8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 9, 2013

INUVO, INC.

(Exact name of registrant as specified in its charter)

Nevada	001-32442	87-0450450
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

1111 Main St., Suite 201, Conway AR	72032
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: 855-440-8484

 (Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 2.02.RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

On May 9, 2013, Inuvo, Inc. issued a press release and held a management conference call regarding its financial results for Q1 2013 and the outlook of the Company. A copy of the Company’s press release is being furnished herewith as Exhibit 99.1 and a copy of the script of the Company’s management for the conference call is being furnished herewith as Exhibit 99.2.

The information in this Current Report on Form8-K under this caption and accompanying exhibits are being furnished under Item 2.02 and shall not be deemed to be “filed” for the purposes of Section18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liabilities of such section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933 (the “Securities Act”) or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

The Company made reference to non-GAAP financial information in both the press release and the conference call. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in the attached press release.

ITEM 7.01REGULATION FD DISCLOSURE.

On May 9, 2013, the Company held a management conference call to discuss the Company's financial results for Q1 2013 and the outlook of the Company and certain other matters.

A copy of the script for the conference call is attached as Exhibit 99.2 and is incorporated by reference into this Current Report on Form8-K.

The information in this Current Report on Form8-K and accompanying exhibit is being furnished and shall not be deemed to be “filed” for the purposes of Section18 of the Exchange Act, or otherwise subject to the liabilities of such section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

ITEM 9.01FINANCIAL STATEMENTS AND EXHIBITS.

(d) Exhibits.

Exhibit No.	Description
99.1	Press release dated May 9, 2013 regarding Q1 2013 financial results.
99.2	Conference Call Script.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	INUVO, INC.
Date: May 9, 2013	By:	/s/ John Pisaris
		John Pisaris, General Counsel

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EXHIBIT INDEX

Exhibit No.	Description
99.1	Press release dated May 9, 2013 regarding Q1 2013 financial results.
99.2	Conference Call Script.

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EX-99.1

EXHIBIT 99.1

Inuvo, Inc. Reports 82% Increase in First Quarter Revenue to $15.9 Million

CONWAY, AR, May 9, 2013 -- Inuvo, Inc. (NYSE MKT: INUV) (the "Company" or "Inuvo"), an Internet marketing and technology company that develops consumer applications and delivers targeted advertisements onto websites reaching desktop and mobile, today announced revenue for the first quarter of 2013 increased 82% to $15.9 million compared to the same period of 2012. Adjusted EBITDA was $1.4million, a six fold increase, compared to the first quarter of 2012. The Company improved gross profit by 147% to $8.4 million from $3.4 million in the prior year, increasing gross profit as a percent of revenue to 53% in the first quarter of 2013 compared to 39% in the first quarter of 2012. As a result, the net loss was materially reduced to $291 thousand from $1.9 million over that same period.

"Revenue, margins, expenses, debt and income were all improved within the quarter and as a result, we are very pleased with the progress we have made so far this year,” stated Richard Howe, Chairman and Chief Executive Officer of Inuvo. “As we look ahead, we see growth opportunity across our segments but in particular, our expansion into mobile offers the most significant upside.”

First Quarter 2013 Highlights

●   Net revenue of $15.9 million, increased $7.2 million or 82% compared to the first quarter of 2012.

●   Gross profit of $8.4 million, increased 147% compared to $3.4 million in the first quarter of 2012.

●   Adjusted EBITDA, a non-GAAP measure, increased to $1.4 million compared to $212 thousand in the first quarter of 2012.

●   Net revenue for the Network segment was $10.8 million and gross profit was $3.7million, an increase of 69% and 151% from the first quarter of 2012, respectively.

●   Net revenue for the Applications segment was $5.1 million and gross profit was $4.7million compared to $2.4 million net revenue and $1.9 million gross profit in first quarter 2012.

The Company's consolidated financial statements as of March 31, 2013 include the financial results of its Vertro subsidiary from March 2012 forward; prior year periods do not contain financial results of the Vertro subsidiary. In addition, after combining operations, management has modified the reported operating segments into two segments; Network and Applications, rather than the former three segments; Software Search, Publisher, and Partner Programs. The Partner Programs segment is absorbed into the other two segments for all periods presented.

Three-month financial results for the period ended March 31, 2013

Net revenues for the three months ended March 31, 2013, were $15.9 million, up 82% compared to the three months ended March 31, 2012. Gross profit increased 147% to $8.4 million in the three months ended March 31, 2013 compared to the same period of 2012. Growth in the quarter was driven primarily via the Network segment, where revenue increased to $4.4 million, a 69% improvement over the same period in 2012. Net revenue from the Applications segment was $5.1 million, or 32% of total net revenues.

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For the quarter ended March 31, 2013, Adjusted EBITDA, a non-GAAP measure, increased to $1.4 million compared to $212 thousand in the first quarter of 2012. The Company reported a net loss of approximately

$291 thousand, or less than $0.02 per share loss, for the three months ended March 31, 2013, compared to a net loss of $1.9 million, or $0.13 per share loss, for the corresponding period last year.

Balance Sheet as of March 31, 2013

Cash and cash equivalents totaled $3.2 million at March 31, 2013. Current assets and total assets were $9.1 million and $28.2 million, respectively and current liabilities and total liabilities were $13.2 million and $24.1 million, respectively, as of March 31, 2013. Borrowings under our bank line of credit were reduced to $6.9 million from $7.8 million at December 31, 2012. Shareholder’s equity was approximately $4.1 million.

Conference Call Information

Date: Thursday, May 9, 2013

Time: 4:15 p.m. EDT

Domestic Dial-in number: 1-877-941-2069

International Dial-in number: 1-480-629-9713

Live webcast: http://public.viavid.com/index.php?id=104644

In addition, the call will be webcast on the Investor Relations section of the Company's website at http://investor.inuvo.com/events_and_presentations where it will also be archived for 45 days. A telephone replay will be available through Thursday May 23, 2013. To access the replay, please dial 1-877-870-5176 (domestic) or 1-858-384-5517 (international). At the system prompt, enter the code 4618339 followed by the # sign. You will then be prompted for your name, company and phone number. Playback will then automatically begin.

About Inuvo, Inc.

Inuvo®, Inc. (NYSE MKT: INUV ), an internet marketing and technology company that develops consumer applications that make using the Internet easier and delivers targeted advertisements onto websites owned by partners and the company. To learn more about Inuvo, please visit www.inuvo.com.

Forward-looking Statements

This press release contains certain forward-looking statements that are based upon current expectations and involve certain risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words or expressions such as "anticipate," "plan," "will," "intend," "believe" or "expect'" or variations of such words and similar expressions are intended to identify such forward-looking statements.

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These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including, without limitation, statements made with respect to expectations with respect to our lack of profitable operating history, changes in our business, potential need for additional capital, fluctuations in demand; changes to economic growth in the U.S. economy; and government policies and regulations, including, but not limited to those affecting the Internet, all as set forth in our Annual Report on Form 10-K for the year ended December 31, 2012. All forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, many of which are generally outside the control of Inuvo and are difficult to predict. Inuvo undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Inuvo, Inc.

Wally Ruiz, Chief Financial Officer

501-205-8397

wallace.ruiz@inuvo.com

or

Investor Relations

Alliance Advisors, LLC.

Chris Camarra, 212-398-3487

ccamarra@allianceadvisors.net

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INUVO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2013 (Unaudited)		December 31, 2012
Assets
Current assets
Cash	$	3,225,778	$	3,381,018
Restricted cash		—		301,158
Accounts receivable, net		5,346,554		5,400,290
Unbilled revenue		36,179		58,219
Intangible assets - current, net of accumulated amortization		—		328,665
Prepaid expenses and other current assets		503,499		467,957
Total current assets		9,112,010		9,937,307
Property and equipment, net		1,956,719		2,110,771
Goodwill		5,760,808		5,760,808
Intangible assets		10,919,829		11,138,330
Other assets		444,530		182,387
Total assets	$	28,193,896	$	29,129,603
Liabilities and Stockholders’ Equity
Current liabilities
Term and credit notes payable - current portion	$	1,333,333	$	1,333,333
Accounts payable		8,711,403		10,196,930
Accrued expenses and other current liabilities		3,111,375		1,872,722
Total current liabilities		13,156,111		13,402,985
Deferred tax liability		4,016,000		4,099,000
Term and credit notes payable - long term		5,555,555		6,488,889
Other long-term liabilities		1,377,377		932,377
Total liabilities		24,105,043		24,923,251
Total stockholders' equity		4,088,853		4,206,352
Total liabilities and stockholders' equity	$	28,193,896	$	29,129,603

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INUVO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended March 31,
	2013			2012
Net revenue	$	15,919,779		$	8,767,149
Cost of revenue		7,480,868			5,347,751
Gross profit		8,438,911			3,419,398
Operating expenses
Search costs		4,692,889			1,843,057
Compensation		1,993,325			1,296,565
Selling, general and administrative		2,144,831			1,985,463
Total operating expenses		8,831,045			5,125,085
Operating loss		(392,134	)		(1,705,687	)
Interest expense, net		(106,669	)		(166,701	)
Loss from continuing operations before taxes		(498,803	)		(1,872,388	)
Income tax benefit		83,000			—
Net loss from continuing operations		(415,803	)		(1,872,388	)
Net income (loss) from discontinued operations		125,093			(1,709	)
Net loss		(290,710	)		(1,874,097	)
Other comprehensive income
Foreign currency revaluation		3			5,156
Total comprehensive loss	$	(290,707	)	$	(1,868,941	)
Per common share data
Basic and diluted
Net loss from continuing operations	$	(0.02	)	$	(0.13	)
Net income from discontinued operations		0.01			—
Net loss	$	(0.01	)	$	(0.13	)
Weighted average shares (basic and diluted)		23,252,095			14,431,201

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INUVO, INC.

SELECTED DATA BY SEGMENT

(unaudited)

	Three Months Ended March 31,
	2013		2012
Net Revenue:
Network	$	10,793,085	$	6,384,088
Applications		5,126,694		2,383,061
Total net revenue		15,919,779		8,767,149
Gross Profit:
Network		3,719,680		1,482,947
Applications		4,719,231		1,936,451
Total gross profit	$	8,438,911	$	3,419,398

INUVO, INC.

RECONCILIATION OF LOSS FROM CONTINUING OPERATIONS BEFORE TAXES TO ADJUSTED EBITDA

(Unaudited)

	Three Months Ended March 31,
	2013			2012
Loss from continuing operations before taxes	$	(498,803	)	$	(1,872,388	)
Interest expense, net		106,669			166,701
Depreciation		705,467			329,849
Amortization		547,166			956,203
Stock-based compensation		189,993			195,419
Accrued severance		316,161			-
Merger costs		-			436,452
Adjusted EBITDA	$	1,366,653		$	212,236

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Reconciliation of Net Loss from Continuing Operations to Adjusted EBITDA

In addition to disclosing financial results in accordance with United States generally accepted accounting principles (“GAAP”), our earnings release contains the non-GAAP financial measure “Adjusted EBITDA.”

Adjusted EBITDA is not a measure of performance defined in accordance with GAAP. However, management believes that Adjusted EBITDA is useful to investors in evaluating the Company’s performance because Adjusted EBITDA is a commonly used financial analysis tool for measuring and comparing companies in the Company’s industry in areas of operating performance.

Management believes that the disclosure of Adjusted EBITDA offers an additional view of the Company’s operations that, when coupled with the GAAP results and the reconciliation to GAAP net loss, provides a more complete understanding of the Company’s results of operations and the factors and trends affecting the Company’s business.

We present Adjusted EBITDA as a supplemental measure of our performance. We defined Adjusted EBITDA as net loss from continuing operations plus (i) interest expense, net, (ii) provision for taxes, (iii) depreciation and amortization, (iv) stock based payments, (v) indirect costs incurred during the merger with Vertro and (vi) the accrual of severance expense related to the relocation to Arkansas. These further adjustments are itemized above. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same or similar to some of the adjustments in the presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

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EX-99.2

EXHIBIT 99.2

First Quarter 2013 Earnings Call, May 9, 2013

Alan Sheinwald:            

Thank you and good morning.  I’d like to thank everyone for joining us today for the Inuvo First Quarter 2013 Shareholder Update Conference Call.  Mr. Richard Howe, Chief Executive Officer, and Mr. Wally Ruiz, Chief Financial Officer of Inuvo, will be your presenters on the call.

Before we begin, I’m going to review the company’s Safe Harbor statement.  Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events, and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially.  When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to Inuvo Inc are such a forward-looking statement.  Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by Inuvo at this time.  In addition, other risks are more fully described in Inuvo’s public filings with the US Securities and Exchange Commission, which can be reviewed at www.sec.gov.

With that, I’d now like to congratulate management on yet another strong quarter and introduce Mr. Rich Howe, CEO of Inuvo.  Rich, please go ahead.

Richard Howe Comments:

Thank you Alan, and thanks everyone for joining us today.

Thank you Alan, and thanks everyone for joining us today.

We are pleased to report that revenue for the first quarter of 2013 was $15.9 million dollars, a significant increase over the $8.8 million dollars reported in the first quarter of 2012.  We are equally encouraged by the improvement in Adjusted EBITDA for the quarter ,which at $1.4 million dollars, was meaningfully better then the comparable period in 2012 where Adjusted EBITDA was $212 thousand dollars.

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On today’s call I would like to provide a brief overview of the first quarter, discuss where we are headed for the year and offer some updates on information communicated on the March 13 year end call.

Following my opening statements, I will turn the call over to Wally for a more detailed accounting of our financial results after which I will have some closing remarks.

As a reminder for those of you who are new to the company, we organize our business and report along two segments, our Network segment, which includes all the revenue from the delivery of advertisements into our partners’ mobile and desktop websites and applications as well as any revenue derived from our Owned and operated websites.

And our Applications segment, which includes all the revenue associated with the company’s applications, which are marketed directly to consumers through various online marketing methods.

The growth year-over-year was driven principally from within the Network segment, which now makes up roughly 68% of overall revenue and contributed $10.8 million in the quarter. The Application segment delivered $5.1 million, or 32% of overall revenue in the quarter.

The increase in contribution to overall revenue from the Network reflects our focus on this part of the business and the opportunity we see within the mobile space. More on that later.

On our year-end call we had anticipated revenue for Q1 2013 would be between $16.2 and $16.5 million and while revenue in the quarter was slightly lower than we had thought, it represents none the less a very strong first quarter given the more typical seasonality issues we experience between January and April.

The reason why revenue was lower than expected was because we experience a marketplace pricing change in Mid-March that was unexpected. This is not an uncommon event in our business and typically occurs when the marketplace owners, which in this case are MicroSoft and Yahoo, modify their pricing algorithms so as to optimize performance for themselves and their advertisers.

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Now, since we do not typically receive forewarning of these changes, the challenge for us is not the change itself but rather adapting to the change, which often takes between 30-90 days.

We do not view this as a long-term issue and in fact we see revenue improving well leading into May based on the changes we made in late March and we expect to see continuing improvement throughout the remainder of the 2nd quarter. Quality, subsequent to the changes, is as high as it has ever been, a strong indication that we have adapted both quickly and correctly.

Based on internal reporting, Revenue for the first 7 days of May was approximately $155 thousand dollars per day and has been headed upwards since the end of March and is already trending higher Year-over-Year.  Our larges revenue day so far this quarter was $170 thousand dollars.

Within the first quarter, Revenue, Gross profit, operating margins, the net loss and debt were all improved materially relative to last year and as we exit the first quarter we expect to see ongoing benefits to operations from this trend into Q3 and Q4 particularly now that we have executed on our office consolidations, a move designed to improve Cash flow within the business.

Managing cash remains a very important part of operating our business and we have been cash flow positive since August of last year and the $1.4 million of Adjusted EBITDA delivered within the first quarter reflects the progress the team has made here.

That being said, we remain determined to implement efficiencies wherever possible in our business and it may be worth noting that on revenue per headcount basis, Inuvo is significantly more efficient than its peer group.

In March we had announced that we were expecting to realize approximately $120,000 dollars of monthly expense benefits from the move. As discussed on that call, the three largest components of that saving were the Tampa lease, which we exited in March, the NY lease, which I am pleased to report we sub-let in April at cost, and the NY Data Centers, which we are on track to exit by the end of June.

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We have already secured 75% of this benefit and we expect ongoing cost benefits associated with the move as a result of the lower cost basis in our new location in Conway, Arkansas.

The new office in Arkansas has been up and running since April 1st and we now have over 19 full time employees in that office out of the 36 total employees we have across the company. I remain pleased with the quality of talent we have recruited in Arkansas and while we have experienced some disruption associated with the move, we feel confident that we have and are managing through this transition judiciously.

We have leased shared office space in NY for our New York based employees and moved our key Florida based employees to home based offices.

I’d like to now talk briefly about the two segments of the business and where we are headed, starting first with the Network segment:

This segment of the business has been the principle driver of our growth over the last 12 months. Our expansion into mobile and the development of owned and operated web properties both rely on the ad services from this segment to be successful.

To put this in perspective, roughly 12% of our overall revenue in the first quarter was from owned and operated websites and we are already trending towards 18% in the second quarter.

As it relates to mobile traffic, 15% of all traffic within the Network originated through a mobile device in the first quarter and this too has been headed higher in the second quarter, already trending towards 20%.

We are currently working either directly or indirectly with over 150 mobile applications that are in various stages of their implementation of our Ad services.

Consumer web activity is still growing robustly at 6% a year, but mobile web traffic is increasing at an astonishing 55% per year. We are extremely well positioned, both as a result of our technology and our relationships, to take advantage of this opportunity for market expansion.

We recently announced the launch of our local search web property into Europe. We see attractive growth potential in the local search part of the business over the next 18 months and expect to continue the expansion of our domestic and internationally owned websites across a number of high interest consumer categories.

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You should expect to hear about launches of new web properties throughout the remainder of the year and, as has been discussed in the past, each new web property will typically be followed by the launch of a companion application, increasingly, a mobile based application.

Additionally, within this segment of our business, we have also been very encouraged by many of the new growth initiatives coming out of Yahoo and we are working together with them on some exciting new ways to package search results for the display market. More on that in the ensuing months.

The application segment of the business continues to improve following a number of recent changes we discussed on our year-end call in March.

Our application business should be viewed in many respects in a manner similar to which we view our expansion into owned and operated websites. Not only do we want to serve ads into the applications of others (which we in fact do today) but we also, where possible and when it makes sense, want to effectively control that distribution, by owning the application itself.

The Alot AppBar is a perfect example of this controlled distribution strategy where we have approximately 4.7 million worldwide users of an application whose income is derived from advertising. View this as one of many channels where Inuvo drives profitable revenue from advertising, each and everyone one of them competing, internally, for marketing dollars and resources based on their respective contributions to the overall business.

While this is perhaps not commonly known, we already provide advertising and coupon services to a number of ToolBar companies so this concept of both partnering and owning is already well proven at Inuvo from both a website and application perspective.

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This segment of the business has contracted over the last 6 months, however, this only means that we are optimizing this channel for profitability and while we could grow this part of the business more aggressively through marketing spend, currently, the economics associated with other opportunities offer a more immediate return on investment.

This does not mean we are not taking steps to position this segment for growth. On the product development front, we recently reported the launch of a Chrome version of the Alot Appbar, which opens us up to a growing market that we had previously not served and we are preparing the launch of additional products over the next several quarters.

From an application development perspective, strategically, we have focused our attention towards mobile-deployed applications. As mentioned earlier, each of the websites we launch is expected to have its companion application, and we expect to launch our first mobile application with BargainMatch in late Q2.

I would like to now turn the call over to Wally for a more detailed analysis of the financials. Wally.

Wally Ruiz Comments:

Thank you Rich.  Good afternoon everyone.  Thank you for joining us today to discuss the company's financial results for the first quarter of 2013.  My comments will refer to the press release and 10-Q filed today.  I would like to remind everyone, that for comparison purposes, the first quarter of 2012 included one month’s worth of the acquisition we made in that quarter.

Throughout my talk today, I will compare the first quarter of 2013 with that comparable first quarter in 2012 and where it is relevant, to the immediate prior quarter, the fourth quarter of 2012.  

As Rich mentioned, Inuvo today reported net revenue of $15.9 million in the first quarter of 2013. This is an 82 percent increase over the same quarter last year. Both the Network and the Applications segment contributed to the higher revenue of the current year quarter. The Network segment reported $10.8 million of revenue in the current quarter, an increase of 69% over the same quarter last year. The Network segment represents 68% of the company’s total revenue. The increase in the first quarter of 2013 over the same quarter last year is due to the strong increase in the delivery of advertisements to partner websites and our own websites. Revenue from partner’s websites increased 60% compared to the first quarter of 2012 the result of expansion across publisher segments and an improvement in quality and the growth in mobile. Revenue from our owned and operated websites increased nearly 8 fold compared to the first quarter of 2012 largely due to the expansion of websites, particularly the local search directory at local.alot.com. All other revenue in the segment, non-core operations, declined $230 thousand in the first quarter compared to the same quarter last year.

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The Applications segment represented 32% of the company’s total revenue in the first quarter. The Applications segment reported $5.1 million of revenue in the quarter. This segment is mostly comprised of operations acquired in the merger in March of last year. The revenue of this segment is $2.7 million greater in the 2013 quarter compared to the same quarter last year and $1.7 million lower than the immediate prior quarter, the fourth quarter of 2012. The policy changes in the first quarter by our advertisement sourcingpartner required that we modify marketing programs the result of which impacted our ability to acquire new Alot customers as cost effectively as we had been able to in the past.

Gross profit was $8.4 million in the first quarter of 2013. This is a 147 percent increase over the same quarter last year. Both the Network and the Applications segment contributed to the higher gross profit. Gross profit as a percent of revenue was 53% compared to 39% last year. In the first quarter of 2013, the Network segment gross profit as a percent of revenue was 34.5% compared to 23.2% for the same quarter last year. The increase in gross is primarily due to the greater percent of advertising driven through our owned and operated websites. The Applications segment gross profit, as a percent of revenue was 92% compared to 81.2% for the same quarter last year and 88.4% for the immediate prior quarter. The higher gross profit is primarily due the discontinuance of under performing marketing programs.

Operating expense was $8.8 million in the first quarter. This is a $3.7 million increase over the same quarter last year and a $1 million decrease from the immediate prior quarter. The increase over the first quarter is largely due to having only one month of merged operations in the last year quarter. The decrease in operating expense in the first quarter of 2013 compared to the immediate prior quarter is due to approximately $1 million lower Search costs in the current quarter and to higher expenses in the fourth quarter of 2012 due to a $505 thousand charge associated with the departure of the former CEO. Search costs are mostly associated with the ALOT operations within the Applications segment where we bid on keywords in order to drive traffic to our landing pages, the successful result from which is that a consumer downloads our product. To a lesser extent, we also spend on Search for owned and operated web properties.

Search costs increased $2.9 million in the first quarter of 2013 over the same quarter in the prior year and decreased approximately $400,000 from the immediate prior quarter due to the policy changes mentioned above. Compensation increased $696 thousand in the first quarter of 2012 over the same quarter in the prior year and decreased $252 thousand from the immediate prior quarter due to the $505 thousand charge in the fourth quarter of 2012 previously mentioned. Compensation expense in the current year quarter includes a non-recurring accrual of $316 thousand dollars for severance for employees who chose not to relocate to Arkansas. Selling, general & administration expense, or S, G & A increased $160 thousand in the first quarter of 2013 over the same quarter in the prior year and decreased $370 thousand from the immediate prior quarter. The increase in the current quarter S,G&A over the same quarter of the prior year is due primarily to $406 thousand dollars of higher depreciation and amortization expense. The decrease in the current quarter S,G&A from the fourth quarter of the prior year is largely due a $222 thousand charge in the fourth quarter for the allowance for doubtful accounts and generally lower operating expenses in the current quarter.

As Rich said the relocation to Arkansas has gone well and we are beginning to see the benefits in the form of lower operating expense. At this point, the state has reimbursed us for nearly $1.5 million in relocation expenses.

Net interest and other expense was $107 thousand in the first quarter of 2013 compared to $167 thousand in the same quarter in the prior year. The lower interest expense of this year’s quarter was due to writing off a bank financing fee of $100 thousand in the last year quarter due to signing a new agreement with the bank associated with the March 2012 merger.

During the first quarter we received a favorable resolution to an income tax audit of our discontinued German subsidiary resulting in a tax credit of $125 thousand.

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The Company reported a net loss of $291 thousand, or $0.01 per share, for the three months ended March 31, 2013, compared to a net loss of $1.9 million, or $0.13 per share, for the corresponding period last year.

EBITDA, adjusted for stock compensation expense and severance associated with the relocation was approximately $1.4 million in the quarter that ended March 31, 2013 and that compares to an adjusted EBITDA of $212 thousand in the same quarter of the prior year.

Balance Sheet as of December 31, 2012

Turning the balance sheet, cash and cash equivalents totaled $3.2 million at March 31, 2013 compared to $3.4 million at the end of 2012.  Bank debt was approximately $6.9 million compared to $7.8 million at the end of 2012. Again as mentioned, the company has been generating a positive cash flow from operations since last August.

I would like to now turn the call back to Rich for closing remarks.

Richard Howe Comments:

Thanks Wally. In closing, I would like to summarize:

1)   We had a great first quarter and while we experienced a slow down in Mid March and April, we see plenty of opportunity within the business as we look out towards the end of the year.

2)   We’ve made significant improvements with margins, expenses, income and debt and continue to measure our efficiency as a company against our peer group.

3)   We have already secured 75% of the monthly benefits we had anticipated from the move and expect to realize the entire benefit starting at the end of June.

4)   We continue to expand our owned and operated properties, generating roughly 12% of our revenue from this strategy in Q1 and trending towards 18% in Q2.

5)   We continue to aggressively exploit the mobile growth curve with 15% of traffic currently mobile and trending quickly towards 20%.

And finally,

6)   Our move to Arkansas is almost completed and despite some disruption in the business, we are exceptionally pleased with the quality of new employees and our decision to relocate.

I’d like to now turn the call over to the operator for questions and answers.

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Richard Howe Comments:

I would like to thank everyone who joined us on today’s call. We appreciate your continued interest in Inuvo and look forward to reporting progress over the coming quarters.

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