INUVO, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number:
001-32442
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Inuvo, Inc.
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(Exact name of registrant as specified in its charter)
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Nevada
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87-0450450
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1111 Main St Ste 201
Conway, AR
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72032
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(Address of principal executive offices)
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(Zip Code)
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(501) 205-8508
Registrant's telephone number, including area code
not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Title of Class
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Shares outstanding at October 24, 2014
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Common Stock
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23,563,798
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TABLE OF CONTENTS
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Page No.
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Part I
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Item 1.
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Financial Statements.
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Consolidated Balance Sheets
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Consolidated Statements of Comprehensive Income
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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Item 4.
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Controls and Procedures.
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Part II
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Item 1.
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Legal Proceedings.
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Item 1A.
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Risk Factors.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds.
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Item 3.
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Defaults upon Senior Securities.
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Item 4.
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Mine Safety and Disclosures.
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Item 5.
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Other Information.
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Item 6.
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Exhibits.
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Signatures
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of such terms or other comparable terminology. This report includes, among others, statements regarding our:
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•
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history of losses;
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•
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material dependence on our relationships with Yahoo! and Google;
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•
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present and future dependence on our financing arrangements with Bridge Bank, N.A. or any future lender which are collateralized by our assets;
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•
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covenants and restrictions in our grant agreement with the state of Arkansas;
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•
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possible need to raise additional capital;
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•
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dependence of our Partner Network segment on relationships with distribution partners;
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•
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introduction of new products and services, which require significant investment;
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•
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dependence of our Owned and Operated Network segment on our ability to maintain and grow our customer base and the estimates and assumptions we use in that segment;
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•
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ability to acquire traffic through other search engines;
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•
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lack of control over content and functionality of advertisements we display from third-party networks;
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•
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ability to effectively compete;
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•
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need to keep pace with technology changes;
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•
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fluctuations in our quarterly earnings and the trading price of our common stock;
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•
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possible interruptions of services;
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•
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dependence on third-party providers;
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•
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liability associated with retrieved or transmitted information, failure to adequately protect personal information; security breaches and computer viruses, and other risks experienced by companies in our industry;
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•
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dependence on key personnel;
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•
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regulatory and legal uncertainties;
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•
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ability to defend our company against lawsuits;
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•
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failure to protect our intellectual property;
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•
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risks from publishers who could fabricate clicks; and
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•
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outstanding restricted stock grants warrants and options and potential dilutive impact to our stockholders.
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These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2013, as amended and filed with the Securities and Exchange Commission (“SEC”).
Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms "Inuvo," the “Company,” "we," "us," "our" and similar terms refer to Inuvo, Inc., a Nevada corporation, and its subsidiaries. When used in this report, “
2013
” means the fiscal year ended
December 31, 2013
and "
2014
" means the fiscal year ended
December 31, 2014
. The information which appears on our corporate web site at www.inuvo.com is not part of this report.
3
INUVO, INC.
September 30, 2014
(Unaudited) and December 31, 2013
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2014
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2013
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Assets
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Current assets
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Cash
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$
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3,459,946
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$
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3,137,153
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Accounts receivable, net of allowance for doubtful accounts of $87,733 and $62,845, respectively
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5,105,414
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3,609,825
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Unbilled revenue
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19,013
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24,472
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Prepaid expenses and other current assets
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426,189
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510,968
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Total current assets
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9,010,562
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7,282,418
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Property and equipment, net
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1,031,956
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1,188,566
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Other assets
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Goodwill
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5,760,808
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5,760,808
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Intangible assets, net of accumulated amortization
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9,728,823
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10,324,326
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Other assets
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229,247
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379,513
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Total other assets
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15,718,878
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16,464,647
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Total assets
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$
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25,761,396
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$
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24,935,631
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Liabilities and Stockholders’ Equity
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|||||||
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Current liabilities
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Accounts payable
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$
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6,642,228
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$
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6,235,533
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Accrued expenses and other current liabilities
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2,772,990
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2,386,226
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Term and credit notes payable - current portion
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1,659,942
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2,548,333
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Total current liabilities
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11,075,160
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11,170,092
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Long-term liabilities
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Deferred tax liability
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3,713,205
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3,788,903
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Term and credit notes payable - long term
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2,833,333
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3,595,300
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Other long-term liabilities
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775,399
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1,039,470
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Total long-term liabilities
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7,321,937
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8,423,673
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Stockholders’ equity
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Preferred stock, $.001 par value:
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Authorized shares 500,000, none issued and outstanding
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—
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—
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Common stock, $.001 par value:
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Authorized shares 40,000,000; issued shares 23,940,325
and 23,763,307, respectively; outstanding shares
23,563,798 and 23,386,780, respectively
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23,939
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23,763
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Additional paid-in capital
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128,470,661
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127,908,328
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Accumulated deficit
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(119,733,742
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)
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(121,193,666
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)
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Treasury stock, at cost - 376,527 shares
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(1,396,559
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)
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(1,396,559
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)
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Total stockholders' equity
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7,364,299
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5,341,866
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Total liabilities and stockholders' equity
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$
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25,761,396
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$
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24,935,631
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See accompanying notes to the consolidated financial statements.
4
INUVO, INC.
For the Three and Nine Months Ended
September 30
, 2014 and 2013
(Unaudited)
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For the Three Months Ended September 30,
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For the Nine Months Ended September 30,
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||||||||||||||
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2014
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2013
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2014
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2013
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Net revenue
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$
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13,026,011
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$
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14,509,050
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$
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34,089,761
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$
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43,559,257
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Cost of revenue
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5,910,719
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8,183,064
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14,253,649
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22,628,243
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Gross profit
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7,115,292
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6,325,986
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19,836,112
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20,931,014
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Operating expenses
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Marketing costs
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4,277,446
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2,939,584
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11,555,731
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10,625,638
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Compensation
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1,192,227
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1,412,842
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3,431,237
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4,727,936
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Selling, general and administrative
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1,180,940
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1,360,610
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3,245,904
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5,270,986
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Total operating expenses
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6,650,613
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5,713,036
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18,232,872
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20,624,560
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Operating income
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464,679
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612,950
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1,603,240
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306,454
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Other expense, net
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Interest expense, net
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(84,870
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)
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(98,451
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)
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(285,973
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)
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(271,448
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)
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Other expense, net
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(84,870
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)
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(98,451
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)
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(285,973
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)
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(271,448
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)
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Income from continuing operations before taxes
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379,809
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514,499
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1,317,267
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35,006
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Income tax benefit
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—
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75,699
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75,698
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237,946
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Net income from continuing operations
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379,809
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590,198
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1,392,965
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272,952
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Net income from discontinued operations
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23,065
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49,601
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66,959
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457,709
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Net income
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402,874
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639,799
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1,459,924
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730,661
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Foreign currency valuation
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$
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—
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$
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(294
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)
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$
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—
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$
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(418
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)
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Total comprehensive income
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$
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402,874
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$
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639,505
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$
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1,459,924
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$
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730,243
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Per common share data
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Basic and diluted:
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|||||||||||||
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Net income from continuing operations
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$
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0.02
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$
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0.03
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$
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0.06
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$
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0.01
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|||
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Net income from discontinued operations
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—
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—
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—
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0.02
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|||||||
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Net income
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$
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0.02
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$
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0.03
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$
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0.06
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$
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0.03
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Weighted average shares
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|||||||||||||||
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Basic
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23,445,771
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23,291,468
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23,485,052
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23,278,003
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Diluted
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24,143,194
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23,447,301
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23,855,148
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23,329,551
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See accompanying notes to the consolidated financial statements.
5
INUVO, INC.
(Unaudited)
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For the Nine Months Ended September 30,
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|||||||
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2014
|
2013
|
|||||
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Operating activities:
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|||||||
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Net income
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$
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1,459,924
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$
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730,661
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Adjustments to reconcile net income to net cash provided by operating activities:
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|||||||
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Depreciation and amortization
|
1,320,734
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2,563,887
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|
|||
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Deferred income taxes
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(75,698
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)
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(234,400
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)
|
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Amortization of financing fees
|
19,330
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27,083
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|
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Adjustment of European liabilities related to discontinued operations
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(93,013
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)
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(370,980
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)
|
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Provision of doubtful accounts
|
24,888
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(44,882
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)
|
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Stock based compensation
|
658,800
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|
539,766
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|
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Other, net
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(96,291
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)
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—
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|
|||
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Change in operating assets and liabilities:
|
|||||||
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Accounts receivable and unbilled revenue
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(1,515,018
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)
|
1,155,254
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|
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Prepaid expenses and other assets
|
171,819
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(216,538
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)
|
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Accounts payable
|
499,708
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|
(2,500,619
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)
|
|||
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Accrued expenses and other liabilities
|
255,626
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|
240,943
|
|
|||
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Other, net
|
—
|
|
2,827
|
|
|||
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Net cash provided by operating activities
|
2,630,809
|
|
1,893,002
|
|
|||
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Investing activities:
|
|||||||
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Purchases of equipment and capitalized development costs
|
(656,441
|
)
|
(878,466
|
)
|
|||
|
Grant funds received for equipment and office construction
|
—
|
|
360,812
|
|
|||
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Net cash used in investing activities
|
(656,441
|
)
|
(517,654
|
)
|
|||
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Financing activities:
|
|||||||
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Deposit to collateralize letter of credit
|
—
|
|
301,158
|
|
|||
|
Prepaid financing fees and other
|
43,896
|
|
37,600
|
|
|||
|
Proceeds from revolving line of credit
|
1,700,000
|
|
4,775,000
|
|
|||
|
Payments on revolving line of credit
|
(2,934,002
|
)
|
(5,200,000
|
)
|
|||
|
Proceeds from term note payable
|
2,000,000
|
|
—
|
|
|||
|
Payments on term note payable and capital leases
|
(2,461,469
|
)
|
(1,033,835
|
)
|
|||
|
Net cash used in financing activities
|
(1,651,575
|
)
|
(1,120,077
|
)
|
|||
|
Effect of exchange rate changes
|
—
|
|
(418
|
)
|
|||
|
Net change – cash
|
322,793
|
|
254,853
|
|
|||
|
Cash, beginning of year
|
3,137,153
|
|
3,381,018
|
|
|||
|
Cash, end of period
|
$
|
3,459,946
|
|
$
|
3,635,871
|
|
|
|
Supplemental information:
|
|||||||
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Interest paid
|
$
|
237,365
|
|
$
|
253,767
|
|
|
See accompanying notes to the consolidated financial statements.
6
Inuvo, Inc.
Notes to Consolidated Financial Statements
Business Overview
Inuvo, Inc. and subsidiaries ("we", "us" or "our") is an Internet marketing and technology company that delivers purchase-ready customers to advertisers through a broad network of desktop and mobile websites and applications reaching both desktop and mobile devices.
We deliver content and targeted advertisements over the internet and generate revenue when an end user clicks on the advertisements we have delivered. We manage our business as
two
segments, the Partner Network and the Owned and Operated Network.
The Partner Network delivers advertisements to our partners' websites and applications on desktop, tablet and mobile devices. We generate revenue in this segment when an advertisement is clicked, and we share a portion of that revenue with our partners. Our proprietary technology platform allows for targeted distribution of advertisements at a scale that measures in the hundreds of millions of advertisements delivered monthly.
The Owned and Operated Network designs, builds and markets consumer websites and applications. This segment consists of our mobile-ready ALOT websites and the ALOT Appbar (the "Appbar") and is focused on providing engaging content to our users. The majority of revenue generated by this segment is derived from clicks on advertisements delivered through web searches or advertisements displayed on the websites.
Relocation of corporate headquarters
During 2012, we relocated our offices in New York City and Clearwater, FL to Conway, AR and received a grant from the state of Arkansas to cover costs associated with that move. Inuvo remains in compliance with all provisions of the grant agreement. For additional information, please refer to the form 8-K dated January 31, 2013.
Liquidity
On September 29, 2014, we renewed our Business Financing Agreement with Bridge Bank, N.A. ("Bridge Bank") (see Note 5, "Notes Payable"). The renewal provided continued access to the revolving line of credit up to
$10 million
through September 2016 and a new term loan of
$2 million
through September 2017. As of
September 30, 2014
, the revolving line of credit had approximately
$2,367,661
in availability. We believe that the combination of our existing cash, our availability under the Bridge Bank revolver line of credit, and our expected future cash flows from operations will provide us with sufficient liquidity to fund our operations and capital requirements for a least the next
twelve
months. During the first quarter of 2014 we filed an S-3 registration statement with the Securities and Exchange Commission ("SEC") to replace the existing, expiring S-3 “shelf” registration statement. Though we do not expect to need additional funds in the next
twelve
months, we may still elect to sell stock to the public or to selected investors, or borrow under the current or any replacement line of credit or other debt instrument.
Customer concentration
We generate the majority of our revenue from
two
customers, Yahoo! and Google. At
September 30, 2014
and
December 31, 2013
these two customers combined accounted for
94.8%
and
88.0%
of our gross accounts receivable balance, respectively. For the
three and nine
months ended
September 30, 2014
these two customers combined accounted for
97.83%
and
96.88%
of net revenue, respectively. For the
three and nine
months ended
September 30, 2013
, these two customers combined accounted for
95.6%
and
93.2%
of net revenue, respectively.
Basis of presentation
The consolidated financial statements presented are for Inuvo, Inc. and its consolidated subsidiaries. The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for
7
interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2013, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. In our opinion, these financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 10, 2014 and amended on April 3, 2014.
Use of estimates
The preparation of financial statements, in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s regular evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. We regularly evaluate estimates and assumptions related to allowances for returns and redemptions, allowances for doubtful accounts, goodwill and purchased intangible asset valuations, lives of intangible assets, deferred income tax asset valuation allowances, accrued sales reserve, contingent liabilities, stock compensation and the value of stock-based compensation. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605-10 Revenue Recognition. 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.
Most of our revenue is generated through clicks on advertisements presented on our properties or those of our partners. We recognize revenue from clicks in the period in which the click occurs. Payments to partners who display advertisements on our behalf are recognized as cost of revenue. Revenue from data sales and commissions is recognized in the period in which the transaction occurs and the other revenue recognition criteria are met.
Accounting for headquarters relocation grant
During the first quarter of 2013, we received a grant from the state of Arkansas to relocate our corporate headquarters to Conway, AR. We recognize the grant funds into income as a reduction of the related expense in the period in which those expenses are recognized. We defer grant funds related to capitalized costs and classify them as current or long-term liabilities on the balance sheet according to the classification of the associated asset. Grant funds received are presented on the consolidated statements of cash flows as operating or investing cash flows depending on the classification of the underlying spend. The grant contains certain requirements, discussed in Note 1 of the 10-K as of December 31, 2013 that would require us to repay a portion or all of the grant if certain requirements are not met. We expect to meet all such requirements, and we continually reassess this expectation. If circumstances arise in the future that cause us to conclude we will no longer meet these requirements, we may reserve for the expected loss during the period in which it is concluded that we will not meet the grant requirements.
Recent accounting pronouncements
Accounting Standards Update No. 2013-11
, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” for fiscal years, and interim periods within those years, beginning after December 15, 2013. In July 2013, the FASB issued new accounting guidance on the presentation of unrecognized tax benefits. The new guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use the deferred tax
asset for such purpose, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This
8
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. Accordingly, we adopted these presentation requirements during the first quarter of 2014.
In April 2014, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
, which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations that have, or will have, a major effect on the organization’s operations and financial results should be presented as discontinued operations. Additionally, the guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU No. 2014-08 will be applied prospectively to annual periods beginning on or after December 15, 2014, and interim periods within those years, with early adoption permitted. Accordingly, we will adopt these presentation requirements during the fourth quarter of 2014.
In May 2014, FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not allowed. The adoption of ASU 2014-09 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, which will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The adoption of ASU 2014-15 is not expected to have an impact on the Company’s consolidated financial position or results of operations.
The net carrying value of property and equipment was as follows:
|
|
September 30, 2014
|
December 31, 2013
|
|||||
|
Furniture and fixtures
|
$
|
67,341
|
|
$
|
67,341
|
|
|
|
Equipment
|
2,576,329
|
|
2,547,686
|
|
|||
|
Software
|
8,648,216
|
|
8,020,982
|
|
|||
|
Leasehold improvements
|
66,903
|
|
66,903
|
|
|||
|
Subtotal
|
11,358,789
|
|
10,702,912
|
|
|||
|
Less: accumulated depreciation and amortization
|
(10,326,833
|
)
|
(9,514,346
|
)
|
|||
|
Total
|
$
|
1,031,956
|
|
$
|
1,188,566
|
|
|
During the
three and nine
months ended
September 30, 2014
, depreciation expense was
$225,924
and
$725,231
, respectively. During the
three and nine
months ended
September 30, 2013
, depreciation expense was
$409,685
and
$1,619,719
, respectively.
9
The following is a schedule of intangible assets from continuing operations as of
September 30, 2014
:
|
|
Term
|
Carrying
Value
|
Accumulated Amortization and Impairment
|
Net Carrying Value
|
Year-to-date Amortization
|
||||||||||||
|
Customer list, Google
|
20 years
|
$
|
8,820,000
|
|
$
|
(1,139,250
|
)
|
$
|
7,680,750
|
|
$
|
330,750
|
|
||||
|
Customer list, all other
|
10 years
|
1,610,000
|
|
(415,927
|
)
|
1,194,073
|
|
120,753
|
|
||||||||
|
Trade names, ALOT (1)
|
5 years
|
960,000
|
|
(496,000
|
)
|
464,000
|
|
144,000
|
|
||||||||
|
Trade names, web properties (1)
|
-
|
390,000
|
|
—
|
|
390,000
|
|
—
|
|
||||||||
|
Intangible assets classified as long-term
|
$
|
11,780,000
|
|
$
|
(2,051,177
|
)
|
$
|
9,728,823
|
|
$
|
595,503
|
|
|||||
|
Goodwill, Partner Network
|
$
|
1,776,544
|
|
$
|
—
|
|
$
|
1,776,544
|
|
$
|
—
|
|
|||||
|
Goodwill, Owned and Operated Network
|
3,984,264
|
|
—
|
|
3,984,264
|
|
—
|
|
|||||||||
|
Goodwill, total
|
|
$
|
5,760,808
|
|
$
|
—
|
|
$
|
5,760,808
|
|
$
|
—
|
|
||||
|
(1)
|
We have determined that our trade names intangible related to our web properties has an indefinite life, and as such it is not amortized. We determined our ALOT trade names should be amortized over
five
years.
|
Our amortization expense over the next five years and thereafter is as follows:
|
2014
|
$
|
198,501
|
|
|
2015
|
794,004
|
|
|
|
2016
|
794,004
|
|
|
|
2017
|
634,004
|
|
|
|
2018
|
602,004
|
|
|
|
Thereafter
|
6,316,306
|
|
|
|
Total
|
$
|
9,338,823
|
|
The following table summarizes our notes payable balances as of
September 30, 2014
and
December 31, 2013
:
|
September 30, 2014
|
December 31, 2013
|
|||||||
|
Term note payable - 4.25 percent at September 30, 2014 (prime plus 1 percent), due September 10, 2017.
|
$
|
2,000,000
|
|
$
|
2,888,888
|
|
||
|
Revolving credit line - 3.75 percent at September 30, 2014 (prime plus .5 percent), due September 29, 2016.
|
2,493,275
|
|
3,254,745
|
|
||||
|
Total
|
4,493,275
|
|
6,143,633
|
|
||||
|
Less: current portion
|
(1,659,942
|
)
|
(2,548,333
|
)
|
||||
|
Term note payable and revolving credit line - long term portion
|
$
|
2,833,333
|
|
$
|
3,595,300
|
|
||
10
Principal Payments:
Principal payments under the term note payable are due as follows as of
September 30, 2014
:
|
2014
|
$
|
166,667
|
|
|
2015
|
666,667
|
|
|
|
2016
|
666,667
|
|
|
|
2017
|
499,999
|
|
|
|
Total
|
$
|
2,000,000
|
|
On March 1, 2012 we entered into a Business Financing Agreement with Bridge Bank. The agreement provided us with a
$5 million
term loan and access to a revolving credit line of up to
$10 million
which we use to help satisfy our working capital needs. We have provided Bridge Bank with a first priority perfected security interest in all of our accounts and personal property as collateral for the credit facility.
Available funds under the revolving credit line are
80%
of eligible accounts receivable balances plus
$1 million
, up to a limit of
$10 million
. Eligible accounts receivable is generally defined as those from United States based customers that are not more than
90
days from the date of invoice. We had approximately
$2,367,661
available under the revolving credit line as of
September 30, 2014
.
At December 31, 2013 and July 31, 2014, the Company was not in compliance with certain financial covenants. Bridge Bank provided a waiver of those covenants. As of September 30, 2014, we were in compliance with all Bridge Bank requirements.
In September 2014, the Company entered into the Fifth Business Financing Modification Agreement with Bridge Bank that renewed the existing Agreement and modified some terms. The renewed agreement extended the revolving line of credit to September 2016 and provided for a new term loan of
$2 million
through September 2017. The financial covenants were revised to a Debt Service Coverage Ratio of at least
1.50
to
1.0
tested on the immediate proceeding
three
month period beginning August 2014 measuring period, and not less than
1.75
to
1.00
for each monthly measuring period thereafter; and an Asset Coverage Ratio of not less than
1.15
to
1.0
for the August 2014 through December 2014 measuring periods, and not less than
1.25
to
1.0
for each monthly measuring period thereafter.
The accrued expenses and other current liabilities consist of the following at
September 30, 2014
and December 31,
2013
:
|
|
September 30, 2014
|
December 31, 2013
|
|||||
|
Accrued marketing costs
|
$
|
1,501,992
|
|
$
|
1,198,152
|
|
|
|
Accrued expenses and other
|
423,616
|
|
519,859
|
|
|||
|
Loss contingency
|
308,000
|
|
263,238
|
|
|||
|
Accrued sales reserve
|
295,503
|
|
—
|
|
|||
|
Deferred Arkansas grant, current portion
|
169,376
|
|
242,225
|
|
|||
|
Capital leases, current portion
|
36,916
|
|
51,205
|
|
|||
|
Accrued taxes
|
31,968
|
|
25,765
|
|
|||
|
Accrued payroll and commission liabilities
|
5,619
|
|
85,782
|
|
|||
|
Total
|
$
|
2,772,990
|
|
$
|
2,386,226
|
|
|
11
Other long-term liabilities consist of the following as of:
|
|
September 30, 2014
|
December 31, 2013
|
|||||
|
Taxes payable
|
$
|
506,453
|
|
$
|
506,453
|
|
|
|
Deferred Arkansas grant, less current portion
|
164,024
|
|
360,576
|
|
|||
|
Deferred rent
|
83,524
|
|
120,218
|
|
|||
|
Capital leases, less current portion
|
21,398
|
|
52,223
|
|
|||
|
Total
|
$
|
775,399
|
|
$
|
1,039,470
|
|
|
We have a deferred tax liability of
$3,713,205
as of
September 30, 2014
, related to our intangible assets. Pursuant to ASC 740, we recognized in the first quarter of 2014, an income tax benefit of
$75,698
related to the decrease of our deferred tax liability associated with the amortization of the related intangible assets. In assessing the available evidence, the amortization of the recorded deferred tax liability is not appropriate in the current quarter due to the timing of the reversal of the temporary differences and cannot reasonably be determined. We will reassess the timing of the reversal of the temporary differences in future quarters.
We also have a net deferred tax asset of approximately
$32,000,000
. We have evaluated this asset and are unable to support a conclusion that it is more likely than not that any of this asset will be realized. As such, the net deferred tax asset is fully reserved. We will continue to evaluate our deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit.
At
September 30, 2014
we have accrued
$506,453
in other long-term liabilities for uncertain tax positions.
We maintain a stock-based compensation program intended to attract, retain and provide incentives for talented employees and directors and align stockholder and employee interests. Currently, we grant options and restricted stock units ("RSUs") from the 2005 Long-Term Incentive Plan ("2005 LTIP") and the 2010 Equity Compensation Plan (“2010 ECP”). Option and restricted stock unit vesting periods are generally up to
three
years.
Options and restricted stock units generally vest based on either (i) continued service to the Company for a period of up to three years, or (ii) achieving performance goals.
For the
three and nine
months ended
September 30, 2014
, we recorded stock-based compensation expense for all equity incentive plans of
$279,970
and
$658,800
, respectively, and
$239,353
and
$539,766
for the
three and nine
months ended
September 30, 2013
, respectively. Total compensation cost not yet recognized at
September 30, 2014
was
$736,704
to be recognized over a weighted-average recognition period of
0.8
years.
On April 1, 2014, we granted certain employees a total of
78,500
RSUs with a weighted average fair value of $
0.78
per share. On April 1, 2014, we also granted employees a performance RSU that is dependent upon 2014 profitability. At
September 30, 2014
, the number of performance RSUs was
677,072
shares with a weighted average fair value of
$.78
per share. The shares vest ratably over
three
years or upon achieving performance conditions. In the same quarter, we granted members of our board of directors a total of
102,560
RSUs with a weighted average fair value of
$.78
a share which vest quarterly until March 31, 2015. In the first quarter of 2013, we granted employees a total of
100,000
RSUs with a weighted average fair value of
$0.72
per share.
On March 31, 2013, some of our employees voluntarily canceled certain outstanding stock options for no consideration. As a result,
805,134
shares were canceled and returned to 2005 LTIP and 2010 ECP plans. The cancellation of these options resulted in the recognition of
$49,577
in additional stock-based compensation expense, which represented the fair value of the canceled options that had not yet been recognized as of the date of cancellation.
12
The following table summarizes the stock grants outstanding under our 2005 LTIP and 2010 ECP plans as of
September 30, 2014
:
|
|
Options Outstanding
|
RSUs Outstanding
|
Options and RSUs Exercised
|
Available Shares
|
Total
|
|||||||||
|
2010 ECP
|
250,498
|
|
907,874
|
|
1,108,353
|
|
1,419,220
|
|
3,685,945
|
|
||||
|
2005 LTIP
|
33,748
|
|
407,721
|
|
542,364
|
|
16,167
|
|
1,000,000
|
|
||||
|
Total
|
284,246
|
|
1,315,595
|
|
1,650,717
|
|
1,435,387
|
|
4,685,945
|
|
||||
We also have
82,131
options outstanding with exercise prices from
$16.01
to
$35.58
under a separate plan which is not authorized to issue any additional shares.
Certain of our subsidiaries previously operated in the European Union ("EU"). Though operations ceased in 2009, statutory requirements require 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.
For the
three and nine
months ended
September 30, 2014
, we recognized net income from discontinued operations of
$23,065
and
$66,959
, respectively, which came primarily from an adjustment of certain accrued liabilities originating in 2009 and earlier. During the
three and nine
months ended
September 30, 2013
, we recognized net income of
$49,601
and
$457,709
, respectively, primarily related to the favorable resolution of a tax audit.
During the
three and nine
months ended
September 30, 2014
, we generated net income from continuing operations. Accordingly, some of our outstanding stock options, warrants and restricted stock awards now have a dilutive impact, illustrated in the following table. We generated basic and diluted earnings per share from net income of
$0.02
for the
three
- month period ending
September 30, 2014
and
$0.06
for the
nine
-month period ended
September 30, 2014
.
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||
|
September 30, 2014
|
September 30, 2013
|
September 30, 2014
|
September 30, 2013
|
|||||||||
|
Weighted average shares outstanding for basic EPS
|
23,445,771
|
|
23,291,468
|
|
23,485,052
|
|
23,278,003
|
|
||||
|
Effect of dilutive securities
|
||||||||||||
|
Options
|
4,876
|
|
8,090
|
|
4,408
|
|
6,486
|
|
||||
|
Restricted stock units
|
679,932
|
|
140,259
|
|
357,040
|
|
44,738
|
|
||||
|
Warrants
|
12,615
|
|
7,484
|
|
8,649
|
|
324
|
|
||||
|
Weighted average shares outstanding for diluted EPS
|
24,143,194
|
|
23,447,301
|
|
23,855,148
|
|
23,329,551
|
|
||||
In addition, we have potentially dilutive options and warrants. We have
361,501
outstanding stock options with a weighted average exercise price of
$6.00
. We also have
725,000
outstanding warrants with a weighted average exercise price of
$2.15
.
We lease certain office space and equipment. As leases expire, it can be expected that they will be renewed or replaced in the normal course of business. Rent expense from continuing operations was a credit of
$10,887
and
$23,061
for the
three and nine
months ended
September 30, 2014
. For the
three and nine
months ended
September 30, 2013
, rent expense from continuing operations was
$15,405
and
$222,888
, respectively. The credit in the
three and nine
months ended
September 30, 2014
is primarily due to subleasing the company’s former New York City office at a higher rate than its lease cost.
13
Minimum future lease payments and future receipts under non-cancelable operating leases as of
September 30, 2014
are:
|
Lease Payments
|
Sublease income
|
||||||
|
2014
|
$
|
134,449
|
|
$
|
148,909
|
|
|
|
2015
|
552,451
|
|
604,569
|
|
|||
|
2016
|
46,788
|
|
50,753
|
|
|||
|
Total
|
$
|
733,688
|
|
$
|
804,231
|
|
|
During 2013 we signed an amendment allowing us to terminate our Clearwater office lease for
$615,000
, and the lease was terminated on March 31, 2013. We also entered into an agreement to lease office space in Conway, Arkansas for
two
years in the total amount of
$193,200
which we prepaid. The lessor of this space is First Orion Corp., which is owned by a director and shareholder of Inuvo.
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:
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 been largely dormant but the plaintiff has engaged in the minimal activity necessary to maintain the case on the court’s docket. Inuvo is defending against the claim and the co-defendants' separate counsel is likewise defending against the claim on behalf of 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.
Admanage Litigation.
In May 2014 Inuvo and its wholly owned subsidiary ValidClick, Inc. filed a complaint in the Circuit Court of Faulkner County Arkansas against certain former distribution partners of our Publisher Network, i.e., Admanage S.A., ClickFind Media Corp., Neo Clicks, Inc. and Neoclicks Internet Services Corp., demanding return of an aggregate of approximately
$134,000
paid to such distribution partners during time periods when Inuvo and ValidClick allege that the activities of the distribution partners violated the ValidClick terms of service. In July 2014, Admanage S.A., Neoclicks Internet Services and ClickFind Media Corp. filed a suit against Inuvo and ValidClick in United States District Court Eastern District of Arkansas Western Division, alleging, among other things breach of contract for non payment of approximately
$696,000
allegedly earned by the distribution partners. Admanage S.A., Neoclicks Internet Services and ClickFind Media Corp. subsequently removed the Faulkner County Circuit Court lawsuit to United States District Court Eastern District of Arkansas Western Division, and the
two
cases have now been consolidated into the removed case. Inuvo is vigorously defending the matter.
We operate our business as
two
segments, Partner Network and Owned and Operated Network, which are described in Note 1.
Listed below is a presentation of net revenue and gross profit for all reportable segments for the three and nine months ended
September 30, 2014
and
2013
. We currently only track certain assets at the segment level and therefore assets by segment are not presented below.
14
Revenue by Segment
|
For the Three Months Ended
|
For the Nine Months Ended
|
||||||||||||||||||||||||
|
|
September 30, 2014
|
September 30, 2013
|
September 30, 2014
|
September 30, 2013
|
|||||||||||||||||||||
|
$
|
% of Revenue
|
$
|
% of Revenue
|
$
|
% of Revenue
|
$
|
% of Revenue
|
||||||||||||||||||
|
Partner Network
|
7,089,584
|
|
54.4
|
%
|
10,807,377
|
|
74.5
|
%
|
$
|
18,110,706
|
|
53.1
|
%
|
$
|
28,232,281
|
|
64.8
|
%
|
|||||||
|
Owned and Operated Network
|
5,936,427
|
|
45.6
|
%
|
3,701,673
|
|
25.5
|
%
|
$
|
15,979,055
|
|
46.9
|
%
|
$
|
15,326,976
|
|
35.2
|
%
|
|||||||
|
Total net revenue
|
13,026,011
|
|
100.0
|
%
|
14,509,050
|
|
100.0
|
%
|
$
|
34,089,761
|
|
100.0
|
%
|
$
|
43,559,257
|
|
100.0
|
%
|
|||||||
Gross Profit by Segment
|
$
|
Gross Profit %
|
$
|
Gross Profit %
|
$
|
Gross Profit %
|
$
|
Gross Profit %
|
||||||||||||||||
|
Partner Network
|
1,207,382
|
|
17.0
|
%
|
2,793,999
|
|
25.9
|
%
|
4,024,984
|
|
22.2
|
%
|
6,456,050
|
|
22.9
|
%
|
|||||||
|
Owned and Operated Network
|
5,907,910
|
|
99.5
|
%
|
3,531,987
|
|
95.4
|
%
|
15,811,128
|
|
98.9
|
%
|
14,474,964
|
|
94.4
|
%
|
|||||||
|
Total gross profit
|
7,115,292
|
|
54.6
|
%
|
6,325,986
|
|
43.6
|
%
|
19,836,112
|
|
58.2
|
%
|
20,931,014
|
|
48.1
|
%
|
|||||||
On January 31, 2013 we entered into an agreement to lease office space in Conway, AR for
two
years at a monthly rental rate of
$8,400
which we prepaid in connection with our relocation to Arkansas for a discounted total of
$193,200
. A director and shareholder of Inuvo is the majority owner of the lessor of this space.
Company Overview
Inuvo, Inc. and subsidiaries ("we", "us" or "our") is an Internet marketing and technology company that delivers purchased-ready customers to advertisers through a broad network of desktop and mobile websites and applications reaching both desktop and mobile devices.
We deliver content and targeted advertisements over the internet and generate revenue when an end user clicks on the advertisements we have delivered. We manage our business as
two
segments, Partner Network and Owned and Operated Network.
The Partner Network delivers advertisements to our partners' websites and applications on desktop, tablet and mobile devices. We generate revenue in this segment when an advertisement is clicked, and we share a portion of that revenue with our partners. Our proprietary technology platform allows for targeted distribution of advertisements at a scale that measures in the hundreds of millions of advertisements delivered monthly.
The Owned and Operated Network designs, builds and markets consumer websites and applications. This segment consists of our mobile-ready ALOT websites and the ALOT Appbar (the "Appbar") and is focused on providing engaging content to our users. The majority of revenue generated by this segment is derived from clicks on advertisements delivered through web searches or advertisements displayed on the websites.
We took several significant steps in 2013 to position our business for long-term success including a reduction in compensation and administrative expenses, which helped improve net income and make 2013 our first profitable year in recent memory. In 2014 we are focused on expanding our product portfolio and growing revenue and profitability.
15
During 2013 and 2014, we expanded our ALOT-branded websites and applications with the launch of ALOT Local, ALOT Health, ALOT Finance, ALOT Careers, ALOT Travel and ALOT Living. These sites are content rich, searchable, mobile-ready web properties. We plan to continue the expansion of our website and mobile application business for the remainder of 2014.
During 2012, we relocated our offices in New York City and Clearwater, FL to Conway, AR and received a grant from the state of Arkansas to cover costs associated with the move. Inuvo remains in compliance with all providsions of the grant agreement. For additional information, please refer to the Current Report on form 8-K dated January 31, 2013.
In conjunction with the relocation to Arkansas, we exited our Clearwater, FL office lease, found a subtenant for our office in New York City and completed the relocation of our New York City data centers to a single location in Arkansas. As a result, we do not expect compensation and selling, general and administrative costs to increase much for the remainder of 2014.
Results of Operations
Net Revenue
|
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||||||||||||||||
|
|
2014
|
2013
|
Change
|
% Change
|
2014
|
2013
|
Change
|
% Change
|
|||||||||||||||||||||
|
Partner Network
|
$
|
7,089,584
|
|
$
|
10,807,377
|
|
$
|
(3,717,793
|
)
|
(34.4
|
%)
|
$
|
18,110,706
|
|
$
|
28,232,281
|
|
$
|
(10,121,575
|
)
|
(35.9
|
%)
|
|||||||
|
Owned and Operated Network
|
5,936,427
|
|
3,701,673
|
|
2,234,754
|
|
60.4
|
%
|
15,979,055
|
|
15,326,976
|
|
$
|
652,079
|
|
4.3
|
%
|
||||||||||||
|
Net Revenue
|
$
|
13,026,011
|
|
$
|
14,509,050
|
|
$
|
(1,483,039
|
)
|
(10.2
|
%)
|
$
|
34,089,761
|
|
$
|
43,559,257
|
|
$
|
(9,469,496
|
)
|
(21.7
|
%)
|
|||||||
Net revenue declined 10% and 22% in the
three and nine
month periods of 2014, respectively, compared to the same quarters last year. While there were both increases in the Owned and Operated Network and decreases in the Partner Network over these periods, the principal reason for the overall decline revolves around the stated strategy to transition out of the Appbar product. Appbar revenue for the three months period decreased from $1.75 million in 2013 to $0.35 million in 2014 and for the nine month period decreased from $9.3 million in 2013 to $1.87 million in 2014. We expect the Appbar revenue to be near zero by the end of 2014.
The Partner Network segment revenue declined during the
third
quarter and first nine months of 2014 from the comparable periods in 2013. Revenue in this segment is both a function of the total number of transactions processed through the ValidClick platform and the revenue we receive per transaction. Beginning in the second half of 2013, we decided to focus on the recruitment and retention of partners with the highest quality traffic, making a strategic decision to focus less on the volume of transactions and more on the revenue per transaction, which has a tendency to increase with quality. This strategy has the added benefit of reducing the company's exposure to click fraud. As a result, we have experienced revenue declines in this segment in part because we terminated publishers who did not meet their contractual obligations and our quality standards.We expect increase revenue in this segment to be driven by advertisements delivered to desktop and mobile devices as well as the deployment of new advertising solutions throughout our publisher network. The segment grew 27% sequentially between the second quarter of 2014 and the third quarter of 2014.
Revenue in our Owned and Operated Network is generated through our consumer-facing ALOT branded websites and applications. In early 2013, we decided, as a result of changes in the marketplace, to transition away from the Appbar product which we acquired in the Vertro acquisition in 2012 and apply the assets purchased in that acquisition towards growing an Owned and Operated website and mobile applications business. We expect Appbar product revenue to continue to decline and website revenue to increase throughout the balance of 2014. We have now launched a number of properties under the ALOT brand including ALOT Health, ALOT Finance, ALOT Careers, ALOT Local, ALOT Travel and ALOT Living. These websites are content-rich and optimized for mobile and desktop devices, and are designed to capitalize on growing consumer demand for content, delivered both on the desktop and on mobile devices. The revenue from our websites has grown 187% from $2.0 million in the third quarter of last year to $5.6 million in the third quarter of 2014; and 134% from $6.0 million in the first nine months of 2013 to $14.1 million in the first nine months of 2014. We intend to continue to expand our Owned and Operated Network by enhancing our current websites and mobile applications, launching additional mobile applications under the ALOT brand and expanding the content of the ALOT sites.
Starting with quarter ended June 30, 2014, we accrued a reserve against revenue to account for regular adjustments from advertisers. The balance of the reserve as of
September 30, 2014
is
$295,503
.
16
Cost of Revenue
|
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||||||||||||||||
|
|
2014
|
2013
|
Change
|
% Change
|
2014
|
2013
|
Change
|
% Change
|
|||||||||||||||||||||
|
Partner Network
|
$
|
5,882,202
|
|
$
|
8,013,378
|
|
$
|
(2,131,176
|
)
|
(26.6
|
%)
|
$
|
14,085,722
|
|
$
|
21,776,231
|
|
$
|
(7,690,509
|
)
|
(35.3
|
%)
|
|||||||
|
Owned and Operated Network
|
28,517
|
|
169,686
|
|
(141,169
|
)
|
(83.2
|
%)
|
167,927
|
|
852,012
|
|
$
|
(684,085
|
)
|
(80.3
|
%)
|
||||||||||||
|
Cost of revenue
|
$
|
5,910,719
|
|
$
|
8,183,064
|
|
$
|
(2,272,345
|
)
|
(27.8
|
%)
|
$
|
14,253,649
|
|
$
|
22,628,243
|
|
$
|
(8,374,594
|
)
|
(37.0
|
%)
|
|||||||
Cost of revenue in the Partner Network is generated by payments to website and application publishers who host our advertisements. The decrease in cost of revenue is directly associated with lower revenue in this segment as well as to the change we made to focus on recruiting partners with higher quality traffic and our efforts to enforce publisher contract terms and conditions associate with our Network operating policies.
The decrease in cost of revenue in the Owned and Operated Network was driven primarily by the transition away from the ALOT Appbar product. Other cost of revenue in this segment consists of charges for web searches and content acquisition.
Operating Expenses
|
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||||||||||||||||
|
|
2014
|
2013
|
Change
|
% Change
|
2014
|
2013
|
Change
|
% Change
|
|||||||||||||||||||||
|
Marketing costs
|
$
|
4,277,446
|
|
$
|
2,939,584
|
|
$
|
1,337,862
|
|
45.5
|
%
|
$
|
11,555,731
|
|
$
|
10,625,638
|
|
$
|
930,093
|
|
8.8
|
%
|
|||||||
|
Compensation
|
1,192,227
|
|
1,412,842
|
|
(220,615
|
)
|
(15.6
|
%)
|
3,431,237
|
|
4,727,936
|
|
(1,296,699
|
)
|
(27.4
|
%)
|
|||||||||||||
|
Selling, general and administrative
|
1,180,940
|
|
1,360,610
|
|
(179,670
|
)
|
(13.2
|
%)
|
3,245,904
|
|
5,270,986
|
|
(2,025,082
|
)
|
(38.4
|
%)
|
|||||||||||||
|
Operating expenses
|
$
|
6,650,613
|
|
$
|
5,713,036
|
|
$
|
937,577
|
|
16.4
|
%
|
$
|
18,232,872
|
|
$
|
20,624,560
|
|
$
|
(2,391,688
|
)
|
(11.6
|
%)
|
|||||||
Operating expenses for the three months ended
September 30, 2014
increased as compared to the same period last year due to an increase in marketing costs that will be discussed below. Operating expenses for the nine months ended
September 30, 2014
declined as compared to the prior year as a result of lower investments in marketing costs due the transition away from the Appbar product and expense savings resulting from the move to Arkansas, including reduced compensation and overhead expenses.
Marketing costs include those expenses required to attract traffic to our owned and operated websites and to effect Appbar downloads. Marketing costs increased in the third quarter of 2014 as a result of the growth within the owned and operated website and application business. We expect marketing costs to continue to increase in the last quarter of 2014 as we expand the ALOT branded websites and mobile applications.
Compensation expense declined in the
three and nine
month periods of 2014 as compared to the same period of 2013, respectively, due to operational efficiencies and reduced payroll related to the relocation to Arkansas. Our total employment, both full-time and part-time was
51
at
September 30, 2014
.
The decrease in selling, general and administrative costs is primarily due to cost savings related to the relocation to Arkansas and other operating efficiencies. The primary reasons for the lower cost in the three months ended
September 30, 2014
compared to the same period last year are approximately $184,000 lower amortization and depreciation expense; and $104,000 lower facilities cost. The primary reasons for the lower cost in the nine months ended
September 30, 2014
compared to the same period last year are approximately $914,000 lower amortization and depreciation expense; $569,000 lower facilities cost; $129,000 lower travel and entertainment costs; and $70,000 lower professional fees.
Other Expense, net
Other expense, net was
$84,870
and
$98,451
for the three months ended
September 30, 2014
and
2013
, respectively, and
$285,973
and
$271,448
for the
nine
months ended
September 30, 2014
and 2013, respectively. These charges are entirely
17
interest expense on the credit facility with Bridge Bank where outstanding loan balances were higher in 2013 than 2014 though interest rates were higher in 2014 over 2013. The average interest rate for the first nine months of 2014 was 7.2%. Beginning with the fourth quarter 2014, we expect the average interest rate to be 5.7%.
Income from Discontinued Operations
For the three and
nine
month periods ended
September 30, 2014
, we recognized net income from discontinued operations of
$23,065
and
$66,959
, respectively. The income was generated primarily by an adjustment of certain accrued liabilities originating in 2009 and earlier. During the three and
nine
month periods ended
September 30, 2013
, we recognized net income of
$49,601
and
$457,709
, respectively related to the favorable resolution of a tax audit in the first quarter of 2013 and to an adjustment of certain accrued liabilities originating in 2009 and earlier.
Liquidity and Capital Resources
On September 29, 2014, we renewed our Business Financing Agreement with Bridge Bank, N.A. ("Bridge Bank") (see Note 5, "Notes Payable," Part I, Item 1, "Financial Statements"). The renewal provided continued access to the revolving line of credit up to $10 million through September 2016 and to a new term loan of $2 million through September 2017. As of
September 30, 2014
, the revolving line of credit had approximately
$2,367,661
in availability. We believe that the combination of our existing cash, and our expected future cash flows from operations will provide us with sufficient liquidity to fund our operations and capital requirements for a least the next twelve months. We presently have an effective shelf registration statement covering up to $15 million. This shelf registration statement enhances our ability to quickly raise additional capital through the sale of equity, however, we are not presently a party to any agreement or understanding for the sale of our equity securities and there are no assurances we will proceed with such a transaction during 2014. Though we do not expect to need additional funds in the next twelve months, we may still elect to sell stock to the public or to selected investors, or borrow under the current or any replacement line of credit, or through another debt instrument.
Cash Flows - Operating
Net cash provided by operating activities was
$2,630,809
during the
nine
months ended
September 30, 2014
. We produced net income of
$1,459,924
, which included non-cash depreciation and amortization expense of
$1,320,734
and stock-based compensation expense of
$658,800
. The change in operating assets and liabilities was a
$587,865
use of cash as a result of better operating performance.
During the comparable period in
2013
we generated cash from operating activities of
$1,893,002
and a net income of
$730,661
which was offset by non-cash depreciation and amortization expenses of
$2,563,887
and stock-based compensation expenses of
$539,766
.
Cash Flows - Investing
Net cash used in investing activities was
$656,441
and
$517,654
for the
nine
months ended
September 30, 2014
and
2013
, respectively.
Cash used in investing activities during the
2014
period primarily consisted of capitalized internal development costs, which are slightly higher than the previous year as last year's results included grant funds received for equipment and office construction.
Cash Flows - Financing
Net cash used in financing activities was
$1,651,575
during
2014
. The cash was primarily used to reduce the Bridge Bank term loan.
During the first half of
2013
, net cash used in financing activities was
$1,120,077
. The release of the letter of credit securing our Clearwater, FL office provided
$301,158
largely offset by payments to reduce the term loan with Bridge Bank.
Off Balance Sheet Arrangements
As of
September 30, 2014
, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
18
liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Not applicable to a smaller reporting company.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management does not expect that our disclosure controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
September 30, 2014
, the end of the period covered by this report, our management concluded their evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As of the evaluation date, our Chief Executive Officer and Chief Financial Officer concluded that we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the period ended
September 30, 2014
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Note 13, Litigation and Settlements, for a discussion of outstanding legal proceedings.
19
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 10, 2014 and as amended on April 3, 2014 subject to the new or modified risk factors appearing below that should be read in conjunction with the risk factors disclosed in such Form 10-K.
We have a history of losses and there are no assurances that we can consistently generate net income.
Although we generated net income in 2013 and the first nine months of 2014, we have a history of net losses that have resulted in an accumulated deficit of
$119,733,742
as of
September 30, 2014
. We cannot provide assurance that we can consistently generate a net income.
We rely on two customers for a significant portion of our revenues.
We are reliant upon Yahoo! and Google for most of our revenue. During the
third
quarter of
2014
they accounted for
53.74 percent
and
44.1 percent
of our revenues, respectively, and during the same period 2013 they accounted for 73.48 percent and 22.03 percent, respectively. The amount of revenue we receive from these customers is dependent on a number of factors outside of our control, including the amount they charge advertisers, the breath of advertisements available from them, and their ability to display relevant ads aligned with the needs of our network. Both contracts are up for renewal in 2015
.
We would likely experience a significant decline in revenue and our business operations could be significantly harmed if these customers do not approve, or change the policies associated with, new websites and/or applications wherein we show their ads, if we violate their guidelines or they change their guidelines, or if our contracts are not renewed on the same or substantially similar terms. In addition, if any of these preceding circumstances were to occur, we may not be able to find a suitable alternate provider or otherwise replace the lost revenues. The loss of either of these customers or a material change in the revenue or gross profit they generate would have a material adverse impact on our business, results of operations and financial condition in future periods.
Failure to comply with the covenants and restrictions in our credit facility could result in the acceleration of a substantial portion of our debt, which we may not be able to repay or refinance on favorable terms.
We have a credit facility with Bridge Bank, N.A. ("Bridge Bank") under which we had approximately
$4.5 million
in debt outstanding as of
September 30, 2014
. The credit facility contains a number of covenants that requires us and certain of our subsidiaries to, among other things,:
|
•
|
pay fees to the lender associated with the credit facility;
|
|
•
|
meet prescribed financial covenants;
|
|
•
|
maintain our corporate existence in good standing;
|
|
•
|
grant the lender a security interest in our assets;
|
|
•
|
provide financial information to the lender; and
|
|
•
|
refrain from any transfer of any of our business or property, subject to customary exceptions.
|
We have historically had difficulties meeting the financial covenants set forth in our credit agreement. Our lender has given us waivers in the past and reset our financial covenants several times, including waivers in March and September of 2014. In the event of a breach of our covenants we cannot provide any assurance that our lender would provide a waiver or reset our covenants. A breach in our covenants could result in a default under the credit facility, and in such event Bridge Bank could elect to declare all borrowings outstanding to be due and payable. If this occurs and we are not able to repay, Bridge Bank could require us to apply all of our available cash to repay the debt amounts and could then proceed against the underlying collateral. Should this occur, we cannot assure you that our assets would be sufficient to repay our debt in full, we would be able to borrow sufficient funds to refinance the debt, or that we would be able to obtain a waiver to cure any such default. In such an event, our ability to conduct our business as it is currently conducted would be in jeopardy.
None.
None.
20
Not applicable.
None.
|
Exhibit No.
|
|
Description of Exhibit
|
|
10.1
|
Business Financing Modification Agreement, dated September 29, 2014 with Bridge Bank N.A.
|
|
|
10.2
|
Bridge Bank BFA Modification, dated October 9, 2014
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer *
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer *
|
|
32.1
|
|
Section 1350 certification of Chief Executive Officer *
|
|
32.2
|
|
Section 1350 certification of Chief Financial Officer *
|
|
101.INS
|
XBRL Instance Document *
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document *
|
|
|
1010.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document *
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document *
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document *
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document *
|
|
* filed herewith
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Inuvo, Inc.
|
|
|
|
October 30, 2014
|
By:
|
/s/ Richard K. Howe
|
|
|
|
Richard K. Howe,
|
||
|
Chief Executive Officer, principal executive officer
|
|||
|
|
|
|
|
|
October 30, 2014
|
By:
|
/s/
Wallace D. Ruiz
|
|
|
Wallace D. Ruiz,
|
|||
|
|
|
Chief Financial Officer, principal financial officer
|
|
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TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsNote 1 Organization and Business OverviewNote 2 Summary Of Significant Accounting PoliciesNote 3 Property and EquipmentNote 4 Other Intangible Assets and GoodwillNote 5 - Notes PayableNote 6 Accrued Expenses and Other Current LiabilitiesNote 7 Other Long-term LiabilitiesNote 8 Income TaxesNote 9 - Stock-based CompensationNote 10 Discontinued OperationsNote 11 - Earnings Per ShareNote 12 - LeasesNote 13 - Litigation and SettlementsNote 14 - SegmentsNote 15 - Related Party TransactionsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety and DisclosuresItem 5. Other InformationItem 6. Exhibits