 million for the three month period ended September 30, 2018 and $6.0 million for the nine month period ended September 30, 2018, slightly lower from the prior year periods. Inuvo expects quarterly selling, general and administrative expense to continue to be relatively flat.

 

Interest Expense, net

 

Interest expense, net, which represents interest expense on the bank credit facility and capital lease obligations, increased approximately $4,000 to $101,000 in the quarter ended September 30, 2018 compared to the same period in 2017 and $84,000 to $297,000 for the nine months ended September 30, 2018 compared to the same period in 2017, primarily due to higher interest rates on the credit line in 2018 year compared to 2017.

 

Income from Discontinued Operations

 

In the third quarter of 2016, Inuvo’s petition with the UK (United Kingdom) Companies House to strike off and dissolve its remaining subsidiary in the EU was approved. As a result, for the nine months ended September 30, 2017, Inuvo recorded a net loss of $1,109 due to a charge from a service provider.

 

2017 Overview

 

2017 was a strong year for Inuvo, Inc. Leading into 2017, Inuvo laid the foundation for a transformational acquisition that would fuel continued growth in revenue and margin while opening opportunities to leverage a new set of machine learning technologies (the IntentKey) with applicability throughout its business and markets. During 2017, Inuvo:

 

·Grew revenue by 11% and gross profits, net of traffic acquisition costs (TAC), by 30%.

 

·Acquired the assets of NetSeer Inc. growing revenue in that business from $0.8 million in the month of February 2017 to $1.9 million in December 2017.

 

·Opened a new development and support office in San Jose, CA.

 

·Entered partnerships with Microsoft Bing and OpenX.

 

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·Hired a Chief Revenue Officer who built a Media and Publisher Sales and Account Management organization.

 

·Began developing relationships in China that could result in media spend in the U.S.

 

·Continued the migration to mobile, going from 52.4% mobile in 2016 to 62.1% in 2017.

 

Comparison of the Year Ended December 31, 2017 and 2016

 

Results of Operations

 

   For the Years Ended December 31, 
   2017   2016   Change   % Change 
Net Revenue  $79,554,493   $71,530,102   $8,024,391    11.2%
Cost of Revenue   36,669,543    21,364,795    15,304,748    71.6%
Gross Profit  $42,884,950   $50,165,307   $(7,280,357)   (14.5)%
Marketing Cost (TAC)  $28,578,401   $39,195,653   $(10,617,252)   (27.1)%
Gross Profit adjusted for Marketing Cost (TAC)  $14,306,549   $10,969,654   $3,336,895    30.4%

 

Net Revenue

 

Net revenue for the year ended December 31, 2017 was $79.6 million compared to $71.5 million for the year ended December 31, 2016. The increase was primarily due to growth in the business acquired in February 2017. Revenue from the acquired business line grew from $0.8 million in its first month of operations, February 2017 to $1.9 million in December 2017. Inuvo expects the new business line to continue to fuel its growth into the future. Revenue from Inuvo’s ValidClick business, serving advertisements to publisher partners, increased 25% in 2017 compared to 2016. Revenue from Inuvo’s Digital Publishing business declined as Inuvo redirected resources and investment to the acquired business which has higher gross margins. The fourth quarter is traditionally the highest revenue quarter of the year. In 2017, the fourth quarter revenue was $23.8 million, 21% greater than the same quarter in 2016. The higher revenue in the fourth quarter of 2017 was attributable primarily to the new business line.

 

Cost of Revenue

 

Cost of revenue is primarily generated by payments to website and application publishers who host Inuvo’s advertisements. The increase in cost of revenue in 2017 compared to 2016 was due to with the higher revenue from the acquired business and ValidClick.

 

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Operating Expenses

 

   For the Year Ended December 31, 
   2017   2016   Change   % Change 
Marketing costs (TAC)  $28,578,401   $39,195,653   $(10,617,252)   (27.1)%
Compensation   10,200,117    6,830,338    3,369,779    49.3%
Selling, general and administrative   8,342,906    4,996,482    3,346,424    67.0%
Operating expenses  $47,121,424   $51,022,473   $(3,901,049)   (7.6)%

 

Operating expenses decreased in the twelve months ended December 31, 2017 as compared to the same period of the prior year.

 

Marketing costs or TAC include those expenses required to attract traffic to Inuvo’s owned web properties. The decrease in marketing costs in the twelve months ended December 31, 2017 was a strategy initiated at the beginning of 2017 in anticipation of the acquisition in February 2017. This strategy was designed to focus resources and investment towards a higher growth and gross margin (after TAC) business at the expense of growth in another business line at lower gross margin.

 

Compensation expense increased 49.3% in the twelve months ended December 31, 2017 primarily due to an increase in the number of employees. The higher headcount was primarily due to the additional employees from the February 2017 acquisition. Inuvo’s total employment, both full-time and part-time, was 89 at December 31, 2017 compared to 72 at December 31, 2016. Inuvo expects compensation expense to increase, though moderately, in the coming quarters as Inuvo hires additional developers and sales personnel to support the anticipated growth.

 

Selling, general and administrative costs in 2017 were $8.3 million, an increase of 67.0% over 2016. The primary reasons for the higher cost in the twelve months ended December 31, 2017 compared to the same period last year was due to the acquisition in February 2017. Among the higher 2017 expenses compared to 2016 were IT costs approximately $1.3 million higher; amortization and depreciation expense approximately $852,000 higher; facilities cost approximately $290,000 higher and travel and entertainment costs approximately $255,000 higher. Inuvo expects selling, general and administrative costs to decrease in 2018.

 

Interest Expense, net

 

Interest expense, net, which represents interest expense on the bank credit facility, was higher in 2017 compared to the same periods in 2016 because of a higher average outstanding revolving credit line balance and higher interest rates in 2017 compared to 2016.

 

Income Tax Benefit

 

In 2017, Inuvo recognized an income tax benefit of $1,498,076 due to the passing of the Tax Cuts and Jobs Act in December 2017. The new law reduced corporate income tax rates from 35% to 21%. As a result, the deferred tax assets and liabilities recorded in the consolidated balance sheet were reevaluated at the new tax rates. Both the deferred tax assets and the deferred tax liabilities were reduced. The decrease in the deferred tax liability resulted in the one-time tax benefit.

 

In 2016, Inuvo recognized an income tax benefit of $29,260.

 

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Income (loss) from Discontinued Operations

 

Certain of Inuvo’s subsidiaries previously operated in the European Union (EU). Though operations ceased in 2009, statutory requirements made it necessary to have 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, Inuvo’s 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, 2017, Inuvo recognized a net loss from discontinued operations of $1,109 due to a charge from a service provider. As of December 31, 2016, Inuvo recorded a net income of $155,287 due primarily to the adjustment of certain accrued liabilities. No further charges or adjustments are expected.

 

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. Inuvo also has other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding its results.

 

Liquidity and Capital Resources

 

On October 11, 2018, Inuvo entered into the Amended and Restated Business Financing Agreement with Western Alliance Bank. The Amended and Restated Financing Agreement, which is secured by all of Inuvo’s assets, amended and superseded in its entirety the Business Financing Agreement, as amended, that Inuvo 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. As a result of the amended terms of Inuvo’s lending relationship with Western Alliance Bank, Inuvo has additional access to credit.

 

In May 2018, Inuvo completed its underwritten public offering of 2,860,000 shares of its common stock at a public offering price of $0.70 per share and an additional 429,000 shares to cover over allotments in connection with the offering. The net proceeds after deducting the underwriting discounts and commissions and estimated offering expenses payable was approximately $2.1 million.

 

During the third quarter of 2017, Inuvo 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 Inuvo to offer and sell up to $15 million of its securities from time to time in one or more offerings. In May 2018, Inuvo took down from this shelf registration statement approximately $2.3 million in the underwritten public offering.

 

For the three months ended September 30, 2018, Inuvo’s revenues declined 17.3% from the same quarter in the prior year. The lower revenue in this year’s quarter was principally responsible for Inuvo’s $1.4 million net loss in the third quarter of 2018. Since Inuvo’s credit facility is dependent upon receivables, the lower revenue reduces its credit availability. Inuvo does not know when, if ever, that its revenues will return to historic levels or if Inuvo will be able to replace those lost revenues with revenues from other demand partners. The combination of lower credit availability and negative cash flows generated from operating activities raises concern about Inuvo’s ability to continue without interruption. On November 2, 2018, Inuvo entered into the merger agreement and an affiliate of ConversionPoint lent Inuvo $1 million for working capital, and its Chief Executive Officer and members of its board of directors have lent Inuvo an aggregate of $250,000 to cover certain costs associated with the pending mergers. Subject to the terms of the merger agreement and the credit facility, with the additional borrowing, Inuvo believes it will have sufficient cash and credit to operate until the mergers close. However, there are no assurances that the mergers will be consummated. While the mergers are pending, Inuvo’s ability to raise additional working capital is limited by the terms of the merger agreement. There are no assurances Inuvo will be successful in its efforts to generate revenues, report profitable operations or close the mergers in which case Inuvo would need to find additional sources of credit and make substantial reduction to operating expense.

 

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Cash Flows - Operating

 

Net cash used in operating activities was $284,122 during the nine months ended September 30, 2018. Inuvo reported a net loss of $3,682,371, which included non-cash expenses; depreciation and amortization expense of $2,371,958 and stock-based compensation expense of $827,595. The change in operating assets and liabilities during the nine months ended September 30, 2018 was a provision of cash of $219,558 primarily due to a decrease in the accounts receivable balance by $5,183,579, partially offset by a decrease in the accounts payable balance by $4,592,798. The terms are such that Inuvo generally collects receivables prior to paying trade payables. Media sales, which are part of the business acquired in 2017, typically have slower payment terms than the terms of related payables.

 

During the comparable period in 2017, cash used in operating activities was $2,962,766 from a net loss of $4,061,596, which included several non-cash expenses; depreciation and amortization of $2,239,498 and stock-based compensation of $923,072. The cash used was further increased by a change in the accounts payable balance by $1,099,692 and a change in the accounts receivable balances of $237,078 largely due to the working capital needs of the business acquired in 2017.

 

Cash Flows - Investing

 

Net cash used in investing activities was $1,300,179 and $827,048 for the nine months ended September 30, 2018 and September 30, 2017, respectively, and primarily consisted of capitalized internal development costs.

 

Cash Flows - Financing

 

Net cash provided financing activities was $1,689,889 during 2018 primarily from proceeds of the sale of 3,289,000 shares of common stock, net of repayments on Inuvo’s revolving line of credit and capital leases.

 

In 2017, net cash provided by financing activities was $2,744,975 which largely consisted of proceeds from the revolving credit facility used to pay off the debt acquired in the 2017 asset acquisition, net of debt repayment.

 

Off Balance Sheet Arrangements

 

As of December 31, 2017, Inuvo does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its 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 Inuvo as a party, under which Inuvo has 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.

 

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Market Prices of and Dividends on Inuvo Common Stock

 

Inuvo’s common stock is listed on the NYSE American under the symbol “INUV.”  The following table sets forth the reported high and low prices for Inuvo’s common stock for the following periods.

 

   High   Low 
         
Year Ended December 31, 2017:          
First Quarter  $1.74   $1.21 
Second Quarter  $1.39   $0.96 
Third Quarter  $1.24   $0.88 
Fourth Quarter  $1.12   $0.70 
Year Ended December 31, 2016          
First Quarter  $2.77   $1.67 
Second Quarter  $2.13   $1.33 
Third Quarter  $1.78   $1.13 
Fourth Quarter  $2.31   $1.00 
Year Ending December 31, 2018:          
First Quarter  $1.05   $0.78 
Second Quarter  $1.03   $0.68 
Third Quarter  $0.78   $0.36 
Fourth Quarter (Through December 13, 2018)  $1.55   $0.38 

 

As of November 30, 2018, there were approximately 408 stockholders of record of Inuvo’s common stock.

 

Dividends

 

Inuvo has not declared or paid cash dividends on its common stock since its inception. Under Nevada law, Inuvo is prohibited from paying dividends if the distribution would result in Inuvo not being able to pay its debts as they become due in the normal course of business if its total assets would be less than the sum of Inuvo’s total liabilities plus the amount that would be needed to pay the dividends, or if Inuvo 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. Inuvo’s board of directors has complete discretion on whether to pay dividends subject to compliance with applicable Nevada law. Even if Inuvo’s board of directors decides to pay dividends, the form, the frequency, and the amount will depend upon Inuvo’s 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 Inuvo’s board of directors will make any future decisions regarding dividends, as circumstances surrounding Inuvo change, it currently does not anticipate that Inuvo will pay any cash dividends in the foreseeable future.

 

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Management

 

Executive Officers

 

Name

 

Positions

Richard K. Howe   Chairman of the Board
Wallace D. Ruiz   Chief Financial Officer, Secretary
John B. Pisaris, Esq.   General Counsel
Don Walker “Trey” Barrett III   Chief Operating Officer

 

Executive officers of Inuvo are appointed by the board of directors and serve at the pleasure of the board.

 

Richard K. Howe. For information regarding Mr. Howe, please see “Inuvo Board” which appears below.

 

Wallace D. Ruiz. Mr. Ruiz, 67, has served as Inuvo’s Chief Financial Officer since June 2010. From 2005 until April 2009, Mr. Ruiz was Chief Financial Officer and Treasurer of SRI Surgical Express, Inc. (Nasdaq: STRC), a Tampa, Florida provider of outsourced sterilization and supply chain management services to healthcare providers. From 1995 until 2004 he was Chief Financial Officer of Novadigm, Inc. (Nasdaq: NVDM), a developer and worldwide marketer of enterprise infrastructure software that was acquired by Hewlett-Packard Company in 2004. Since March 2018 he has been a member of the board of directors of Truli Media Group, Inc. (OTCPink: TRLI). 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, 52, has served as Inuvo’s General Counsel since March 2012 following Inuvo’s 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, 54, 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.

 

Inuvo Board

 

Name   Age   Positions   Director Since
Richard K. Howe   56   Executive Chairman of the Board and Chief   2008
        Executive Officer; Class I Director    
Gordon J. Cameron   54   Class I Director   2016
G. Kent Burnett   73   Class II Director   2016
Charles D. Morgan   75   Class III Director   2009
Patrick Terrell   64   Class III Director   2013

 

Director Qualification

 

The following is a discussion for each director of the specific experience, qualifications, attributes or skills that led the Nominating, Corporate Governance and Compensation Committee to recommend to the board, and for the board to conclude that the individual should be serving as a director of Inuvo.

 

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Richard K. Howe. Mr. Howe has been a member of Inuvo’s board of directors since November 2008, and has served as Executive Chairman of the board since March 2012 and as Inuvo’s Chief Executive Officer since December 2012. Previously, he served as Inuvo’s 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 the billion dollar multi-channel marketing services leader Acxiom Corporation (NasdaqGS: ACXM) where, since 2004, he led 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 innovator, ieWild. Mr. Howe has over his career led the acquisition, merger or divestiture of a dozen companies on three continents worth many hundreds of millions of dollars to shareholders. 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.

 

Gordon J. Cameron. Mr. Cameron has been a member of Inuvo’s board of directors since November 2016. He is a business transformation executive with three decades of success in growing businesses while managing risk. Mr. Cameron is currently an Executive Vice President in Retail Lending at PNC Financial Services, one of the largest diversified financial services institutions in the United States, where he serves as a credit risk executive, a position he has held since 2008. Prior to PNC Financial Services, Mr. Cameron was the Chief Credit Officer, Retail and Small Business Lending, at Canadian Imperial Bank of Commerce from 2005 to 2008. Mr. Cameron was the Chief Scientist Transaction Analytics, Global Account Management Solutions at Fair Isaac Corporation FICO from 2001 to 2005. Prior to his tenure with Fair Isaac Corporation, Mr. Cameron held executive positions at IeWild Inc., HNC Software Inc., Advanta National Bank/Fleet, The Cambell Group LTD and Fidelity Bank N.A. Mr. Cameron received a MBA from Widener University School of Management and a B.S. in Finance from Pennsylvania State University.

 

G. Kent Burnett. Mr. Burnett has been a member of Inuvo’s board of directors since November 2016. He is a retired technology and e-commerce executive. Mr. Burnett joined Dillard’s, Inc., one of the nation’s largest fashion retailers, in 1979. Mr. Burnett held various executive level technology positions at Dillard’s, including Chief Information Officer, Western Division Chairman and from 2009 to 2016 was Vice President of Technology and e-commerce. Prior to joining Dillard’s Mr. Burnett held various marketing, technology and engineering positions with IBM. Since 2012 he has been a member of the Board of Directors of First Orion Corp., a phone call protection and data provider, and from February 2012 to April 2013 he served as a member of the Board of Directors of Acumen Brands, an e-commerce retailer. Mr. Burnett received his undergraduate degree from the University of Arkansas.

 

Charles D. Morgan. Mr. Morgan has been a member of Inuvo’s board of directors since June 2009. Since 2008, he has been the Chief Executive Officer of First Orion Corp., a private company that developed and markets PrivacyStar, an application that helps protect the mobile phone users’ privacy. He also serves as a member and is the past Chairman of the Board of Trustees of Hendrix College. 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.

 

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Patrick Terrell. Mr. Terrell has been a member of Inuvo’s board of directors since January 2013. Since 2002 and 2004, respectively, Mr. Terrell has been the managing member of both PatRick Investments, LLC and Terrell Group Management, private equity and real estate investment companies. He also serves on the board of directors of Routeware Inc. Mr. Terrell served as founder and CEO of Leading Technology, a $300 million per year manufacturer of personal computers. Additionally, he founded Byte Shops Northwest, which serviced personal computers, and grew to $50 million in annual revenues. Mr. Terrell attended Oregon State University.

 

There are no family relationships between any of the directors.

 

In addition to the each of the individual skills and background described above, the Nominating, Corporate Governance and Compensation Committee and Inuvo’s board also concluded that each of these individuals will continue to provide knowledgeable advice to Inuvo’s other directors and to senior management on numerous issues facing Inuvo and on the development and execution of its strategy.

 

Corporate Governance

 

Inuvo is committed to maintaining the highest standards of honest and ethical conduct in running its business efficiently, serving its stockholders interests and maintaining its integrity in the marketplace. To further this commitment, Inuvo has adopted its Code of Conduct and Business Code of Ethics, which applies to all its directors, officers and employees. To assist in its governance, Inuvo’s board has formed two standing committees composed entirely of independent directors, Audit and Nominating, Corporate Governance and Compensation. A discussion of each committee’s function is set forth below. Additionally, Inuvo has adopted and published to all employees, its Whistleblower Notice establishing procedures by which any employee may bring to the attention of Inuvo’s Audit Committee any disclosure regarding accounting, internal control or other auditing issues affecting Inuvo or any improper activities of any officer or employee. Disclosure may be made anonymously.

 

Inuvo’s bylaws, the charters of each board committee, the independent status of a majority of its board of directors, its Code of Conduct and Business Code of Ethics and its Whistleblower Notice provide the framework for Inuvo’s corporate governance. Copies of Inuvo’s bylaws, committee charters, Code of Conduct and Business Code of Ethics and Whistleblower Notice may be found on Inuvo’s website at www.inuvo.com. Copies of these materials also are available without charge upon written request to Inuvo’s corporate secretary.

 

Board of Directors

 

The board of directors oversees Inuvo’s business affairs and monitors the performance of management. In accordance with Inuvo’s corporate governance principles, the board of directors does not involve itself in day-to-day operations. The directors keep themselves informed through discussions with the Executive Chairman, Chief Executive Officer and Chief Financial Officer and by reading the reports and other materials that Inuvo sends them and by participating in board of directors and committee meetings. Commencing with Inuvo’s 2008 annual meeting, Inuvo’s directors were divided into three classes and designated Class I, Class II and Class III. Directors may be assigned to each class in accordance with a resolution or resolutions adopted by the board of directors. Directors are elected for a full term of three years. Inuvo’s directors hold office until their successors have been elected and duly qualified unless the director resigns or by reason of death or other cause is unable to serve in the capacity of director. If any director resigns, dies or is otherwise unable to serve out his or her term, or if the board increases the number of directors, the board may fill any vacancy by a vote of a majority of the directors then in office, although less than a quorum exists. A director elected to fill a vacancy shall serve for the unexpired term of his or her predecessor. Vacancies occurring by reason of the removal of directors without cause may only be filled by vote of the stockholders.

 

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Board Leadership Structure and Board’s Role in Risk Oversight

 

Mr. Richard K. Howe serves as both the Executive Chairman of Inuvo’s board of directors and Inuvo’s Chief Executive Officer. Mr. Charles D. Morgan, an independent director, serves as Inuvo’s Lead Independent Director. Inuvo’s board believes Inuvo’s current structure provides independence and oversight, and facilitates the communication between senior management and the full board of directors regarding risk oversight, which the board believes strengthens its risk oversight activities. Moreover, the structure allows the Executive Chairman and Chief Executive Officer to better focus on his responsibilities of running the company, enhancing stockholder value and expanding and strengthening its business, while allowing the Lead Independent Director to lead the board in its fundamental role of providing independent oversight of management.

 

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. Inuvo faces a number of risks, including credit risk, interest rate risk, liquidity risk, operational risk, strategic risk and reputation risk. Management is responsible for the day-to-day management of the risks Inuvo faces, while the Inuvo board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Inuvo board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, the Inuvo board meets regularly with management, as well as independently, to review Inuvo’s risks. Both Inuvo’s General Counsel and Chief Financial Officer attend many of the board meetings and are available to address any questions or concerns raised by any member of the Inuvo board on risk management and any other matter. The independent members of the Inuvo board work together to provide strong, independent oversight of Inuvo’s management and affairs through the board’s standing committees and, when necessary, special meetings of independent directors. Inuvo’s independent directors may meet at any time in their sole discretion without any other directors or representatives of management present. Each independent director has access to the members of Inuvo’s management team or other employees as well as full access to Inuvo’s books and records. Inuvo has no policy limiting, and exerts no control over, meetings of its independent directors.

 

Board Committees

 

The board of directors has standing Audit and Nominating, Corporate Governance and Compensation Committees. Each committee has a written charter. The charters are available on Inuvo’s website at www.inuvo.com. Except as set forth below, all committee members are independent directors. Information concerning the current membership and function of each committee is as follows:

 

Director  Audit Committee Member   Nominating, Corporate
Governance and
Compensation
Committee Member
 
Charles D. Morgan         
Patrick Terrell        
Gordon J. Cameron   (1)     
G. Kent Burnett       (1)

 

 

(1)Denotes Chairperson.

 

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Audit Committee. The Audit Committee assists the board in fulfilling its oversight responsibility relating to:

 

·the integrity of Inuvo’s financial statements;

 

·Inuvo’s compliance with legal and regulatory requirements; and

 

·the qualifications and independence of Inuvo’s independent registered public accountants.

 

The Audit Committee is composed of three directors, all of whom have been determined by the board of directors to be independent as defined by the NYSE American Company Guide. The board has determined that each of Mr. Terrell and Mr. Cameron qualifies as an “audit committee financial expert” as defined by the SEC. During 2017, the Audit Committee held three meetings and took action by unanimous written consent one time.

 

Nominating, Corporate Governance and Compensation Committee. The Nominating, Corporate Governance and Compensation Committee is responsible for:

 

·overseeing Inuvo’s compensation programs and practices, including its executive compensation plans and incentive compensation plans;

 

·recommending the slate of director nominees for election to Inuvo’s board;

 

·identifying and recommending candidates to fill vacancies occurring between annual stockholder meetings;

 

·reviewing the composition of board committees; and

 

·monitoring compliance with, reviews, and recommends changes to Inuvo’s various corporate governance policies and guidelines.

 

The Chief Executive Officer provides input to the committee with respect to the individual performance and compensation recommendations for the other executive officers. The committee’s charter authorizes the committee to retain an independent consultant, and from time to time has done so. The committee did not retain a consultant in 2017. The committee also prepares and supervises the board’s annual review of director independence and the board’s annual self-evaluation.

 

A majority of the persons serving on Inuvo’s board must be independent. Thus, the committee has considered transactions and relationships between each director or any member of his immediate family and Inuvo or its affiliates, including those reported under “Certain Relationships and Related Transactions” below. The committee also reviewed transactions and relationships between directors or their affiliates and members of Inuvo’s senior management or their affiliates. As a result of this review, the committee affirmatively determined that each of Messrs. Morgan, Terrell, Cameron and Burnett are independent as defined by the NYSE American Company Guide.

 

The committee considers all qualified candidates for Inuvo’s board identified by members of the committee, by other members of the Inuvo board, by senior management and by Inuvo’s stockholders. The committee reviews each candidate including each candidate’s independence, skills and expertise based on a variety of factors, including the person’s experience or background in management, finance, regulatory matters and corporate governance. Further, when identifying nominees to serve as director, while Inuvo does not have a policy regarding the consideration of diversity in selecting directors, the committee seeks to create a board that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance. In addition, prior to nominating an existing director for re-election to the Inuvo board, the committee will consider and review an existing director’s board and committee attendance and performance, length of board service, experience, skills and contributions that the existing director brings to the board, equity ownership in Inuvo and independence.

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The committee follows the same process and uses the same criteria for evaluating candidates proposed by stockholders, members of the Inuvo board and members of senior management. Based on its assessment of each candidate, the committee recommends candidates to the Inuvo board. However, there is no assurance that there will be any vacancy on the Inuvo board at the time of any submission or that the committee will recommend any candidate for the Inuvo board.

 

During 2017 the Nominating, Corporate Governance and Compensation Committee was composed of three directors, all of whom have been determined by the Inuvo board to be independent as defined by the NYSE American Company Guide. Mr. Burnett serves as Chairman of the Nominating, Corporate Governance and Compensation Committee. During 2017, the Nominating, Corporate Governance and Compensation Committee held one meeting and took action by unanimous written consent five times.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”)

 

Dodd-Frank requires public companies to provide stockholders with an advisory vote on compensation of the most highly compensated executives, which are sometimes referred to as “say on pay” as well as an advisory vote on how often the company will present say on pay votes to its stockholders. At Inuvo’s 2017 annual meeting of stockholders held on June 19, 2017, Inuvo’s stockholders approved a non-binding proposal that the frequency of an advisory vote on Inuvo’s executive compensation would be held every three years together with a non-binding resolution approving Inuvo’s executive compensation as described in that proxy statement.

 

The Securities and Exchange Commission has also approved NYSE listing standards relating to compensation committees of listed companies, including companies on the NYSE American. The listing requirements were added pursuant to Dodd-Frank and address:

 

·enhanced independence requirement for compensation committee members,

 

·compensation committee authority relating to compensation consultants, counsel and other advisers, and

 

·the responsibility of the compensation committee to consider potential conflicts of interests when choosing consultants, counsel and other advisers.

 

Listed companies had until the earlier of the first annual meeting after January 15, 2014, or October 31, 2014 to comply with the new compensation committee independence and were required to comply with other new standards, including those relating to the authority of the compensation committee, beginning on July 1, 2013. A smaller reporting company such as Inuvo is not subject to the requirements of these recent compensation committee rules, except that a smaller reporting company must have, and certify that it has and will continue to have, a compensation committee of at least two members, each of whom must be an independent director as defined under the current NYSE American independence rules. Inuvo’s Nominating, Corporate Governance and Compensation Committee meets this requirement.

 

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Executive Compensation

 

Compensation Philosophy

 

The fundamental objectives of Inuvo’s executive compensation program are to attract and retain highly qualified executive officers, motivate these executive officers to materially contribute to Inuvo’s long-term business success, and align the interests of Inuvo’s executive officers and stockholders by rewarding Inuvo’s executives for individual and corporate performance based on targets established by the Nominating, Corporate Governance and Compensation Committee.

 

Inuvo believes that achievement of these compensation program objectives enhances long-term stockholder value. When designing compensation packages to reflect these objectives, the Nominating, Corporate Governance and Compensation Committee has adopted the following four principles as a guide:

 

·Alignment with stockholder interests: Compensation should be tied, in part, to Inuvo’s stock performance through the granting of equity awards to align the interests of executive officers with those of Inuvo’s stockholders;

 

·Recognition for business performance: Compensation should correlate in large part with Inuvo’s overall financial performance;

 

·Accountability for individual performance: Compensation should partially depend on the individual executive’s performance, in order to motivate and acknowledge the key contributors to Inuvo’s success; and

 

·Competition: Compensation should generally reflect the competitive marketplace and be consistent with that of other well-managed companies in Inuvo’s peer group. In implementing this compensation philosophy, the Nominating, Corporate Governance and Compensation Committee takes into account the compensation amounts from the previous years for each of the named executive officers, and internal compensation equity between the named executive officers and other employees.

 

2017 Compensation Determination Process

 

In 2017, the compensation program for Inuvo’s executive officers consisted of the following components:

 

·base salary;

 

·cash bonus plan;

 

·2010 Plan awards;

 

·2017 Plan awards; and

 

·other fringe benefits and perquisites.

 

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The Nominating, Corporate Governance and Compensation Committee believes that Inuvo’s executive compensation package consists of elements of compensation that are typically used to incentivize and reward executive management at other companies of Inuvo’s size, in Inuvo’s geographic area or in Inuvo’s industry. Each of these components is designed to meet the program’s objectives of providing a combination of fixed and variable, performance-based compensation linked to individual and corporate performance. In the course of setting the initial compensation level for new hires or adjusting the compensation of existing employees, the Nominating, Corporate Governance and Compensation Committee considered the advice and input of Inuvo’s management. Inuvo’s Chief Executive Officer typically makes recommendations to the Nominating, Corporate Governance and Compensation Committee for any proposed changes in salary, as well as performance-based awards and stock option grants, for the other named executive officers. The Nominating, Corporate Governance and Compensation Committee decides any salary change, as well as performance-based awards and stock option grants, for the Chief Executive Officer.

 

Base Salary

 

Base salary is an important component of executive compensation because it provides executives with an assured-level of income, assists Inuvo in attracting executives and recognizes different levels of responsibility and authority among executives. The determination of base salaries is based upon the executive’s qualifications and experience, scope of responsibility and potential to achieve the goals and objectives established for the executive. Additionally, contractual provisions in executive employment agreements, past performance, internal pay equity and comparison to competitive salary practices are also considered.

 

In general, the Nominating, Corporate Governance and Compensation Committee considers two types of potential base salary increases including “merit increases” based upon the executives’ individual performance and/or “market adjustments” based upon the peer group salary range for similar executives.

 

Plan Awards

 

The objective of Inuvo’s long-term incentive program is to provide a long-term retention incentive for the named executive officers and others and to align their interests directly with those of Inuvo’s stockholders by way of stock ownership. Under Inuvo’s 2010 Equity Compensation Plan (the “2010 Plan”), and Inuvo’s 2017 Equity Compensation Plan (the “2017 Plan”), the board of directors or the Nominating, Corporate Governance and Compensation Committee has the discretion to determine whether equity awards will be granted to named executive officers and if so, the number of shares subject to each award. Both plans allow the board or the Nominating, Corporate Governance and Compensation Committee to grant options and restricted stock and other stock-based awards with respect to up to shares of Inuvo’s common stock, valued in whole or in part by reference to the fair market value of the stock. In most instances, these long-term grants vest over a multi-year basis.

 

The Inuvo board or the Nominating, Corporate Governance and Compensation Committee determines the recipients of long-term incentive awards based upon such factors as performance, the length of continuous employment, managerial level, any prior awards, and recruiting and retention demands, expectations and needs. All Inuvo’s employees are eligible for awards. The Inuvo board or the Nominating, Corporate Governance and Compensation Committee grants such awards by formal action, which awards are not final until a stock option agreement is delivered by Inuvo and executed by both Inuvo and the employee. There is no set schedule for the board or the Nominating, Corporate Governance and Compensation Committee to consider and grant awards. The Inuvo board and the Nominating, Corporate Governance and Compensation Committee have the discretion to make grants whenever it deems it appropriate in Inuvo’s best interests. The Nominating, Corporate Governance and Compensation Committee has discretion to grant equity awards at any time.

 

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Inuvo does not have any program, plan or practice in place to time option or other award grants with the release of material, non-public information and does not release such information for the purpose of affecting the value of executive compensation. The exercise price of stock subject to options awarded under the plans is the fair market value of the stock on the date the grant is approved by the board or the Nominating, Corporate Governance and Compensation Committee. Under the terms of each plan, the fair market value of the stock is the closing sales price of the stock on the date the grant is approved by the board or the Nominating, Corporate Governance and Compensation Committee as reported by the NYSE American.

 

Cash Bonus Plan

 

For 2017 Inuvo approved a 2017 Management Incentive Program. The program established a variable cash incentive pool which may be awarded to executive officers and Inuvo’s employees, including Inuvo’s Chief Executive Officer, based on achieving certain revenue and net income levels as determined by Inuvo’s 2017 financial results or at the discretion of the Committee. The program provided that the total incentive pool which was available for distribution would be divided between Inuvo’s executive officers (75% in the aggregate) and other employees (25% in the aggregate), subject to their continued employment with Inuvo. The percentage of pool participation by each of Inuvo’s individual executive officers was fixed by the program and the amount of individual awards to Inuvo’s employees, other than its executive officers, was determined by Inuvo’s Chief Executive Officer.

 

Other Compensation and Benefits

 

Inuvo has historically provided perquisites and other types of non-cash benefits on a very limited basis in an effort to avoid an entitlement mentality, reinforce a pay-for-performance orientation and minimize expense. Such benefits, when provided, can include additional health care benefits and additional life insurance.

 

Retirement and Other Post-Termination Benefits

 

Other than Inuvo’s 401(k) plan, employment agreements with Inuvo’s named executive officers and certain other employment agreements which provide for severance for termination without cause, Inuvo has not entered into any employment agreements that provide for a continuation of post-employment benefits. Inuvo’s benefits plans are generally the same for all employees, and so as of the date of this Prospectus, the Nominating, Corporate Governance and Compensation Committee does not believe that any such plans in their present forms would continue post-employment, except as required by law (including with respect to COBRA), or otherwise set forth in this Prospectus. Inuvo does not currently maintain any other retirement or post-termination benefits plans.

 

Change in Control Severance Policy

 

Inuvo does not currently maintain any change in control severance plans or severance policies, except as provided in the executive employment agreements and the 2010 Plan and 2017 Plan, both of which are discussed in this section. Therefore, none of Inuvo’s named executive officers will receive any cash severance payments in the event Inuvo undergoes a change in control, unless their employment agreement otherwise provides.