Inuvo, Inc. - Quarter Report: 2012 March (Form 10-Q)

inuv_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o	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

INUVO, INC.

(Exact name of registrant as specified in its charter)

Nevada		87-0450450
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

143 Varick Street, New York, NY		10013
(Address of principal executive offices)		(Zip Code)

(212) 231-2000

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 such filing requirements for the past 90 days. Yes þ No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of Class		Shares Outstanding at May 11, 2012
Common Stock		23,482,122

INUVO, INC.

FORM 10-Q

Quarter Ended March 31, 2012

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION

Item 1.	Financial Statements		4
	Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011		4
	Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011 (Unaudited)		5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)		6
	Notes to Consolidated Financial Statements (“Unaudited”)		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4	Controls and Procedures		30
PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3.	Defaults Upon Senior Securities		33
Item 4.	Mine Safety Disclosures		33
Item 5.	Other Information		33
Item 6.	Exhibits		34

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Exchange Act"), and Section 21E of the Securities Exchange Act of 1934, as amended. 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:

●

Revenue;

●	Primary operating costs and expenses;

●	Capital expenditures;

●	Operating lease arrangements; and

●	Evaluation of possible acquisitions of or investments in business, products, and technologies.

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 our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission. 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 the “Company,” "we," "us," "ours," and similar terms refers to Inuvo, Inc., a Nevada corporation, and our subsidiaries.

The information which appears on our web site at www.inuvo.com is not part of this report.

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

INUVO, INC.

CONSOLIDATED BALANCE SHEETS

March 31, 2012 (Unaudited) and December 31, 2011

	March 31,			December31,
	2012			2011
Assets:
Current assets:
Cash	$	3,490,425		$	4,413
Restricted cash		475,762			475,586
Accounts receivable, net of allowance for doubtful accounts of $448,805 and $477,289, respectively		5,299,757			5,426,865
Unbilled revenue		101,141			49,196
Intangible assets - current, net of accumulated amortization		1,235,238			947,882
Prepaid expenses and other current assets		809,803			433,601
Total current assets		11,412,126			7,337,543
Property and equipment, net		3,339,250			1,590,011
Other assets:
Goodwill		6,062,750			1,776,544
Intangible assets, net of accumulated amortization		11,823,834			390,000
Other assets		162,730			2,243
Total other assets		18,049,314			2,168,787
Total assets	$	32,800,690		$	11,096,341

Liabilities and Stockholders’ Equity (Deficit):

Current liabilities:
Term and credit note payable – current portion	$	1,111,000		$	452,000
Accounts payable		10,093,695			6,198,921
Deferred revenue		17,250			18,083
Deferred compensation		-			929,428
Accrued expenses and other current liabilities		3,132,302			1,593,748
Current liabilities of discontinued operations		100,000			160,000
Total current liabilities		14,454,247			9,352,180

Long-term liabilities:
Deferred tax liability		4,543,000			-
Term and credit notes payable – long term		3,889,000			2,454,303
Other long-term liabilities		927,962			300,124
Total long-term liabilities		9,359,962			2,754,427

Stockholders’ equity (deficit):
Preferred stock, $.001 par value:
Authorized shares – 500,000 – none issued or outstanding		-			-
Common stock, $.001 par value:
Authorized shares 40,000,000, issued shares 23,847,679 and 10,422,617, respectively
Outstanding shares – 23,482,122 and 10,035,790, respectively		23,847			10,422
Additional paid-in capital		126,868,409			115,096,953
Accumulated deficit		(116,522,134	)		(114,648,037	)
Accumulated other comprehensive income		5,156			-
Treasury stock, at cost – 365,557 and 386,827 shares, respectively		(1,388,797	)		(1,469,604	)
Total stockholders’ equity (deficit)		8,986,481			(1,010,266	)
Total liabilities and stockholders’ equity (deficit)	$	32,800,690		$	11,096,341

The accompanying notes to the consolidated financial statements are an integral part of these financial statements.

INUVO, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Three Months Ended March 31, 2012 and 2011

(Unaudited)

	2012			2011
Net revenue	$	8,767,149		$	11,793,495
Cost of revenue:
Affiliate expenses		4,505,699			5,741,766
Data acquisition		779,975			621,764
Merchant processing fees and product costs		62,077			7,936
Cost of revenue		5,347,751			6,371,466
Gross profit		3,419,398			5,422,029
Operating expenses:
Search costs		1,843,057			2,493,479
Compensation and telemarketing		1,296,565			2,672,277
Selling, general and administrative		1,985,463			1,435,166
Total operating expenses		5,125,085			6,600,922
Operating loss		(1,705,687	)		(1,178,893	)
Other income (expenses):
Litigation settlements		-			(374,800	)
Interest expense, net		(166,701	)		(96,669	)
Other expenses, net		(166,701	)		(471,469	)
Loss from continuing operations before taxes		(1,872,388	)		(1,650,362	)
Income tax expense		-			-
Net loss from continuing operations		(1,872,388	)		(1,650,362	)
Net (loss) income from discontinued operations		(1,709	)		257,136
Net loss	$	(1,874,097	)	$	(1,393,226	)
Other comprehensive income:
Foreign currency revaluation	$	5,156		$	-
Total comprehensive loss	$	(1,868,941	)	$	(1,393,226)

Per common share data:
Basic and diluted:
Net loss from continuing operations	$	(0.13	)	$	(0.19	)
Net income from discontinued operations		(0.00	)		0.03
Net loss	$	(0.13	)	$	(0.16	)

Weighted average shares (Basic and diluted)		14,431,201			8,558,790

The accompanying notes to the consolidated financial statements are an integral part of these statements.

INUVO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2012 and 2011

(Unaudited)

	2012			2011
Operating activities:
Net loss	$	(1,874,097	)	$	(1,393,226	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,286,052			1,144,107
Gain on litigation settlement – discontinued operations		-			(256,424	)
Litigation settlements in common stock		-			249,800
Deferred compensation		-			372,100
Stock based compensation		195,419			175,437
Change in operating assets and liabilities:
Restricted cash		(176	)		(340,478	)
Accounts receivable		2,220,953			(336,040	)
Prepaid expenses and other assets		215,619			97,742
Accounts payable		141,161			319,004
Deferred revenue		(833	)		(15,138	)
Other accrued expenses and current liabilities		(1,309,141	)		321,588
Net cash provided by operating activities from continuing operations		874,957			338,472
Net cash used in operating activities of discontinued operations		(60,000	)		-
Net cash provided by operating activities		814,957			338,472

Investing activities:
Purchases of equipment and capitalized development costs		(131,815	)		(47,792	)
Net cash received from merger with Vertro, Inc., net of merger costs		2,439,3600			-
Purchase of names database and bundled downloads		(707,400	)		(917,227	)
Net cash provided by (used in) investing activities		1,600,145			(965,019	)

Financing activities:
Advances from term note payable		5,000,000			-
Deposit to collateralize letter of credit		(475,000	)		(475,000	)
Advances from credit note payable		-			6,302,744
Payments on credit note payable and capital leases		(3,459,246	)		(3,507,617	)
Net cash provided by financing activities		1,065,754			2,320,127
Accumulated other comprehensive income		5,156			-
Net change – cash		3,486,012			1,693,580
Cash, beginning of period		4,413			118,561
Cash, end of period	$	3,490,425		$	1,812,141

Supplemental information:
Interest paid	$	66,386		$	185,208
Non-cash investing activities:
Issuance of stock as settlement of deferred compensation	$	915,750		$	-

The accompanying notes to the consolidated financial statements are an integral part of these statements.

INUVO, INC.

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

(Unaudited)

Note 1 – Organization and Business and Accounting Policies

Inuvo® is an internet marketing and technology company specialized in marketing browser-based consumer applications, managing networks of website publishers and operating specialty websites. We develop software and analytics technology that is accessible over the internet for use by consumers, online advertisers and website publishers.

On March 1, 2012 we completed our acquisition of Vertro, Inc. (“Vertro”), an internet company that owns and operates the ALOT product portfolio. Effective with the merger, we are now organized into three operating segments: Software Search, Publisher Network and Partner Programs. Vertro’s operations are now part of our Software Search and Partner Programs segments. Our Publisher Network segment consists of the technology and analytics platforms that provide advertisers and publishers the capability to facilitate performance based advertising. This segment also consists of websites we own and operate. The Partner Programs segment consists of consumer applications we have designed, developed and marketed. The Software Search, Publisher Network and Partner Programs segments represent approximately 20%, 64% and 16%, respectively, of our total net revenue for the quarter ending March 31, 2012. Prior to the period covered by this report, we were organized under two segments; Web Properties and Performance Marketing. For presentation purposes, our prior period results included herein have been reclassified for our new segment structure.

Merger with Vertro

In evaluating the merger, we, and the management of Vertro believed that the combination of the two companies could create a stronger, more scalable business, from which to attract advertisers, publishers and consumers. Expected benefits include:

	●	diversified revenue streams which should 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;
	●	the combination of two experienced digital marketing teams; and

●

the combination will eliminate approximately $2.9 million in overlapping annual operating and public company expenses.

We are currently integrating the operations of the two companies.

Software Search

Following our acquisition of Vertro, effective March 1, 2012, we are including the ALOT product line into what we now call our Software Search segment. The ALOT product line offers two primary products to consumers, ALOT Home, a homepage product, and ALOT Appbar, a software application that consumers install into their web browsers. Both ALOT Home and ALOT Appbar include a search box from which consumers conduct type-in web search requests. The ALOT Appbar provides access to a library of applications, which are used by consumers to receive dynamic information, perform useful tasks, or access their favorite content online. There are hundreds of apps available for consumers to choose from ranging from a weather app that provides an at-a-glance snapshot of the weather for the coming four days, to a radio app that enables consumers to instantly listen to thousands of radio stations from around the world. All ALOT products and apps are free to download and use.

In addition to displaying apps, the ALOT Home and ALOT Appbar products also include a search box from which a majority of the revenue has historically been derived. Users conduct millions of searches per day producing both algorithmic results and sponsored listings. Both the algorithmic results and sponsored listings are provided by third parties with whom we have contractual relationships. If users click on a sponsored listing after conducting a search, we earn a percentage of the total click-through revenue provided by the third-party that placed the advertisement. Historically, search revenue from Google accounted for over 80% of revenue from the ALOT operations.

Publisher Network

The Publisher Network segment designs, builds, implements, manages and sells the various technology platforms and services we offer. In this business, we mediate between advertisers and publishers to facilitate performance-based advertising. Our Publisher Network is made up of thousands of different websites, from large, well-known portals to independent tech bloggers. The Publisher Network segment consolidates some of the disparate technologies and platforms we acquired between 2002 and 2008 into the Inuvo platform. The Inuvo platform is an open, fraud filtering, lead generation marketplace designed to allow advertisers and publishers to manage their 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 and directories within the Publisher Network segment, including:

●

The ValidClick® service at www.validclick.com. ValidClick is a fraud filtering, pay-per-click marketplace where publishers can integrate dynamically-generated advertisements within their websites based on the demographics and natural search behaviors of the consumer. ValidClick provides publishers with access to tens of thousands of advertisers in an easy-to-use XML-based implementation, giving the publisher greater control over content and integration than other competitive offerings.

●

The LocalXML service at www.localxml.com. LocalXML is a service which allows publishers to make real-time calls to the LocalXML database. These calls answer the simple questions “what” and “where.” For example, “what” equals “steaks” and “where” equals “Tampa,” from which the LocalXML database returns a complete listing of all local businesses in Tampa that meet this criteria. Publishers may customize how the data appears on their site, and include user reviews of the businesses searched. The LocalXML service is designed to be bundled with the ValidClick service described above.

●

The Yellowise.com™ directory search web site at www.yellowise.com and the recently launched Local.ALOT.com web sites are included in the Publisher Network segment as well. Yellowise.com is a local search and review site powered by the LocalXML service. Users may search by category and location, and receive requested search results. Users may also post reviews of their favorite and not-so-favorite businesses making the reviews available to all other users of the site. Yellowise.com is the in-market website we use to ensure the LocalXML service performs in accordance with market needs.

Partner Programs

The Partner Programs segment designs, builds and implements unique offers that generate revenue from the sale of products, services, data and advertising. It consists of display revenues, affiliate programs, data sales, Kowabunga® and BargainMatch. This segment includes the non-search revenue generated from the ALOT products when users interact with certain applications from within the Appbars. We refer to these as sponsored apps and they generate either pay-per-click or cost-per-action revenue. Website page-views are also monetized through cost-per-thousand display ads. We also utilize user data to enhance product offering and generate additional revenue.

●

The Kowabunga consumer daily deals website at www.kowabunga.com. Kowabunga is a daily deal program focused on rural America, a market Inuvo believes is underserved by market leaders. Inuvo has access to millions of consumers through its search marketing operations that are potential customers for a local deal of the day. Inuvo is partnering with a national direct marketer, which currently markets offers from thousands of merchants in rural America. Inuvo has developed the infrastructure to present daily local offers from the inventory of its partner to the consumers from the Inuvo Platform. Inuvo believes that the potential reach of this program is to approximately 20 million households in 25 states, with a potential for 90% household penetration, 2,500 national and local retail advertisers. Kowabunga was launched in the third quarter of 2011.

●

The BargainMatch consumer product comparison-shopping and shopping rewards website at www.BargainMatch.com. BargainMatch is also a service which allows publishers to offer their visitors an online shopping experienced branded around their site with rewards to consumers coming in the form of cash back on every online purchase made through the publisher. The service has been designed and positioned as a consumer loyalty solution. The product line also includes a consumer facing application which can be downloaded at www.bargainmatch.com/installnow.

●

The MyAP® Affiliate Platform at www.MyAP.com. MyAP is a complete affiliate tracking and management software solution providing advertisers the ability to sign up, manage and track the activities of their publishers through a reliable, easy-to-use, and privately-branded platform with full data transparency. Where the Inuvo Platform is an open platform where many advertisers and publishers interact, the MyAP platform is designed specifically to allow merchants to build private affiliate networks. Each advertising customer of MyAP is supported by a unique implementation of the software, customized to suit their individual needs and populated by publishers who use the platform exclusively for that advertiser. Today, MyAP supports hundreds of customers.

●	ALOT Display comprises various display advertising opportunities throughout the ALOT product platform, including our www.alothome.com default home page, hundreds of Apps in our ALOT Appbar, and other ALOT-branded websites.

Liquidity

On March 1, 2012, we entered into a new Business Financing Agreement with Bridge Bank, N.A. for up to a $10 million revolving credit facility and a $5 million term loan. The Revolving Credit Line replaced our then existing $8 million revolving credit facility with Bridge Bank. The new credit facility will be used primarily to satisfy our working capital needs. We believe with the higher loan availability from the new bank facility and our plan to reduce duplicate costs with respect to the merger with Vertro, we will have sufficient cash for the next twelve months.

Discontinued Operations

At March 31, 2012, we reported a small loss from discontinued operations associated with Vertro’s European operations.During the three months ended March 31, 2011, we settled a lawsuit resulting in a gain of approximately $257,000 from a business sold in 2010, MarketSmart Advertising ("MSA").

Basis of Presentation

The consolidated financial statements include our accounts and those of our subsidiaries. All inter-company accounts and transactions are eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 are prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 and filed with the SEC. The interim consolidated financial information contained herein is not certified or audited; it reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited consolidated financial statements. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year. Further, with the acquisition of Vertro, effective March 1, 2012, our consolidated financial statements as of March 31, 2012 include the operations and financial results of the Vertro subsidiary for one month.

Reclassification

For comparability, the 2011 consolidated financial statements reflect reclassifications where appropriate to conform to the interim consolidated financial statement presentation used in 2012. These reclassifications have no effect on total stockholders’ equity (deficit) or net loss.

Use of Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, goodwill and purchased intangible asset valuations, lives of intangible assets, deferred income tax asset valuation allowances, stock compensation, and the value of stock options and warrants. We base our estimates and assumptions on current facts, historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Credit Risk, Customer and Vendor Evaluation

Accounts receivable are typically unsecured and are derived from sales to customers. We perform ongoing credit evaluations of our customers and maintain allowances for estimated credit losses. We apply judgment as to our ability to collect outstanding receivables based primarily on management’s evaluation of the customer’s financial condition and past collection history and records a specific allowance. In addition, we record an allowance based on the length of time the receivables are past due.

At March 31, 2012 and subsequent to the merger with Vertro, we have two individual customers with accounts receivable balances greater than 10% of our gross accounts receivable from continuing operations. These customers owed approximately $4.4 million or 82.7% of gross accounts receivable from continuing operations at March 31, 2012. These same customers contributed approximately $7.8 million or 88.4% of total net revenue from continuing operations for the three months ended March 31, 2012. At March 31, 2011, we had one customer with receivable balance greater than 10% of our gross accounts receivable from continuing operations. This customer owed approximately $3.6 million or 69.9% of gross accounts receivable from continuing operations at March 31, 2011. This same customer contributed approximately $9.8 million or 83.4% of total net revenue from continuing operations for the three months ended March 31, 2011.

Note 2 – Property and Equipment

The net carrying value of property and equipment consisted of the following as of:

	March 31, 2012			December 31, 2011
	(unaudited)
Furniture and fixtures	$	427,121		$	427,121
Equipment		2,233,795			2,005,505
Software		7,399,680			5,469,804
Leasehold improvements		343,795			310,416
Subtotal		10,404,391			8,212,846
Less: accumulated depreciation and amortization		(7,065,141	)		(6,622,835	)
Total	$	3,339,250		$	1,590,011

Depreciation and amortization expenses related to property and equipment for the three months ended March 31, 2012 and 2011 was approximately $330,000 and $415,000, respectively. Depreciation is included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive loss.

Note 3 – Goodwill and Intangible Assets

The following is a schedule of our intangible assets from continuing operations as of March 31, 2012 (unaudited):

Description	Term	Carrying Value		Accumulated Amortization			Net Carrying Value

Names database (1)	9 months	$	15,414,068	$	(14,624,842	)	$	789,226
Customer list	20 years		8,820,000		(36,750	)		8,783,250
Customer list	10 years		1,610,000		(13,416)			1,596,584
Bundled downloads (1)	4.5 months		714,848		(268,836)			446,012
Exclusivity and non-compete agreements	1 year		270,000		(160,000	)		110,000
Tradenames (2)	5 years		960,000		(16,000)			944,000
Tradenames	-		390,000		-			390,000
Total intangible assets		$	28,178,916	$	(15,119,844	)	$	13,059,072
Goodwill		$	6,062,750	$	-		$	6,062,750

(1)	Amortization of our Names Database for the three months ended March 31, 2012 and 2011 was approximately $499,000 and $572,000, respectively. Amortization of our bundled downloads for the three months ended March 31, 2012 was approximately $269,000. Intangible assets with an amortization term of less than one year are shown in the current assets section of the consolidated balance sheets.
(2)		The carrying value of the Tradenames acquired in the merger with Vertro.

Our amortization expense over the next five years and thereafter as of March 31, 2012 is as follows:

2012	$	1,920,738
2013		814,000
2014		794,000
2015		794,000
2016		794,000
Thereafter		7,552,334,334
Total	$	12,669,072

Note 4 – Accrued Expenses and Other Current Liabilities

The accrued expenses and other current liabilities consisted of the following as of:

	March 31, 2012		December 31, 2011
	(unaudited)
Accrued expenses	$	739,267	$	1,401,521
Accrued search costs		1,678,132		109,706
Accrued affiliate expenses		167,345		16,570
Taxes		259,881		-
Accrued payroll and bonus liabilities		244,684		8,370
Capital leases – current portion		42,993		57,581
Total	$	3,132,302	$	1,593,748

Note 5 – Other Long Term Liabilities

Other long term liabilities consisted of the following as of:

	March 31, 2012		December 31, 2011
	(unaudited)
Deferred rent	$	385,471	$	283,469
Taxes payable		506,453		-
Long-term deposits		32,738		-
Capital leases – less current portion		3,300		16,655
Total	$	927,962	$	300,124

Note 6 – Term and Credit Note Payable

The following table summarizes our notes payable balance as of:

Lender	Due Date	Interest Rate	March 31, 2012 (unaudited)			December 31, 2011
Bridge Bank – term note; paid in full on March 1, 2012	February 2013	Prime + 2 percentage points	$	-		$	475,000
Bridge Bank – term note	February 2016	Prime + 1 percentage points		5,000,000
Bridge Bank – credit facility; paid in full on March 1, 2012	February 2014	Prime + 2 percentage points		-			2,431,303
Totals				5,000,000			2,906,303
Less: term and credit facility payable – current portion				(1,111,000	)		(452,000	)
Term and credit facility – long-term			$	3,889,000		$	2,454,303

Principal Payments Due

Principal payments due are as follows as of March 31, 2012:

2012	$	777,778
2013		1,333,333
2014		1,333,333
2015		1,333,333
2016		222,223
Total	$	5,000,000

On March 1, 2012, we entered into a new Business Financing Agreement with Bridge Bank. N.A. (“Bridge Bank”), for up to a $10 million 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 herein. As of March 31, 2012, there was approximately $4 million 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, which are generally those balances owed by U.S. based customers that are less than 90 days from the date of invoice, 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, which is repayable in 45 equal monthly installments beginning June 2012. The Revolving Credit Line portion of the credit facility expires on February 28, 2014, at which time all loan advances under the Revolving Credit Line become due and payable. The Term Loan expires in February 2016. Under the terms of the new agreement, we must maintain certain depository, operating and investment accounts at Bridge Bank; provide Bridge Bank a first priority perfected security interest in all of our accounts and personal property; provide various monthly, quarterly and annual reports; and limit additional indebtedness to $500,000 of purchase money including capital leases and an additional $500,000 of all other indebtedness. In addition, we must maintain through May 2012 an “operating profit” of net income plus interest and taxes plus non-cash expenses for amortization, depreciation, stock based compensation, discontinued operations, non-recurring non-cash items and certain closing costs associated with the Vertro transaction of not less than $200,000 for the immediate proceeding three month period; after May 2012 a Debt Service Coverage Ratio of at least 1.50 to 1.0 tested on the immediate proceeding three month period; and an Asset Coverage Ratio of not less than1.10 to 1 at all times until September 30, 2012 and 1.25 to 1.0 thereafter. Interest on the Revolving Credit Line is payable monthly at prime plus 0.5% (3.75% at March 31, 2012) plus a monthly maintenance fee of 0.125 percentage points on the average daily account balance. Interest on the Term Loan bears interest at prime plus 1% (4.25% at March 31, 2012). In connection with establishing the credit facility, the Company incurred fees payable to Bridge Bank of approximately $100,000. The agreement calls for a termination fee until the first anniversary and prepayment fee on the Term Loan until the first anniversary.

On February 15, 2011, we entered into a two-year Business Financing Agreement (the “Agreement”) with Bridge Bank. This Agreement provided for a revolving credit facility of up to $8.0 million. The Bridge Bank credit facility allows us to borrow against 80% of eligible accounts receivable balances, which are generally those balances owed by U.S. based customers that are less than 90 days from the date of invoice. In addition, the Bridge Bank facility provided an additional term note payable of $475,000 to collateralize a stand-by letter of credit required by our corporate headquarters lease. The $475,000 of proceeds from the term note payable is included in restricted cash as of March 31, 2012. At the closing of the Agreement several fees were paid including a facility fee (0.25% of the maximum credit limit), a due diligence fee of $800, a fee-in-lieu-of-warrant of $21,250 and a non-formula facility fee of $4,750. A maintenance fee of 0.125% of the average daily balance and the finance charge (Prime Rate plus 200 bonus points) was due monthly. At March 1, 2012, the Agreement terminated and was replaced with the Business Financing Agreement described above. As of March 31, 2012, there was $0 outstanding under the revolving credit facility and the remaining balance of the fees paid at the February 2011 closing, $100,743 were written off.

On June 2, 2011, we entered into a Business Financing Modification Agreement with Bridge Bank effective May 25, 2011 pursuant to which $1.0 million of the revolving line of credit was converted to a nonformula sublimit of availability that would mature in 240 days. In order to secure this additional availability, Mr. Charles D. Morgan, a member of our board of directors, provided a backup letter of credit to Bridge Bank in the amount of $1.0 million. In connection therewith, we entered into a Reimbursement and Security Agreement with Mr. Morgan pursuant to which we granted him a second position security interest in and to our assets and agreed to reimburse him should Bridge Bank be required to draw against the backup letter of credit provided by him. We drew down on this additional availability and used it for our working capital needs. It was fully repaid on June 23, 2011.

At March 31, 2012, we were in compliance with all terms of the Bridge Bank credit facility.

Note 7 – Stock-Based Compensation Plans

The stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We consider our option programs critical to our operation and productivity. Currently, we grant options and restricted stock awards ("RSAs") from two shareholder approved plans, the 2005 Long-Term Incentive Plan ("2005 LTIP") and the 2010 Equity Compensation Plan (“2010 ECP”). Option and restricted stock unit vesting periods are generally zero to three years.

On September 23, 2011, all unexpired stock options had their expiration term extended by 5 years from the date of grant. The extension of the termination period for these stock options increased the expected life of the options by approximately one year and accordingly increased the fair market value of these stock options by approximately $283,000 of which $117,000 was related to fully vested stock options and was recorded as a charged to expense in the third quarter of 2011. We are amortizing $166,000 over the remaining vesting periods.

On January 1, 2012, the number of shares of our common stock issuable under the 2010 ECP was increased by 100,357 shares due to the ever-green provision as part of the 2010 ECP. Additionally, effective February 29, 2012, our shareholders increased the number of shares of our common stock issuable under the 2010 ECP by 2.5 million shares. As of March 31, 2012, we had reserved under our 2005 LTIP 1.0 million shares of common stock for issuance and another 3,385,945 shares under our 2010 ECP.

The following table summarizes all stock based compensation grants as of March 31, 2012:

	Stock Options Outstanding		RSA's Outstanding		Options and RSA’s Exercised	Available Shares	Total
2010 ECP		621,124		6,787	891,478	1,866,556		3,385,945
2005 LTIP		649,675		75,000	172,193	103,132		1,000,000
Total		1,270,799		81,787	1,063,671	1,969,688		4,385,945

The fair value of RSAs is determined using the market value of the common stock on the date of the grant. The fair value of stock options is determined using the Black-Scholes valuation model. The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Under Accounting Standards Codification (“ASC”) 718, “Compensation-Stock Compensation,” forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture rate, which is currently estimated at a weighted average of 25% of unvested options outstanding, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

We recorded stock-based compensation expense for all equity incentive plans of approximately $195,000 and $175,000 for the three months ended March 31, 2012 and 2011, respectively.

At March 31, 2012, the aggregate intrinsic value of all outstanding options is $0 and has a weighted average remaining contractual term of 7.78 years. As of March 31, 2012, 721,456 of the outstanding options are exercisable and have an aggregate intrinsic value of $0, a weighted average exercise price of $3.02 and a weighted average remaining contractual term of approximately 7.41 years. The total compensation cost at March 31, 2012 related to non-vested awards not yet recognized was approximately $918,000 and has an average remaining expense recognition period of 1.2 years. As a result of the merger, we had 212,595 options outstanding as of March 31, 2012 that were not part of either plan.

The following table summarizes unaudited information about stock option activity during the three months ended March 31, 2012 and 2011, respectively.

	2012					2011
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding, beginning of period		1,358,717		$	2.81		1,223,159		$	3.74
Granted		-		$	-		300,000		$	2.93
Forfeited or expired		(87,918	)	$	2.54		(55,005	)	$	5.31
Exercised		-		$	-		-		$	-
Outstanding, end of period		1,270,799		$	2.83		1,468,154		$	3.32
Exercisable, end of period		721,955		$	3.02		405,088		$	4.70

No option or warrant exercises occurred under any share-based payment arrangements for the three months ended March 31, 2012 and 2011.

In accordance with ASC 718, the fair values of options granted were not changed. There were no options granted during the three months ended March 31, 2012. The fair value of options granted during the three months ended March 31, 2011 were estimated assuming the following weighted averages:

	2012		2011
Expected life in years		-		4.2
Volatility		-		176.3	%
Risk free interest rate		-		2.7	%
Dividend yield		-		0.0	%

Expected volatility is based on the historical volatility of our common stock over the period commensurate with, or longer than, the expected life of the options. The expected life of the options is based on the vesting schedule of the option in relation to the overall term of the option. The risk free interest rate is based on the market yield of the US Treasury Bill with a 5 year term. We do not anticipate paying any dividends so the dividend yield utilized in the model is zero.

Deferred Compensation

During the three months ended March 31, 2011, our executive officers, certain of our senior management and members of our board of directors, voluntarily elected to defer a portion of their compensation. The amount of the deferred compensation was approximately $187,000 for the three months ended March 31, 2011. As an incentive for our executive officers, management and directors to participate in the elected deferrals, we granted them RSAs with a fair value equal to the amount of the deferred compensation. The RSAs vested upon the earlier of payment of the deferred compensation or one year from date of grant. The number of RSAs granted in conjunction with the deferred compensation was 66,155 for the three months ended March 31, 2011, and were granted at an exercise price ranging from $2.94 per share to $2.64 per share on the date of each grant. There was no deferred compensation in the three months ended March 31, 2012. As of March 31, 2012, all RSAs granted in connection with these elected deferrals were issued (see Note 8).

Warrants Outstanding

As of March 31, 2012, we have outstanding warrants for the potential issuance of 765,000 shares of common stock. Exercise price for these warrants ranges from $1.50 to $15.00. These warrants were primarily issued in connection with acquisitions, private placements and debt issuances.

Note 8 – Sale of Common Stock and Treasury Stock

On June 20, 2011, we entered into Subscription Agreements with 17 institutional and accredited investors, several of which are affiliated entities, for the sale of 1,350,000 shares of our common stock, together with immediately exercisable five year warrants to purchase up to an aggregate of 675,000 shares of common stock, resulting in gross proceeds to us of $2,700,000. Each warrant entitles the investor to purchase 0.50 shares of our common stock for every share of common stock purchased by such investor in the offering. The purchase price for each share of common stock and the related warrants was $2.00. Each warrant has an exercise price of $2.20 per share which is subject to adjustments in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. This offering was priced at the close of market on June 20, 2011 and was conducted as a takedown from our shelf registration statement which was declared effective by the SEC in April 2011. A portion of the proceeds from the sale the common stock were used to repay the $1 million non-formula revolving line of credit secured by Mr. Morgan (see Note 6).

In August 2011, we retired 164,869 shares of our common stock held in treasury valued at approximately $627,000. In February 2012, we retired 21,270 shares of our common stock valued at approximately $81,000.

The merger agreement with Vertro required that at closing of the merger, we pay outstanding obligations under our deferred compensation program and bonus agreements to our executive officers, board of directors and certain management employees with our common stock in lieu of cash. These obligations were satisfied by issuing 1,017,742 shares of our common stock. At the same time, 284,962 of the common stock issued to executives, board directors and managers were withheld by us at the same value as issued, to pay for the associated individual’s income taxes, approximately $256,000. Those shares withheld were retired.

Note 9 – Income Taxes

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2008 through 2011. Our state income tax returns are also open to audit under the statute of limitations for the years ending December 31, 2008 through 2011.

As of March 31, 2012, we have accrued $506,453 for uncertain tax positions that we reported as discrete items in the other long-term liabilities section of the condensed balance sheet (unaudited) as of March 31, 2012.

Due to the recent history of tax losses, the economic conditions in which we operate, recent organizational changes, and near term projections, we concluded that we are unable to support a conclusion that it is more likely than not that any of our deferred income tax assets will be realized. As a result, we have recorded a full valuation allowance for the net deferred tax assets at March 31, 2012 and December 31, 2011. We recorded a deferred tax liability of $4,543,000 as a result of the merger with Vertro.

Note 10 – Discontinued Operations

The table below summarizes unaudited financial results primarily for our European operations in 2012 as a result of our merger with Vertro in March 2012 and for the assets classified as held for sale which is comprised of our MSA operation in 2011. The unaudited results for discontinued operations in the three months ended March 31, 2012 and 2011 are:

	Three Months Ended
	2012		2011
Revenue	$	-	$	-
(Loss) income from discontinued operations before sale		(1,709)		257,136
(Loss) income from discontinued operations	$	(1,709)	$	257,136

In 2011, we settled a lawsuit involving a lease with our discontinued MSA operations and we recorded a one-time credit of approximately $256,000 in March 2011 related to this settlement.

Note 11 – Net Loss Per Common Share

During the periods presented, we had securities, mainly stock options and warrants, which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect are anti-dilutive. Per share data is based on the weighted average number of shares outstanding.

Note 12 – Impact of Recent Accounting Pronouncements

ASU 2011-08— In September 2011, the Financial Accounting Standards Board ("FASB") issued “Intangibles-Goodwill and Other: Testing Goodwill for Impairment” to simplify the goodwill impairment test. The change allows companies to first decide whether they need to do the two-step test by allowing companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This amendment also includes examples of how the amended test should be carried out. This amendment is effective for annual and interim tests performed for fiscal years beginning after December 15, 2011, although early adoption is permitted. The effect of adopting this statement is not expected to have an impact on our financial position or results of operations.

ASU 2011-05 - In June 2011, the FASB issued “Presentation of Comprehensive Income”. For annual periods, an entity has the option to present the components of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For interim periods, total comprehensive income is required to be disclosed either below net income on the income statement or as a separate statement. The Accounting Standards Update ("ASU") does not change the items that must be reported as other comprehensive income. Whether presenting two separate statements or one continuous statement in annual periods, the ASU required entities to present reclassifications from other comprehensive income in the statement reporting net income. In December 2011, however, the FASB deferred this requirement when it issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, which has the same effective date as ASU 2011-05. Companies must continue to disclose reclassifications from other comprehensive income on the statement that reports other comprehensive income, or in the notes to the financial statements. We adopted this guidance effective January 1, 2012, and disclosed total comprehensive income below net income on the income statement in our interim financial statements. The effect of adopting this statement is not expected to have an impact on our financial position or results of operations.

Other recent accounting pronouncements issued by the FASB, the AICPA, and the SEC did not or are not believed by management to have a material impact on our present or future consolidated financial statements.

Note 13 – Segment Analysis

In 2012, management reorganized the operations along three new operating segments – Publisher Network, Software Search and Partner Programs. Prior to 2012, our two segments were classified as Performance Marketing and Web Properties segments.

Listed below is an unaudited presentation of net revenue, gross profit and earnings before interest, taxes, and depreciation and amortization, stock based payments and indirect merger costs for all reportable segments for the three months ended March 31, 2012 and 2011. We currently only track certain assets at the segment level and therefore assets by segment are not presented below. The Corporate category in the “Earnings before Interest, Taxes, Depreciation and Amortization, and Stock Based Payments and Indirect Merger Costs” from continuing operations table consists of corporate expenses not allocated to any segment. Note that the “Earnings before Interest, Taxes, Depreciation and Amortization, Stock Based Payments and Indirect Merger Costs” is not a measure of performance defined in accordance with GAAP.

Net Revenue by Industry Segment

	Three Months Ended March 31
	2012					2011
Segment:	Amount		Percent			Amount			Percent
Publisher Network	$	5,624,956		64.2	%	$	9,850,062			83.5	%
Software Search		1,767,340		20.2	%			-			-
Partner Programs		1,374,853		15.6	%		1,943,433			16.5	%
Total Revenue	$	8,767,149		100.0	%	$	11,793,495			100.0	%

Gross Profit by Industry Segment

	Three Months Ended March 31
Segment:	2012		2011
Publisher Network	$	1,241,195	$	4,113,419
Software Search		1,452,308		-
Partner Programs		725,895		1,308,610
Total	$	3,419,398	$	5,422,029

Earnings before Interest, Taxes, Depreciation and Amortization, Stock Based Payments and Indirect Merger Costs by Industry Segment

	Three Months Ended March 31
Segment:	2012			2011
Publisher Network	$	904,270		$	1,487,292
Software Search		50,724
Partner Programs		1,056,492			627,169
Corporate		(1,799,250	)		(1,912,471	)
Total	$	212,236		$	201,990

Note 14 – Merger with Vertro, Inc.

Effective March 1, 2012, we merged with Vertro. Pursuant to the terms and conditions of the merger agreement, Vertro became a wholly owned subsidiary of Inuvo and we issued to the Vertro stockholders 12,713,552 shares of our common stock for all the outstanding shares of Vertro common stock. Upon closing of the merger, all the shares of Vertro common stock, which traded under the symbol “VTRO,” were delisted from the NASDAQ Capital Market and ceased trading.

The following summarizes the net assets received and liabilities assumed in the merger with Vertro:

Total consideration paid in common stock	$	11,442,196
Fair value of assets acquired:
Accounts receivable, net		(2,093,845	)
Other current assets		(520,342	)
Property and equipment		(2,059,729	)
Other assets		(283,911	)
Goodwill		(4,286,206	)
Intangible assets		(11,857,537	)
Fair value of liabilities assumed:
Accounts payable		3,753,613
Line of credit		1,000,000
Accrued expenses		2,779,807
Deferred tax liability		4,543,000
Other long-term liabilities		709,991
Cash received in merger	$	3,127,037

Unaudited Pro Forma Results of Operations

As a result of the merger with Vertro, effective March 1, 2012 the unaudited pro forma consolidated operating results for the three months ended March 31, 2012 and 2011, would have been revenue of $12,551,951 and $20,157,841, respectively; net loss of $4,080,253 and $1,482,179, respectively; and basic and diluted loss per share of $0.48 and $0.10, respectively. The pro forma results do not include any anticipated synergies which may occur subsequent to the acquisition date. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of our future combined operating results..

Note 15 – Litigation and Settlements

From time to time we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we are currently involved in the following litigation which is not incidental to its business:

Shareholder Class Action Lawsuits. In 2005, five putative securities fraud class action lawsuits were filed against Vertro and certain of its former officers and directors in the United States District Court for the Middle District of Florida, which were subsequently consolidated. The consolidated complaint alleged that Vertro and the individual defendants violated Section 10(b) of the Exchange Act and that the individual defendants also violated Section 20(a) of the Exchange Act as “control persons.” Plaintiffs sought unspecified damages and other relief alleging that, during the putative class period, Vertro made certain misleading statements and omitted material information. The court granted Defendants’ motion for summary judgment on November 16, 2009, and the court entered final judgment in favor of all Defendants on December 7, 2009. Plaintiffs appealed the summary judgment ruling and the court’s prior orders dismissing certain claims. On September 30, 2011, the Court of Appeals for the Eleventh Circuit affirmed the dismissal of 9 of the 11 alleged misstatements and reversed the court’s prior order on summary judgment. Vertro intends to file a petition for certiorari with the United States Supreme Court seeking review of the Eleventh Circuit’s decision.

Derivative Stockholder Litigation. On July 25, 2005, a stockholder, Bruce Verduyn, filed a putative derivative action purportedly on behalf of Vertro in the United States District Court for the Middle District of Florida, against certain of Vertro’s directors and officers. This action is based on substantially the same facts alleged in the securities class action litigation described above. The complaint is seeking to recover damages in an unspecified amount. By agreement of the parties and by orders of the court, the case was stayed pending the resolution of the defendant’s motion to dismiss in the securities class action. On July 10, 2007, the parties filed a stipulation to continue the stay of the litigation. On July 13, 2007, the court granted the stipulation to continue the stay and administratively closed the case pending notification by plaintiff’s counsel that the case is due to be reopened.

Beth Tarczynski v. Inuvo, Inc. d/b/a Blog Tool Kit, Home Biz Ventures, LLC, and John Doe Defendants; Case No. 11-5111-CI-7, in the Circuit Court for the Sixth Judicial Circuit of Florida. On June 10, 2011, a putative class action complaint was filed alleging violations of the Florida statute prohibiting misleading advertisements, violation of Florida’s Deceptive and Unfair Trade Practices Act, fraud in the inducement, conspiracy to commit fraud, restitution/unjust enrichment, and breach of contract. The plaintiffs are seeking certification of a statewide class and unspecified damages. Initial discovery has begun and Inuvo is vigorously defending the action.

Express Revenue, Inc. v. Inuvo, Inc.; Case No. 10-44118-13, in the Circuit Court for the Seventeenth Judicial Circuit of Florida. On November 4, 2010, the plaintiff filed this lawsuit alleging breach of oral contract, and violation of Florida Statute §68.065, among other claims, and seeking approximately $30,000 for allegedly unpaid commissions dating back to 2009. This matter is in its initial stages and Inuvo is defending the claim.

ICR, LLC v. Inuvo, Inc.; Case No. 2010-10920-CI, in the Circuit Court for the Sixth Judicial Circuit of Florida. On July 19, 2010, the plaintiff filed this lawsuit claiming breach of contract and unjust enrichment. This suit was settled in February 2012 for $8,500. State of Florida civil investigation re Inuvo, Inc. formerly d/b/a iLead Media, LLC d/b/a Home Biz Ventures, LLC, Case No. L09-3-1186. The State of Florida Attorney General’s office served a subpoena for documents on November 23, 2009, relating to the negative-option marketing business of former Inuvo subsidiary iLead Media, LLC. Inuvo responded to the subpoena and has continued to engage in informational exchanges with the Attorney General’s office.

Corporate Square, LLC v. Think Partnership, Inc., Scott Mitchell, and Kristine Mitchell; Case No. 08-019230-CI-11, in the Circuit Court for the Sixth Judicial Circuit of Florida. This complaint, filed on December 17, 2008, involves a claim by a former commercial landlord for alleged improper removal of an electric generator and for unpaid electricity expenses, amounting to approximately $60,000. The litigation has not been actively prosecuted, but the plaintiff recently served discovery requests seeking additional information. Inuvo is actively defending this action, and the co-defendants’ separate counsel is likewise defending the claim against the co-defendants.

Microchannel Technologies Ltd. v. Think Partnership, Inc.; Case No. 08-08287-CI-20, in the Circuit Court for the Sixth Judicial Circuit of Florida. This action, instituted in 2008, involves a claim for unpaid license fees by a UK publisher against Inuvo’s former UK subsidiary, Web Diversity Limited. This suit was settled in February 2012 for $7,000.

Hypertouch, Inc. v. ValueClick, Inc., E-Babylon, Inc., Hi-Speed Media, Inc., VC E-Commerce Solutions, Inc. Webclients, Inc. and Primary Ads, Inc., Case No. LC081000, in the Los Angeles Superior Court. On April 8, 2008, Hypertouch, Inc. filed an action against Inuvo and various other defendants in the same industry. The plaintiff is seeking recovery for purported violations of the California anti-“spam” statute and the California unfair competition statute, alleging that Inuvo sent 4,000 “spam” e-mails. This case was settled in January 2012 for $40,000.

Oltean, et al. v. Think Partnership, Inc.; Edmonton, Alberta CA. On March 6, 2008, Kelly Oltean, Mike Baldock and Terry Schultz, former employees, filed a breach of employment claim against Inuvo in The Court of Queen’s Bench of Alberta, Judicial District of Edmonton, Canada, claiming damages for wrongful dismissal in the amount of $200,000 for each of Kelly Oltean and Terry Schultz and $187,500 for Mike Baldock. On March 6, 2008, the same three plaintiffs filed a similar statement of claim against Vintacom Acquisition Company, ULC, a subsidiary of Inuvo, again for wrongful dismissal and claiming the same damages. In October 2009, the two actions were consolidated. The case is in the discovery stage and Inuvo is vigorously defending the matter.

Litigation Relating to the Merger. On October 27, 2011, a complaint was filed in the Supreme Court of the State of New York, County of New York against Vertro, its directors, Inuvo, and Anhinga Merger Subsidiary, Inc. on behalf of a putative class of Vertro shareholders (the “New York Action”). Two other complaints, also purportedly brought on behalf of the same class of shareholders, were filed on November 3 and 10, 2011, against these same defendants in Delaware Chancery Court and were ultimately consolidated by the Court (the “Delaware Action”). The plaintiffs in both the New York and the Delaware Actions alleged that Vertro’s board of directors breached their fiduciary duties regarding the merger with Inuvo and that Vertro, Inuvo, and Anhinga Merger Subsidiary, Inc. aided and abetted the alleged breach of fiduciary duties. The plaintiffs asked that the merger be enjoined and sought other unspecified monetary relief.

Plaintiffs in the Delaware Action requested expedited discovery and related proceedings, but this request was denied by the Delaware Chancery Court on December 21, 2011. Defendants in the Delaware Action moved to dismiss plaintiffs’ complaint, but before the briefing of that motion was complete the plaintiffs filed a notice and proposed order of voluntary dismissal without prejudice, which was entered by the Delaware Court on March 20, 2012. The defendants in the New York Action also moved to dismiss the complaint, or in the alternative to stay proceedings. The New York Court granted Defendants’ motion to stay on February 22, 2012 and, as a result of this ruling, the Court denied without prejudice defendants’ motion to dismiss and the plaintiff’s pending request for expedited discovery.

We were a party to litigation with a former employee, for alleged breach of an employment agreement and other contract and tort claims. On April 7, 2011, we entered into an agreement to settle this litigation pursuant to which we agreed to pay an aggregate of $125,000, partially covered by insurance, and issue 50,000 shares of the our common stock valued at approximately $135,000 in full settlement of this litigation. We recorded a one-time charge of $235,000 related to this settlement and it is included in Litigation Settlements in the 2011 consolidated statements of operations.

Scott Mitchell v. Inuvo. In January 2012 we were named as a defendant in an action styled Scott Mitchell versus Inuvo, Inc., f/k/a Think Partnership Inc. and Kowabunga! Inc., Does I-X , Case No. A-11-653956-C in the District Court, Clark County, Nevada. The complaint is related to our alleged failure to fully indemnify Mr. Mitchell, our former chief executive officer and member of the board of directors, pursuant to the terms of an indemnification agreement entered into in connection with his employment agreement, for attorneys’ fees and costs incurred by him related to an investigation of insider trading brought against Mr. Mitchell by the Securities and Exchange Commission. The complaint alleges that Mr. Mitchell has subsequently received correspondence from the staff of the Securities and Exchange Commission that the Commission does not intend to make any recommendation for an enforcement action against him. Under the terms of Inuvo’s director’s and officer’s liability policy, its insurer has already paid approximately $588,000 of attorneys’ fees and costs to Mr. Mitchell’s counsel. Mr. Mitchell is seeking an additional approximately $265,000 of fees and costs which he allegedly owes to his counsel. The complaint alleges breach of contract/indemnity agreement, breach of implied covenant of good faith and fair dealing, tortious breach of the implied covenant of good faith and fair dealing, and failure to indemnify pursuant to our bylaws and the Nevada statutes. The complaint seeks a judgment against us for actual, consequential and special damages in excess of $10,000, advances of fees, costs and expenses, punitive damages, attorney’s fees and costs, pre and post-judgment interest and a determination of his rights with respect to the indemnification agreement, our bylaws and the Nevada statutes. Given the amount of recovered funds received by Mr. Mitchell, and the position of Inuvo’s insurer that any reimbursement beyond what has already been paid is unwarranted, Inuvo intends to defend this lawsuit on the basis of the scope of the applicable indemnification and the reasonableness of the fees demanded.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this quarterly report on Form 10-Q constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical, including statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate” “intend,” “estimate,” “may,” “will,” “should,” and “could.” These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements including, without limitation, our lack of profitable operating history, changes in our business, potential need for additional capital and the other additional risks and uncertainties that are set forth in this Quarterly Report on Form 10-Q, as well as in our Annual Report on Form 10-K for the year ended December 31, 2011 and as filed with the Securities and Exchange Commission. The risk factors described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we deem immaterial also may materially adversely affect our business, financial condition and/or operating results. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law. The following discussion should also be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

Overview

On March 1, 2012 we completed our acquisition of Vertro, an internet company that owns and operates the ALOT product portfolio. We are now organized into three operating segments: Software Search, Publisher Network and Partner Programs. Prior to 2012, our segments were classified as Performance Marketing and Web Properties. Vertro’s operations are now part of our Software Search and Partner Programs segments. Our Publisher Network segment consists of the technology and analytics platforms that provide advertisers and publishers the capability to facilitate performance based advertising. This segment also consists of websites we own and operate. The Partner Programs segment consists of consumer applications we have designed, developed and marketed. The Software Search, Publisher Network and Partner Program segments represent approximately 20%, 64% and 16%, respectively, of our total net revenue for the quarter ending March 31, 2012. Further, with the acquisition of Vertro effective March 1, 2012, the Company’s consolidated financial statements as of March 31, 2012 include the operations and financial results of the Vertro subsidiary for one month. Prior to the period covered by this report, we were organized under two segments; Web Properties and Performance Marketing. For presentation purposes, our prior period results included herein have been reclassified for our new segment structure.

Software Search

Following our acquisition of Vertro, effective on March 1, 2012, we are including the ALOT product line into what we now call our Software Search segment. The ALOT product line offers two primary products to consumers, ALOT Home, a homepage product, and ALOT Appbar, a software application that consumers install into their web browsers. Both ALOT Home and ALOT Appbar include a search box from which consumers conduct type-in web search requests. The ALOT Appbar provides access to a library of applications, which are used by consumers to receive dynamic information, perform useful tasks, or access their favorite content online. There are hundreds of apps available for consumers to choose from ranging from a weather app that provides an at-a-glance snapshot of the weather for the coming four days, to a radio app that enables consumers to instantly listen to thousands of radio stations from around the world. All ALOT products and apps are free to download and use.

Publisher Network

●

Partner Programs

●

●	ALOT Display comprises various display advertising opportunities throughout the ALOT product platform, including our www.alothome.com default home page, hundreds of Apps in our ALOT Appbar, and other ALOT-branded websites.

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 at March 1, 2012, 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.

Three months ended March 31, 2012 and 2011

The following table sets forth selected information concerning our results of operations for the three months ended March 31, 2012 and 2011 (unaudited and in thousands):

	2012			% of Revenue			2011			% of Revenue
Net revenues	$	8,767			100.0	%	$	11,793			100.0	%
Cost of revenue		5,348			61.0			6,371			54.0
Gross profit		3,419			39.0			5,422			46.0
Total operating expenses		5,125			58.5			6,601			56.0
Operating loss		(1,706	)		(19.5	)		(1,179	)		(10.0	)
Other expenses		(166	)		(1.8	)		(471	)		(4.0	)
Net loss from continuing operations		(1,872	)		(21.3	)		(1,650	)		(14.0	)
Discontinued operations		(2	)		-			257			2.2
Net loss	$	(1,874	)		(21.3	)%	$	(1,393	)		(11.8	)%

In the three months ended March 31, 2012, net revenues decreased 25.7% from the same period of 2011. Additionally, gross profit also decreased by 36.9% in the three months ended March 31, 2012 compared to the same period of 2011. These decreases were due primarily from decreases in revenue from our Publisher Network and Partner Programs segments partially offset by new revenue from our Software Search segment as a result of our merger with Vertro. In the three months ended March 31, 2012, our operating expenses decreased by approximately 22.4% over the same period in 2011 due primarily to a decrease in compensation and telemarketing costs of approximately $1.4 million and a decrease in search costs of approximately $650,000 partially offset by an increase in selling, general and administrative expenses (“SG&A”) of approximately$550,000.

Our net loss from continuing operations for the three months ended March 31, 2012 increased by approximately $222,000 from the same period in 2011 due to lower gross profit that was not offset by lower operating expenses.

Net Revenue

Total net revenue from our Publisher Network, Software Search and Partner Programs segments for the three months ended March 31, 2012 and 2011 were as follows (unaudited and in thousands):

	Three Months Ended March 31,
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		5,625		64.2	%		9,850		83.5	%		(4,225	)		(42.9	)%
Software Search		1,767		20.2	%		-		-	%		1,767			-
Partner Programs		1,375		15.6	%		1,943		16.5	%		(568	)		(29.2	)%
Total net revenue		8,767		100.0	%		11,793		100.0	%		(3,026	)		(25.7	)%

Net revenue from our Publisher Network segment decreased 42.9% for the three months ended March 31, 2012 compared to the same period of 2011 primarily due to the decrease in the number of transactions driven through our owned and operated websites and through third party affiliates using the ValidClick platform. In December 2011, Yahoo! provided preliminary notice that it had identified certain traffic irregularities across its publisher network, to which Inuvo is a contributor. While this irregular traffic did not originate within the Inuvo network, it passed through some websites the company manages and in some cases owns and operates. Yahoo! made advertiser refunds as a result of identified traffic irregularities that it charged back to us in the first quarter of 2012 of approximately $238,000. This amount was a reduction of our revenue in the current quarter and most of this amount has been charged back to our vendors. Additionally, we have reduced traffic to some websites we manage while we restart and test campaigns that were put on hold when the notice from Yahoo! was received. There can be no assurance that we will be able to successfully return these campaigns to their previous levels. The revenue of this segment has been volatile due to the decrease in transactions as described above and we expect the volatility to continue in the near future.

With the merger of Vertro closing March 1, 2012, one month of the Vertro operations were included in Inuvo’s first quarter 2012 results. Net revenue from the Software Search segment is derived from the ALOT users conducting searches that produce both algorithmic results and sponsored listings. Both the algorithmic results and sponsored listings are provided by third parties with whom we have contractual relationships. When users click on a sponsored listing after conducting a search, we earn a percentage of the total click-through revenue provided by the third-party that placed the advertisement. The revenue of this segment has been growing and we expect it to continue in the near future.

Net revenue from our Partner Programs segment decreased 29.2% for the three months ended March 31, 2012 compared to the same period of 2011 primarily due to the decrease in revenue from our BabytoBee business. The decrease was due primarily to a decline in revenue generated from telesales which we discontinued in the second quarter of 2011 with the termination of the outsourced telemarketing company. As previously disclosed, since outsourcing the telesales operations in August 2010, we did not profitably operate and grow the business. In the second quarter of 2011, we decided to terminate the outsourcing agreement and no longer generate revenue and leads through the telesales process. Though the BabytoBee revenue has declined, the other revenue sources of this segment is expected to grow in the near future, those sources include display advertising, our BargainMatch and Kowabunga programs and the Inuvo affiliate platforms.

One provider of paid search results for our Software Search segment accounted for approximately 20.2% of our consolidated revenues for the three months ended March 31, 2012, no revenue from that paid search provider was included in our consolidated revenue for the three months ended March 31, 2011 because of the timing of the Vetro transaction. Additionally, one provider of paid search results for our Publisher Network segment accounted for approximately 64.2% and 83.4% of consolidated revenues for the three month periods ended March 31, 2012 and 2011 respectively.

Cost of Revenue and Gross Profit

Cost of revenue for the three months ended March 31, 2012 and 2011 were as follows (unaudited and in thousands ):

	Three Months Ended March 31,
	2012 ($)		% of Revenue		2011 ($)	% of Revenue		$ Change		% Change
Affiliate expenses		4,506	51.4	%	5,742	48.7	%	(1,236	)	(21.5	)%
Data acquisition		780	8.9	%	622	5.3	%	158		(25.4	)%
Merchant processing fees and product costs		62	0.7	%	8	0.1	%	54		675	%
Total cost of revenue		5,348	61.0	%	6,372	54.1	%	(1,024	)	(16.1	)%

The higher affiliate payments as a percentage of revenue for the three months ended March 31, 2012 compared to the same period in 2011 is due to decreased revenue from our BabytoBee operations from our owned and operated websites for the reasons discussed above.

The increase in data acquisition costs both in real dollars and as a percentage of revenue for the three months ended March 31, 2012 as compared to the same period of 2011 is due primarily to bundled downloads used to drive revenue through our ALOT Appbar which was acquired in the Vertro acquisition in March 2012. We believe these costs will continue to increase for the next few months.

The following table provides information on gross profit by operating segment for each of the periods presented (unaudited and in thousands):

	Three Months Ended March 31,
	2012 ($)		% of Gross Profit			2011 ($)		% of Gross Profit			$ Change			% Change
Publisher network		1,241		36.3	%		4,113		75.9	%		(2,872	)		(69.8	)%
Software search		1,452		42.5	%		-		-	%		1,452			-
Partner Programs		726		21.2	%		1,309		24.1	%		(583	)		(44.5	)%
Total gross profit		3,419		100.0	%		5,422		100.0	%		(2,003	)		(36.9	)%

Gross profit from our Publisher Network segment decreased 69.8% for the three months ended March 31, 2012 compared to the same period of 2011 primarily due to the 42.9% decrease in net revenue and a 23.6% decrease in cost of revenue.

Gross profit from the Software Search segment is resulted from the new revenue acquired in the merger with Vertro in March 2012..

Gross profit from our Partner Programs segment decreased 44.5% for the three months ended March 31, 2012 compared to the same period of 2011 primarily due primarily to the 29.2% decrease in net revenue, primarily from BabytoBee.

Operating Expenses

Operating expenses for the three months ended March 31, 2012 and 2011 were as follows (unaudited and in thousands):

	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Search costs		1,843		21.0	%		2,494		21.1	%		(651)			(26.1)	%
Compensation and telemarketing		1,297		14.8	%		2,672		22.7	%		(1,375	)		(51.5	)%
Selling, general and administrative		1,985		22.7	%		1,435		12.2	%		550			38.3	%
Total operating expenses		5,125		58.5	%		6,601		56	%		(1,476	)		(22.4	)%

Our operating expenses by segment were as follows for the periods presented (unaudited and in thousands):

	Three Months Ended March 31,
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		337		3.8	%		2,626		22.2	%		(2,289)			(87.2)	%
Software Search		1,671		19.1	%		-		-			1,671			-
Partner Programs		168		1.9	%		1,254		10.6	%		(1,086	)		(86.6	)%
Corporate		2,949		33.7	%		2,721		23.2	%		228			8.4	%
Total operating expenses		5,125		58.5	%		6,601		56	%		(1,476	)		(22.4	)%

Search costs decreased 26.1% for the three months ended March 31, 2012 compared to the same period of 2011 primarily due to 42.9% lower revenue from our Publisher Network segment partially offset by the advertising spend to create download traffic for the ALOT appbar. This expense is expected to increase in the future as we recognize ALOT revenue in the Software Search segment acquired in the Vertro merger.

Compensation and telemarketing expense decreased 51.5% for the three months ended March 31, 2012 compared to the same period of 2011 primarily due to discontinuing the telemarketing operations in the second quarter of 2011. This expense is expected to increase in the future as we absorb the acquired operations from the Vertro merger in March 2012.

Selling, general and administrative expense increased 38.3% for the three months ended March 31, 2012 compared to the same period of 2011 primarily due to the acquired operations from the Vertro merger in March 2012.

Corporate expense in the three months ended March 31, 2012 compared to the same quarter last year increased approximately $228,000 primarily due to $436,000 of indirect costs associated with the merger with Vertro; $94,000 of higher rent expense and $41,000 of higher travel expense, partially offset by decreases in payroll and related expenses of $400,000 due to lower head count compared to 2011.

Other Income (Expense)

The charge to litigation settlements at March 31, 2011 of approximately $375,000 resulted from settlements with a former director of the company and a former employee.

Interest expense, which is related to our borrowings from Bridge Bank N.A. (“Bridge Bank”) and Wachovia Bank, N.A. (“Wachovia”), increased by 72.4% during the three months ended March 31, 2012 to $166,701 as compared to $96,669 for the same period in 2011. This increase in interest expense primarily reflects the write-off of $100,743 of fees related to the February 2011 Bridge Bank credit facility that was superseded by a March 2012 Bridge Bank credit facility.

Income (Loss) from Discontinued Operations, Net of Tax Expense

The income from discontinued operations for the three months ended March 31, 2011 was approximately $257,000 and is attributed to the write-off of an accrued rent liability due to the settlement of the lease litigation related to the MSA discontinued operations.

Liquidity and Capital Resources

Liquidity is our ability to generate adequate amounts of cash to meet the company’s needs for cash. At March 31, 2012 and December 31, 2011, we had working capital deficits of approximately $3.0 million and $2.0 million, respectively. Our principal sources of liquidity are cash from operations, cash on hand and the bank credit facility.

While we do not have any commitments for capital expenditures which come due within the next 12 months, in 2011 our liquidity had been negatively affected, as a result of a reduction in search marketing revenue. 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. We had also delayed payments to publishers and vendors in the management of our cash flows. In September 2011, in order to further reduce our operating costs, we eliminated an additional 16 full time positions and six part time positions. Additionally in 2011, our directors, executive officers and certain senior managers agreed to a deferral of cash compensation. In the first quarter of 2011, we favorably renegotiated the outsourced call center contract reducing the monthly cost outlay 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.

Due to the merger with Vetro at March 1, 2012 and the new Business Financing Agreement (see below), cash at March 31, 2012 increased $3.5 million from the end of 2011 and bank debt correspondingly increased from $2.9 million at December 31, 2011 to $5.0 million at the end of the first quarter.

On March 1, 2012, we entered into a new Business Financing Agreement with Bridge Bank, for up to 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 the Company’s then existing $8 million revolving credit facility with Bridge Bank. The new credit facility will be used primarily to satisfy our working capital needs. As of March 31, 2012, there was approximately $3.8 million credit available on the Revolving Credit Line 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, which are generally those balances owed by U.S. based customers that are less than 90 days from the date of invoice, 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, which is repayable in 45 equal monthly installments beginning June 2012. The Revolving Credit Line portion of the credit facility expires on February 28, 2014, at which time all loan advances under the Revolving Credit Line become due and payable. The Term Loan expires in February 2016. Under the terms of the new agreement, we must maintain certain depository, operating and investment accounts at Bridge Bank; provide Bridge Bank a first priority perfected security interest in all of our accounts and personal property; provide various monthly, quarterly and annual reports; and limit additional indebtedness to $500,000 of purchase money including capital leases and an additional $500,000 of all other indebtedness. In addition, we must maintain through May 2012 an “operating profit” of net income plus interest and taxes plus non-cash expenses for amortization, depreciation, stock based compensation, discontinued operations, non-recurring non-cash items and certain closing costs associated with the Merger Transaction with Vertro of not less than $200,000 for the immediate proceeding three month period; after May 2012 a Debt Service Coverage Ratio of at least 1.50 to 1.0 tested on the immediate proceeding three month period; and an Asset Coverage Ratio of not less than 1.10 to 1 at all times until September 30, 2012 and 1.25 to 1.0 thereafter. Interest on the Revolving Credit Line is payable monthly at prime plus 0.5% plus a monthly maintenance fee of 0.125 percentage points on the average daily account balance. Interest on the Term Loan bears interest at prime plus 1%. In connection with establishing the credit facility, we incurred fees payable to Bridge Bank of approximately $100,000. The agreement calls for a termination fee until the first anniversary and prepayment fee on the Term Loan until the first anniversary.

We may seek to raise additional capital through public or private equity financings in order to fund our operations, take advantage of favorable business opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of favorable conditions in capital markets, sell certain of our operations or respond to competitive pressures in an effort to maintain our market position. We cannot be assured that additional financing will be available to us on favorable terms, or at all. If we issue additional equity, our existing stockholders may experience substantial dilution. If we continue to generate losses and are unable to comply with the continued listing standards of NYSE Amex, we could be delisted and be unable to raise additional capital at a reasonable cost. We believe with the higher loan availability from the new bank facility and our plan to reduce duplicate costs with respect to the merger with Vertro, we will have sufficient cash for the next twelve months.

Cash flows

Net cash provided by operating activities for the three months ended March 31, 2012 totaled approximately $815,000 compared to net cash provided by operations of approximately $338,000 during the same period in 2011. Other than depreciation and amortization, the net cash provided by operating activities for the three months ended March 31, 2012 was primarily due to decreases in accounts receivable of approximately $2.2 million, prepaid expenses of approximately $216,000 and an increase of accounts payable of approximately 141,000. These provisions of operating cash were partially offset by a decrease in accruals and other current liabilities of approximately $1.3 million. Other than depreciation and amortization, cash provided by operating activities in the three months ended March 31, 2011 were primarily due from increases in accounts payable and accrued expenses of approximately $641,000 and deferred compensation of approximately $372,000 and a decrease in prepaid expenses of approximately $98,000. These provisions of operating cash in 2011 were partially offset by increases in restricted cash and accounts receivable of approximately 677,000.

Net cash provided by investing activities in 2012 of $1.6 million was primarily due to the cash received up on the merger with Vertro of $3.1 million partially offset by merger costs of approximately $688,000 and the purchase of names database and bundled downloads of $707,000. Net cash used in investing activities for the three months ended March 31, 2011 of approximately $965,000 was primarily due to the purchase of names database for approximately $917,000 and the $48,000 of equipment purchases and capitalized development costs.

Net cash provided by financing activities during the three months ended March 31, 2012 and 2011were approximately $1.1 million and $2.3 million, respectively. The cash provided by financing activities for both periods resulted from the net proceeds from the net advances under our bank term note and credit facility and capital lease payments.

Off Balance Sheet Arrangements

As of March 31, 2012, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for us. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31, 2012, the end of the period covered by this report, our management concluded its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As of the evaluation date, our Chief Executive Officer and Chief Financial Officer, concluded that we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ICR, LLC v. Inuvo, Inc.; Case No. 2010-10920-CI, in the Circuit Court for the Sixth Judicial Circuit of Florida. On July 19, 2010, the plaintiff filed this lawsuit claiming breach of contract and unjust enrichment. This suit was settled in February 2012 for $8,500. State of Florida civil investigation re Inuvo, Inc. formerly d/b/a iLead Media, LLC d/b/a Home Biz Ventures, LLC, Case No. L09-3-1186 . The State of Florida Attorney General’s office served a subpoena for documents on November 23, 2009, relating to the negative-option marketing business of former Inuvo subsidiary iLead Media, LLC. Inuvo responded to the subpoena and has continued to engage in informational exchanges with the Attorney General’s office.

Scott Mitchell v. Inuvo. In January 2012 we were named as a defendant in an action styled Scott Mitchell versus Inuvo, Inc., f/k/a Think Partnership Inc. and Kowabunga! Inc., Does I-X , Case No. A-11-653956-C in the District Court, Clark County, Nevada. The complaint is related to our alleged failure to fully indemnify Mr. Mitchell, our former chief executive officer and member of the board of directors, pursuant to the terms of an indemnification agreement entered into in connection with his employment agreement, for attorneys’ fees and costs incurred by him related to an investigation of insider trading brought against Mr. Mitchell by the Securities and Exchange Commission. The complaint alleges that Mr. Mitchell has subsequently received correspondence from the staff of the Securities and Exchange Commission that the Commission does not intend to make any recommendation for an enforcement action against him. Under the terms of Inuvo’s directors and officer’s liability policy, its insurer has already paid approximately $588,000 of attorneys’ fees and costs to Mr. Mitchell’s counsel. Mr. Mitchell is seeking an additional approximately $265,000 of fees and costs which he allegedly owes to his counsel. The complaint alleges breach of contract/indemnity agreement, breach of implied covenant of good faith and fair dealing, tortious breach of the implied covenant of good faith and fair dealing, and failure to indemnify pursuant to our bylaws and the Nevada statutes. The complaint seeks a judgment against us for actual, consequential and special damages in excess of $10,000, advances of fees, costs and expenses, punitive damages, attorney’s fees and costs, pre and post-judgment interest and a determination of his rights with respect to the indemnification agreement, our bylaws and the Nevada statutes. Given the amount of recovered funds received by Mr. Mitchell, and the position of Inuvo’s insurer that any reimbursement beyond what has already been paid is unwarranted, Inuvo intends to defend this lawsuit on the basis of the scope of the applicable indemnification and the reasonableness of the fees demanded.

ITEM 1A. RISK FACTORS.

Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC and our subsequent filings with the SEC.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable to our operations.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

10.1	Yahoo! Publisher Network Contract, dated April 24, 2009, as amended /*
31.1	Rule 13a-14(a)/15d-14(a) certificate of Chief Executive Officer 2002 (Sarbanes-Oxley)
31.2	Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer
32.1	Section 1350certification of Chief Executive Officer
32.2	Section 1350certification of Chief Financial Officer

101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

**	filed herewith.

***

Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission under Rule 24b-2. The omitted confidential material has been filed separately with the Commission. The location of the omitted confidential information is indicated in the exhibit with asterisks (***).

SIGNATURES

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

	INUVO, INC.

Date: May 14, 2012	By:	/s/ Peter A. Corrao
	Peter A. Corrao,
	Chief Executive Officer, principal executive officer

Date: May 14, 2012	By:	/s/ Wallace D. Ruiz
	Wallace D. Ruiz,
	Chief Financial Officer, principal financial and accounting officer