NETSEER, INC.
Financial Statements
December 31, 2016 (Audited) and 2015 (Unaudited)
(With Independent Auditor’s Report Thereon)
NETSEER, INC.
Table of Contents
Pages
Independent Auditor’s Report 1 - 2
Balance Sheets 3
Statements of Operations 4
Statements of Redeemable Convertible Preferred Stock
and Stockholders’ Deficit 5
Statements of Cash Flows 6
Notes to Financial Statements 7 - 18
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13577 Feather Sound Drive, Suite 400 square6 Clearwater, Florida 33762
Main: 727.572.1400 square6 Fax: 727.571.1933 square6 www.mhm-pc.com
Independent Auditor’s Report
To the Board of Directors and
Stockholders of NetSeer, Inc.:
We have audited the accompanying financial statements of NetSeer, Inc., which comprise the balance
sheet as of December 31, 2016, and the related statements of operations, redeemable convertible preferred
stock and stockholders’ deficit, and cash flows for the year then ended, and the related notes to the
financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or
error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of NetSeer, Inc. as of December 31, 2016, and the results of their operations and their
cash flows for the year then ended in accordance with accounting principles generally accepted in the
United States of America.
Prior Period Financial Statements
The 2015 financial statements were compiled by us, and we did not audit or review those financial
statements, and accordingly, express no opinion or other form of assurance on them.
April 12, 2017
Clearwater, Florida
NETSEER, INC.
Balance Sheets
December 31, 2016 (Audited) and 2015 (Unaudited)
See accompanying independent auditor’s report and notes to financial statements. 3
2016 2015
(Audited) (Unaudited)
Current assets:
Cash and cash equivalents $ 385,097 1,071,007
Restricted cash 50,000 50,000
Accounts receivable, net of allowance for doubtful
accounts of $9,360 and $0, respectively 3,630,439 5,620,083
Prepaid expenses and other current assets 168,738 233,622
Total current assets 4,234,274 6,974,712
Property and equipment, net 286,948 417,820
Total assets $ 4,521,222 7,392,532
Current liabilities:
Accounts payable $ 4,452,194 4,949,717
Accrued expenses and other current liabilities 792,598 1,957,298
Factoring line of credit 1,909,526 2,073,377
Current portion of note payable 480,000 2,034,243
Convertible notes payable and accrued interest 27,216,847 18,357,101
Total current liabilities 34,851,165 29,371,736
Notes payable, net of current portion - 480,000
Other long-term liabilities 59,731 60,817
Total liabilities 34,910,896 29,912,553
Redeemable convertible preferred stock, $.001 par value:
Authorized shares 13,005,727; 12,884,664 shares
issued and outstanding 30,090,112 30,090,112
Stockholders' deficit:
Common stock, $.001 par value:
Authorized shares 21,000,000; 3,450,557 shares
issued and outstanding 3,451 3,451
Additional paid-in capital 619,684 619,684
Accumulated deficit (61,102,921) (53,233,268)
Total stockholders' deficit (60,479,786) (52,610,133)
Total liabilities, redeemable convertible preferred
stock and stockholders' deficit $ 4,521,222 7,392,532
Assets
Liabilities, Redeemable Convertible Preferred Stock
and Stockholders' Deficit
NETSEER, INC.
Statements of Operations
For the Years Ended December 31, 2016 (Audited) and 2015 (Unaudited)
See accompanying independent auditor’s report and notes to financial statements. 4
2016 2015
(Audited) (Unaudited)
Revenues, net $ 20,853,784 18,479,233
Cost of revenue 15,710,933 14,214,571
Gross profit 5,142,851 4,264,662
Operating expenses:
Compensation 7,147,395 7,737,751
Selling, general and administrative 3,334,999 3,517,725
Depreciation and amortization 233,576 212,853
Total operating expenses 10,715,970 11,468,329
Other expense:
Interest expense 1,996,534 1,279,062
Loss on settlement of litigation 300,000 -
Total other expense 2,296,534 1,279,062
Net loss $ (7,869,653) (8,482,729)
NETSEER, INC.
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit
For the Years Ended December 31, 2016 (Audited) and 2015 (Unaudited)
See accompanying independent auditor’s report and notes to financial statements. 5
Additional
Paid-in Accumulated
Shares Stock Shares Stock Capital Deficit Total
Balances as of December 31, 2014
(Unaudited) 12,884,664 $ 30,090,112 3,450,557 $ 3,451 593,986 (44,750,539) (14,062,990)
Contributions - - - - 25,698 - 25,698
Net loss - - - - - (8,482,729) (8,482,729)
Balances as of December 31, 2015
(Unaudited) 12,884,664 30,090,112 3,450,557 3,451 619,684 (53,233,268) (22,520,021)
Net loss - - - - - (7,869,653) (7,869,653)
Balances as of December 31, 2016
(Audited) 12,884,664 $ 30,090,112 3,450,557 $ 3,451 619,684 (61,102,921) (30,389,674)
Common StockPreferred Stock Series A
Redeemable Convertible
NETSEER, INC.
Statements of Cash Flows
For the Years Ended December 31, 2016 (Audited) and 2015 (Unaudited)
See accompanying independent auditor’s report and notes to financial statements. 6
2016 2015
(Audited) (Unaudited)
Cash flows from operating activities:
Net loss $ (7,869,653) (8,482,729)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 233,576 212,853
Provision for doubtful accounts 9,360 -
Interest on convertible notes payable 1,509,746 849,321
Loss on settlement of litigation 300,000 -
Change in operating assets and liabilities:
Accounts receivable 1,980,284 (3,759,775)
Prepaid expenses and other assets 64,884 424,573
Accounts payable (497,523) 3,764,271
Accrued expenses and other liabilities (1,445,411) 117,751
Net cash used in operating activities (5,714,737) (6,873,735)
Cash flows from investing activities:
Purchases of equipment (62,764) (124,563)
Net cash used in investing activities (62,764) (124,563)
Cash flows from financing activities:
Contributions - 25,698
Net repayments (proceeds) on factoring line of credit (163,851) 1,089,378
Proceeds from convertible notes payable 7,350,000 9,200,000
Payments on note payable (2,034,243) (2,525,760)
Payments on capital lease obligations (60,315) (101,344)
Net cash provided by financing activities 5,091,591 7,687,972
Net change in cash and cash equivalents (685,910) 689,674
Cash and cash equivalents, beginning of year 1,071,007 381,333
Cash and cash equivalents, end of year $ 385,097 1,071,007
Supplemental information:
Interest paid $ 524,000 371,000
Non-cash investing and financing activities:
Purchase of property and equipment
under capital lease obligation $ 39,940 -
NETSEER, INC.
Notes to Financial Statements
December 31, 2016 (Audited) and 2015 (Unaudited)
7
(1) Organization and Business
NetSeer, Inc. (the “Company”), a Delaware company founded in 2006, develops concept-based ad
targeting solutions for advertisers and publishers. The Company takes a Concept-based approach to
ad targeting for advertisers and publishers. Concepts offer an accurate, nuanced picture of the
audience’s mindset – which results in algorithms that think more like humans, and less like
machines. The Company’s patented ConceptGraph™ reads between the lines to decode the signals
of consumer intent, to give a more precise, predictive targeting. With access to more than 90
percent of U.S. households online, the Company delivers exceptionally relevant, brand-safe
advertising across desktop, mobile and video – to make the most of campaign dollars for brands,
and monetize the content for publishers.
As of February 6, 2017, the assets and certain liabilities of NetSeer, Inc. were purchased by Inuvo,
Inc. (see Note 13).
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of
three months or less.
(b) Accounts Receivable
Accounts receivable consists of trade receivables from customers. We record accounts
receivable at its net realizable value, recognizing an allowance for doubtful accounts based on
our best estimate of probable credit losses on our existing accounts receivable. Balances are
written off against the allowance after all means of collection have been exhausted and the
possibility of recovery is considered remote.
(c) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Major renewals and improvements are capitalized while 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 are eliminated from accounts
and the net gain or loss is reflected as an operating expense in the statement of operations.
Property and equipment are depreciated on a straight-line basis over three to five years for
equipment and computer hardware, two to seven years for furniture and fixtures and three
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.
NETSEER, INC.
Notes to Financial Statements - Continued
8
(2) Summary of Significant Accounting Policies - Continued
(d) Impairment of Long-Lived Assets
In accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and
Equipment, long-lived assets, such as property and equipment, are 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. No
such impairment was recorded for the year ended December 31, 2016.
(e) Revenue Recognition
We recognize revenue in accordance with ASC 605-10, Revenue Recognition-General. 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.
The monetization segment consists of publishers who have partnered with us to utilize our ad
delivery technology to serve ads on their websites for customers to view. Revenue in the
monetization product is generated when an advertisement that is delivered is subsequently
clicked on by a consumer. The product line sources revenues through direct publisher
relationships, real-time bidding on exchanges, direct inventory buys, Mobile text ads, and
video. Revenue is collected from advertisers when an advertisement is clicked. We then share
a portion of the revenue with the publisher. Revenue sharing agreements are in place with
publishers that we will deliver a set amount of impressions and conversions for specific ad
units.
Media revenues consist of the online display revenue which is paid for on a cost per
impression basis. The company leverages the technology to buy relevant ads from an
inventory for advertisers. Advertisers pay us based on the number of times their ad appears on
the third party’s website. We recognize revenue based on the number of impressions delivered
per campaign. The delivery of impressions is evidence by third party reports and revenue is
capped at the maximum amount per insertion orders.
(f) Stock-Based Compensation
We value stock compensation based on the fair value recognition provisions of ASC 718,
Compensation – Stock Compensation, which establishes accounting for stock-based awards
exchanged for employee services and requires companies to expense the estimated grant date
fair value of stock awards over the requisite employee service period. To value the fair value
stock option awards, we use the Black-Scholes-Merton option pricing model. This model
involves assumptions including the expected life of the option, stock price volatility, risk-free
interest rate, dividend yield and exercise price. We recognize compensation expense in
earnings over the requisite service period, applying a forfeiture rate to account for expected
forfeitures of awards.
NETSEER, INC.
Notes to Financial Statements - Continued
9
(2) Summary of Significant Accounting Policies - Continued
(g) Concentration of Credit Risk
We are exposed to concentrations of risk primarily in 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. At times, deposits may exceed
FDIC limits.
(h) Customer Concentrations
At December 31, 2016, we had two individual customers with accounts receivable balances
greater than 10% of the gross accounts receivable. These customers combined owed
approximately 46.6% of our gross accounts receivable balance as of December 31, 2016. The
same two customers accounted for 50.8% of our revenue for the year ended December 31,
2016.
At December 31, 2015, we had one customer with an accounts receivable balance greater
than 10% of the gross accounts receivable. This customer owed approximately 56% of our
gross accounts receivable balance as of December 31, 2015. The same customer accounted
for 44% of our revenue for the year ended December 31, 2015.
(i) 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 financial statements are based upon management’s regular evaluation of the
relevant facts and circumstances as of the date of the financial statements. Actual results may
differ from the estimates and assumptions used in preparing the accompanying financial
statements, and such differences could be material.
Significant estimates underlying the Company’s reported financial position and results of
operations include the allowance for doubtful accounts, useful lives of long-lived assets,
valuation allowance on deferred income taxes and the fair value of the stock options granted
and warrants issued.
NETSEER, INC.
Notes to Financial Statements - Continued
10
(2) Summary of Significant Accounting Policies - Continued
(j) Income Taxes
The Company utilizes the liability method of accounting for income taxes as set forth in
ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on
the temporary differences between the financial statement and tax basis 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, which requires significant judgment.
Management examines 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. Management believes it is more likely than
not that essentially none of the deferred tax assets will be realized, and have recorded a full
valuation for the net deferred tax assets as of December 31, 2016 and 2015.
The Company has 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.
(k) New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which
supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and
requires entities to recognize revenue in a way that depicts the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. In August 2015, the FASB issued
ASU 2015-14, which defers by one year the effective date of ASU 2014-09. Accordingly, this
guidance is effective for interim and annual periods beginning after December 15, 2018. The
Company is currently evaluating the effects, if any, that the adoption of this guidance will
have on the Company’s financial position, results of operations and cash flows.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements –
Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern. ASU 2014-15 provides guidance on management’s
responsibility in evaluating whether there is substantial doubt about a company’s ability to
continue as a going concern and about related footnote disclosures. For each reporting period,
management is required to evaluate whether there are conditions or events that raise
substantial doubt about a company’s ability to continue as a going concern within one year
from the date the financial statements are issued. Management is also required to evaluate and
disclose whether its plans alleviate that doubt. ASU 2014-15 is effective for the annual period
ending after December 15, 2016, and for interim periods within annual periods ending after
December 15, 2016. The Company adopted ASU 2014-15 during fiscal 2016. The adoption of
this ASU had no impact on the Company’s financial statements.
NETSEER, INC.
Notes to Financial Statements - Continued
11
(2) Summary of Significant Accounting Policies - Continued
(k) New Accounting Pronouncements - Continued
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard will
require all leases with durations greater than twelve months to be recognized on the balance
sheet and is effective for interim and annual reporting periods beginning after December 15,
2019, although early adoption is permitted. We believe adoption of this standard will have an
impact on our Consolidated Balance Sheets. Although we have not completed our
assessment, we do not expect the adoption to change the recognition, measurement or
presentation of lease expenses within the consolidated financial position or results of
operations.
(3) Property and Equipment, Net
The net carrying value of property and equipment, net at December 31, 2016 and 2015 was as
follows:
2016 2015
(Audited) (Unaudited)
Furniture and fixtures $ 23,975 30,732
Equipment and computer hardware 1,733,009 1,666,405
Software 10,549 10,549
Leasehold improvements 12,126 36,422
1,779,659 1,744,108
Less accumulated depreciation and amortization (1,492,711) (1,326,288)
$ 286,948 417,820
Depreciation and amortization expense was $233,576 and $212,853 for the years ended
December 31, 2016 and 2015, respectively.
(4) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at December 31, 2016 and
2015:
2016 2015
(Audited) (Unaudited)
Accrued expenses $ 344,983 1,038,571
Accrued compensation and benefits 407,955 859,778
Current portion of capital lease obligations 39,660 58,949
$ 792,598 1,957,298
NETSEER, INC.
Notes to Financial Statements - Continued
12
(5) Factoring Line of Credit
In March 2016, the Company entered into a factoring agreement (the “Factoring Agreement”) with
Fast Pay Partners LLC (the “Fast Pay” or the “Factor”) with a maximum availability of $7,000,000,
in which Fast Pay has agreed to provide 80% advances on the Company’s accounts receivables,
under the terms and conditions as outlined in the Factoring Agreement. The term of the agreement
is for a period of one year and will automatically renew for additional one year terms, unless
terminated at any time by the Factor or by the Company prior to such renewal, with sixty days’
prior written notice.
Under the terms of the Factoring Agreement, the Company may sell and assign eligible accounts
receivable to the Factor in exchange for advances made to the Company. The Factor purchases
eligible accounts receivable net of a factoring commission of 0.933% of such receivable. The
Company bears the risk of credit loss on the receivable. These receivables are accounted for as a
secured borrowing arrangement and not a sale of financial assets.
Factor expenses and interest charged to operations during the year ended December 31, 2016 were
$267,000. At December 31, 2016, $1,909,526 was outstanding under the terms of the Factoring
Agreement, for advances made to the Company, net of repayments of such advances through the
collection of factored receivables.
All outstanding fees, principal and interest were fully repaid in 2017 when the Company entered
into the Asset Purchase Agreement (see Note 13).
Prior to entering into the Factoring Agreement, the Company had entered into a factoring line of
credit with a financial institution whereby the lender agrees to provide 80% advances on the
Company’ accounts receivable with maximum availability of $3,000,000. This line bears a finance
charge of 8%. The balance under this line of credit was $2,073,377 at December 31, 2015. The
line of credit was fully repaid upon entering into the Factoring Agreement with FastPay in 2016.
(6) Note Payable
The Company entered into a secured term loan with a financial institution with an original principal
amount of $2,400,000. The term loan bears interest at 4.5% per annum and matures in June 2017.
The outstanding balance on this term loan as of December 31, 2016 and 2015 was $480,000 and
$2,514,243, respectively. All outstanding principal and interest was fully repaid in 2017 when the
Company entered into the Asset Purchase Agreement (see Note 13).
NETSEER, INC.
Notes to Financial Statements - Continued
13
(7) Convertible Notes Payable
The Company entered into a Note Purchase Agreement (“Agreement”) with Mission Ventures III,
L.P., Mission Ventures Affiliates III, L.P. and Onset V, L.P. (together, “the Investors”), whereby the
Company sells the Investors unsecured convertible promissory notes (“Notes”). The Agreement has
since been amended over time to adjust certain terms, such as, the aggregate maximum principal
amount, maturity dates, and certain definitions. The Notes are convertible upon automatic
conversion or optional conversion as defined by the Agreement and Notes. Automatic conversion
occurs in the event of a Qualifying Financing transaction where the Company consummates a sale
of its equity securities for at least $2,000,000. On, or prior to, the earlier of the maturity date or a
sale of the Company, the outstanding principal amount of the Notes and all accrued but unpaid
interest thereon shall automatically be converted into that number of fully paid and non-assessable
shares of capital stock issued in such a Qualifying Financing as equals the amount to be converted
divided by 80% of the price per share at which equity securities are sold by the Company in the
Qualifying Financing. Optional conversion occurs in the event that (i) the sale of the Company or
(ii) a conversion in connection with a Qualifying Financing has not occurred by the maturity date,
then at the option of the Holder, the entire principal balance and unpaid interest may be converted
into non-assessable Convertible Series A Preferred Stock of the Company at $2.3404 per share. In
the event that a sale of the Company occurs prior to a conversion, then 300% of the outstanding
principal amount plus any then unpaid and accrued interest shall immediately become due and
payable prior to consummation of such sale. The Notes mature at various dates through
December 31, 2016 and bear interest at the rate of 7% per annum from the date of issuance until
repayment of the Notes or conversion of the Notes. On or after the respective maturity dates, all
unpaid principal, together with any unpaid and accrued interest and other amounts payable shall be
due and payable upon the written demand of the Holder or subject to optional conversion.
No written demand has been requested by the Holder. All amounts outstanding under the Notes
were $24,050,000 and $16,700,000 as of December 31, 2016 and 2015, respectively. Accrued
interest on the Notes totaled $3,166,847 and $1,657,101 as of December 31, 2016 and 2015,
respectively (see Note 13).
(8) Income Taxes
Income tax expense (benefit) is composed of the following for the year ended December 31, 2016
and 2015:
2016 2015
(Audited) (Unaudited)
Federal statutory rate $ (2,563,899) (2,885,816)
State income tax rate, net of federal benefit 16,292 (20,430)
Permanent differences 30,432 28,800
Change in valuation allowance 2,575,489 4,517,327
Change in net operating loss carryforward (615,853) (1,927,794)
Interest on convertible debt 513,314 288,769
Other 44,225 (856)
Income tax expense (benefit) $ - -
NETSEER, INC.
Notes to Financial Statements - Continued
14
(8) Income Taxes - Continued
Deferred income taxes are the result of temporary 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.
The Company assesses 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 balance sheets. Management evaluates the realizability of our deferred tax assets on
a regular basis, an exercise that requires significant judgment. In the course of this evaluation
management considers the Company’s recent history of tax losses, the economic conditions in
which it operates, recent organizational changes and forecasts and projections. Management
believes it is more likely than not that essentially none of the Company’s deferred tax assets will be
realized, and has recorded a full valuation allowance for the net deferred tax assets as of
December 31, 2016.
The following is a schedule of the deferred tax assets and liabilities as of December 31, 2016 and
2015:
2016 2015
(Audited) (Unaudited)
Deferred tax assets:
Net operating loss carry forward $ 23,768,282 21,104,426
Alternative minimum tax credits 1,294,306 1,278,773
Accrued expense 106,300 234,000
Other 2,057 2,057
Allowance for doubtful accounts 3,700 -
Subtotal 25,174,645 22,619,256
Less valuation allowance (25,152,445) (22,576,956)
Total 22,200 42,300
Deferred tax liabilities:
Depreciation and amortization (22,200) (42,300)
Total (22,200) (42,300)
Total deferred tax assets (liabilities) $ - -
The net operating losses amounted to approximately $55,501,736 and expire beginning 2027
through 2036.
At December 31, 2016, the Company had approximately $1,278,773 of research and development
tax credits available to offset future federal income taxes. The credits have no expiration date.
NETSEER, INC.
Notes to Financial Statements - Continued
15
(8) Income Taxes - Continued
We are currently open to audit under the statute of limitations by the Internal Revenue Service for
the years ending December 31, 2013 through 2016. Our state income tax returns are open to audit
under the statute of limitations for the same periods.
We recognize interest and penalties related to income taxes in income tax expense. We have
incurred no penalties and interest for the year ended December 31, 2016.
(9) Stock-Based Compensation
The Company maintains a stock-based compensation program intended to attract, retain and
provide incentives for talented employees to align stockholder and employee interests. Option unit
vesting periods are generally up to five years.
Compensation Expense
The Company determined that the grant date fair value of options issued was not material. The
Company recorded no stock-based compensation expense for the year ended December 31, 2016 or
2015. There are no amounts compensation cost not yet recognized at December 31, 2016.
Significant Grants and Cancellations
On October 18, 2016, the Company granted employees a total of 385,200 stock options which fully
vest over 4 years. The exercise price of the options is $.50 per share.
At various dates throughout 2015, the Company granted employees a total of 614,200 stock options
which fully vest over 4 years. The exercise price of the options is $.50 per share.
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. Forfeitures are
estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture
rate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to
differ, from the previous estimate.
The following table summarizes our stock option activity during 2016:
Weighted
Average
Options Exercise Price
Outstanding, beginning of year 2,706,780 $ 0.48
Granted 385,200 0.50
Forfeited, expired or cancelled (447,840) (0.50)
Exercised - -
Outstanding, end of year 2,644,140 $ 0.96
NETSEER, INC.
Notes to Financial Statements - Continued
16
(9) Stock-Based Compensation - Continued
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.
(10) Stockholders’ Equity and Convertible Preferred Stock
Convertible Series A Preferred Stock
Each share of Convertible Series A Preferred Stock is convertible at the holder’s option into shares
of Common Stock at any time after the date of issuance, initially based on $2.3404 (adjusted for
any stock dividends, combinations or splits) dividend by the conversion price. The conversion price
is initially $2.3404 per share for the Convertible Series A Preferred Stock. Conversion of each share
of Convertible Series A Preferred Stock is automatic upon the earlier of (a) the date specified and
agreed upon by holders of at least 60% of the shares of the Convertible Series A Preferred Stock
then outstanding, or (b) a public offering of the Company’s Common Stock for which the aggregate
gross proceeds to the Company is at least $30 million and at a price per share of at least $11.702.
Voting Rights
The holders of the Convertible Series A Preferred Stock are entitled to vote, together with the
holders of Common Stock, on all matters submitted to stockholders vote. Each Convertible Series A
Preferred Stock is entitled to the number of votes equal to the number of shares of Common Stock
into which each preferred share is convertible at the time of such vote.
Liquidation Preference
In the event of voluntary or involuntary liquidation, the holders of the Convertible Series A
Preferred Stock will receive, prior and in preference to any distribution of any assets or surplus
funds, the amount of $2.3404 per share (the “Issue Price”) then held by them (adjusted for any
stock dividends, combinations or splits), plus all declared but unpaid dividends on each such share.
After receipt of this amount, the entire remaining assets and funds of the Company legally available
for distribution will be distributed to the holders of the Convertible Series A Preferred Stock and the
Common Stock in proportion to the number of shares of Common Stock then held by each
(assuming conversion of all Convertible Series A Preferred Stock) until the holders of the
Convertible Series A Preferred Stock have received an aggregate of $4.6808 per share, including
amounts previously received (adjusted for any stock dividends, combinations or splits). Thereafter,
if assets remain in the Company, the holders of the Common Stock will receive all the remaining
assets of the Company in proportion to the number of shares of Common Stock held. A change in
control, as defined, constitutes a liquidation event.
NETSEER, INC.
Notes to Financial Statements - Continued
17
(10) Stockholders’ Equity and Convertible Preferred Stock - Continued
Redemption
At any time after November 20, 2013, upon written request from the holders of at least 60% of the
then outstanding shares of convertible preferred stock, the Company is required to redeem all of the
outstanding shares by paying cash a sum equal to the Issue Price (adjusted for any stock dividends,
combinations or splits), plus all declared but unpaid dividends on each such share.
Dividends
The holders of the Convertible Series A Preferred Stock are entitled to receive dividends at the rate
of $0.1872 per share per annum. Dividends are payable only when, as, and if declared by the board
and are noncumulative. No dividend will be paid on any Common Stock during any fiscal year until
dividends in the total amount of $0.1872 per share on the Convertible Series A Preferred Stock have
been paid or declared and set apart during the fiscal year. No dividends were declared during 2016
and 2015.
Warrants
As of December 31, 2016 and 2015, we have outstanding warrants for the potential issuance of
83,317 shares of Convertible Series A Preferred Stock with an exercise price of $2.3404. These
warrants were issued in connection with debt issuance.
(11) Retirement Plan
The Company provides a 401(k) plan (“Plan”) to assist their employees prepare for retirement. The
Plan covers all employees of the Company who meet certain eligibility requirements. The Company
may make contributions to the Plan upon their discretion. There were no Company discretionary
contributions for the year ended December 31, 2016 or 2015.
(12) Commitments and Contingencies
Litigation
From time to time we may become subject to legal proceedings, claims and litigation arising in the
ordinary course of business (see Note 13).
Operating Lease
The Company leases office space under a non-cancellable lease expiring in 2017. As leases expire,
it can be expected that they will be renewed or replaced in the normal course of business. Rent
expense was $382,708 and $326,651 for the years ended December 31, 2016 and 2015,
respectively. Future minimum lease payments during the year ended December 31, 2017 is
approximately $173,000.
NETSEER, INC.
Notes to Financial Statements - Continued
18
(13) Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through April 12, 2017, the date the financial statements were
available to be issued.
On January 20, 2017, the Company entered into a settlement and release agreement with an
unrelated third party that they had previously entered into an Asset Purchase Agreement (“APA”)
with. The parties mutually consented to terminate the APA and resolve their disputes through
payment by the Company. The settlement and release agreement stated that the Company will pay
the third party the sum of $300,000 for full. In exchange for this consideration, all claims against
the Company are dismissed. Included in accrued expenses and other current liabilities in the
accompanying balance sheet as of December 31, 2016 is $300,000 related to the payments required
by the Company.
During January 2017, the Company issued $650,000 in Notes under the Agreement as described in
Note 7. The Notes maturity dates were extended to February 28, 2017.
On February 6, 2017, the Company entered into an Asset Purchase Agreement (the “Asset Purchase
Agreement”) with Inuvo, Inc. Under the terms of the Asset Purchase Agreement, substantially all of
the Company’s assets were acquired in exchange for 3,529,000 shares of Inuvo, Inc.’s Common
Stock, and the assumption of certain outstanding liabilities. The holders of Common and Preferred
stock had zero priority upon this liquidation, and as such, these shares issued at closing were
allocated to the Investors and certain executives as assigned by the Investors. Under the terms of an
Escrow Agreement (the “Escrow Agreement”) 529,350 shares of the Common Stock issued in the
transaction were deposited into escrow pending possible post-closing adjustments to the purchase
price related to working capital and audited financial statement adjustments, as well as in
connection with possible indemnification claims post-closing.
