Organization and Business

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 1 - Organization and Business

Company Overview

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.  The performance marketing segment consolidates 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 services and license legacy platforms 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. 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. 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. We believe a very important by-product of 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. 

As described later in this section, beginning in the fourth quarter of 2010, we experienced a reduction in search marketing revenue resulting from our migration to the recently launched Yahoo!-Bing platform.  While we have made adjustments to adapt to this new marketplace, we continued to experience volatility in volumes and revenue throughout 2011.  As a result, our operations and liquidity have been adversely impacted.  We are unable to ascertain at this time whether the volatility will continue   into 2012.

Subsequent Events

On March 1, 2012, we completed our acquisition of Vertro, Inc. (“Vertro”), an Internet company that owns and operates the ALOT product portfolio.  Vertro’s operations are now part of our web properties segment. 

In evaluating the merger, we, and the management of Vertro, believed that the combination could create a stronger, more scalable business from which to attract advertisers, publishers and consumers.  We also expect that the combination will allow for the elimination of approximately $2.4 million in overlapping operating and public company  annual expenses.  Other expected benefits include:

• diversified revenue streams which will mitigate our dependence on one major customer;

• an existing install and distribution capability through Vertro’s ALOT toolbar applications for our consumer facing innovations;

• a stronger business from which to access both debt and capital markets to support growth; and

• the combination of two experienced digital marketing teams.

We are in the early stages of integrating the operations of the two companies.

NYSE Amex

On May 9, 2011, we received notice from the NYSE Amex that we were below certain of the exchange’s continued listing standards due to stockholders’ equity of less than $4.0 million and losses from continuing operations and/or net losses in three of our four most recent fiscal years as set forth in Section 1003(a)(ii) of the NYSE Amex Company Guide.  The exchange accepted our plan to regain compliance with the continued listing standards and in June 2011 we executed the first part of the plan by raising $2.7 million in equity.  Another key component of the plan was the launching of new marketing initiatives, BargainMatch and Kowabunga! , that we believed would enhance revenues and income in the next 12 months.  However, following the closing of the merger with Vertro, our stockholders’ equity then exceeded the minimum requirement of the exchange and we regained compliance with the continued listing standards.  The exchange has advised us it will monitor our continued compliance for several quarters as we integrate Vertro’s operations into our company.

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.

Liquidity

While we do not have any commitments for capital expenditures which come due within the next 12 months, our liquidity has been negatively affected throughout 2011 and into 2012, as a result of a reduction in search marketing revenue resulting from the migration by Yahoo! to the Bing platform. The integration of these two platforms caused both an unexpected disruption in search traffic purchased through the Yahoo!-Bing platform and lower revenue-per-click received from the Yahoo!-Bing platform. We have made adjustments to adapt to this new marketplace, but we continue to experience volatility in revenue that may continue in the future. In response, we implemented a cost reduction plan during the first quarter of 2011 to offset the reduced revenue which included a reduction in employees and related expenses which resulted in monthly savings of $107,000 beginning in February 2011.  We have also delayed payments to publishers and vendors in the management of our cash flows.  Extending these payments may affect the decision of publishers and vendors to do business with Inuvo.  In September 2011, in order to further reduce our operating costs, we eliminated an additional 16 full time positions and six part-time positions.  The effect of this reduction in personnel was approximately $92,000 monthly.

Additionally, our directors, executive officers and certain senior managers agreed to a deferral of cash compensation of approximately $356,000..  In the first quarter of 2011, we favorably renegotiated the outsourced call center contract reducing the monthly cost outlay of over $100,000 monthly and in the second quarter we decided to terminate the outsourcing agreement entirely.  The result of that decision was a one-time termination fee of $340,000 and the forgiveness of the remainder of a note receivable associated with the sale of furniture and equipment.

On February 15, 2011, we entered into the Business Financing Agreement (the “Agreement”) with Bridge Bank, N.A. (“Bridge Bank”) (see Note 6). This Agreement provides for a revolving credit facility of up to $8.0 million and replaced 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 allowed us to borrow against 80% of eligible accounts receivable balances.  In addition, the Bridge Bank facility provides an additional term credit of $475,000 to collateralize a stand-by letter of credit required by our corporate headquarters lease.  

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.

Effective with our merger with Vertro on March 1, 2012 (Note 17),  we entered into a new Business Financing Agreement with Bridge Bank, for a $10 million accounts receivable revolving credit facility (the “Revolving Credit Line”) and a $5 million term loan (the “Term Loan”) . The Revolving Credit Line replaced our then existing $8 million revolving credit facility. The new credit facility will be used primarily to satisfy our working capital needs following the closing of the merger with Vertro, Inc. described later in this report, .  As of March 1, 2012, there was approximately $4.2 million of credit available on the revolving credit facility and $0 on the term loan. Subject to the terms of the new agreement, we are entitled to obtain advances against the Revolving Credit Line up to 80% of eligible accounts receivable balances plus $1 million up to the credit limit of $10 million.  In addition, subject to the terms of the agreement, we are entitled to borrow up to $5 million under the Term Loan portion of the credit facility.  

We believe that with the new Business Financing Agreement and the operating benefits from the merger with Vertro (Note 17) will provide us with sufficient cash for operations over the next 12 months.

The accompanying consolidated financial statements were prepared by management on a go-forward basis and therefore do not include any adjustment to our assets or liabilities.

Discontinued Operations

During the second quarter of 2008, we made a decision to divest our MarketSmart Advertising, Inc. (“MSA”) operations and, effective August 31, 2010, we sold substantially all of the assets of MSA.  In March 2010, we determined that due to market and strategic reasons to accelerate our decision to exit the negative-option marketing programs which became part of our web properties 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.