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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
(Mark One)

    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019
OR

     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to ______________________
 
Commission file number: 001-32442
inuv-20190930_g1.jpg
Inuvo, Inc.
(Exact Name of Registrant as Specified in its Charter)

Nevada87-0450450
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
 Identification No.)
500 President Clinton Ave., Suite 300 Little Rock, AR
72201
(Address of Principal Executive Offices)(Zip Code)
(501) 205-8508
Registrant's Telephone Number, Including Area Code
not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stockINUVNYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.     Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(B) of the Securities Act: 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  





Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Title of ClassNovember 8, 2019
Common Stock49,013,375




EXPLANATORY NOTE

This Amendment No. 1 to our Quarterly Report on Form 10-Q (the “Form 10-Q/A”) amends our Quarterly Report on Form 10-Q for the period ended September 30, 2019 previously filed with the SEC on November 14, 2019 (the “Original Filing”). We are filing this Form 10-Q/A to correct inadvertent errors in Part I, Item 4 of the Original Filing regarding the results of the evaluation by our management of our disclosure controls and procedures for the period covered by this report. The correction of this error had no impact on the consolidated financial statements contained in the Original Filing and no other changes have been made to the Original Form 10-Q. This Form 10-Q/A speaks as of the filing date of the Original Filing, does not reflect events that may have occurred subsequent to the Original Filing, and does not modify or update in any way any other disclosures made in the Original Filing. This Form 10-Q/A also includes current dated certifications by the Company’s Chief Executive Officer and Chief Financial Officer filed as Exhibits 31.1, 31.2, 32.1 and 32.2.

TABLE OF CONTENTS

  Page No.
Part I
 
Item 1.Financial Statements.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders Equity
Notes to Consolidated Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Item 4.Controls and Procedures.
 
Part II
 
Item 1.Legal Proceedings.
Item 1A.Risk Factors.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.Defaults upon Senior Securities.
Item 4.Mine Safety and Disclosures.
Item 5.Other Information.
Item 6.Exhibits.
Signatures


3


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of such terms or other comparable terminology. This report includes, among others, statements regarding our risks associated with:

our history of losses, declining revenues and working capital deficit;
our ability to continue as a going concern;
our ability to obtain credit from a financial institution;
our reliance on revenues from a limited number of customers;
complying with the covenants and restrictions contained in our grant agreement with the State of Arkansas;
seasonality of our business which impacts our financial results and cash availability;
dependence on our supply partners;
our ability to acquire traffic in a profitable manner;
failure to keep pace with technology changes;
impact of possible interruption in our network infrastructure;
dependence on our key personnel;
regulatory and legal uncertainties;
failure to comply with privacy and data security laws and regulations;
third party infringement claims;
publishers who could fabricate fraudulent clicks;
a downturn in the global economy which could adversely impact our access to credit and ability to raise capital;
the impact of quarterly results on our stock price; and
dilution to our stockholders upon the exercise of outstanding stock options and restricted stock unit grants and the conversion of convertible notes.


These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing in this report, together with those appearing in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission ("SEC") on March 15, 2019, and our subsequent filings with the SEC.

Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, when used in this report the terms "Inuvo," the “Company,” "we," "us," "our" and similar terms refer to Inuvo, Inc., a Nevada corporation, and its subsidiaries. When used in this report, "third quarter 2019" means for the three months ended September 30, 2019, "third quarter 2018" means for the three months ended September 30, 2018, “2018” means the fiscal year ended December 31, 2018 and "2019" means the fiscal year ending December 31, 2019. The information which appears on our corporate web site at www.inuvo.com and our various social media platforms are not part of this report.

4


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INUVO, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2019 (Unaudited) and December 31, 2018
 September 30, 2019December 31, 2018
Assets
Current assets  
Cash$714,063  $228,956  
Accounts receivable, net of allowance for doubtful accounts of $125,000 and $63,727, respectively.
6,078,025  6,711,595  
Prepaid expenses and other current assets251,219  271,466  
Total current assets7,043,307  7,212,017  
Property and equipment, net1,467,110  2,123,672  
Other assets  
Intangible assets, net of accumulated amortization11,003,803  9,441,681  
Goodwill9,853,342  9,853,342  
Right of use assets - operating lease864,058  —  
Right of use assets - finance lease132,476  —  
Other assets35,170  35,170  
Total other assets21,888,849  19,330,193  
Total assets$30,399,266  $28,665,882  
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$6,535,436  $9,499,541  
Accrued expenses and other current liabilities4,255,922  2,489,834  
Financed receivables2,427,950  1,859,853  
Convertible promissory note1,238,333    
Derivative liability460,800    
Notes payable250,000  250,000  
Total current liabilities15,168,441  14,099,228  
Long-term liabilities  
Deferred tax liability2,339,832  2,339,832  
Convertible promissory note  1,000,000  
Lease liability - operating lease440,561  —  
Other long-term liabilities82,914  193,007  
Total long-term liabilities2,863,307  3,532,839  
Stockholders’ equity
Preferred stock, $0.001 par value:
Authorized shares 500,000, none issued and outstanding
    
Common stock, $0.001 par value:
Authorized shares 60,000,000; issued shares 49,335,746 and 32,757,817, respectively; outstanding shares 48,959,219 and 32,381,290, respectively
49,336  32,759  
Additional paid-in capital143,814,121  138,867,509  
Accumulated deficit(130,099,380) (126,469,894) 
Treasury stock, at cost - 376,527 shares
(1,396,559) (1,396,559) 
Total stockholders' equity12,367,518  11,033,815  
Total liabilities and stockholders' equity$30,399,266  $28,665,882  
 
See accompanying notes to the consolidated financial statements.
5










INUVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2019201820192018
Net revenue$13,789,754  $16,806,170  $43,302,230  $56,315,006  
Cost of revenue4,955,508  6,196,057  17,310,496  21,965,955  
Gross profit8,834,246  10,610,113  25,991,734  34,349,051  
Operating expenses  
Marketing costs (traffic acquisition costs or TAC)6,940,772  8,285,465  20,013,117  25,025,922  
Compensation2,186,252  1,806,111  5,730,297  6,749,280  
Selling, general and administrative2,081,547  1,859,020  6,672,115  5,968,233  
Total operating expenses11,208,571  11,950,596  32,415,529  37,743,435  
Operating loss(2,374,325) (1,340,483) (6,423,795) (3,394,384) 
Interest expense, net(143,642) (101,167) (511,558) (296,612) 
Other income, net3,305,867    3,305,867    
Income (loss) before taxes787,900  (1,441,650) (3,629,486) (3,690,996) 
Income tax benefit      8,625  
Net income (loss)787,900  (1,441,650) (3,629,486) (3,682,371) 
Per common share data  
Basic and diluted:  
Net income (loss)$0.02  $(0.04) $(0.10) $(0.12) 
Weighted average shares
Basic46,218,413  32,316,988  37,079,457  30,540,796  
Diluted51,019,631  32,316,988  37,079,457  30,540,796  
 
See accompanying notes to the consolidated financial statements.
6










INUVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the Nine Months Ended September 30,
 20192018
Operating activities:
Net loss$(3,629,486) $(3,682,371) 
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on merger termination(3,766,667)   
Depreciation and amortization2,298,964  2,371,958  
Depreciation-Right of Use Assets131,104  —  
Stock based compensation594,630  827,595  
Derivative liability460,800    
Provision (recovery) of doubtful accounts61,273  (40,062) 
Amortization of financing fees43,402  19,200  
Amortization of OID interest expense93,333    
Change in operating assets and liabilities:
Accounts receivable572,297  5,183,579  
Prepaid expenses and other current assets11,374  74,634  
Accrued expenses and other liabilities1,450,574  (445,857) 
Accounts payable(2,964,105) (4,592,798) 
Net cash used in operating activities(4,642,507) (284,122) 
Investing activities:
Purchases of equipment and capitalized development costs(893,104) (1,300,179) 
Net cash used in investing activities(893,104) (1,300,179) 
Financing activities:
Proceeds from sale of common stock4,414,126  2,000,583  
Net (payments) proceeds on revolving credit line  (75,000) 
Proceeds from convertible promissory notes1,200,000    
Net proceeds from financed receivables568,097    
Shareholder Settlement125,000    
Payments on capital leases—  (158,650) 
Payments on financing leases(151,409) —  
Prepaid financing fees(24,529)   
Debt issuance cost(65,000)   
Net taxes paid on RSU grants exercised
(45,567) (77,044) 
Net cash provided by financing activities6,020,718  1,689,889  
Net change – cash485,107  105,588  
Cash, beginning of year228,956  4,084,686  
Cash, end of period$714,063  $4,190,274  
Supplemental information:
Interest paid$306,073  $287,374  
Non cash investing and financing activities:
Adoption of ASC 842$1,437,526  $  
ReTargeter Intangible Assets$2,575,000  $  
 
See accompanying notes to the consolidated financial statements.
7










INUVO, INC.
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
(unaudited)
For the Nine Months Ended September 30,

2019
Common Stock Additional Paid in CapitalAccumulated DeficitTreasury StockTotal
SharesStock
Balance as of December 31, 201832,381,290  $32,759  $138,867,509  $(126,469,894) $(1,396,559) $11,033,815  
Net loss(2,462,393) (2,462,393) 
Stock-based compensation96,871  96,871  
Stock issued for vested restricted stock awards186,031  186  (186) —  
Balance as of March 31, 201932,567,321  32,945  $138,964,194  $(128,932,287) $(1,396,559) $8,668,293  
Net loss(1,954,993) —  (1,954,993) 
Stock-based compensation49,822  49,822  
Shares withheld for taxes on vest restricted stock(9,045) (9,045) 
Stock issued for vested restricted stock awards47,213  47  (47) —  
Balance as of June 30, 201932,614,534  $32,992  $139,004,924  $(130,887,280) $(1,396,559) $6,754,077  
Net income787,900  787,900  
Stock-based compensation447,937  447,937  
Shares withheld for taxes on vest restricted stock(36,522) (36,522) 
Stock issued for vested restricted stock awards532,185  531  (531) —  
Capital Raise, net15,812,500  15,813  4,398,313  4,414,126  
Balance as of September 30, 201948,959,219  $49,336  $143,814,121  $(130,099,380) $(1,396,559) $12,367,518  


8










2018
Common Stock Additional Paid in CapitalAccumulated DeficitTreasury StockTotal
SharesStock
Balance as of December 31, 201728,618,454  $28,996  $136,033,967  $(120,579,062) $(1,396,559) $14,087,342  
Net loss(1,408,024) (1,408,024) 
Stock-based compensation377,847  377,847  
Stock issued for vested restricted stock awards178,744  178  (178) —  
Balance as of March 31, 201828,797,198  $29,174  $136,411,636  $(121,987,086) $(1,396,559) $13,057,165  
Net loss(832,697) —  (832,697) 
Stock-based compensation289,950  289,950  
Stock issued for vested restricted stock awards40,406  40  (40) —  
Shares withheld for taxes on vested restricted stock(1,702) (1,702) 
Capital Raise, net3,289,000  3,289  2,060,044  2,063,333  
Balance as of June 30, 201832,126,604  $32,503  $138,759,888  $(122,819,783) $(1,396,559) $14,576,049  
Net loss(1,441,650) (1,441,650) 
Stock-based compensation159,799  159,799  
Stock issued for vested restricted stock awards307,071  308  (308) —  
Shares withheld for taxes on vested restricted stock(139,795) (139,795) 
Balance as of September 30, 201832,433,675  $32,811  $138,779,584  $(124,261,433) $(1,396,559) $13,154,403  

9










Inuvo, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 – Organization and Business
 
Company Overview
 
Inuvo is a technology company that provides data-driven platforms that can automatically identify and message online audiences for any product or service across devices, channels and formats, including video, mobile, connected TV, display, social and native. These capabilities allow Inuvo’s clients to engage with their customers and prospects in a manner that drives engagement from the first contact with the consumer. Inuvo facilitates over a billion marketing messages to consumers every single month and counts among its clients numerous world-renowned names in industries that have included retail, automotive, insurance, health care, technology, telecommunications and finance. Inuvo counts among its many contractual relationships, three clients who collectively manage over 50% of all US digital advertising budgets.

Inuvo’s solution incorporates a proprietary form of artificial intelligence, or AI, branded the IntentKey. This sophisticated machine learning technology uses interactions with Internet content as a source of information from which to predict consumer intent. The AI includes a continually updated database of over 500 million machine profiles which Inuvo utilizes to deliver highly aligned online audiences to its clients. Inuvo earns revenue when consumers view or click on its client’s messages. Inuvo’s business scales through account management activity with existing clients and by adding new clients through sales activity.
 
As part of Inuvo’s technology strategy, it owns a collection of websites like alot.com and earnspendlive.com, where Inuvo creates content in health, finance, travel, careers, auto, education and living categories. These sites provide the means to test Inuvo’s technologies, while also delivering high quality consumers to clients through the interaction with proprietary content in the form of images, videos, slideshows and articles.
There are many barriers to entry to Inuvo’s business that would require proficiency in large scale data center management, software development, data products, analytics, artificial intelligence, integration to the internet of things, or IOT, the relationships required to execute within the IOT and the ability to process tens of billions of transactions daily. Our intellectual property is protected by 15 issued and eight pending patents.

Recent Developments
Increase in authorized shares of common stock and shares available under our 2017 ECP

On August 21, 2019, our board of directors approved a proposal to amend our articles of incorporation to increase the number of authorized shares of our common stock from 60,000,000 to 100,000,000 in the form of the articles of amendment and was subsequently approved by stockholders on October 4, 2019 at the annual stockholders meeting. At our 2019 annual meeting of stockholders our stockholders also approved an increase of 6,800,000 shares of our common stock in the number of shares which are reserved for grants under our 2017 Equity Compensation Plan (“2017 ECP”).

Equity Offering
On July 15, 2019, the Company closed on the underwritten public offering of 13,750,000 shares of common stock at a public offering price of $0.30 per share.  On July 17, 2019, the Company issued 2,062,500 shares of common stock to Roth Capital Partners (the “Underwriter”) in connection with the Underwriter fully exercising its over-allotment option at the public offering price of $0.30 per share. After giving effect to the full exercise of the over-allotment option, the total number of shares sold by the Company in the public offering increased to 15,812,500 shares and gross proceeds increased to approximately $4.7 million. The net proceeds to the Company, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, were approximately $4.4 million.

Mergers Termination

On June 20, 2019, Inuvo entered into an Agreement and Plan of Merger Termination Agreement (the “Merger Termination Agreement”) with ConversionPoint Technologies Inc., a Delaware corporation (“CPT”), ConversionPoint Holdings, Inc., a Delaware corporation (“Parent”), CPT Merger Sub, Inc., a Delaware corporation, (“CPT Merger Sub”), and CPT Cigar Merger Sub, Inc., a Nevada corporation (“Inuvo Merger Sub”), which, among other things, (1) terminated the Agreement and Plan of Merger, dated November 2, 2018, by and among Inuvo, CPT, Parent, CPT Merger Sub, and Inuvo Merger Sub, as amended (the
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“Merger Agreement”), pursuant to which Inuvo would have merged with and into Inuvo Merger Sub and become a wholly-owned subsidiary of Parent, and CPT would have merged with and into CPT Merger Sub and become a wholly-owned subsidiary of Parent (the “Mergers”), and (2) terminated each of the Support Agreements that were entered into by certain officers and directors of Inuvo and the parties to the Merger Agreement. The Merger Agreement was terminated as a result of Parent’s inability to fulfill the closing condition of the Mergers that Parent raise $36,000,000 in gross proceeds from an equity, debt, or equity-linked offering of its securities which no longer obligated Inuvo to consummate the Mergers contemplated by the Merger Agreement.

Concurrently with the execution of the Merger Termination Agreement, CPT Investments, LLC, a California limited liability company and an affiliate of CPT (“CPT Investments”), and Inuvo entered into a certain Inuvo Note Termination Agreement (the “Note Termination Agreement”) and agreed to (1) terminate and cancel the 10% Senior Unsecured Subordinated Convertible Promissory Note, dated November 1, 2018, executed by Inuvo in favor of CPT Investments (the “CPTI Note”), which as of June 20, 2019, had $1,063,288 in accrued principal and interest outstanding (the “Outstanding Indebtedness”) by July 20, 2019, (2) effective immediately, terminate all conversion rights under the CPTI Note to convert amounts outstanding into shares of Inuvo’s common stock, (3) terminate the Securities Purchase Agreement, dated November 1, 2018, by and between Inuvo and CPTI (the “Securities Purchase Agreement”), and (4) terminate the Registration Rights Agreement, dated November 1, 2018, by and between Inuvo and CPTI.

The Merger Termination Agreement provided that the termination fee of $2,800,000 to be paid to Inuvo (the “Termination Fee”) for failure to fulfill the Financing Condition would be satisfied as follows:

(1)  $1,063,288 of the Termination Fee (the “Indebtedness Satisfaction Amount”) was satisfied in consideration of the termination and cancellation of the Outstanding Indebtedness pursuant to the CPTI Note Termination Agreement that was approved by CPT’s senior lenders Montage Capital II, L.P. and Partners for Growth IV, L.P. (the “Senior Lenders”) of CPT’s issuance of a replacement note to CPT Investments that was entered into in July 2019;

(2)  $1,611,712 of the Termination Fee (the “ReTargeter Satisfaction Amount”) was satisfied by CPT transferring all of the assets related to CPT’s programmatic and RTB advertising solutions business conducted through managed services and a proprietary SaaS solution (the “ReTargeter Business”), free and clear of all liabilities, encumbrances, or liens, to Inuvo (the “ReTargeter Asset Transfer”); and

(3)  CPT paid $125,000 to Inuvo on September 15, 2019 to be contributed to the settlement of ongoing litigation with respect to the Mergers (the “Litigation Fee”).

On September 30, 2019, Inuvo paid its obligation of $250,000 under a confidential settlement agreement that it entered into on June 20, 2019 resolving certain outstanding litigation related to the Mergers. Under the Merger Termination Agreement, CPT and Inuvo agreed to mutually release all claims that each party had against the other, as well as certain affiliated entities of each. Inuvo, however, will be able to pursue any claims against CPT and its affiliates for breaches of the Merger Termination Agreement.

An independent valuation of the ReTargeter Business was completed as of September 30, 2019. The enterprise valuation of the ReTargeter Business was determined to be $2.57 million (see Note 4 - Other Intangible Assets and Goodwill).

Special Stockholder Meeting
On May 8, 2019, a Special Meeting of Stockholders (the “Special Meeting”) for the purposes of (i) approving and adopting the Merger Agreement; (ii) approving, on a non-binding advisory basis, the compensation that may be paid or become payable to the named executive officers of Inuvo that is based on or otherwise relates to the completion of the transactions contemplated by the Merger Agreement; (iii) approving and adopting an amendment to Inuvo’s articles of incorporation permitting Inuvo to increase the amount of authorized shares of its common stock from 40,000,000 to 60,000,000; and (iv) approving one or more adjournments of the Special Meeting, if necessary, to permit further solicitation of additional proxies in the event there are not sufficient votes present at the Special Meeting in person or by proxy, or at any adjournment or postponement of that Special Meeting, to approve and adopt the Merger Agreement. Stockholders approved the first three items. The fourth item was withdrawn as stockholders approved and adopted the Merger Agreement, although as noted above, the Mergers were subsequently terminated.

Liquidity

On October 11, 2018, we entered into the Amended and Restated Business Financing Agreement (the “Amended and Restated Financing Agreement”) with Western Alliance Bank. The Amended and Restated Financing Agreement, which is secured by all
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of our assets, superseded in its entirety the prior the Business Financing Agreement, as amended, that we entered into on March 1, 2012 with Bridge Bank, N.A. which is now owned by Western Alliance Bank. The Amended and Restated Financing Agreement does not have a term and either party may terminate upon notice to the other party.

On May 1, 2019, effective April 30, 2019, we entered into the Second Amendment (the “Second Amendment”) to the Amended and Restated Business Financing Agreement dated October 11, 2018, as amended with Western Alliance Bank. The Second Amendment extended the expiration date with respect to the eligible unbilled receivable sublimit of $2,500,000 to the date that is the earlier to occur of (a) May 31, 2019, or (b) three (3) days after consummation of the Merger transactions; amended the definition of “Change of Control” to state that any change of control pursuant to the Merger Transactions will be deemed to occur three days after the completion of the Merger Transactions; and imposed an amendment fee of $1,000 on Inuvo.
On June 6, 2019, we entered into the Third Amendment to the Business Financing Modification Agreement (the “Third Amendment”). The Third Amendment provides that with respect to the eligible unbilled receivable sublimit of $2,500,000, which expired May 31, 2019 under the Amended and Restated Financing Agreement, that: (i) lender has no obligation to finance unbilled receivables but may do so in its discretion; and (ii) lender may terminate financing of unbilled receivables upon written notice. The Third Amendment also imposed an amendment fee of $2,000 on Inuvo.

For the nine months ended September 30, 2019, our revenues declined 23% from the same period in the prior year. The lower revenue in the nine-month period of 2019 is principally responsible for our $3.6 million net loss. The net loss includes a one-time gain of $3.8 million related for the CPT Merger Termination fee, partially offset by $460,800 expense due to the derivative liability (see Note 8). Of the loss, approximately $2.9 million were the non-cash expenses of depreciation, amortization, and stock-based compensation. Further, we had roughly $1 million of Merger related costs within the nine-month period ending September 30, 2019. Since our credit facility is dependent upon receivables, and we do not know when, if ever, that our revenues will return to historic levels or if we will be able to replace those lost revenues with revenues from other sources, the combination of lower credit availability, assuming that the lender will continue to finance unbilled receivables of which there are no assurances, and negative cash flows generated from operating activities introduces potential risk to operation without interruption. As described earlier in this report, on November 2, 2018, we entered into the Merger Agreement which we terminated in June 2019 due to the acquirer's inability to fulfill the closing conditions. The termination of the Merger Agreement resulted in a termination fee of $2.8 million that was partially satisfied by the termination and cancellation of the CPTI Note Of approximately $1.1 million in July 2019.

On November 2, 2018, four directors of the Company lent us $62,500 each, for an aggregate of $250,000, under the terms of 10% Promissory Notes, to cover certain costs associated with the Mergers. The Promissory Notes and related interest were due and satisfied on November 1, 2019. In March 2019, we sold an aggregate of $1,440,000 Original Issue Discount Unsecured Subordinated Convertible Notes due September 1, 2020 in a private placement and received $1,200,000 in proceeds which were used for working capital. Subsequently, in July 2019, we raised an additional $4.4 million net in a public offering of our common stock after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. There are no assurances we will be successful in our efforts to generate revenues or report profitable operations in which case we would need to find additional sources of credit and make substantial reductions to operating expense. We may have to find additional sources of credit and/or make substantial reductions in our operating expense. A substantial reduction of operating expense may cause disruption to the business and the generation of future revenue. Given the above conditions, there is doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared with the realization of assets and the satisfaction of liabilities in the normal course of business.

Customer concentration

We generated the majority of our revenue from two customers, Yahoo! and Google as noted below:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2019201820192018
Yahoo!59.9 75.6 %68.0 %72.9 %
Google14.1 8.5 %12.4 %9.0 %
Total74.0 84.1 %80.4 %81.9 %

As of September 30, 2019, Yahoo! and Google accounted for 62.5% of our gross accounts receivable balance. As of December 31, 2018, the same two customers accounted for 71.1% of our gross accounts receivable balance.

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We still source the majority of our revenue through these relationships where we have access to advertiser budgets indirectly. While this strategy creates a concentration risk, we believe that it also provides upside opportunities including; access to hundreds of thousands of advertisers across geographies; the ability to scale our business across verticals; an avoidance of the sales costs associated with a large direct to advertisers’ sales force; access to innovation; overall media budget market insights; attractive payment terms; and low risk on receivables. As our IntentKey business continues to grow and become a larger proportion of our overall revenue, the percentage of Yahoo! and Google revenue to the total revenue is expected to decrease.


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Note 2 – Summary of Significant Accounting Policies
 
Basis of presentation
 
The consolidated financial statements presented are for Inuvo and its consolidated subsidiaries. The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2018, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). In our opinion, these consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 15, 2019.

Use of estimates

The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s regular evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, accrued sales reserve, goodwill and purchased intangible asset valuations, lives of intangible assets, valuation of long-lived assets, derivative liability and stock compensation. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from
Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted this guidance on January 1, 2018 using the modified retrospective approach and elected to apply the new guidance only to contracts that were not complete as of the date of adoption. The cumulative impact to retained earnings was not material.
Most of our revenue is generated through clicks on advertisements presented on our properties or those of our partners. We
recognize revenue from clicks in the period in which the click occurs. Payments to partners who display advertisements on our behalf are recognized as cost of revenue. Revenue from data sales and commissions is recognized in the period in which the
transaction occurs and the other revenue recognition criteria are met. Effective January 1, 2018, revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We also recognize revenue from serving impressions when we complete all or a part of an order from an advertiser. The revenue is recognized in the period that the impression is served.

The below table is the proportion of revenue that is generated through advertisements on our partners sites and owned and operated ("O&O") sites:

For the Three Months Ended September 30,For the Nine Months Ended September 30,
2019201820192018
Partners$8,713,358  63.2 %$7,566,559  45.0 %$30,573,852  70.6 %$28,001,296  49.7 %
O&O5,076,396  36.8 %9,239,611  55.0 %12,728,378  29.4 %28,313,710  50.3 %
Total$13,789,754  100.0 %$16,806,170  100.0 %$43,302,230  100.0 %$56,315,006  100.0 %

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The following table presents our revenue disaggregated by channel:

For the Three Months Ended September 30,For the Nine Months Ended September 30,
2019201820192018
Mobile$8,032,115  $12,532,579  $27,402,314  $39,800,781  
Desktop5,532,455  4,014,356  15,062,731  15,671,684  
Other225,184  259,235  837,185  842,541  
Total$13,789,754  $16,806,170  $43,302,230  $56,315,006  

Leases
 
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new standard effective January 1, 2019 on a modified retrospective basis and did not restate comparative periods. We elected the package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The new standard did not have a material impact on our consolidated financial statements.

We determine if an arrangement is a lease at inception. Operating and finance leases are included in Right Of Use ("ROU") assets, and lease liability obligations in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liability obligations represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We have lease agreements with lease and non-lease components and account for such components as a single lease component. As most of our leases do not provide an implicit rate, we estimated our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Please refer to Note 13 for additional information.


15










Note 3– Property and Equipment
 
The net carrying value of property and equipment was as follows as of:
 September 30, 2019December 31, 2018
Furniture and fixtures$293,152  $293,152  
Equipment1,013,792  1,527,054  
Capitalized internal use and purchased software10,019,804  9,142,075  
Leasehold improvements421,016  421,016  
Subtotal11,747,764  11,383,297  
Less: accumulated depreciation and amortization(10,280,654) (9,259,625) 
Total$1,467,110  $2,123,672  

During the three and nine months ended September 30, 2019, depreciation expense was $412,660 and $1,286,086, respectively. During the three and nine months ended September 30, 2018, depreciation expense was $457,272 and $1,343,247, respectively.

Note 4 – Other Intangible Assets and Goodwill
 
The following is a schedule of intangible assets as of September 30, 2019:
 TermCarrying
Value
Accumulated Amortization and ImpairmentNet Carrying ValueYear-to-date Amortization
Customer list, Google20 years$8,820,000  $(3,344,250) $5,475,750  $330,750  
Technology5 years3,600,000  (1,920,000) 1,680,000  540,000  
Customer list, ReTargeter (2)5 years1,931,250    1,931,250    
Customer list, all other10 years1,610,000  (1,220,947) 389,053  120,753  
Brand name, ReTargeter (2)5 years643,750    643,750    
Customer relationships20 years570,000  (76,000) 494,000  21,375  
Trade names, web properties (1)-390,000    390,000    
Intangible assets classified as long-term$17,565,000  $(6,561,197) $11,003,803  $1,012,878  
Goodwill, total-$9,853,342  $—  $9,853,342  $—  

1.The trade names related to our web properties have an indefinite life, and as such are not amortized.
2.We recorded $2.57 million in intangible assets from the CPT Merger Termination Agreement. An independent valuation of the assets was performed to determine the carrying value of the assets listed above. See Note 1 - Organization and Business.
Amortization expense over the next five years and thereafter is as follows:
 
2019$444,918  
20201,865,504  
20211,865,504  
20221,071,294  
2023984,500  
Thereafter4,382,083  
Total$10,613,803  

Note 5 - Bank Debt
 
The following table summarizes our bank debt as of:

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September 30, 2019December 31, 2018
Finance receivables - 6.0 percent at September 30, 2019 (prime plus 1 percent) on invoiced receivables; 7.0 percent at September 30, 2019 (prime plus 2 percent) on uninvoiced receivables
$2,427,950  $1,859,853  
Total$2,427,950  $1,859,853  

On March 1, 2012 we entered into a Business Financing Agreement with Bridge Bank, which is now owned by Western Alliance Bank. The agreement provided us with a revolving credit line of up to $10 million which we use to help satisfy our working capital needs. On October 11, 2018, we entered into the Amended and Restated Financing Agreement with Western Alliance Bank which superseded the Business Financing Agreement, as amended. The Amended and Restated Financing Agreement may be terminated by either party upon notice to the other party. The material terms of the Amended and Restated Financing Agreement include financing eligible invoiced receivables at an advance rate of 85% and an interest rate of prime plus 1% and a sub-limit of up to $2.5 million of uninvoiced eligible receivables at an advance rate of 75% and an interest rate of prime plus 2%. The sub-limit provision expired at the end of April 2019. The Amended and Restated Financing Agreement included certain fees; a facility fee of $11,765 due at closing; an annual facility fee of 0.25% of the account balance due beginning on April 20, 2019; a monthly maintenance fee of 0.125% of the ending daily account balance; a $30,000 fee in lieu of a warrant; and $80,000 due upon termination of the agreement or repayment of our obligations under the agreement. The Amended and Restated Financing Agreement is secured by all of our assets. On April 30, 2019, under the terms of the Second Amendment, Western Alliance Bank agreed to extend the $2.5 million sub-limit provision of uninvoiced eligible receivables until the earlier of May 31, 2019 or three days after the closing of the Mergers, among other terms.

On June 6, 2019, we entered into the Third Amendment to the Amended and Restated Financing. The Third Amendment provides that with respect to the eligible unbilled receivable sublimit of $2,500,000, which expired May 31, 2019 under the Amended and Restated Financing Agreement, that: (i) lender has no obligation to finance unbilled receivables but may do so in its discretion; and (ii) lender may terminate financing of unbilled receivables upon written notice. The Third Amendment also imposed an amendment fee of $2,000.

Note 6 - Notes Payable

On November 2, 2018, each of Messrs. Richard K. Howe, the Company’s Chief Executive Officer and member of our board of directors, and Charles D. Morgan, G. Kent Burnett and Gordon Cameron, members of the Company’s board of directors, lent the Company $62,500, for an aggregate of $250,000, under the terms of 10% Promissory Notes. The Company used the proceeds from these notes to pay certain costs associated with the Mergers. The notes are unsecured, bear interest at 10% per annum and the principal and accrued interest is due on November 2, 2019, subject to acceleration upon an Event of Default or Change of Control (as both terms are defined in the note) (see Note 14 - Related Party Transactions). The notes and accrued interest were due and satisfied on November 1, 2019.


Note 7 – Accrued Expenses and Other Current Liabilities

The accrued expenses and other current liabilities consist of the following as of:
 September 30, 2019December 31, 2018
Accrued marketing costs (TAC)$2,542,023  $1,509,843  
Accrued expenses and other935,956  461,823  
Capital lease—  198,769  
Operating lease liability424,544  —  
Financing lease liability128,329  —  
Accrued payroll and commission liabilities117,923  200,290  
Arkansas grant contingency50,000  55,000  
Accrued sales allowance50,000  50,000  
Accrued taxes7,147  14,109  
Total$4,255,922  $2,489,834  

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Note 8 - Convertible Promissory Notes

On March 1, 2019, Inuvo entered into a Securities Purchase Agreement with three accredited investors (the “Purchasers”) for the purchase and sale of an aggregate of $1,440,000 of principal of Original Issue Discount Unsecured Subordinated Convertible Notes due September 1, 2020 (the “Calvary Notes”) to fund working capital and additional expenses resulting from the delay in closing of the Mergers associated with the government shut down. The initial conversion price of the Calvary Notes is $1.08 per share which would make them convertible into 1,333,333 unregistered shares of Inuvo’s common stock upon conversion. The Calvary Notes were issued in a private placement and the shares of common stock issuable upon conversion are restricted, subject to resale under Rule 144. The proceeds to Inuvo from the offering were $1,200,000. Inuvo did not pay any commissions or finders fees in connection with the sale of the Calvary Notes and Inuvo utilized the proceeds for working capital. On July 15, 2019, the initial conversion price of the Calvary Notes of $1.08 per share was adjusted to $0.30 per share to equal the equity offering price as discussed in Note 1. At September 30, 2019, the fair value of the derivative was determined to be $460,800 and the expense was recorded to other income, net.

On November 1, 2018, the Company and CPT Investments entered into a Securities Purchase Agreement for up to $2 million pursuant to which the Company issued and sold a $1,000,000 principal amount 10% senior unsecured subordinated convertible promissory note ("the CPTI Note") to CPT Investments which we used for working capital. The CPTI Note, which bore interest at the rate of 10% per annum and the principal and accrued interest was due on November 1, 2021. On June 20, 2019, the Company entered into a Merger Termination Agreement with CPT and its affiliated companies and concurrently entered into a Note Termination Agreement with CPT Investments as partial satisfaction of the termination fee required by the Merger Agreement. On July 23, 2019, the Company received notice that the conditions precedent to effectiveness of the termination of the CPTI Note were met pursuant to the Inuvo Note Termination Agreement, dated June 20, 2019, by and between the Company and CPT Investments, and the CPTI Note has been canceled and terminated in full and rendered null and void. All past, current, or future obligations under the CPTI Note have been extinguished. The termination of the note was recorded to other income, net.

Note 9 – Other Long-Term Liabilities
 
Other long-term liabilities consist of the following as of:
 September 30, 2019December 31, 2018
Capital leases, less current portion$—  $80,969  
Deferred rent69,152  98,276  
Accrued taxes, less current portion13,762  13,762  
Total$82,914  $193,007  

Note 10 – Income Taxes

We have a deferred tax liability of $2,339,832 as of September 30, 2019 and December 31, 2018, related to intangible assets acquired in March 2012 and February 2017.

We also have a net deferred tax asset of approximately $32,663,706. We believe it is more likely than not that essentially none of our deferred tax assets will be realized, and we have recorded a valuation allowance for the net deferred tax assets that may not be realized as of September 30, 2019 and December 31, 2018.

Note 11 - Stock-Based Compensation
 
We maintain a stock-based compensation program intended to attract, retain and provide incentives for talented employees and directors and align stockholder and employee interests. Currently, we grant options and restricted stock units ("RSUs") from the 2010 Equity Compensation Plan (“2010 ECP”) and the 2017 ECP. Option and RSUs vesting periods are generally up to three years and/or achieving certain financial targets.

On August 14, 2019, the Inuvo Nominating, Corporate Governance and Compensation Committee approved modifications to the outstanding RSU grants under the 2010 and 2017 ECP plans. The modifications include deeming the performance criteria for the performance based RSU grants with a measurement period based on June 30, 2019 as met and vested. In addition, any remaining RSU grants outstanding were modified to vest in three equal parts on August 19, 2019, January 1, 2020 and July 1, 2020 as long as the grantee is employed by Inuvo on the vesting date.

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On August 21, 2019 our board of directors adopted, subject to stockholder approval, an amendment to our 2017 ECP to increase in the number of shares reserved for issuance upon grants made under the plan by an additional 6,800,000 shares of our common stock. The stockholders approved the amendment to our 2017 ECP at the annual stockholders meeting on October 4, 2019.

Compensation Expense

For the three and nine months ended September 30, 2019, we recorded stock-based compensation expense for all equity incentive plans of $447,937 and $594,630, respectively. For the three and nine months ended September 30, 2018, we recorded stock-based compensation expense for all equity incentive plans of $