Notes to Consolidated Financial Statements
December 31, 2012
and
2011
Note 1 – Organization and Business
Company Overview
Inuvo®, Inc. and subsidiaries ("we", "us", "our" or the "Company") is an Internet marketing and technology company that develops consumer applications and delivers targeted advertisements onto websites reaching desktop and mobile.
We operate
two
segments, Network and Applications. In 2012, we reorganized operations along the operating segments (previously referred to as Publisher Network and Software Search, respectively). Prior to 2012, the segments were Performance Marketing and Web Properties.
The Network segment designs, builds, implements, manages and sells the various business to business technology platforms and services that the Company offers. The segment also designs, builds and markets to the various web properties the Company owns and operates. The segment is also responsible for managing the various affiliate technology, and programs it manages, either directly or indirectly. The technology that supports this segment facilitates transactions between advertisers and website publishers in an automated and transparent environment. The majority of the revenue earned within this segment is principally derived from clicks on advertisements as well as commissions on the sale of products through the applications, websites and platforms. We believe that greater transparency and alignment between advertisers and publishers, combined with sophisticated analytic technologies that predict fraud and target offers more effectively, will differentiate service providers in this marketplace.
The Applications segment designs, builds, and markets the various business to consumer products it offers. Revenue earned within this segment is derived from clicks on advertisements and sponsored advertisements within applications.
On March 1, 2012 we completed the acquisition of Vertro, Inc. (“Vertro”), an internet company that owns and operates the ALOT product portfolio, comprised of both browser-based consumer applications and websites. Vertro's operations are now part of our Applications segment. In evaluating the merger, we, and the management of Vertro, believed that the combination of the two companies could create a stronger, more scalable business, from which to attract advertisers, publishers and consumers. The merger allowed for greater diversification of revenue streams, mitigating dependence on a single customer; the existing ALOT install and distribution capability has provided a vehicle for our consumer facing innovations like BargainMatch; the combined business is a greater footprint to access the debt and capital markets; the combining of two experienced digital marketing teams has broadened our ability and reduced time to market; and the elimination of overlapping operating and public company expenses has reduced combined costs by over
$2 million
per year.
Subsequent Events
On January 25, 2013, we agreed with the state of Arkansas to receive a grant of up to
$1.75 million
for expenses related to the relocation of the our headquarters and operations from New York and Florida to Arkansas as well as expenses related to purchase of equipment necessary to begin operations in Arkansas. The grant is contingent upon us having at least
fifty
full-time equivalent permanent positions within
four
years and maintaining at least
fifty
full-time equivalent permanent positions for the following
six
years. The grant is also contingent upon us paying the full-time equivalent permanent positions an average total compensation of
$90,000
per year. After the initial
four
year period, the grant provides for penalties if either the minimum full-time equivalent permanent positions or the average total compensation conditions are not met. In no event would the penalty exceed the amount of the grant received.
On January 31, 2013, we agreed to an early termination of the Clearwater office lease. For a total early termination fee of
$615,000
, the lease will terminate on March 31, 2013.
On January 31, 2013 we signed a
two
year lease for
5,834
square feet of office space in Conway, Arkansas. A director and shareholder of Inuvo is the majority owner of First Orion Corp., the lessor of this space.
On February 1, 2013 we agreed to a
two
year Services Agreement with Google Inc. for advertising and search services.
NYSE MKT
On May 9, 2011, we received notice from the NYSE MKT, LLC, formerly NYSE Amex (the "Exchange") that it did not meet certain of the Exchange's continued listing standards due to stockholders' equity of less than
$4.0 million
and losses from continuing operations and/or net losses in three of the four most recent fiscal years as set forth in Section 1003(a) (ii) of the NYSE MKT Company Guide. The exchange accepted our plan to regain compliance with the continued listing standards and on September 11, 2012, we received notification from the Exchange that the continued listing deficiencies were resolved. However, since we had losses from continuing operations and/or net losses in five of its most recent fiscal years, the Exchange's minimum requirement for continued listing becomes a stockholder equity of not less than
$6,000,000
. At September 30, 2012, stockholders' equity was
$5.1 million
and in November 2012, Inuvo was notified by the Exchange that it was below the Exchange's continued listing standards. We were afforded the opportunity to submit a plan of compliance to the Exchange by December 31, 2012, that demonstrates our ability to regain compliance with Section 1003(a)(iii) of the Company Guide by December 2, 2013 (the “Plan Period”). We submitted our plan and were notified on February 15, 2013 that the plan was accepted by the Exchange. We are able to continue our listing during the Plan Period, though subject to periodic review to determine whether it is making progress consistent with the plan.
Liquidity
While we do not have any commitments for capital expenditures which come due within the next
12 months
, our liquidity was affected by the investment made in search costs to increase the ALOT users and revenue acquired in the merger with Vertro on March 1, 2012. In 2011 prior to the merger, we implemented a cost reduction plan which included a reduction in employees and related expenses which resulted in monthly savings of
$107,000
beginning in February 2011. We have also delayed payments to publishers and vendors in the management of our cash flows. Extending these payments may affect the decision of publishers and vendors to do business with us. In September 2011, in order to further reduce our operating costs, we eliminated an additional
16
full time positions and
six
part-time positions. The effect of this reduction in personnel was approximately
$92,000
monthly. Additionally in 2011, the directors, executive officers and certain senior managers agreed to a deferral of cash compensation for approximately
$356,000
. In the first quarter of 2011,we renegotiated the outsourced call center contract reducing the monthly cost outlay of over
$100,000
monthly and in the second quarter decided to terminate the outsourcing agreement entirely. The result of that decision was a one-time termination fee of
$340,000
and the forgiveness of the remainder of a note receivable associated with the sale of furniture and equipment. In 2012, with the merger with Vertro, we moved our headquarters to the Vertro facilities in New York and negotiated the reduction of the leased space in Clearwater, FL by approximately
$30,000
per month. The Company also consolidated its data operations, closing the Florida facility and moving it to the Vertro collocation in New York. However, even with the savings achieved by merging the two public companies, it was realized the fixed operating expense level was too high. On January 31, 2013, we announced that we had received a grant of
$1.75 million
from the state of Arkansas to assist with the costs of purchasing equipment and relocating our headquarters to Arkansas. We are in the process of relocating its headquarters to Conway, AR. In conjunction with the relocation, the Clearwater, FL office will be closed and the former headquarters office in New York City will be subleased. We are also in process of consolidating its data center collocation facilities in New York City into a single collocation facility in Arkansas. We believe a reduced leased space, a single collocation facility and a generally lower cost of living in Arkansas will have a significant effect in lowering its operating expenses in the future.
Effective with our merger with Vertro on March 1, 2012 (Note 15), we entered into a new Business Financing Agreement with Bridge Bank, for a
$10 million
accounts receivable revolving credit facility (the “Revolving Credit Line”) and a
$5 million
term loan (the “Term Loan”) . The Revolving Credit Line replaced our then existing
$8 million
revolving credit facility. The new credit facility will be used primarily to satisfy our working capital needs following the closing of the merger with Vertro, Inc. described later in this report. Subject to the terms of the new agreement, we are entitled to obtain advances against the Revolving Credit Line up to
80%
of eligible accounts receivable balances plus
$1 million
up to the credit limit of
$10 million
. In addition, subject to the terms of the agreement, we are entitled to borrow up to
$5 million
under the Term Loan portion of the credit facility. As of December 31, 2012, there was approximately
$1.5 million
of credit available on the revolving credit facility and
$0
on the term loan. On June 29, 2012 we entered into the First Business Financing Modification Agreement with Bridge Bank (the "First Amendment") changing the minimum asset coverage ratio to
0.75
to
1.00
for the June 2012, July 2012 and August 2012,
0.80
to
1.00
for the September 2012,
0.85
to
1.00
for the October 2012,
1.00
to
1.00
for the November 2012 and
1.15
to
1.00
beginning December 2012. It also changed the minimum operating profit measured monthly on a trailing
3
month basis to not less than
$200,000
for June 2012,
$500,000
for July 2012,
$1,000,000
for August 2012 and
$1,500,000
for September 2012. Further, the First Amendment required from October 2012 and thereafter that the Debt Service Coverage Ratio be at least
1.50
to
1.0
, on a trailing
3
month basis and waived the event of default caused by the non-compliance of the Asset Coverage Ratio in April and May 2012.
On October 11, 2012 we entered into the Second Business Financing Modification Agreement with Bridge Bank (the "Second Amendment") changed the minimum asset coverage ratio to
0.9
to
1.0
for September 2012 and October 2012,
1.0
to
1.0
for November and December 2012 and
1.15
to
1.0
for each measuring period thereafter beginning January 2013. It also changed
the minimum operating profit measured monthly on a trailing
3
month basis to not less than
$600,000
for the September 2012 measuring period and
$1,000,000
for the October 2012 measuring period. Also changed was the minimum debt service ratio, measured monthly on a trailing
3
month basis, to not less than
1.1
to
1.0
for November 2012 measuring period,
1.25
to
1.0
for December 2012 and
1.50
to
1.0
for each measuring period thereafter beginning January 2013. Further, the Second Amendment waived the event of default caused by the non-compliance of the operating profit in July and August 2012. Additionally, pursuant to the Second Amendment, the Company issued Bridge Bank a warrant to purchase
51,724
shares of our own common stock exercisable at
$0.87
per share until October 2017. As of December 31, 2012, we were in compliance with all terms of the amended Bridge Bank credit facility.
We believe that with the new Business Financing Agreement and the operating benefits from the merger with Vertro (Note 15) will provide us with sufficient cash for operations over the next
12 months
.
The accompanying consolidated financial statements were prepared by management on a go-forward basis and therefore do not include any adjustment to our assets or liabilities.
Note 2 – Summary of Significant Accounting Policies
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In addition, results from the former Vertro operations are included beginning on March 1, 2012, the date of the merger.
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b)
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Cash and restricted cash
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We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Our cash deposits exceeded FDIC-insured limits at various financial institutions on December 31, 2012 by approximately
$3.2 million
, as reported before adjustment for outstanding checks. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk related to cash.
In 2011, we established a restricted cash account with Bridge Bank that secures a letter of credit related to our headquarters lease in Clearwater, FL (see Note 6). As of December 31, 2012 and 2011, we had approximately
$301,000
and
$476,000
, respectively, of restricted cash. As of March 31, 2013 this restriction will be released and the cash will be available for operations.
We recognize revenue in accordance with
Accounting Standards Codification (“ASC”)
ASC 605-10
Revenue Recognition-General
(“ASC 605-10”). Under ASC 605-10, we recognize revenue when the following criteria have been met: persuasive evidence of an arrangement exists, the fees are fixed and determinable, no significant obligations remain and collection of the related receivable is reasonably assured.
Affiliate Advertising
- Consistent with the provisions of ASC 605-45
Revenue Recognition-Principal Agent Considerations
(“ASC 605-45”), we recognize revenue as an agent in affiliate marketing transactions in which we are not the primary obligor. Accordingly, service fee revenue is recognized on a net basis because any affiliate expenses are the responsibility of our advertising customer. In certain instances we assume the position of primary obligor and thus recognize revenue on a gross basis. Revenue is recognized when the related services are performed.
Search Advertising
- In accordance with ASC 605-45, we record as revenue the gross amount received from advertisers and the amount paid to the publishers placing the advertisements as cost of sales. Revenue is earned on our owned networks on a “per click” basis and is recognized when the end user clicks on an advertisement.
Affiliate Software
- We recognize revenue the month in which the software is utilized. Customers are invoiced on the first of the month for the monthly services. All overages for the month are billed at the end of the month and are included in our unbilled revenue.
Hosting Arrangements
– We recognize revenue through a monthly hosting fee and additional usage fees as provided.
Online Membership Income
– We recognize revenue from online memberships when payment is received and the service date of providing membership benefits has taken place.
Lead Sales
- For lead sales, our revenue recognition varies depending on the arrangement with the purchaser. Where the arrangement provides for delivery only, revenue is recognized when the lead information is provided to the purchaser. Where the arrangement provides for compensation based on sales generated by the purchaser from the lead, we recognize revenue in the period that the purchasing company makes a sale that was derived from the lead we provided.
List Management Services
- Substantially all of our revenue from list management services is recorded at the net amount of our gross billings less pass-through expenses charged to a customer. In most cases, the amount that is billed to customers exceeds the amount of revenue that is earned and reflected in our consolidated financial statements, because of various pass-through expenses. In compliance with ASC 605-45, we assess whether we or a third-party supplier is the primary obligor. We have evaluated the terms of our customer agreements and considered other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor as part of this assessment. Accordingly, we generally record revenue net of pass-through charges.
Accounts receivable are recorded at the net realizable value and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses on our existing accounts receivable. We review our allowance for doubtful accounts quarterly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. In determining past due or delinquent status of a customer, the aged trial balance is continually reviewed by our collections department and generally any accounts older than
120 days
are considered delinquent.
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e)
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Advertising and search expenses
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We expense advertising costs as incurred. Advertising costs from continuing operations included in selling general and administrative expenses for the years ended December 31, 2012 and 2011 were approximately
$112,000
and
$119,000
, respectively. In addition, we expense search costs as incurred. Search cost advertising is the purchase of key words and phrases from search engine operators that attracts web browsers to a web site. In 2012, we increased search costs by approximately
$10.7 million
to
$18.2 million
to create download traffic for the ALOT appbar acquired with the merger of Vertro in March 2012.
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f)
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Property and equipment
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Property and equipment are stated at cost, net of accumulated depreciation and amortization. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of assets sold or retired and the related accumulated depreciation and amortization are eliminated from accounts and the net gain or loss is reflected in the statement of comprehensive loss.
Property and equipment are depreciated on a straight-line basis over
3 years
for equipment,
5
to
7 years
for furniture and fixtures and
3
to
5 years
for software. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the remaining term of the lease. Depreciation and amortization expense was approximately
$2.5 million
and
$1.5 million
, respectively, for the years ended December 31, 2012 and 2011.
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g)
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Capitalized Software Costs
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We capitalize certain costs related to the acquisition and internally developed software and amortize these costs using the straight-line method over the estimated useful life of the software. We utilize all developed software for internal use. We do not sell internally developed software. Certain development costs not meeting the criteria for capitalization, in accordance with ASC 350-40 Internal-Use Software, are expensed as incurred.
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h)
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Goodwill and other intangible assets
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Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. In accordance with ASC 350,
Goodwill and Other Intangible Assets (“ASC 350”),
we test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis or more frequently if we believe indicators of impairment exist. The performance of the test involves a two-
step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying value, including goodwill.
We generally determine the fair value of our reporting units using the income approach methodology of valuation that includes the undiscounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill (See Note 5).
We amortize our identifiable intangible assets, which result from acquisitions accounted for under the purchase method of accounting, using the straight-line method over their estimated useful lives. Tradenames are not amortized as they are believed to have an indefinite life. Tradenames are reviewed annually for impairment under ASC 350.
We recorded no impairment of goodwill and other intangible assets during 2012. For the year ended December 31, 2011, we had impairments of our goodwill and other intangible assets of approximately
$2.6 million
as a result of exiting our call center activities.
We utilize the liability method of accounting for income taxes as set forth in ASC 740,
Income Taxes
(“ASC 740”). Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we must project future levels of taxable income. This assessment requires significant judgment. We examine evidence related to the history of taxable losses or income, the economic conditions in which we operate, organizational characteristics, our forecasts and projections, as well as factors affecting liquidity.
We have adopted certain provisions of ASC 740. This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements.
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j)
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Impairment of long-lived assets
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In accordance with ASC 360,
Property, Plant and Equipment
, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of the carrying amount to future undiscounted cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value.
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k)
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Share-based compensation
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We recognize share based compensation at fair value pursuant to ASC 718,
Compensation- Stock Compensation
(“ASC 718”) using the modified prospective transition method. The fair value of units granted is determined using market value of our common stock on the date of the grant. We estimate the fair value of all stock option awards as of the grant date by applying the Black-Scholes-Merton option pricing model, and recognize the fair value as compensation expense in earnings over the requisite service period. The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Under ASC 718, forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture rate, which is currently estimated at a weighted average of
25 percent
of unvested options outstanding, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
The cost method was used in recording the purchase of the treasury stock. Treasury stock changes as a result of common stock acquired in the market. During 2012, we retired
21,270
treasury shares and during 2011, we retired
164,869
treasury shares. We also withheld shares to pay for employee taxes on restricted stock grants, increasing treasury stock by
10,970
treasury shares valued at approximately
$7,800
.
During the periods presented, we had securities that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive. Because we reported a loss from operations for all periods presented, shares associated with stock options, warrants and restricted stock are not included because they are anti-dilutive. Basic and diluted net loss per share is the same for all periods presented.
ASC 280,
Segment Reporting,
requires disclosures of certain information about operating segments, products and services, geographic areas in which we operate, and their major customers. We have evaluated the effect of this standard and have determined that we currently operate in
two
segments, as defined in this statement (See Note 17). In 2012, management reorganized our operations along
two
operating segments – Network and Applications. Prior to 2012, our operations were classified as the Performance Marketing and Web Properties segments.
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o)
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Concentration of credit risk
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Financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable, which are generally not collateralized. Our policy is to place our cash and cash equivalents with high credit quality financial institutions in order to limit the amount of credit exposure. We do not require collateral from our customers, but our credit extension and collection policies include monitoring payments and aggressively pursuing delinquent accounts. We maintain allowances for potential credit losses.
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p)
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Risks and concentrations
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When assessing credit risk, we consider whether the credit risk exists at both the individual and group level. Consideration is given to the activity, region and economic characteristics when assessing if there exists a group concentration risk. The following disclosures were calculated based on our entire results. At December 31, 2012 , we had
two
individual customers with accounts receivable balances greater than
10%
of the gross accounts receivable from continuing operations. These customers owed approximately
$4.0 million
or
71%
of gross accounts receivable from continuing operations at December 31, 2012. These same
two
customers contributed approximately
$47.7 million
or
89.3%
of net revenue from continuing operations for year ended December 31, 2012. At December 31, 2011 a single customer owed approximately
$4.8 million
or
81%
of gross accounts receivable from continuing operations. The same customer contributed approximately
$31.1 million
or
86.6%
of our total net revenue from continuing operations for the year ended December 31, 2011.
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q)
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Fair value of financial instruments
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We have adopted ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”) for our financial assets and liabilities. We use the fair value hierarchy of ASC 820, which gives the highest priority to quoted prices in active markets. The fair value of financial instruments is estimated based on market trading information, where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at our estimates of fair value.
ASC 820 defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
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Level 1
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Quoted prices in active markets for identical assets or liabilities.
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Level 2
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Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted price for identical or similar assets and liabilities in markets that are not active; or other input that are observable or can be corroborated by observable market data.
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Level 3
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Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
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As of December 31, 2012, we have no financial assets or liabilities that were measured at fair value on a recurring basis.
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, useful lives of property and equipment, goodwill and purchased intangible asset valuations and useful lives, deferred income tax asset valuation allowances, stock compensation, and valuation of stock options and warrants. In addition, we used significant assumptions in our valuation of the assets and liabilities acquired with the acquisition of Vertro. We base our estimates and assumptions on current facts, historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
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s)
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Litigation and settlement costs
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From time to time, we are involved in disputes, litigation and other legal actions. In accordance with ASC 450,
Contingencies
, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred as of the date of the consolidated financial statements and (ii) the range of loss can be reasonably estimated (See Note 16).
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t)
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Recent accounting pronouncements
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ASU 2011-08-
In September 2011, the Financial Accounting Standards Board ("FASB") issued “Intangibles-Goodwill and Other: Testing Goodwill for Impairment” to simplify the goodwill impairment test. The change allows companies to first decide whether they need to perform the two-step test by allowing companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This amendment also includes examples of how the amended test should be carried out. This amendment is effective for annual and interim tests performed for fiscal years beginning after December 15, 2011, although early adoption is permitted. The effect of adopting this statement is not expected to have an impact on our financial position or results of operations.
ASU 2011-05
- In June 2011, the FASB issued “Presentation of Comprehensive Income"
.
For annual periods, an entity has the option to present the components of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For interim periods, total comprehensive income is required to be disclosed either below net income on the income statement or as a separate statement. The Accounting Standards Update ("ASU") does not change the items that must be reported as other comprehensive income. Whether presenting two separate statements or one continuous statement in annual periods, the ASU required entities to present reclassifications from other comprehensive income in the statement reporting net income. In December 2011, however, the FASB deferred this requirement when it issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, which has the same effective date as ASU 2011-05. Companies must continue to disclose reclassifications from other comprehensive income on the statement that reports other comprehensive income, or in the notes to the financial statements. We adopted this guidance effective January 1, 2012, and disclosed total comprehensive income below net income on the income statement in our interim financial statements. The effect of adopting this statement is not expected to have an impact on our financial position or results of operations.
Other recent accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants (AICPA), and the SEC did not or are not believed by management to have a material impact on our present or future consolidated financial statements.
Certain reclassifications have been made in the 2011 financial statements to conform to the classifications used in 2012. These reclassifications had no effect on total consolidated stockholders' (deficit) or net loss.
N
ote 3 – Allowance for Doubtful Accounts
The activity in the allowance for doubtful accounts was as follows during the years ended December 31, 2012 and 2011:
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2012
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2011
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Balance at the beginning of the year
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$
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477,289
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|
$
|
450,634
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Provision for bad debts
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299,565
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|
83,020
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Charge-offs
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(554,145
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)
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(132,753
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)
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Recoveries
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—
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76,388
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Allowance for doubtful accounts acquired from the merger with Vertro, Inc.
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$
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8,833
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$
|
—
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Balance at the end of the year
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$
|
231,542
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|
$
|
477,289
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Note 4– Property and Equipment
The net carrying value of property and equipment at December 31, 2012 and 2011 was as follows:
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2012
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2011
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Furniture and fixtures
|
$
|
421,425
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$
|
421,425
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Equipment
|
2,473,813
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2,095,825
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Software
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8,018,509
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5,382,424
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Leasehold improvements
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348,159
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313,172
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Subtotal
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$
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11,261,906
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$
|
8,212,846
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Less: accumulated depreciation and amortization
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(9,151,135
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)
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(6,622,835
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)
|
|
Total
|
$
|
2,110,771
|
|
|
$
|
1,590,011
|
|
Note 5 – Other Intangible Assets and Goodwill
During 2012, we evaluated our other intangible assets and goodwill for impairment at the reporting unit level. Based on the results of step 1 of our evaluation, there were no indications of impairment. During 2011, we also evaluated our other intangible assets and goodwill for impairment at the reporting unit level. Based on the results of our evaluation, there were indications of impairment within our web properties primarily due to the cessation of our call center activities in 2011. We completed step 2 of the analysis on the intangible assets related to our web properties and we determined that there was an impairment of our goodwill and names database and consequently we recognized an impairment charge of approximately
$2.6 million
.
Additionally, beginning in 2012 we are amortizing the names database costs over
nine
months as management has determined that the useful life for our names database has decreased due to the cessation of our call center operations. The following is a schedule of our intangible assets from continuing operations as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
Carrying
Value
|
|
Accumulated Amortization and Impairment
|
|
Net Carrying Value
|
|
2012 Amortization Expense
|
|
Names database (1)
|
9 months
|
|
$
|
17,417,397
|
|
|
$
|
(17,094,626
|
)
|
|
$
|
322,771
|
|
|
$
|
1,590,529
|
|
|
Bundled downloads (1)
|
4.5 months
|
|
2,447,075
|
|
|
(2,441,181
|
)
|
|
5,894
|
|
|
2,441,181
|
|
|
Intangible assets classified as current
|
|
|
$
|
19,864,472
|
|
|
$
|
(19,535,807
|
)
|
|
$
|
328,665
|
|
|
$
|
4,031,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list, Google
|
20 years
|
|
8,820,000
|
|
|
(367,500
|
)
|
|
8,452,500
|
|
|
367,500
|
|
|
Customer list, all other
|
10 years
|
|
1,610,000
|
|
|
(134,170
|
)
|
|
1,475,830
|
|
|
134,170
|
|
|
Exclusivity agreement
|
1 year
|
|
120,000
|
|
|
(100,000
|
)
|
|
20,000
|
|
|
100,000
|
|
|
Trade names, ALOT (2)
|
5 years
|
|
960,000
|
|
|
(160,000
|
)
|
|
800,000
|
|
|
160,000
|
|
|
Trade names, web properties (2)
|
-
|
|
390,000
|
|
|
—
|
|
|
390,000
|
|
|
—
|
|
|
Intangible assets classified as long-term
|
|
|
$
|
11,900,000
|
|
|
$
|
(761,670
|
)
|
|
$
|
11,138,330
|
|
|
$
|
761,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
$
|
5,760,808
|
|
|
$
|
—
|
|
|
$
|
5,760,808
|
|
|
N/A
|
The following is a schedule of our intangible assets from continuing operations as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
Carrying
Value
|
|
Accumulated Amortization and Impairment
|
|
Net Carrying Value
|
|
2011 Amortization Expense
|
|
Names database, classified as current (1)
|
9 months
|
|
$
|
16,130,086
|
|
|
$
|
(15,182,204
|
)
|
|
$
|
947,882
|
|
|
$
|
3,582,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Website development
|
5 years
|
|
4,210,000
|
|
|
(4,210,000
|
)
|
|
—
|
|
|
99,171
|
|
|
Customer lists
|
5 years
|
|
3,500,000
|
|
|
(3,500,000
|
)
|
|
—
|
|
|
22,186
|
|
|
Exclusivity agreement
|
1 year
|
|
150,000
|
|
|
(150,000
|
)
|
|
—
|
|
|
37,500
|
|
|
Tradenames, web properties (2)
|
-
|
|
390,000
|
|
|
—
|
|
|
390,000
|
|
|
—
|
|
|
Intangible assets classified as long-term
|
|
|
$
|
8,250,000
|
|
|
$
|
(7,860,000
|
)
|
|
$
|
390,000
|
|
|
$
|
158,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
$
|
3,893,405
|
|
|
$
|
(2,116,861
|
)
|
|
$
|
1,776,544
|
|
|
N/A
|
___________
|
|
|
|
(1)
|
The amortization of our names database and bundled downloads assets are included in cost of revenue. As of January 1, 2012, the names database is amortized over
nine
months due to the change in our estimate of their useful life. The change in estimate resulted in the names database being classified as current in the 2012 and 2011 consolidated balance sheets, respectively. Per ASC 250,
Accounting Changes and Error Corrections
, this change in estimate does not require a restatement in amounts in prior periods and will only change classifications prospectively.
|
|
|
|
|
(2)
|
We have determined that our Inuvo trade name intangible has an indefinite life, and as such it is not amortized. We determined our ALOT trade names acquired with Vertro should be amortized over
five
years.
|
Our amortization expense over the next five years and thereafter is as follows:
|
|
|
|
|
|
|
|
2013
|
$
|
1,142,669
|
|
|
2014
|
794,004
|
|
|
2015
|
794,004
|
|
|
2016
|
794,004
|
|
|
2017
|
634,004
|
|
|
Thereafter
|
$
|
6,918,310
|
|
|
Total
|
$
|
11,076,995
|
|
Note 6 - Notes Payable
The following table summarizes our notes payable balances as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
Due Date
|
|
Interest Rate
|
|
2012
|
|
2011
|
|
Bridge Bank – term note payable - March 1, 2012
|
|
February 10, 2016
|
|
4.25% (prime, plus 1 percentage point)
|
|
$
|
4,222,222
|
|
|
$
|
—
|
|
|
Bridge Bank – term note payable - February 15, 2011
|
|
Matured March 1, 2012
|
|
5.25% (prime, plus 2 percentage points)
|
|
—
|
|
|
475,000
|
|
|
Bridge Bank – revolving credit line - March 1, 2012
|
|
March 1, 2014
|
|
3.75% (prime, plus 0.5 percentage point)
|
|
3,600,000
|
|
|
—
|
|
|
Bridge Bank – revolving credit line - February 15, 2011
|
|
Matured March 1, 2012
|
|
5.25% (prime, plus 2 percentage points)
|
|
—
|
|
|
2,431,303
|
|
|
Total
|
|
|
|
|
|
$
|
7,822,222
|
|
|
$
|
2,906,303
|
|
|
Less: current portion
|
|
|
|
|
|
(1,333,333
|
)
|
|
(452,000
|
)
|
|
Term and revolving credit line - long term portion
|
|
|
|
|
|
$
|
6,488,889
|
|
|
$
|
2,454,303
|
|
Principal Payments:
Principal payments under the term note payable are due as follows as of December 31, 2012:
|
|
|
|
|
|
|
|
2013
|
$
|
1,333,333
|
|
|
2014
|
1,333,333
|
|
|
2015
|
1,333,333
|
|
|
2016
|
222,223
|
|
|
Total
|
$
|
4,222,222
|
|
Bridge Bank Credit and Term Note Payable
On February 15, 2011, we entered into the Business Financing Agreement (the “Agreement”) with Bridge Bank, N.A. (“Bridge Bank”). This Agreement provides for a revolving credit facility of up to
$8.0 million
and replaces the
$5.0 million
credit facility with Wachovia Bank, N.A. (“Wachovia”) that was scheduled to expire in March 2011. The Bridge Bank credit facility allows us to borrow against
80%
of eligible accounts receivable balances, which are generally those balances owed by U.S. based customers that are less than
90
days from the date of invoice. In addition, the Bridge Bank facility provides an additional term credit of
$475,000
to collateralize a stand-by letter of credit required by our corporate headquarters lease. Under the terms of the Agreement, we must maintain certain depository, operating and investment accounts at Bridge Bank; provide Bridge Bank a first priority perfected security interest in all of our accounts and personal property; provide various monthly, quarterly and annual reports; limit additional indebtedness to
$500,000
of purchase money including capital leases and an additional
$500,000
of all other indebtedness; and maintain “operating profit” of net income plus interest and taxes plus non-cash expenses for amortization, depreciation, stock based compensation, discontinued operations and non-recurring items of not less than
$100,000
for the immediate proceeding
three
month period. At the closing of the Agreement several fees were paid including a facility fee (
0.25%
of the maximum credit limit), a due diligence fee
($800)
, a fee-in-lieu-of-warrant
($21,250)
and a non-formula facility fee
($4,750)
. The facility fee is due annually. A maintenance fee of
.125%
of the average daily balance and the finance charge (Prime Rate plus 200 bonus points) and are due monthly. The outstanding borrowings under the Agreement were fully repaid to Bridge Bank on March 1, 2012 with a portion of the proceeds of the new Business Financing Agreement signed March 1, 2012.
On March 1, 2012 we entered into a new Business Financing Agreement with Bridge Bank, for a
$10 million
accounts receivable revolving credit facility (the “Revolving Credit Line”) and a
$5 million
term loan (the “Term Loan”) . The Revolving Credit Line replaced the Company’s then existing
$8 million
revolving credit facility. The new credit facility will be used primarily to satisfy our working capital needs following the closing of the merger with Vertro. described later in this report. Subject to the terms of the new agreement, we are entitled to obtain advances against the Revolving Credit Line up to
80%
of eligible accounts receivable balances, which are generally those balances owed by U.S. based customers that are less than
90
days from the date of invoice, plus
$1 million
up to the credit limit of
$10 million
. In addition, subject to the terms of the agreement, the Company is entitled to borrow up to
$5 million
under the Term Loan portion of the credit facility, which is repayable in
45
equal monthly installments beginning June 2012. The Revolving Credit Line portion of the credit facility expires on February 28, 2014, at which time all loan advances under the Revolving Credit Line become due and payable. The Term Loan expires in February 2016. Under the terms of the new agreement, we must maintain certain depository, operating and investment accounts at Bridge Bank; provide Bridge Bank a first priority perfected security interest in all of our accounts and personal property; provide various monthly, quarterly and annual reports; and limit additional indebtedness to
$500,000
of purchase money including capital leases and an additional
$500,000
of all other indebtedness. In addition, the Company must maintain through May 2012 an “operating profit” of net income plus interest and taxes plus non-cash expenses for amortization, depreciation, stock based compensation, discontinued operations, non-recurring non-cash items and certain closing costs associated with the merger transaction with Vertro of not less than
$200,000
for the immediate proceeding
three
month period; after May 2012 a Debt Service Coverage Ratio of at least
1.50
to 1.0 tested on the immediate proceeding
three
month period; and an Asset Coverage Ratio of not less than
1.10
to
1
at all times until September 30, 2012 and
1.25
to 1.0 thereafter. Interest on the Revolving Credit Line is payable monthly at
prime
plus
0.5%
plus a monthly maintenance fee of
0.125%
percentage points on the average daily account balance. Interest on the Term Loan bears interest at
prime
plus
1%
. In connection with establishing the credit facility, the Company incurred fees payable to Bridge Bank of approximately
$100,000
. The agreement calls for a termination fee until the first anniversary and prepayment fee on the Term Loan until the first anniversary.
On June 29, 2012 we entered into the First Business Financing Modification Agreement with Bridge Bank (the "First Amendment") changing the minimum asset coverage ratio to
0.75
to 1.00 for the June 2012, July 2012 and August 2012,
0.80
to 1.00 for the September 2012,
0.85
to
1.00
for the October 2012,
1.00
to 1.00 for the November 2012 and
1.15
to
1.00
beginning December 2012. It also changed the minimum operating profit measured monthly on a trailing
3
month basis to not less than
$200,000
for June 2012,
$500,000
for July 2012,
$1,000,000
for August 2012 and
$1,500,000
for September 2012. Further, the First Amendment required from October 2012 and thereafter that the Debt Service Coverage Ratio be at least
1.50
to
1.0
, on a trailing
3
month basis and waived the event of default caused by the non-compliance of the Asset Coverage Ratio in April and May 2012.
On October 11, 2012 we entered into the Second Business Financing Modification Agreement with Bridge Bank (the "Second Amendment") changed the minimum asset coverage ratio to
0.9
to
1.0
for September 2012 and October 2012,
1.0
to 1.0 for November and December 2012 and
1.15
to 1.0 for each measuring period thereafter beginning January 2013. It also changed the minimum operating profit measured monthly on a trailing
3
month basis to not less than
$600,000
for the September 2012 measuring period and
$1,000,000
for the October 2012 measuring period. Also changed was the minimum debt service ratio, measured monthly on a trailing
3
month basis, to not less than
1.1
to
1.0
for November 2012 measuring period,
1.25
to
1.0
for December 2012 and
1.50
to
1.0
for each measuring period thereafter beginning January 2013. Further, the Second Amendment waived the event of default caused by the non-compliance of the operating profit in July and August 2012. Additionally, pursuant to the Second Amendment, the Company issued Bridge Bank a warrant to purchase
51,724
shares of our own common stock exercisable at
$0.87
per share until October 2017. The warrant was valued at
$45,000
, which was recorded to interest expense.
As of December 31, 2012, we had a balance outstanding of approximately
$4.2 million
on the Term Loan and
$3.6 million
on the Revolving Credit Line, and we were in compliance with all terms of the amended Bridge Bank credit facility. We had approximately
$1.5 million
available under the Revolving Credit Line as of December 31, 2012.
Note 7 – Accrued Expenses and Other Current Liabilities
The accrued expenses and other current liabilities consist of the following at December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Accrued expenses and other
|
$
|
1,012,638
|
|
|
$
|
1,419,604
|
|
|
Accrued search costs
|
247,583
|
|
|
109,706
|
|
|
Accrued affiliate expenses
|
46,132
|
|
|
16,570
|
|
|
Capital leases – current portion
|
44,287
|
|
|
57,581
|
|
|
Accrued payroll and commission liabilities
|
522,082
|
|
|
8,370
|
|
|
Total
|
$
|
1,872,722
|
|
|
$
|
1,611,831
|
|
Note 8 – Other Long-Term Liabilities
Other long-term liabilities consist of the following at December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Taxes payable
|
$
|
506,453
|
|
|
$
|
—
|
|
|
Deferred rent
|
345,814
|
|
|
283,469
|
|
|
Capital leases – less current portion
|
47,372
|
|
|
16,655
|
|
|
Long-term deposits
|
32,738
|
|
|
—
|
|
|
Total
|
$
|
932,377
|
|
|
$
|
300,124
|
|
Note 9 – Income Taxes
Provision (Benefit) for Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Current tax provision
|
$
|
—
|
|
|
$
|
—
|
|
|
Deferred tax (benefit) provision
|
(444,000
|
)
|
|
—
|
|
|
Total tax (benefit) provision
|
$
|
(444,000
|
)
|
|
$
|
—
|
|
In addition, we recognized
$123,024
of state franchise taxes in income tax (benefit) expense during 2012.
A reconciliation of the expected Federal statutory rate of
34%
to our actual rate as reported for each of the periods presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Expected statutory rate
|
(34
|
)%
|
|
(34
|
)%
|
|
State income tax rate, net of federal benefit
|
(4
|
)%
|
|
(4
|
)%
|
|
Permanent differences
|
2
|
%
|
|
2
|
%
|
|
Valuation allowance
|
48
|
%
|
|
36
|
%
|
|
Other
|
(18
|
)%
|
|
—
|
%
|
|
|
(6
|
)%
|
|
—
|
%
|
Deferred Income Taxes
Deferred income taxes are the result of timing differences between book and tax basis of certain assets and liabilities, timing of income and expense recognition of certain items and net operating loss carry-forwards.
We assess temporary differences resulting from different treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in the consolidated balance sheets. We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance on an ongoing basis. In evaluating our deferred tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance we must project future levels of taxable income. This assessment requires significant judgment. We examined the evidence related to a recent history of tax losses, the economic conditions in which we operate, recent organizational changes and, our forecasts and projections. As a result, we were unable to support a conclusion that it is more likely than not that any of our deferred tax assets will be realized. We therefore have recorded a full valuation for the net deferred tax assets as of December 31, 2012 and 2011.
We will continue to evaluate our deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of our deferred income tax assets satisfies the realization standard, the valuation allowance will be reduced accordingly. The 2012 net increase of approximately
$3.6 million
in valuation allowance related to deferred tax assets from operating loss carryforwards.
The following is a schedule of the deferred tax assets and liabilities as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carry forward
|
$
|
10,710,000
|
|
|
$
|
8,331,000
|
|
|
Intangible assets
|
6,303,000
|
|
|
5,499,000
|
|
|
Deferred rent
|
124,000
|
|
|
177,000
|
|
|
Depreciation
|
837,000
|
|
|
299,000
|
|
|
Allowance for doubtful accounts
|
88,000
|
|
|
257,000
|
|
|
Accrued expense
|
—
|
|
|
257,000
|
|
|
Stock based expenses
|
1,263,000
|
|
|
942,000
|
|
|
Other
|
225,000
|
|
|
220,000
|
|
|
Subtotal
|
19,550,000
|
|
|
15,982,000
|
|
|
Less valuation allowance
|
(19,550,000
|
)
|
|
(15,982,000
|
)
|
|
Total
|
—
|
|
|
—
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Intangibles
|
4,099,000
|
|
|
—
|
|
|
Total
|
4,099,000
|
|
|
—
|
|
|
Total deferred tax assets (liabilities)
|
(4,099,000
|
)
|
|
—
|
|
The net operating losses amounted to approximately
$27.2 million
and expire beginning 2022 through 2032.
Under the Internal Revenue Code of 1986, as amended, these losses can be carried forward twenty years. We have approximately
$2.5 million
of carry forward deductions from 2006 relating to stock options exercised as of December 31, 2012.
We have accrued
$506,453
for an uncertain tax position added due to the acquisition of Vertro.
We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2008 through 2012. We and our subsidiaries state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2008 through 2012.
We recognize interest and penalties related to income taxes in income tax expense. We have incurred no penalties and interest for the years ended December 31, 2012 and 2011.
Note 10 - Stock-Based Compensation
Our stock-based compensation program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We consider our stock-based compensation programs critical to our operation and productivity. Currently, we grant options and restricted stock awards ("RSAs") from the 2005 Long-Term Incentive Plan ("2005 LTIP") and the 2010 Equity Compensation Plan (“2010 ECP”), approved by our shareholders on June 18, 2010. Option and restricted stock unit vesting periods are generally
zero
to
three
years.
On September 23, 2011, all unexpired stock options had their expiration term extended by
5 years
from the date of grant. The extension of the termination period for these stock options increased the expected life of the options by approximately
one
year and accordingly increased the fair market value of these stock options by approximately
$283,000
, of which
$117,000
was related to fully vested stock options and was recorded as a charge during the year ended December 31, 2011. The remaining
$166,000
is being expensed over the remaining vesting periods.
On January 1, 2012, the number of shares of our common stock issuable under the 2010 ECP was increased by
100,357
shares due to the ever-green provision as part of the 2010 ECP. Additionally, effective February 29, 2012, our shareholders increased the number of shares of our common stock issuable under the 2010 ECP by
2.5 million
shares. As of December 31, 2012, we had reserved under our 2005 LTIP
1.0 million
shares of common stock for issuance and another
3,385,945
shares under our 2010 ECP.
On July 31, 2012, the company granted
445,500
RSAs, of which
296,505
were granted to our executive officers, certain of our senior management and our Board of Directors. These RSAs granted to our executive officers, certain of our senior management and our Board of Directors were subject to a 2012 performance target that was not met. As such, these RSAs did not vest. The remaining
148,995
RSAs were granted to the other members of the management team and vested on February 1, 2013 provided the grantee remained in the company’s employ on that date. Further, the company granted to non-management employees on July 31, 2012,
49,500
options to purchase the company’s common stock at
$0.56
per share, the closing price of the stock on the grant date. The options fully vested on February 1, 2013 provided the grantee remained in the company’s employ on that date.
The following table summarizes the stock based compensation grants outstanding under our 2005 LTIP and 2010 ECP plans as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
RSAs Outstanding
|
|
Options and RSAs Exercised
|
|
Available Shares
|
|
Total
|
|
2010 ECP
|
605,690
|
|
|
173,805
|
|
|
904,744
|
|
|
1,701,706
|
|
|
3,385,945
|
|
|
2005 LTIP
|
573,509
|
|
|
—
|
|
|
224,164
|
|
|
202,327
|
|
|
1,000,000
|
|
|
Total
|
1,179,199
|
|
|
173,805
|
|
|
1,128,908
|
|
|
1,904,033
|
|
|
4,385,945
|
|
The fair value of restricted stock units is determined using market value of the common stock on the date of the grant. The fair value of stock options is determined using the Black-Scholes-Merton valuation model. The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Under ASC 718, “Accounting for Stock Options and Other Stock Based Compensation,” forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture rate, which is estimated at a weighted average of
25%
of unvested options outstanding, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
In 2011, we granted options to purchase
40,000
shares of common stock under the 2005 LTIP with an average exercise price of
$2.05
per share. We also granted options to purchase
300,000
shares of common stock under the newly adopted 2010 ECP with an average exercise price of
$2.93
per share.
We recorded stock-based compensation expense for all equity incentive plans of approximately
$843,000
and
$957,000
for the years ended December 31, 2012 and 2011, respectively.
At December 31, 2012, the aggregate intrinsic value of options outstanding under the 2005 LTIP and 2010 ECP plans was
$0
with a weighted average remaining contractual term of
7.1 years
, of which
896,101
of the outstanding options are currently
exercisable with an aggregate intrinsic value of
$0
, a weighted average exercise price of
$2.79
and a weighted average remaining contractual term of
6.9 years
. There were no options exercised during the years ended December 31, 2012 and 2011. The total compensation cost at December 31, 2012 related to non-vested awards not yet recognized was approximately
$444,000
that will be recognized over a weighted-average recognition period of
0.63 years
. The total fair value of options vested during 2012 and 2011 was approximately
$609,000
and
$466,000
, respectively. The weighted average fair value of options vested during 2012 was
$2.28
.
The following table summarizes information about stock options activity for our 2005 LTIP and 2010 ECP plans during the years ended December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Outstanding, beginning of year
|
1,358,717
|
|
|
$
|
2.81
|
|
|
1,223,159
|
|
|
$
|
3.74
|
|
|
Granted
|
49,500
|
|
|
$
|
0.56
|
|
|
340,000
|
|
|
$
|
2.83
|
|
|
Forfeited or expired
|
(229,018
|
)
|
|
$
|
3.09
|
|
|
(204,442
|
)
|
|
$
|
6.61
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Outstanding, end of year
|
1,179,199
|
|
|
$
|
2.66
|
|
|
1,358,717
|
|
|
$
|
2.81
|
|
|
Exercisable, end of year
|
896,101
|
|
|
$
|
2.79
|
|
|
629,043
|
|
|
$
|
3.03
|
|
The weighted average grant date fair value of options granted during 2012 and 2011 were
$0.49
and
$2.83
, respectively. No option or warrant exercises occurred under any share-based payment arrangements during the years ended December 31, 2012 or 2011.
As part of the merger with Vertro on March 1, 2012, we had
118,842
options which were not part of the existing plans. During 2012,
8,020
of these options with a weighted average exercise price of
$32.15
expired. At December 31, 2012, we had
110,822
options outstanding and exercisable under this plan with a weighted average exercise price of
$69.00
. The weighted average fair value of these options is
$0
, and their aggregate intrinsic value is also
$0
. The weighted average remaining contractual life of the outstanding and exercisable options is
2.16
years.
The following table summarizes information about stock options outstanding as of December 31, 2012, which includes
605,590
2010 ECP options and
573,509
2005 LTIP options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Price
|
|
Shares
|
|
Weighted Average Remaining
Contractual Life ( Years)
|
|
Weighted Average
Exercise Price
|
|
$0.00 – $3.00
|
|
1,128,949
|
|
|
2.49
|
|
$
|
7.20
|
|
|
$3.01 - $9.99
|
|
50,250
|
|
|
6.66
|
|
5.52
|
|
|
Total
|
|
1,179,199
|
|
|
7.13
|
|
$
|
2.66
|
|
In accordance with ASC 718, the fair values of options granted prior to adoption and determined for purposes of disclosure under ASC 718 have not been changed. There were
49,500
options granted during the year ended December 31, 2012. The fair value of options granted during the year ended December 31, 2012 and 2011 was estimated assuming the following weighted averages:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Expected life (in years)
|
3.15
|
|
|
4.90
|
|
|
Volatility
|
174.2
|
%
|
|
163.4
|
%
|
|
Risk free interest rate
|
0.30
|
%
|
|
1.96
|
%
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
Expected volatility is based on the historical volatility of our common stock over the period commensurate with or longer than the expected life of the options. The expected life of the options is based on the vesting schedule of the option in relation to the
overall term of the option. The risk free interest rate is based on the market yield of the U.S. Treasury Bill with a term equal to the expected term of the option awarded. We do not anticipate paying any dividends so the dividend yield in the model is zero.
The following table summarizes our RSA activity for 2012:
|
|
|
|
|
|
|
|
|
|
|
|
RSAs
|
|
Weighted Average Fair Value
|
|
Outstanding, beginning of year
|
322,276
|
|
|
$
|
1.73
|
|
|
Granted
|
1,271,008
|
|
|
$
|
0.78
|
|
|
Forfeited
|
(316,715
|
)
|
|
$
|
0.59
|
|
|
Vested
|
(1,102,764
|
)
|
|
$
|
1.13
|
|
|
Outstanding, end of year
|
173,805
|
|
|
$
|
0.70
|
|
Deferred Compensation and Stock Compensation
During the year ended December 31, 2011, our executive officers, certain of our senior management and our board of directors, voluntarily elected to defer a portion of their compensation. The amount of the deferred compensation was approximately
$418,000
for our executive officers and senior management and
$72,000
for our board of directors. As an incentive for officers, management and directors to participate in the elected deferrals, we granted them RSAs with a fair value equal to the amount of the deferred compensation, with the exception of the board of directors as they received approximately
$36,000
in RSA’s. We paid approximately
$15,000
of these deferred amounts in 2012 with the remaining amounts paid in our common stock. The RSAs vested upon the earlier of payment of the deferred compensation or one year from the date of grant. The number of RSAs granted in conjunction with the deferred compensation program was
326,291
for the year ended December 31, 2011 and were granted at an exercise price ranging from
$1.09
per share to
$2.94
per share on the date of each grant. As of December 31, 2011, none of the shares of restricted stock granted in connection with these elected deferrals were issued. Of these amounts, approximately
$573,000
was recorded as stock compensation expense. No deferrals of compensation were made in 2012.
Note 11 – Stockholders' Equity
Authorized Preferred Stock and Authorized Common Stock
On March 1, 2012 the Secretary of State of the State of Nevada approved an amendment to the Company's Certificate of Incorporation allowing the Company to increase the number of shares of common stock outstanding from
20,000,000
shares to
40,000,000
.
Treasury Stock
During 2011, we retired
164,869
shares of our common stock held in treasury valued at approximately
$627,000
. During 2012, we retired
21,270
shares of our common stock valued at approximately
$81,000
. We also withheld shares to pay for employee taxes on restricted stock grants, increasing treasury stock by
10,970
restricted shares for approximately
$7,800
.
Sale of Common Stock
On June 20, 2011, we entered into Subscription Agreements with
17
institutional and accredited investors, several of which are affiliated entities, for the sale of
1,350,000
shares of our common stock, together with immediately exercisable
five
year warrants to purchase up to an aggregate of
675,000
shares of common stock, resulting in gross proceeds to us of
$2,700,000
. Each warrant entitles the investor to purchase
0.50
shares of our common stock for every share of common stock purchased by such investor in the offering. The purchase price for each share of common stock and the related warrants was
$2.00
. Each warrant has an exercise price of
$2.20
per share which is subject to adjustments in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. This offering was priced at the close of market on June 20, 2011 and was conducted as a takedown from our shelf registration statement which was declared effective by the SEC in April 2011. A portion of the proceeds from the sale the common stock were used to repay the
$1 million
non-formula revolving line of credit secured by a board member.The merger agreement with Vertro required that at closing of the merger, we pay outstanding obligations under our deferred compensation program and bonus agreements to our executive officers, board of directors and certain management employees with our common stock in lieu of cash. These obligations were satisfied by issuing
1,017,742
shares of our common stock. At the same time,
284,962
of the common stock issued to executives, board
directors and managers were withheld by us at the same value as issued, to pay for the associated individual's income taxes, approximately
$256,000
. Those shares withheld were retired.
Warrants Outstanding
As of December 31, 2012, we have outstanding warrants for the potential issuance of
816,724
shares of common stock. Exercise price for these warrants ranges from
$0.87
to
$15.00
. These warrants were primarily issued in connection with acquisitions, private placements and debt issuances. The weighted average remaining contractual life of the warrants outstanding are December 31, 2012 was
3.49 years
and the weighted average exercise price was
$2.37
.
On October 11, 2012, pursuant to the Second Business Financing Modification Agreement with Bridge Bank (see Note 6), the Company issued Bridge Bank a warrant to purchase
51,724
shares of our own common stock exercisable at
$0.87
per share until October 2017.
Note 12 – Discontinued Operations
On September 24, 2010, we sold the assets of MSA and our related companies Rightstuff, Inc. and Checkup Marketing, Inc., all North Carolina corporations which are wholly-owned subsidiaries of Inuvo, Inc. The purchase price of the assets was
$766,636
, of which
$247,147
was paid at closing and the balance was paid in
three
equal installments of
$173,163
each during the
90 days
following the closing. Under the terms of the agreement, the purchaser also assumed certain liabilities related to the purchased assets. To ensure orderly transition of the business, we agreed to provide the purchaser with hosting services at no cost for
90 days
following the closing. The agreement contains customary indemnification, non-disclosure and non-solicitation provisions. All the proceeds received from the sale of MSA were used to reduce the term note with Wachovia. Additionally, we reported a non-cash charge in discontinued operations of approximately
$1.5 million
for the loss on the sale for the year ended December 31, 2010. In July 2010, the Board of Directors approved the plan to sell our RESO business unit. On December 10, 2010, we closed the sale of the assets of RESO. The purchase price of the assets was
$750,000
, of which all was paid at closing less
$31,716
working capital adjustment and
$50,000
held in escrow for a period of
one year
that was paid in December 2011. Earlier in 2010, we announced our intention to sell the business and we accounted for the subsidiary as a discontinued operation since that time. To ensure an orderly transition of the business, we agreed to provide transitional services until April 15, 2011 and received a fee of
$107,204
paid in
five
equal monthly installments. The Asset Purchase Agreement contains customary indemnification, non-disclosure and non-solicitation provisions. All the proceeds from the sale were used to reduce the term note with Wachovia. In addition, we reported a gain on the sale of RESO in discontinued operations of approximately
$500,000
.
On March 1, 2012, Inuvo completed the acquisition of Vertro, an internet company that owns and operates the ALOT product portfolio, comprised of both browser-based consumer applications and websites. In March 2009, Vertro sold the assets of its subsidiary, Miva Media. As a result of the sale, Vertro terminated its European Union ("EU") centered operations and records its balances and transactions a a discontinued operation. Inuvo assumed these assets and liabilities upon the merger and accounts for these balances and transactions as a discontinued operation.
The table below summarizes the loss from EU operations acquired with the Vertro merger during the year ended December 31, 2012, and the gain from a litigation settlement resulting from the favorable settlement of a lawsuit involving a lease during the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
(Loss) from discontinued operations from EU operations acquired with Vertro merger
|
$
|
(183,527
|
)
|
|
$
|
—
|
|
|
Gain from litigation settlement in discontinued operations
|
—
|
|
|
257,136
|
|
|
(Loss) Gain on sale of discontinued operations
|
$
|
(183,527
|
)
|
|
$
|
257,136
|
|
Note 13 – Retirement Plan Costs
We sponsor a defined contribution plan to help eligible employees provide for retirement. During 2010, we suspended matching contributions. There were no matching contributions for the year ended December 31, 2011. With the Vertro merger we resumed matching contributions of
50%
up to the participant's first
6%
contribution. The matching contribution for 2012 was approximately
$31,000
.
Note 14 - Leases
We lease certain office space and equipment. As leases expire, it can be expected that, in the normal course of business, certain leases will be renewed or replaced. Rent expense from continuing operations was approximately
$1,181,000
and
$824,000
for the years ended December 31, 2012 and 2011, respectively.
Minimum lease payments under non-cancelable operating leases as of December 31, 2012 are:
|
|
|
|
|
|
|
|
2013
|
$
|
1,067,871
|
|
|
2014
|
537,501
|
|
|
2015
|
547,967
|
|
|
2016
|
45,749
|
|
|
2017
|
—
|
|
|
Total
|
2,199,088
|
|
Subsequent to December 31, 2012 and not contemplated in the above table, we signed an amendment allowing us to terminate our Clearwater office lease for
$615,000
, which was paid during the first quarter of 2013. As a result, the lease will now end on March 31, 2013, resulting in a reduction of rent of
$135,273
each quarter through November 2013. We also entered into an agreement to lease office space in Conway, Arkansas, which was prepaid during the first quarter of 2013. This agreement is for
two
years in the total amount of
$193,200
. First Orion Corp., the lessor of this space, is owned by a director and shareholder of Inuvo.
Note 15 - Merger with Vertro, Inc.
Effective March 1, 2012, we merged with Vertro. Pursuant to the terms and conditions of the merger agreement, Vertro became a wholly owned subsidiary of Inuvo and we issued to the Vertro stockholders
12,393,308
shares of our common stock for all the outstanding shares of Vertro common stock. Upon closing of the merger, all the shares of Vertro common stock, which traded under the symbol “VTRO,” were delisted from the NASDAQ Capital Market and ceased trading.
The following table summarizes the net assets received and liabilities assumed in the merger with Vertro. Adjustments to the original purchase price allocation include a revision of shares of common stock issued related to the merger and the finalization of the fair value of accrued expenses.
|
|
|
|
|
|
|
|
Total consideration paid in common stock
|
$
|
11,130,983
|
|
|
Fair value of assets acquired:
|
|
|
|
Accounts receivable, net
|
(2,093,845
|
)
|
|
Other current assets
|
(520,342
|
)
|
|
Property and equipment
|
(2,059,729
|
)
|
|
Other assets
|
(283,911
|
)
|
|
Goodwill
|
(3,984,264
|
)
|
|
Intangible assets
|
(11,857,537
|
)
|
|
Fair value of liabilities assumed:
|
|
|
|
Accounts payable
|
3,753,613
|
|
|
Outstanding balance on credit facility
|
1,000,000
|
|
|
Accrued expenses
|
2,782,361
|
|
|
Deferred tax liability
|
4,543,000
|
|
|
Other long-term liabilities
|
709,991
|
|
|
Cash received in merger
|
$
|
3,120,320
|
|
|
Stock issuance costs
|
(687,678
|
)
|
|
Net cash received in merger
|
$
|
2,432,642
|
|
Unaudited Pro Forma Results of Operations
As a result of the merger with Vertro, effective March 1, 2012 the consolidated operating results for the year ended December 31, 2012 and 2011, were revenue of
$57,147,743
and
$64,094,339
, respectively; net (loss) income of
($9,673,000)
and
$788,367
, respectively; and basic and diluted (loss) earnings per share of
($0.46)
and
$0.05
, respectively. The pro forma results do not include any anticipated synergies which may occur subsequent to the acquisition date. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of our future combined operating results.
Note 16 - Commitments and Contingencies
Litigation and Settlement
From time to time we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we are currently involved in the following litigation which is not incidental to its business:
Shareholder Class Action Lawsuits
. In 2005,
five
putative securities fraud class action lawsuits were filed against Vertro and certain of its former officers and directors in the United States District Court for the Middle District of Florida, which were subsequently consolidated. The consolidated complaint alleged that Vertro and the individual defendants violated Section 10(b) of the Exchange Act and that the individual defendants also violated Section 20(a) of the Exchange Act as “control persons.” Plaintiffs sought unspecified damages and other relief alleging that, during the putative class period, Vertro made certain misleading statements and omitted material information. The court granted Defendants' motion for summary judgment on November 16, 2009, and the court entered final judgment in favor of all Defendants on December 7, 2009. Plaintiffs appealed the summary judgment ruling and the court's prior orders dismissing certain claims. On September 30, 2011, the Court of Appeals for the Eleventh Circuit affirmed the dismissal of
9
of the
11
alleged misstatements and reversed the court's prior order on summary judgment and the case has been remanded to the District Court. In October 2012 the District Court entered an order maintaining the existing stay on discovery and setting forth a schedule for briefing by the parties on the defendants' renewed motion of summary judgment.
Derivative Stockholder Litigation
. On July 25, 2005, a stockholder, Bruce Verduyn, filed a putative derivative action purportedly on behalf of Vertro in the United States District Court for the Middle District of Florida, against certain of Vertro's directors and officers. This action is based on substantially the same facts alleged in the securities class action litigation described above. The complaint is seeking to recover damages in an unspecified amount. By agreement of the parties and by orders of the court, the case was stayed pending the resolution of the defendant's motion to dismiss in the securities class action. On July 10, 2007, the parties filed a stipulation to continue the stay of the litigation. On July 13, 2007, the court granted the stipulation to continue the stay and administratively closed the case pending notification by plaintiff's counsel that the case is due to be reopened.
State of Florida civil investigation re Inuvo, Inc. formerly d/b/a iLead Media, LLC d/b/a Home Biz Ventures, LLC, Case No. L09-3-1186
. The State of Florida Attorney General's office served a subpoena for documents on November 23, 2009, relating to the negative-option marketing business of former Inuvo subsidiary iLead Media, LLC. In January 2013, we entered into an Assurance of Voluntary Compliance with The State of Florida Attorney General's office regarding our prior business practices and we agreed to pay
$40,000
to investigative costs and attorney's fees and a
$60,000
charitable donation to Seniors vs. Crime, Inc.
Litigation Relating to the Merger.
On October 27, 2011, a complaint was filed in the Supreme Court of the State of New York, County of New York against Vertro, its directors, Inuvo, and Anhinga Merger Subsidiary, Inc. on behalf of a putative class of Vertro shareholders (the “New York Action”). Two other complaints, also purportedly brought on behalf of the same class of shareholders, were filed on November 3 and 10, 2011, against these same defendants in Delaware Chancery Court and were ultimately consolidated by the Court (the “Delaware Action”). The plaintiffs in both the New York and the Delaware Actions alleged that Vertro's board of directors breached their fiduciary duties regarding the merger with Inuvo and that Vertro, Inuvo, and Anhinga Merger Subsidiary, Inc. aided and abetted the alleged breach of fiduciary duties. The plaintiffs asked that the merger be enjoined and sought other unspecified monetary relief.
Defendants in the Delaware Action moved to dismiss plaintiffs' complaint, but before the briefing of that motion was complete the plaintiffs filed a notice and proposed order of voluntary dismissal without prejudice, which was entered by the Delaware Court on March 20, 2012. The defendants in the New York Action also moved to dismiss the complaint, or in the alternative to stay proceedings. The New York Court granted Defendants' motion to stay on February 22, 2012 and, as a result of this ruling, the Court denied without prejudice defendants' motion to dismiss and the plaintiff's pending request for expedited discovery. Plaintiffs in the New York action then filed a Second Amended Complaint on June 19, 2012 and, on July 9, 2012, Defendants moved to dismiss that complaint for failure to state a claim. A hearing was held on January 31, 2013, regarding Defendants' motion to dismiss.
Express Revenue, Inc. v. Inuvo, Inc.; Case No. 10-44118-13, in the Circuit Court for the Seventeenth Judicial Circuit of Florida.
On November 4, 2010, the plaintiff filed this lawsuit alleging breach of oral contract, and violation of Florida Statute
§68.065
, among other claims, and seeking approximately
$30,000
for allegedly unpaid commissions dating back to 2009. Initial discovery has begun and Inuvo is vigorously defending the action.
Corporate Square, LLC v. Think Partnership, Inc., Scott Mitchell, and Kristine Mitchell; Case No. 08-019230-CI-11, in the Circuit Court for the Sixth Judicial Circuit of Florida.
This complaint, filed on December 17, 2008, involves a claim by a former commercial landlord for alleged improper removal of an electric generator and for unpaid electricity expenses, amounting to approximately
$60,000
. The litigation has not been actively prosecuted, but the plaintiff recently served discovery requests seeking additional information. Inuvo is actively defending this action, and the co-defendants' separate counsel is likewise defending the claim against the co-defendants.
Oltean, et al. v. Think Partnership, Inc.; Edmonton, Alberta CA.
On March 6, 2008, Kelly Oltean, Mike Baldock and Terry Schultz, former employees, filed a breach of employment claim against Inuvo in The Court of Queen's Bench of Alberta, Judicial District of Edmonton, Canada, claiming damages for wrongful dismissal in the amount of
$200,000
for each of Kelly Oltean and Terry Schultz and
$187,500
for Mike Baldock. On March 6, 2008, the same three plaintiffs filed a similar statement of claim against Vintacom Acquisition Company, ULC, a subsidiary of Inuvo, again for wrongful dismissal and claiming the same damages. In October 2009, the
two
actions were consolidated. The case is in the discovery stage and Inuvo is vigorously defending the matter.
Reverso-Softissimo v. ALOT
. In May 2012 a complaint was filed against us in the Court of First Instance of Paris in Paris, France. The complaint is related to our alleged use of Reverso-Softissimo's trademarks in our advertising. The case is in the initial stages and Inuvo is vigorously defending the matter.
Note 17 - Segment Analysis
We are an internet marketing and technology company that develops consumer applications that make using the internet easier and delivers targeted advertisements onto the websites of partners and our own. Our business is separated into
two
reporting segments: Network and Applications. The Network segment includes both the technologies and networks required to facilitate business to business transactions. The Applications segment includes both the products and websites required to market to consumers online, a lead generation business and data collection and distribution. In 2012, management reorganized the Company's segments. Prior to 2012, we operated with two segments classified as Performance Marketing and Web Properties. For presentation purposes, our prior period results included herein have been reclassified for the new segment structure.
Listed below is a presentation of net revenue and gross profit for all reportable segments for the years ended December 31, 2012 and 2011. We currently only track certain assets at the segment level and therefore assets by segment are not presented below.
Net Revenue by Industry Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
|
Network
|
28,892,793
|
|
|
54.1
|
%
|
|
35,753,243
|
|
|
99.8
|
%
|
|
Applications
|
24,470,152
|
|
|
45.9
|
%
|
|
66,753
|
|
|
0.2
|
%
|
|
Total net revenue
|
53,362,945
|
|
|
100.0
|
%
|
|
35,819,996
|
|
|
100.0
|
%
|
Gross Profit by Industry Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
$
|
|
% of Net Revenue
|
|
$
|
|
% of Net Revenue
|
|
Network
|
7,129,783
|
|
|
13.4
|
%
|
|
14,921,984
|
|
|
41.7
|
%
|
|
Applications
|
20,597,652
|
|
|
38.6
|
%
|
|
66,253
|
|
|
0.2
|
%
|
|
Total gross profit
|
27,727,435
|
|
|
52.0
|
%
|
|
14,988,237
|
|
|
41.9
|
%
|
Note 18 – Subsequent Events
On January 25, 2013, we agreed with the state of Arkansas to receive a grant of up to
$1.75 million
for expenses related to the relocation of the our headquarters and operations from New York and Florida to Arkansas as well as expenses related to purchase of equipment necessary to begin operations in Arkansas. The grant is contingent upon us having at least
fifty
full-time equivalent permanent positions within
four years
and maintaining at least
fifty
full-time equivalent permanent positions for the following
six years
. The grant is also contingent upon us paying full-time equivalent permanent positions an average total compensation of
$90,000
per year. After the initial
four
year period, the grant provides for penalties if either the minimum full-time equivalent permanent positions or the average total compensation conditions are not met. In no event would the penalty exceed the amount of the grant received.
On January 31, 2013, we agreed to an early termination of the Clearwater office lease. For a total early termination fee of
$615,000
, the lease will terminate on March 31, 2013.
On January 31, 2013 we signed a
two
year lease for
5,834
square feet of office space in Conway, Arkansas. This agreement is for
two
years in the total amount of
$193,200
. A director and shareholder of Inuvo is the majority owner of First Orion Corp., the lessor of this space.
On February 1, 2013 we agreed to a
2
year Services Agreement with Google Inc. for advertising and search services.
On February 15, 2013 we were notified by the NYSE MKT LLC ("exchange") that our plan to regain compliance with Section 1003(a)(iii) of the exchange's Company Guide by December 2, 2013 was accepted. We are able to continue our listing during the period ending December 2, 2013, though subject to periodic review to determine whether we are making progress consistent with the plan.
On March 8, 2013 Bridge Bank N.A. waived an event of default that occurred in January 2013.
