þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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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15550 Lightwave Drive, Suite 300, Clearwater, FL
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33760
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(Address of principal executive offices)
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(Zip Code)
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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þ
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(Do not check if smaller reporting company) |
Title of Class
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Number of Shares Outstanding at August 1, 2011
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Common Stock
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10,035,791
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Page No.
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||||
PART I. - FINANCIAL INFORMATION
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||||
Item 1.
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Financial Statements
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4 | ||
Consolidated Balance Sheets at June 30, 2011 (Unaudited) and December 31, 2010
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4 | |||
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
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5 | |||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
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6 | |||
Notes to Consolidated Financial Statements (“Unaudited”)
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7 | |||
Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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17 | ||
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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27 | ||
Item 4T
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Controls and Procedures
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27 | ||
PART II - OTHER INFORMATION
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||||
Item 1.
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Legal Proceedings
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29 | ||
Item 1A.
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Risk Factors
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29 | ||
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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29 | ||
Item 3.
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Defaults Upon Senior Securities
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29 | ||
Item 4.
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Removed and Reserved
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29 | ||
Item 5.
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Other Information
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29 | ||
Item 6.
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Exhibits
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30 |
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●
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our history of losses,
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●
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our ability to meet our plan to regain compliance with the continued listing standards of the NYSEAMEX LLC and retain the listing of our common stock on that exchange,
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●
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risks frequently encountered by Internet marketing and advertising companies,
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●
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the adverse effect of search engine industry consolidation and alliances,
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●
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our ability to expand our relationships with other Internet media content, advertising and product providers,
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●
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the terms of our bank loan agreements,
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●
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our dependence upon a significant portion of our revenues from a single customer,
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●
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our ability to effectively compete,
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●
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the impact of increasing government regulations and consumer protection laws on our business model,
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●
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our need to keep pace with changes in technology,
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●
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the possible interruption of our services and our reliance on third-party providers,
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●
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our dependence on credit card processing companies and the risks of increasing fees,
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●
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the risks related to credit card fraud,
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●
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our history of litigation,
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●
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liabilities associated with information we retrieve from our websites,
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●
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the impact of natural disasters on our ability to operate,
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●
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any failure on our part to adequately protect personal information,
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●
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possible security breaches and computer viruses,
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●
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our reliance on our executive officers and key personnel,
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●
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discounts offered to advertisers by upstream advertising networks,
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●
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the impact of “spam,” and
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●
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the impact of our quarterly operating results on our stock price.
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June 30,
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December 31,
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|||||||
2011
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2010
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|||||||
(Unaudited)
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||||||||
Assets: | ||||||||
Current assets:
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||||||||
Cash
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$ | 1,914,997 | $ | 118,561 | ||||
Restricted cash
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478,374 | 140,493 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $439,374 and $450,634, respectively
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3,247,671 | 4,500,894 | ||||||
Unbilled revenue
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44,707 | 59,881 | ||||||
Prepaid expenses and other current assets
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363,819 | 463,958 | ||||||
Current assets of discontinued operations
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50,000 | 50,000 | ||||||
Total current assets
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6,099,568 | 5,333,787 | ||||||
Property and equipment, net
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2,189,168 | 2,749,098 | ||||||
Other assets:
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||||||||
Goodwill
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3,351,405 | 3,351,405 | ||||||
Intangible assets
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2,696,947 | 2,511,918 | ||||||
Other assets
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3,235 | 79,324 | ||||||
Total other assets
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6,051,587 | 5,942,647 | ||||||
Total assets
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$ | 14,340,323 | $ | 14,025,532 |
Liabilities and stockholders’ equity:
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||||||||
Current liabilities:
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||||||||
Term and credit notes payable – current portion
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$ | 1,009,100 | $ | 1,850,000 | ||||
Accounts payable
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4,483,571 | 5,479,796 | ||||||
Deferred revenue
Deferred compensation
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18,083
637,950
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19,921
-
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||||||
Accrued expenses and other current liabilities
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1,109,046 | 1,599,625 | ||||||
Current liabilities of discontinued operations
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250,000 | 712,024 | ||||||
Total current liabilities
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7,507,750 | 9,661,366 | ||||||
Long-term liabilities: | ||||||||
Term and credit note payable – long-term
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2,225,000 | - | ||||||
Other long-term liabilities
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321,230
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356,509
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||||||
Long-term liabilities of discontinued operations |
50,000
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- | ||||||
Total liabilities
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10,103,980 | 10,017,875 | ||||||
Stockholders’ equity:
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||||||||
Preferred stock, $.001 par value:
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||||||||
Authorized shares — 500,000 — none issued or outstanding
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- | - | ||||||
Common stock, $.001 par value:
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||||||||
Authorized shares, 20,000,000, issued shares 10,587,487 and 9,110,406, respectively
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||||||||
Outstanding shares — 10,035,791 and 8,558,790, respectively
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10,587 | 9,110 | ||||||
Additional paid in capital
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115,218,014 | 111,766,319 | ||||||
Accumulated deficit
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(108,896,152 | ) | (105,671,666 | ) | ||||
Treasury stock – 551,696 shares
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(2,096,106 | ) | (2,096,106 | ) | ||||
Total stockholders’ equity
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4,236,343 | 4,007,657 | ||||||
Total liabilities and stockholders’ equity
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$ | 14,340,323 | $ | 14,025,532 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011
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2010
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2011
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2010
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|||||||||||||
Net revenue
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$ | 9,213,037 | $ | 11,365,874 | $ | 21,006,530 | $ | 20,704,080 | ||||||||
Cost of revenue:
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||||||||||||||||
Affiliate expenses
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4,426,446 | 6,564,405 | 10,168,212 | 11,711,257 | ||||||||||||
Data acquisition
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627,535 | 580,495 | 1,199,261 | 1,174,774 | ||||||||||||
Merchant processing fees and product costs
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44,832 | 21,844 | 102,804 | 58,676 | ||||||||||||
Cost of revenue
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5,098,813 | 7,166,744 | 11,470,277 | 12,944,706 | ||||||||||||
Gross profit
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4,114,224 | 4,199,130 | 9,536,253 | 7,759,374 | ||||||||||||
Operating expenses:
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||||||||||||||||
Search costs
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2,296,595 | 861,112 | 4,790,073 | 1,354,283 | ||||||||||||
Compensation and telemarketing
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2,336,656 | 2,453,286 | 5,011,430 | 5,283,063 | ||||||||||||
Selling, general and administrative
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1,097,888 | 1,879,020 | 2,530,558 | 3,922,321 | ||||||||||||
Total operating expenses
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5,731,139 | 5,193,418 | 12,332,061 | 10,559,667 | ||||||||||||
Operating loss
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(1,616,915 | ) | (994,288 | ) | (2,795,808 | ) | (2,800,293 | ) | ||||||||
Other income(expenses): Litigation settlements
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- | - | (374,800 | ) | - | |||||||||||
Loss on write-off of note receivable | (100,745 | ) | - | (100,745 | ) | - | ||||||||||
Interest income
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2,144 | - | 4,638 | 638 | ||||||||||||
Interest expense
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(115,744 | ) | (150,509 | ) | (214,907 | ) | (311,403 | ) | ||||||||
Other expenses, net
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(214,345 | ) | (150,509 | ) | (685,814 | ) | (310,765 | ) | ||||||||
Loss from continuing operations before taxes
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(1,831,260 | ) | (1,144,797 | ) | (3,481,622 | ) | (3,111,058 | ) | ||||||||
Income tax expense
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- | (795 | ) | - | (882 | ) | ||||||||||
Net loss from continuing operations
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(1,831,260 | ) | (1,145,592 | ) | (3,481,622 | ) | (3,111,940 | ) | ||||||||
Net income from discontinued operations
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- | 84,940 | 257,136 | 1,020,053 | ||||||||||||
Net loss
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$ | (1,831,260 | ) | $ | (1,060,652 | ) | $ | (3,224,486 | ) | $ | (2,091,887 | ) | ||||
Per common share data:
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||||||||||||||||
Basic and diluted:
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||||||||||||||||
Net loss from continuing operations
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$ | (0.21 | ) | $ | (0.14 | ) | $ | (0.40 | ) | $ | (0.37 | ) | ||||
Net income from discontinued operations
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(0.00 | ) | 0.01 | 0.03 | 0.12 | |||||||||||
Net loss | $ | (0.21 | ) | $ | (0.13 | ) | $ | (0.37 | ) | $ | (0.25 | ) | ||||
Weighted average shares (Basic and diluted)
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8,805,132 | 8,459,706 | 8,681,150 | 8,451,791 |
2011
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2010
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|||||||
Operating activities:
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||||||||
Net loss
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$ | (3,224,486 | ) | $ | (2,091,887 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
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||||||||
Depreciation and amortization
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2,163,530 | 2,603,931 | ||||||
Provision for doubtful accounts
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25,520
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298,000
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||||||
Loss on write-off of note receivable |
100,745
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- | ||||||
Deferred compensation |
318,975
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- | ||||||
Stock based compensation
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726,711 | 333,357 | ||||||
Change in operating assets and liabilities:
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||||||||
Restricted cash
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137,119 | 61,402 | ||||||
Accounts receivable
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1,227,703 | (1,006,636 | ) | |||||
Prepaid expenses and other assets
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90,657 | (89,230 | ) | |||||
Accounts payable
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(996,225 | ) | 1,188,406 | |||||
Deferred revenue
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(1,838 | ) | (54,305 | ) | ||||
Other accrued expenses and current liabilities
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(194,077 | ) | (498,577 | ) | ||||
Net cash provided by operating activities – continuing operations
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374,334 | 744,461 | ||||||
Net cash used in operating activities – discontinued operations
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(296,424 | ) | (780,459 | ) | ||||
Net cash provided by (used in) operating activities
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77,910 | (35,998 | ) | |||||
Investing activities:
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||||||||
Purchases of equipment and software
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(245,382 | ) | (482,506 | ) | ||||
Purchase of names database
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(1,543,247 | ) | (1,034,917 | ) | ||||
Net cash used in investing activities
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(1,788,629 | ) | (1,517,423 | ) | ||||
Financing activities:
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||||||||
Proceeds from sale of common stock, net
Principal payments made on term note payable
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2,680,036
-
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(1,412,000)
-
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||||||
Advances from credit note payable
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4,396,744 | 14,408,000 | ||||||
Payments on credit note payable and capital leases
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(3,569,625 | ) | (14,959,000 | ) | ||||
Net cash provided by (used in) financing activities
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3,507,155 | (1,963,000 | ) | |||||
Net change – cash
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1,796,436 | (3,516,421 | ) | |||||
Cash, beginning of period
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118,561 | 4,843,128 | ||||||
Cash, end of period
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$ | 1,914,997 | $ | 1,326,707 | ||||
Supplemental information:
|
||||||||
Interest paid
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$ | 271,506 | $ | 291,636 | ||||
Non-cash investing and financing activities:
|
||||||||
Equipment under capital leases
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$ |
-
|
$ |
19,236
|
||||
Restricted advances on term-note payable | $ |
475,000
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$ | - | ||||
Payment of litigation settlements with common stock
|
$ | 365,400 | $ | - |
●
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Performance Marketing, and
|
●
|
Web Properties.
|
●
|
Raise up to $4.0 million of equity over the remainder of 2011,
|
●
|
Launch three new marketing initiatives that we believe will create positive earnings and cash flow, and
|
●
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Maintain a cost reduction program that began in late 2010.
|
●
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20 million households
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●
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25 states covered
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●
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90% household penetration
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●
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2,500 national and local retail advertisers
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●
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80% markets that are home to a college/university
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June 30, 2011
(Unaudited)
|
December 31,
2010 |
|||||||
Furniture and fixtures
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$ | 427,121 | $ | 427,121 | ||||
Equipment
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3,050,346 | 3,078,393 | ||||||
Software
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5,759,757 | 5,514,375 | ||||||
Leasehold improvements
|
321,873 | 321,873 | ||||||
Subtotal
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9,559,097 | 9,341,762 | ||||||
Less: accumulated depreciation and amortization
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(7,369,929 | ) | (6,592,664 | ) | ||||
Net property and equipment from continuing operations
|
$ | 2,189,168 | $ | 2,749,098 |
Description
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Term
|
Carrying Value
|
Accumulated
Amortization
|
Net Carrying
Value
|
||||||||||||
Names database (1)
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1-2 Years
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$ | 15,106,303 | $ | (12,799,356 | ) | $ | 2,306,947 | ||||||||
Customer lists
|
5 Years
|
3,500,000 | (3,500,000 | ) | - | |||||||||||
Exclusivity agreement |
1 Year
|
150,000 | (150,000 | ) | - | |||||||||||
Tradenames (2)
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- | 390,000 | - | 390,000 | ||||||||||||
Total intangible assets
|
$ | 19,146,303 | $ | (16,449,356 | ) | $ | 2,696,947 | |||||||||
Goodwill
|
$ | 3,351,405 | $ | - | $ | 3,351,405 |
(1)
|
Amortization of our Names Database for the three months ended June 30, 2011 and 2010 was approximately $628,000 and $498,000, respectively. Additionally, amortization of our Names Database for the six months ended June 30, 2011 and 2010 was approximately $1,199,000 and $997,000, respectively.
|
(2)
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We do not amortize the carrying value of our Tradenames.
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2011
|
$ | 1,150,429 | ||
2012
|
1,033,285 | |||
2013
|
123,233 | |||
2014
|
- | |||
2015
|
- | |||
Total
|
$ | 2,306,947 |
June 30, 2011
(unaudited)
|
December 31,
2010 |
|||||||
Accrued expenses
|
$ |
747,869
|
$ |
748,515
|
||||
Accrued search costs |
265,219
|
697,510
|
||||||
Accrued affiliate expenses
|
1,141 | 11,949 | ||||||
Accrued payroll and bonus liabilities
|
14,718 | 13,927 | ||||||
Capital leases – current portion
|
80,099 | 127,724 | ||||||
Total
|
$ | 1,109,046 | $ | 1,599,625 |
June 30, 2011
(unaudited)
|
December 31,
2010 |
|||||||
Deferred rent
|
$ | 285,775 | $ | 285,153 | ||||
Capital lease – less current portion
|
35,455 | 71,356 | ||||||
Total
|
$ | 321,230 | $ | 356,509 |
Stock Options
|
RSA's
|
Available Shares
|
Total
|
|||||||||||||
2010 ECP
|
673,171 | 109,796 | 2,621 | 785,588 | ||||||||||||
2005 LTIP
|
746,945 | 90,417 | 162,638 | 1,000,000 | ||||||||||||
Non - LTIP
|
33,032 | - | - | 33,032 | ||||||||||||
Total
|
1,453,148 | 200,213 | 165,259 | 1,818,620 |
2011
|
2010
|
|||||||||||||||
Options
|
Weighted
Average Exercise
Price
|
Options
|
Weighted
Average Exercise
Price
|
|||||||||||||
Outstanding, beginning of period
|
1,223,159 | $ | 3.74 | 987,963 | $ | 5.70 | ||||||||||
Granted
|
300,000 | $ | 2.93 | 175,927 | $ | 2.30 | ||||||||||
Forfeited or expired
|
(70,011 | ) | $ | 5.71 | (165,066 | ) | $ | 5.70 | ||||||||
Exercised
|
- | $ | - | - | $ | - | ||||||||||
Outstanding, end of period
|
1,453,148 | $ | 3.28 | 998,824 | $ | 5.30 | ||||||||||
Exercisable, end of period
|
485,346 | $ | 4.46 | 312,575 | $ | 9.70 |
2011
|
2010
|
|||||||
Expected life in years
|
4.5 | 5.0 | ||||||
Volatility
|
141.1 | % | 164.0 | % | ||||
Risk free interest rate
|
2.15 | % | 1.8 | % | ||||
Dividend yield
|
0.0 | % | 0.0 | % |
Three Months Ended | Six Months Ended | ||||||||||||||||
2011
|
2010
|
2011 | 2010 | ||||||||||||||
Revenue
|
$ | - | $ | 2,356,981 | $ | - | $ | 6,724,850 | |||||||||
Income from discontinued operations before income taxes
|
- | 84,930 | - | 1,020,050 | |||||||||||||
Gain from litigation settlement in discontinued operations
|
- | - | 257,136 | - | |||||||||||||
Income (loss) from discontinued operations
|
$ | - | $ | 84,930 | $ | 257,136 | $ | 1,020,050 |
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||||||||||||
Segment:
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||||||||
Performance marketing
|
$ | 5,877,362 | 63.8 | % | $ | 8,553,391 | 75.3 | % | $ | 13,374,678 | 63.7 | % | $ | 15,387,072 | 74.3 | % | ||||||||||||||||
Web properties
|
3,335,675 | 36.2 | % | 2,812,483 | 24.7 | % | 7,631,852 | 36.3 | % | 5,317,008 | 25.7 | % | ||||||||||||||||||||
Total Revenue
|
$ | 9,213,037 | 100.0 | % | $ | 11,365,874 | 100.0 | % | $ | 21,006,530 | 100.0 | % | $ | 20,704,080 | 100.0 | % |
Three Months Ended
June 30
|
Six Months Ended
June 30
|
|||||||||||||||
Segment:
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Performance marketing
|
$ | 1,440,216 | $ | 1,984,243 | $ | 3,188,785 | $ | 3,644,577 | ||||||||
Web properties
|
2,674,008 | 2,214,887 | 6,347,468 | 4,114,797 | ||||||||||||
Total
|
$ | 4,114,224 | $ | 4,199,130 | $ | 9,536,253 | $ | 7,759,374 |
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||
Segment:
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Performance marketing
|
$ | 830,247 | $ | 1,477,689 | $ | 1,844,290 | $ | 2,593,571 | ||||||||
Web properties
|
(582,227 | ) | 798,034 | (236,024 | ) | 1,406,434 | ||||||||||
Corporate
|
(581,030 | ) | (1,778,875 | ) | (1,739,287 | ) | (3,863,007 | ) | ||||||||
Total
|
$ | (333,010 | ) | $ | 496,848 | $ | (131,021 | ) | $ | 136,998 |
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
●
|
Performance Marketing, and
|
●
|
Web Properties.
|
●
|
Raise up to $4.0 million of equity over the remainder of 2011,
|
●
|
Launch three new marketing initiatives that we believe will create positive earnings and cash flow, and
|
●
|
Maintain a cost reduction program that began in late 2010.
|
●
|
20 million households
|
●
|
25 states covered
|
●
|
90% household penetration
|
●
|
2,500 national and local retail advertisers
|
●
|
80% markets that are home to a college/university
|
Three Months Ended June 30,
|
||||||||
2011
|
2010
|
|||||||
Net revenue
|
$ | 9,213 | $ | 11,366 | ||||
Cost of revenue
|
5,099 | 7,167 | ||||||
Gross profit
|
4,114 | 4,199 | ||||||
Total operating expenses
|
5,731 | 5,193 | ||||||
Operating loss
|
(1,617 | ) | (994 | ) | ||||
Other expenses
|
(214 | ) | (152 | ) | ||||
Net loss from continuing operations
|
(1,831 | ) | (1,146 | ) | ||||
Net income from discontinued operations
|
- | 85 | ||||||
Net loss
|
$ | (1,831 | ) | $ | (1,061 | ) |
Three Months Ended June 30,
|
||||||||||||||||||||||||
2011 ($)
|
% of Revenue
|
2010 ($)
|
% of Revenue
|
$ Change
|
% Change
|
|||||||||||||||||||
Performance Marketing
|
5,877 | 63.8 | % | 8,553 | 75.3 | % | (2,676 | ) | (31.3 | )% | ||||||||||||||
Web Properties
|
3,336 | 36.2 | % | 2,813 | 24.7 | % | 523 | 18.6 | % | |||||||||||||||
Total net revenue
|
9,213 | 100.0 | % | 11,366 | 100.0 | % | (2,153 | ) | (18.9 | )% |
Three Months Ended June 30,
|
||||||||||||
2011
% of Revenue
|
2010
% of
Revenue
|
% Change
|
||||||||||
Affiliate expenses
|
48.0 | % | 57.8 | % | (9.8 | )% | ||||||
Data acquisition
|
6.8 | % | 4.4 | % | 2.4 | % | ||||||
Merchant processing fees and product costs
|
0.5 | % | 0.9 | % | (0.4 | )% | ||||||
Total cost of revenue
|
55.3 | % | 63.1 | % | (7.8 | )% |
Three Months Ended June 30,
|
||||||||||||||||||||||||
2011
($)
|
% of Gross
Profit |
2010
($)
|
% of Gross
Profit |
$
Change
|
%
Change
|
|||||||||||||||||||
Performance Marketing
|
1,440 | 35.0 | % | 1,984 | 47.2 | % | (544 | ) | (27.4 | )% | ||||||||||||||
Web Properties
|
2,674 | 65.0 | % | 2,215 | 52.8 | % | 459 | 20.7 | % | |||||||||||||||
Total gross profit
|
4,114 | 100.0 | % | 4,199 | 100.0 | % | (85 | ) | (2.0 | )% |
Three Months Ended June 30,
|
||||||||||||||||||||||||
2011
($)
|
% of
Revenue |
2010
($)
|
% of
Revenue |
$
Change
|
%
Change
|
|||||||||||||||||||
Search costs
|
2,297 | 24.9 | % | 861 | 7.6 | % | 1,436 |
1.7Times
|
||||||||||||||||
Compensation and telemarketing
|
2,336 | 25.4 | % | 2,453 | 21.6 | % | (117 | ) | (4.8 | )% | ||||||||||||||
Selling, general and administrative
|
1,098 | 11.9 | % | 1,879 | 16.5 | % | (781 | ) | (41.6 | )% | ||||||||||||||
Total other operating expenses
|
5,731 | 62.2 | % | 5,193 | 45.7 | % | 538 | 10.4 | % |
Three Months Ended June 30,
|
||||||||||||||||||||||||
2011
($)
|
% of
Revenue
|
2010
($)
|
% of
Revenue
|
$
Change
|
%
Change
|
|||||||||||||||||||
Performance Marketing
|
610 | 6.6 | % | 610 | 5.4 | % | - | - | ||||||||||||||||
Web Properties
|
3,884 | 42.2 | % | 2,026 | 17.8 | % | 1,858 | 91.7 | % | |||||||||||||||
Corporate
|
1,237 | 13.4 | % | 2,557 | 22.5 | % | (1,320 | ) | (51.6 | )% |
Six Months Ended June 30,
|
||||||||
2011
|
2010
|
|||||||
Net revenue
|
$ | 21,007 | $ | 20,704 | ||||
Cost of revenue
|
11,471 | 12,945 | ||||||
Gross profit
|
9,536 | 7,759 | ||||||
Total operating expenses
|
12,332 | 10,559 | ||||||
Operating loss
|
(2,796 | ) | (2,800 | ) | ||||
Other expenses
|
(686 | ) | (312 | ) | ||||
Loss from continuing operations
|
(3,482 | ) | (3,112 | ) | ||||
Income from discontinued operations
|
258 | 1,020 | ||||||
Net loss
|
$ | (3,224 | ) | $ | (2,092 | ) |
Six Months Ended June 30,
|
||||||||||||||||||||||||
2011
($) |
% of
Revenue |
2010
($) |
% of
Revenue |
$
Change |
%
Change |
|||||||||||||||||||
Performance Marketing
|
13,375 | 63.7 | % | 15,387 | 74.3 | % | (2,012 | ) | (13.1 | )% | ||||||||||||||
Web Properties
|
7,632 | 36.3 | % | 5,317 | 25.7 | % | 2,315 | 43.5 | % | |||||||||||||||
Total net revenue
|
21,007 | 100.0 | % | 20,704 | 100.0 | % | 303 | 1.5 | % |
Six Months Ended June 30,
|
||||||||||||
2011
% of Revenue
|
2010
% of Revenue
|
%
Change |
||||||||||
Affiliate expenses
|
48.4 | % | 56.6 | % | (8.2 | )% | ||||||
Data acquisition
|
5.7 | % | 4.8 | % | 0.9 | % | ||||||
Merchant processing fees and product costs
|
0.5 | % | 1.1 | % | (0.6 | )% | ||||||
Total cost of revenue
|
54.6 | % | 62.5 | % | (7.9 | )% |
Six Months Ended June 30,
|
||||||||||||||||||||||||
2011
($)
|
% of
Gross Profit |
2010
($)
|
% of
Gross Profit |
$
Change
|
%
Change
|
|||||||||||||||||||
Performance Marketing
|
3,189 | 33.4 | % | 3,644 | 47.0 | % | (455 | ) | (12.5 | )% | ||||||||||||||
Web Properties
|
6,347 | 66.6 | % | 4,115 | 53.0 | % | 2,232 | 54.2 | % | |||||||||||||||
Total gross profit
|
9,536 | 100.0 | % | 7,759 | 100.0 | % | 1,777 | 22.9 | % |
Six Months Ended June 30,
|
||||||||||||||||||||||||
2011
($)
|
% of Revenue
|
2010
($)
|
% of Revenue
|
$
Change
|
%
Change
|
|||||||||||||||||||
Search costs
|
4,790 | 22.8 | % | 1,354 | 6.5 | % | 3,436 |
2.5 Times
|
||||||||||||||||
Compensation and telemarketing
|
5,011 | 23.9 | % | 5,283 | 25.6 | % | (272 | ) | (5.1 | )% | ||||||||||||||
Selling, general and administrative
|
2,531 | 12.0 | % | 3,923 | 18.9 | % | (1,392 | ) | (35.5 | )% | ||||||||||||||
Total other operating expenses
|
12,332 | 58.7 | % | 10,560 | 51.0 | % | 1,772 | 16.8 | % |
Six Months Ended June 30,
|
||||||||||||||||||||||||
2011
($)
|
% of
Revenue
|
2010
($)
|
% of
Revenue
|
$
Change
|
%
Change
|
|||||||||||||||||||
Performance Marketing
|
1,344 | 6.4 | % | 1,465 | 7.1 | % | (121 | ) | (8.3 | )% | ||||||||||||||
Web Properties
|
7,783 | 37.0 | % | 4,149 | 20.0 | % | 3,634 | 87.6 | % | |||||||||||||||
Corporate
|
3,205 | 15.3 | % | 4,946 | 23.9 | % | (1,741 | ) | (35.2 | )% |
31.1
|
Rule 13a-14(a)/15d-14(a) certificate of Chief Executive Officer 2002 (Sarbanes-Oxley)
|
31.2
|
Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer
|
32.1
|
Section 1350certification of Chief Executive Officer
|
32.2
|
Section 1350certification of Chief Financial Officer
|
101.INS*
|
XBRL Instance Document
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
101.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
|
*
|
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
INUVO, INC. | |||
Date: August 10, 2011
|
By:
|
/s/ Richard K. Howe | |
Richard K. Howe, | |||
Chief Executive Officer, principal executive officer | |||
Date: August 10, 2011
|
By:
|
/s/ Wallace D. Ruiz | |
Wallace D. Ruiz, | |||
Chief Financial Officer, principal financial and accounting officer | |||
Date: August 10, 2011
|
By:
|
/s/ Richard K. Howe | |
Richard K. Howe | |||
Chief Executive Officer, principal executive officer |
Date: August 10, 2011
|
By:
|
/s/ Wallace D. Ruiz | |
Wallace D. Ruiz | |||
Chief Financial Officer, principal financial and accounting officer | |||
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: August 10, 2011
|
By:
|
/s/ Richard K. Howe | |
Richard K. Howe | |||
Chief Executive Officer, principal executive officer |
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: August 10, 2011
|
By:
|
/s/ Wallace D. Ruiz | |
Wallace D. Ruiz | |||
Chief Financial Officer, principal financial and accounting officer |
Consolidated Balance Sheets (Parenthetical) (USD $)
|
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Allowance for Doubtful accounts | $ 439,374 | $ 450,634 |
Stockholders Equity | Â | Â |
Preferred Stock par value | $ 0.001 | $ 0.001 |
Preferred stock shares authorized | 500,000 | 500,000 |
Preferred stock shares issued | 0 | 0 |
Preferred stock shares outstanding | 0 | 0 |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock shares authorized | 20,000,000 | 20,000,000 |
Common stock shares issued | 10,587,487 | 9,110,486 |
Common stock shares Outstanding | 10,035,791 | 8,558,790 |
Treasury Stock | 551,696 | 551,696 |
Consolidated Statements of Operations (Unaudited) (USD $)
|
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Net revenue | $ 9,213,037 | $ 11,365,874 | $ 21,006,530 | $ 20,704,080 |
Cost of revenue: | Â | Â | Â | Â |
Affiliate expenses | 4,426,446 | 6,564,405 | 10,168,212 | 11,711,257 |
Data Acquitision | 627,535 | 580,495 | 1,199,261 | 1,174,774 |
Merchant processing fees and product costs | 44,832 | 21,844 | 102,804 | 58,676 |
Cost of revenue | 5,098,813 | 7,166,744 | 11,470,277 | 12,944,706 |
Gross profit | 4,114,224 | 4,199,130 | 9,536,253 | 7,759,374 |
Operating expenses: | Â | Â | Â | Â |
Search costs | 2,296,595 | 861,112 | 4,790,073 | 1,354,283 |
Compensation and telemarketing | 2,336,656 | 2,453,286 | 5,011,430 | 5,283,063 |
Selling, general and administrative | 1,097,888 | 1,879,020 | 2,530,558 | 3,922,321 |
Total operating expenses | 5,731,139 | 5,193,418 | 12,332,061 | 10,559,667 |
Operating loss | (1,616,915) | (994,288) | (2,795,808) | (2,800,293) |
Other income (expense): | Â | Â | Â | Â |
Loss on Litigation settlement | 0 | 0 | (374,800) | 0 |
Loss on write-off of note receivable | (100,745) | 0 | (100,745) | 0 |
Interest income | 2,144 | 0 | 4,638 | 638 |
Interest expense | (115,744) | (150,509) | (214,907) | (311,403) |
Other expenses, net | (214,345) | (150,509) | (685,814) | (310,765) |
Loss from continuing operations before taxes | (1,831,260) | (1,144,797) | (3,481,622) | (3,111,058) |
Income tax expense | 0 | (795) | 0 | (882) |
Net loss from continuing operations | (1,831,260) | (1,145,592) | (3,481,622) | (3,111,940) |
Net income from discontinued operations | 0 | 84,940 | 257,136 | 1,020,053 |
Net loss | $ (1,831,260) | $ (1,060,652) | $ (3,224,486) | $ (2,091,887) |
Per common share data: Basic and Diluted | Â | Â | Â | Â |
Net loss from continuing operations | $ (0.21) | $ (0.14) | $ (0.40) | $ (0.37) |
Loss from discontinued operations | $ 0 | $ 0.01 | $ 0.03 | $ 0.12 |
Net loss | $ (0.21) | $ (0.13) | $ (0.37) | $ (0.25) |
Weighted average shares (basic and diluted) | 8,805,132 | 84,597,059 | 8,681,150 | 84,517,911 |
Document and Entity Information (USD $)
|
6 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Aug. 10, 2011
|
|
Entity Registrant Name | INUVO, INC. | Â |
Entity Central Index Key | 0000829323 | Â |
Document Type | 10-Q | Â |
Document Period End Date | Jun. 30, 2011 | |
Amendment Flag | false | Â |
Current Fiscal Year End Date | --12-31 | Â |
Is Entity a Well-known Seasoned Issuer? | No | Â |
Is Entity a Voluntary Filer? | No | Â |
Is Entity's Reporting Status Current? | Yes | Â |
Entity Filer Category | Smaller Reporting Company | Â |
Entity Public Float | Â | $ 14,500,000 |
Entity Common Stock, Shares Outstanding | Â | 10,035,791 |
Document Fiscal Period Focus | Q2 | Â |
Document Fiscal Year Focus | 2011 | Â |
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Stock-Based Compensation Plans
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Stock-Based Compensation Plans |
Note 7 - Stock-Based Compensation Plans
The stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We consider our option programs critical to our operation and productivity. Currently, we grant options and restricted stock awards ("RSAs") from two shareholder approved plans, 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 zero to three years and most options expire after 5 years.
The following table summarizes all stock based compensation grants as of June 30, 2011:
The fair value of RSAs is determined using the market value of the common stock on the date of the grant. The fair value of stock options is determined using the Black-Scholes valuation model. The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Under Accounting Standards Codification (ASC) 718, Compensation-Stock Compensation, forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture rate, which is currently estimated at a weighted average of 25% of unvested options outstanding, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
We recorded stock-based compensation expense for all equity incentive plans of approximately $552,000 and $234,000 for the three months ended June 30, 2011 and 2010, respectively. Additionally, we recorded stock-based compensation expense for all equity incentive plans of approximately $727,000 and $333,000 for the six months ended June 30, 2011 and 2010, respectively
At June 30, 2011, the aggregate intrinsic value of all outstanding options is $0 and has a weighted average remaining contractual term of 3.5 years. As of June 30, 2011, 460,455 of the outstanding options are exercisable and have an aggregate intrinsic value of $0, a weighted average exercise price of $4.56 and a weighted average remaining contractual term of approximately 2.5 years. The total compensation cost at June 30, 2011 related to non-vested awards not yet recognized was approximately $2.0 million and has an average expense recognition period of 1.3 years.
The following table summarizes information about stock option activity during the six months ended June 30, 2011 and 2010, respectively.
The weighted average grant date fair value of options granted during the three and six months ended June 30, 2011 was $2.73. No option or warrant exercises occurred under any share-based payment arrangements for the three and six months ended June 30, 2011 and 2010. In accordance with ASC 718, the fair values of options granted determined for purposes of disclosure under ASC 718 were not changed. The fair value of options granted during the six months ended June 30, 2011 and 2010 were estimated assuming the following weighted averages:
Deferred Compensation
During the three and six months ended June 30, 2011, our executive officers, certain of our senior management and our board of directors, voluntarily elected to defer a portion of their compensation. The amount of the deferred compensation was approximately $132,000 and $319,000 for the three and six months ended June 30, 2011, respectively. As an incentive for officers, management and directors to participate in the elected deferrals, we granted them RSAs with a fair value equal to the amount of the deferred compensation. The RSAs will vest upon the earlier of repayment of the deferred compensation or December 31, 2011. The number of RSAs granted in conjunction with the deferred compensation was 47,662 and 113,817 for the three and six months ended June 30, 2011, respectively, and were granted at an exercise price of the greater of fair market value on the date of each grant or $2.50. As of June 30, 2011, none of the shares of restricted stock granted in connection with these elected deferrals were issued.
Warrants Outstanding
As of June 30, 2011, we have outstanding warrants for the potential issuance of 916,597 shares of common stock. Exercise price for these warrants ranges from $2.20 to $35.00. These warrants were primarily issued in connection with acquisitions, private placements and debt issuances. |
Impact of Recent Accounting Pronouncements
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Impact of Recent Accounting Pronouncements |
Note 12 - Impact of Recent Accounting Pronouncements In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU expands ASC 820s existing disclosure requirements for fair value measurements and makes other amendments that could change how the fair value measurement guidance in ASC 820 is applied. The ASU is effective for us for the interim and annual periods beginning after December 15, 2011. The adoption of this ASU is not expected to have an impact on our consolidated financial statements or disclosures. In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU is effective for us for the interim and annual periods beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or disclosures as of June 30, 2011. In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The ASU does not prescribe a specific method of calculation of the carrying value of a reporting unit in the performance of Step 1 of the goodwill impairment test (i.e. equity-value-based method or enterprise-value-based method). However, it requires entities with a zero or negative carrying value to access considering the qualitative factors such as those used to determine whether a triggering event would require an interim goodwill impairment test (listed in ASC 350-20-35-30, Intangibles Goodwill and Other Subsequent Measurement), whether it is more likely than not that a goodwill impairment exists and perform Step 2 of the goodwill impairment test if so concluded. ASU 2010-28 is effective for us beginning January 1, 2011 and early adoption was not permitted. The adoption of ASU 2010-28 did not have a material impact on our consolidated balance sheet or statement of operations as of June 30, 2011. Other recent accounting pronouncements issued by the FASB, the Public Company Accounting Oversight Board (PCAOB), the American institute of Certified Public Accountants (AICPA), and the SEC did not or are not believed by management to have a material impact on our present or future consolidated financial statements. |
Goodwill and Intangible Assets
|
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Goodwill and Intangible Assets |
Note 3 Goodwill and Intangible Assets
The following is a schedule of our intangible assets from continuing operations as of June 30, 2011:
(1) Amortization of our Names Database for the three months ended June 30, 2011 and 2010 was approximately $628,000 and $498,000, respectively. Additionally, amortization of our Names Database for the six months ended June 30, 2011 and 2010 was approximately $1,199,000 and $997,000, respectively. (2) We do not amortize the carrying value of our Tradenames. Our amortization expense over the next five years as of June 30, 2011 is as follows:
|
Income Taxes
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Income Taxes |
Note 9 Income Taxes We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2007 through 2010. Our 2004 income tax return was reviewed by the Internal Revenue Service. No material items were discovered and the review was finalized in 2006. Our state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2007 through 2010. Due to the recent history of tax losses, the economic conditions in which we operate, recent organizational changes, and near term projections, we concluded that it is more likely than not that any of our deferred income tax assets will be realized. As a result, we have recorded a full valuation allowance for the net deferred tax asset. |
Litigation and Settlements
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Litigation and Settlements |
Note 14 Litigation and Settlements
We were a party to litigation with a former director, John Giura, pursuant to which Mr. Giura filed an action alleging that we breached a consulting agreement. On April 1, 2011, we entered into an agreement to settle this litigation wherein we agreed to pay $25,000 and issue 40,000 shares of our common stock valued at $114,800 in full settlement of all claims in this lawsuit. We recorded a one-time charge of approximately $140,000 in March 2011 related to this settlement.
We were also a party to litigation with an owner of property leased by a subsidiary of Inuvo pursuant to which the owner alleged a breach of a lease agreement, in addition to claims of unfair and deceptive trade practices, fraud and misrepresentation were alleged. On April 6, 2011, we entered into an agreement to settle this litigation wherein we agreed to pay a total of $340,000 in installments over the next 2 years and issued 40,000 shares of the our common stock valued at $115,600 in full settlement of all claims in this lawsuit. We recorded a one-time credit of approximately $256,000 in March 2011 in discontinued operations related to this settlement due to the write-off of accrued rent. We were a party to litigation with a former employee, for alleged breach of an employment agreement and other contract and tort claims. On April 7, 2011, we entered into an agreement to settle this litigation pursuant to which we agreed to pay an aggregate of $125,000, partially covered by insurance, over six months and issue 50,000 shares of the our common stock valued at approximately $135,000 in full settlement of this litigation. We recorded a one-time charge of $235,000 in March 2011 related to this settlement. We were notified by the counsel of our former chief executive officer that he is claiming indemnification of the legal costs not reimbursed by insurance to defend him from a claim made by the Securities and Exchange Commission. We are evaluating the claim at this time and are unable to ascertain the potential monetary impact on us. |
Discontinued Operations
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
|
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Discontinued Operations |
Note 10 Discontinued Operations
The table below summarizes unaudited financial results for the assets classified as held for sale which is comprised primarily of our MSA, iLead and RESO business units for the three and six months ended June 30, 2011 and 2010:
Three Months Ended Six Months Ended
On March 1, 2010, as a result of market and strategic reasons, we decided to exit the negative-option marketing programs which were part of our Direct Segment with the acquisition of iLead in 2006. On June 3, 2010, we sold all of the gross assets of our Exact Supplements, LLC. Business (Exact). We have not recognized any gain or loss from the sale of Exact. During the second quarter of 2008, we made a decision to divest our MSA operations. On September 24, 2010, we sold the assets of MSA and its related companies Rightstuff, Inc. and Checkup Marketing, Inc., all North Carolina corporations which were our wholly-owned subsidiaries. The purchase price of the assets was approximately $767,000, of which approximately $247,000 was paid at closing and the balance was paid in three equal installments of approximately $173,000 each during the 90 days following the closing. Under the terms of the agreement, the purchaser also assumed certain liabilities related to the purchased assets. To ensure orderly transition of the business, we agreed to provide the purchaser with hosting services at no cost for 90 days following the closing. The agreement contains customary indemnification, non-disclosure and non-solicitation provisions. All the proceeds received from the sale of MSA were used to reduce the term note with Wachovia. Additionally, we reported a non-cash charge to discontinued operations of approximately $1.5 million for the loss on the sale for the year ended December 31, 2010. In July 2010, the Board of Directors approved the plan to sell our RESO business unit. On December 10, 2010, we closed the sale of the assets of RESO. The purchase price of the assets was $750,000, of which all was paid at closing less approximately $32,000 of working capital adjustments and $50,000 held in escrow for a period of one year. All the proceeds from the sale were used to reduce the term note with Wachovia. In addition, we reported a gain on the sale of RESO in discontinued operations of approximately $500,000. |
Sale of Common Stock
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Sale of Common Stock |
Note 8 Sale of Common Stock
On June 20, 2011, we entered into Subscription Agreements with 17 institutional and accredited investors, several of which are affiliated entities, for the sale of 1,350,000 shares of our common stock, together with immediately exercisable five year warrants to purchase up to an aggregate of 675,000 shares of common stock, resulting in gross proceeds to us of $2,700,000. Each warrant entitles the investor to purchase 0.50 shares of our common stock for every share of common stock purchased by such investor in the offering. The purchase price for each share of common stock and the related warrants was $2.00. Each warrant has an exercise price of $2.20 per share which is subject to adjustments in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. This offering was priced at the close of market on June 20, 2011 and was conducted as a takedown from our shelf registration statement which was declared effective by the SEC in April 2011. A portion of the proceeds from the sale the common stock were used to repay the $1 million non-formula revolving line of credit secured by Mr. Morgan (see Note 1). |
Organization and Business and Accounting Policies
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6 Months Ended |
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Jun. 30, 2011
|
|
Organization and Business and Accounting Policies |
Note 1 Organization and Business and Accounting Policies
Inuvo, Inc. and subsidiaries (we, us, or our) is an Internet marketing/technology business with two segments:
- Performance Marketing, and - Web Properties.
In 2011, management reorganized our operations along two new operating segments Performance Marketing and Web Properties. Prior to 2011, our segments were classified as Exchange and Direct segments.
The Performance Marketing segment designs, builds, implements, manages and sells the various technology platforms and services we offer. For the last 18 months, the Performance Marketing segment has executed on a technology strategy to consolidate the disparate platforms we acquired between 2002 and 2008, resulting in a single technology foundation which can serve the needs of advertiser and publisher clients within this segment. This foundation is referred to as the Inuvo Platform. The Inuvo Platform is an open, quality-controlled, lead generation marketplace designed to allow advertisers and publishers the ability to manage their consumer marketing transactions in an automated and transparent environment. In addition to the core Inuvo Platform for advertisers and publishers, we continue to sell several legacy platforms, services or directories within the Performance Marketing segment. Revenue is principally generated when a consumer clicks on links, fills out a lead form or purchases a product. In this segment, we must attract highly visited web publishers where competition for advertising space is driven primarily by the amount paid for each offer presented on each page viewed. We believe that greater transparency and alignment between advertisers and publishers, combined with sophisticated analytic technologies that predict fraud and target offers more effectively, will differentiate service providers in this marketplace.
The Web Properties segment designs, builds and manages unique offers and/or websites that generate revenue principally from the sale of products, leads and/or advertising. The Web Properties segment manages owned and operated websites across verticals that include local search, product shopping comparison, pre/post natal interests and baby product shopping. The segment uses a number of online tactics designed to drive traffic to these owned and operated sites including search, affiliates, email and display marketing campaigns. In the future, we expect that a majority of such tactics will be deployed and/or tracked via the Inuvo Platform. We believe the cornerstone of our value proposition for advertisers is our ability to generate high converting and relevant leads at an attractive return on investment (ROI).
In October 2009, we brought to market the Inuvo Platform. Within this solution, advertisers create and manage advertising campaigns, web publishers better monetize their available advertising inventory, and strategic partners and web developers have the ability to customize implementations through an application-programming interface (API). We see ourselves well positioned to capitalize on market trends across online marketing channels using this platform as the foundation for entering new markets.
We believe that we are on the forefront of Internet advertising technologies for the past five years. From our click fraud technology, which has successfully proven our ability to eliminate bad traffic, to our introduction of transaction flagging, to the targeting of advertisements based on behavioral information, we have and will continue to operate our business based on the principle of quality.
We believe a very important by-product of the our business is the information produced both on the advertiser side, where we analyze what kind of products convert, and on the publisher side, where it analyzes what kind of websites consumers have interests in. This business intelligence allows for improved detection of fraudulent transactions and higher advertising response rates.
In March 2011, we completed the exit from the ValidClick AdExchange business. With this exit, we no longer support direct auctioned based cost-per-click advertisers and multi-tiered ad networks of third party websites publishers.
On May 9, 2011 we received notice from the NYSE Amex (the Exchange) that we were below certain of the Exchanges continued listing standards due to stockholders equity of less than $4.0 million and losses from continuing operations and/or net losses in three of our four most recent fiscal years as set forth in Section 1003(a)(ii) of the Exchanges Company Guide. The stockholders equity balance of less than $4.0 million was largely a result of; a series of impairment charges and losses from discontinued operations over the past two years, and lower Search Marketing revenue due to Yahoo!s decision to transfer its search operations to Bing (Microsoft). The Exchange allowed us to submit a plan of compliance (the Plan) demonstrating our ability to regain compliance with their listing standards. We submitted such a plan to the Exchange and it was accepted by the Exchange on July 5, 2011. Our plan was to immediately raise capital sufficient to regain compliance with the Exchanges listing standards. Secondly, we initiated an operating plan that demonstrates our ability to grow revenue and operate profitably to remain compliant with the Exchanges listing requirement and increase shareholder value. The key points of the Plan provided to the Exchange were:
- Raise up to $4.0 million of equity over the remainder of 2011, - Launch three new marketing initiatives that we believe will create positive earnings and cash flow, and - Maintain a cost reduction program that began in late 2010.
On June 20, 2011, we executed the first part of the Plan by raising $2.7 million in equity selling 1,350,000 shares of our common stock and warrants to purchase up to an aggregate of 675,000 shares of common stock at $2.20 per share.
The second part of the Plan, launched in the third quarter of 2011, was three marketing initiatives that we believe will enhance revenues and income in the next 12 months. Each of these initiatives requires minimal capital as they leverage our existing technology, assets and services.
BargainMatch
BargainMatch, an owned and operated website in the Web Properties segment, is our comparative shopping site that rewards consumer loyalty by providing cashback on the purchase of products. BargainMatch has an extensive panel of retailers that offer cash incentives for purchases across a large list of SKUs. Retailers determine how much they will pay for a customer purchase. We take a share of the transaction and set aside the cashback portion for customers.
We have white-labeled the BargainMatch service for use by other online websites interested in building loyalty from their visitors while simultaneously driving additional revenue. Our customers for the white-labeled service promote their version of the site to their constituents. We manage / host the solution and shares revenue from sponsored ads and the commission on product sales.
Kowabunga
Kowabunga is a daily deal program focused on rural America, a market we believe is underserved by market leaders. We have access to millions of consumers through our Search Marketing operations that are potential customers for a local deal of the day. We are partnering with a national direct marketer, which currently markets offers from hundreds of thousands of merchants in rural America. We developed the infrastructure to present daily local offers from the inventory of its partner to the consumers from our platform. The potential reach of this program is to:
- 20 million households - 25 states covered - 90% household penetration - 2,500 national and local retail advertisers - 80% markets that are home to a college/university
Kidzadu
Within our owned and operated site and other sources, we acquire more than 200,000 pre-natal name leads per month. With Kidzadu, we created a model to identify attractive prospects from our inventory of leads. A typical middle income family will spend $12,000 in a babys first year. Inuvo will offer a credit line, financed by a partner who will assume the loan risk, to qualified leads, on a real time basis for use only at our online baby products store, Kidzadu. Converting just 1,000 accounts per month can generate $1.0 million per month at a 10% operating profit.
We believe with the execution of the plan filed with the Exchange and the steps taken to reduce costs, along with the new bank facility and the raising of equity capital, will provide sufficient cash for the next twelve months.
On May 31, 2011, we notified our outsourced telemarketing company that we were exercising our right to terminate the Master Services Agreement between the parties without cause. Pursuant to the terms of the Master Services Agreement, we were required to pay a one-time payment of $340,000 that was made in June 2011. Pursuant to this termination we wrote off a note receivable for approximately $101,000 related to the sale of property and equipment.
We may seek to raise additional capital through public or private equity financings in order to fund our operations, take advantage of favorable business opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, or take advantage of favorable conditions in capital markets. We recently filed an S-3 with the Securities and Exchange Commission which will allow us to raise additional capital through public financing. We cannot be assured that additional financing will be available to us on favorable terms, or at all. If we issue additional equity, our existing stockholders may experience substantial dilution.
The accompanying consolidated financial statements were prepared by management on a go-forward basis and therefore do not include any adjustments to the Companys assets or liabilities.
Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010, as amended, and as filed with the Securities and Exchange Commission (SEC). For interim reporting purposes, we follow the same accounting policies and consider each interim period as an integral part of an annual period. Certain prior period amounts are reclassified to conform to the current presentation related to discontinued operations and segment classification.
Discontinued Operations
During 2008, we made a decision to divest our MarketSmart Advertising, Inc. (MSA) operations and, on September 24, 2010, we sold substantially all of the assets of MSA. In March 2010, due to market and strategic reasons we decided to exit the negative-option marketing programs which became part of our Direct segment following the iLead Media, Inc. (iLead) acquisition in 2006. In July 2010, the Board of Directors approved the plan to sell our Real Estate School Online (RESO) business unit and in December 2010, substantially all of the assets of RESO were sold. See note 10.
Basis of Presentation
The consolidated financial statements include our accounts and those of our subsidiaries. All inter-company accounts and transactions are eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 are prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) are condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K as of and for the year ended December 31, 2010, as amended, and filed with the SEC. The interim consolidated financial information contained herein is not certified or audited; it reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited consolidated financial statements. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.
Reclassifications
Certain prior period amounts are reclassified to conform to the current presentation of discontinued operations related to RESO as the results of RESO were previously included as part of continuing operations for the three and six months ended June 30, 2010. Additionally, we have reclassified amounts to conform to the presentation of our new segments.
Additionally, all consolidated financial statements and notes herein reflect the impact of the 1 for 10 reverse stock split on our common and the related proportional reduction in the number of authorized shares of our common stock and preferred stock in December 2010.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, goodwill and purchased intangible asset valuations, derivatives, deferred income tax asset valuation allowances, stock compensation, and the value of stock options and warrants. We base our estimates and assumptions on current facts, historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from managements estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Credit Risk, Customer and Vendor Evaluation
Accounts receivable are typically unsecured and are derived from sales to customers. We perform ongoing credit evaluations of our customers and maintain allowances for estimated credit losses. We apply judgment as to our ability to collect outstanding receivables based primarily on managements evaluation of the customers financial condition and past collection history and records a specific allowance. In addition, we record an allowance based on the length of time the receivables are past due.
At June 30, 2011, we had one individual customer with accounts receivable balances greater than 10% of the gross accounts receivable from continuing operations. This customer owed approximately $2.3 million or 62.6% of gross accounts receivable at June 30, 2011 and approximately $3.0 million or 57.7% of gross accounts receivable at December 31, 2010. This same customer contributed approximately $8.1 million or 88.0% of total net revenue from continuing operations for the three months ended June 30, 2011 and approximately $8.9 million or 78.1% of total net revenue from continuing operations for the three months ended June 30, 2010. Additionally, this customer contributed approximately $17.9 million or 85.4% of total net revenue from continuing operations for the six months ended June 30, 2011 and approximately $15.8 million or 76.2% of total net revenue from continuing operations for the six months ended June 30, 2010. |
Accrued Expenses and Other Current Liabilities
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Jun. 30, 2011
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Accrued Expenses and Other Current Liabilities |
Note 4 Accrued Expenses and Other Current Liabilities
The accrued expenses and other current liabilities consisted of the following as of:
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Other Long Term Liabilities
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6 Months Ended | ||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Other Long Term Liabilities |
Note 5 Other Long Term Liabilities
Other long term liabilities consisted of the following as of:
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Segment Analysis
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Jun. 30, 2011
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Segment Analysis |
Note 13 - Segment Analysis In 2011, management reorganized our operations along two new operating segments Performance Marketing and Web Properties. Prior to 2011, our two segments were classified as Exchange and Direct segments We are an Internet marketing services business separated into two reporting segments: Performance Marketing and Web Properties. The Performance Marketing Segment includes both the technologies and networks required to facilitate B2B transactions. The Web Properties includes both the products and websites required to market to consumers online including our owned and operated websites, a lead generation business and a data collection and distribution business. MSA, RESO and iLead (see Note 10) are reported as discontinued operations in our consolidated financial statements for 2011 and 2010. Listed below is a presentation of net revenue, gross profit and earnings (loss) before interest, taxes, and depreciation and amortization, and stock based payments for all reportable segments for the three and six months ended June 30, 2011 and 2010. We currently only track certain assets at the segment level and therefore assets by segment are not presented below. The Corporate category in the Earnings (Loss) before Interest, Taxes, Depreciation and Amortization, and Stock Based Payments from continuing operations table consists of corporate expenses not allocated to any segment. Note that the Earnings (Loss) before Interest, Taxes, Depreciation and Amortization, and Stock Based Payments is not a measure of performance defined in accordance with GAAP.
Net Revenue by Industry Segment
Gross Profit by Industry Segment
Earnings (Loss) before Interest, Taxes, Depreciation and Amortization, and Stock Based Payments by Industry Segment
|
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MC0``:6YU=BTR,#$Q,#8S,%]P Note 6 Term and Credit Note Payable On February 15, 2011, we entered into a two-year
Business Financing Agreement (the Agreement) with Bridge Bank, N.A. (Bridge Bank). This Agreement provides
for a revolving credit facility of up to $8.0 million and replaces the $5.0 million credit facility with Wachovia Bank, N.A. (Wachovia)
that was scheduled to expire in March 2011. The Bridge Bank credit facility allows us to borrow against 80% of eligible accounts
receivable balances, which are generally those balances owed by U.S. based customers that are less than 90 days from the date of
invoice. In addition, the Bridge Bank facility provides an additional term note payable of $475,000 to collateralize a stand-by
letter of credit required by our corporate headquarters lease. The stand-by letter of credit requirement will be reduced to $225,000
in August 2011 at which time the term note can be drawn for $250,000. The $475,000 of proceeds from the term note payable was included
in restricted cash as of June 30, 2011. Under the terms of the Agreement, we must maintain certain depository, operating and investment
accounts at Bridge Bank; provide Bridge Bank a first priority perfected security interest in all of our accounts and personal property;
provide various monthly, quarterly and annual reports; limit additional indebtedness to $500,000 of purchase money including capital
leases and an additional $500,000 of all other indebtedness; and maintain operating profit of net income plus interest
and taxes plus non-cash expenses for amortization, depreciation, stock based compensation, discontinued operations and non-recurring
items of not less than $100,000 for the immediate proceeding three month period. At the closing of the Agreement several fees were
paid including a facility fee (0.25% of the maximum credit limit), a due diligence fee of $800, a fee-in-lieu-of-warrant of $21,250
and a non-formula facility fee of $4,750. The facility fee is due annually. A maintenance fee of .125% of the average daily balance
and the finance charge (Prime Rate plus 200 bonus points) are due monthly. The Prime Rate was 3.25% at June 30, 2011. As of June
30, 2011, there was approximately $2,759,000 outstanding under the revolving credit facility and there was no additional availability
under the Agreement. On June 2, 2011, we entered into a Business Financing Modification
Agreement with Bridge Bank effective May 25, 2011 pursuant to which $1.0 million of the revolving line of credit was converted
to a nonformula sublimit of availability that would mature in 240 days. In order to secure this additional availability,
Mr. Charles D. Morgan, a member of our board of directors, provided a backup letter of credit to Bridge Bank in the amount of $1.0
million. In connection therewith, we entered into a Reimbursement and Security Agreement with Mr. Morgan pursuant to
which we granted him a second position security interest in and to our assets and agreed to reimburse him should Bridge Bank be
required to draw against the backup letter of credit provided by him. We drew down on this additional availability and used it
for our working capital needs. It was fully repaid on June 23, 2011. As of June 30, 2011, we were not in compliance with the
covenant to maintain an operating profit of not less than $100,000 (see above) required by the Bridge Bank credit facility.
The one-time payment of a $340,000 termination fee to exit our outsourcing contract (see note 1) resulted in non-compliance
with the covenant. We have received a waiver from Bridge Bank for non-compliance with the covenant for the months ending June
30, 2011, July 31, 2011 and August 31, 2011. Note 2 - Property and Equipment The net carrying value of property and equipment consisted of the
following as of: Depreciation expense for the three months ended
June 30, 2011 and 2010 was approximately $391,000 and $469,000, respectively. Additionally, depreciation expense for the six months
ended June 30, 2011 and 2010 was approximately $805,000 and $935,000, respectively. Depreciation is included in selling, general
and administrative expenses in the accompanying consolidated statements of operations. Note 11 - Net Loss Per Common Share During the periods presented, we had
securities, mainly stock options and warrants, which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect are anti-dilutive. Per share data is based
on the weighted average number of shares outstanding.05\QR$RWB9A=D3,WP^RC2%@I81P+78TJPWFG4XER6"`-9
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6 Months Ended
Term and Credit Note Payable
6 Months Ended
Property and Equipment
June 30, 2011
(Unaudited)
December 31, 2010
Furniture and fixtures
$ 427,121
$ 427,121
Equipment
3,050,346
3,078,393
Software
5,759,757
5,514,375
Leasehold improvements
321,873
321,873
Subtotal
9,559,097
9,341,762
Less: accumulated depreciation and amortization
(7,369,929 )
(6,592,664 )
Net property and equipment from continuing operations
$ 2,189,168
$ 2,749,098
6 Months Ended
Net Loss Per Common Share