Inuvo, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS INUVO, INC. CONSOLIDATED BALANCE SHEETS March 31, 2024 (Unaudited) and December 31, 2023 March 31, 2024 December 31, 2023 Assets Current assets Cash and cash equivalents $ 2,431,957 $ 4,440,454 Accounts receivable, net of allowance for credit losses of $ 487,158 and $ 1,645,045 , respectively. 8,710,358 9,226,956 Prepaid expenses and other current assets 1,018,876 1,076,121 Total current assets 12,161,191 14,743,531 Property and equipment, net 1,725,938 1,680,788 Other assets Goodwill 9,853,342 9,853,342 Intangible assets, net of accumulated amortization 4,418,666 4,664,791 Referral and support services agreement advance 425,000 500,000 Right of use assets - operating lease 1,084,113 805,786 Right of use assets - finance lease 53,911 72,560 Other assets 53,346 53,346 Total other assets 15,888,378 15,949,825 Total assets $ 29,775,507 $ 32,374,144 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 5,330,807 $ 6,432,120 Accrued expenses and other current liabilities 8,030,395 7,926,479 Lease liability - operating lease 233,919 123,074 Lease liability - finance lease 38,186 50,801 Total current liabilities 13,633,307 14,532,474 Long-term liabilities Deferred tax liability 89,238 89,238 Lease liability - operating lease 935,977 751,821 Lease liability - finance lease 12,118 18,209 Other long-term liabilities — 216 Total long-term liabilities 1,037,333 859,484 Stockholders’ equity Preferred stock, $ 0.001 par value: Authorized shares 500,000 , none issued and outstanding — — Common stock, $ 0.001 par value: Authorized shares 200,000,000 ; issued and outstanding shares 139,428,784 and 137,983,918 , respectively. 139,428 137,983 Additional paid-in capital 184,524,308 184,291,414 Accumulated other comprehensive loss — — Accumulated deficit ( 169,558,869 ) ( 167,447,211 ) Total stockholders' equity 15,104,867 16,982,186 Total liabilities and stockholders' equity $ 29,775,507 $ 32,374,144 See accompanying notes to the consolidated financial statements. 4 Table of Contents INUVO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) For the Three Months Ended March 31, 2024 2023 Net revenue $ 17,023,777 $ 11,847,440 Cost of revenue 2,099,042 3,190,563 Gross profit 14,924,735 8,656,877 Operating expenses Marketing costs 13,102,644 7,087,550 Compensation 3,224,859 3,422,841 General and administrative 688,510 1,581,889 Total operating expenses 17,016,013 12,092,280 Operating loss ( 2,091,278 ) ( 3,435,403 ) Financing expense, net ( 20,380 ) ( 19,120 ) Other income, net — 14,418 Net loss ( 2,111,658 ) ( 3,440,105 ) Other comprehensive income Unrealized gain on marketable securities — 84,868 Comprehensive loss $ ( 2,111,658 ) $ ( 3,355,237 ) Per common share data Basic and diluted: Net loss $ ( 0.02 ) $ ( 0.03 ) Weighted average shares Basic 138,789,669 120,970,597 Diluted 138,789,669 120,970,597 See accompanying notes to the consolidated financial statements. 5 Table of Contents INUVO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, 2024 2023 Operating activities: Net loss $ ( 2,111,658 ) $ ( 3,440,105 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 673,203 639,026 Depreciation-Right of Use Assets - Financing 18,649 30,642 Stock based compensation 396,312 432,084 Grant expense ( 5,000 ) 5,000 Amortization of financing fees 833 2,083 Adjustment to expected losses on accounts receivable ( 1,100,000 ) ( 38,875 ) Gain on marketable securities — ( 14,418 ) Stock warrant expense — ( 9,874 ) Change in operating assets and liabilities: Accounts receivable 1,616,597 2,037,941 Referral and support services agreement advance 75,000 75,000 Prepaid expenses, unbilled revenue and other current assets 57,245 ( 171,434 ) Accrued expenses and other liabilities 124,540 ( 240,104 ) Accounts payable ( 1,101,313 ) ( 2,537,965 ) Net cash used in operating activities ( 1,355,592 ) ( 3,230,999 ) Investing activities: Purchases of equipment and capitalized development costs ( 472,228 ) ( 411,238 ) Proceeds from the sale of marketable securities 2,288,876 Net cash provided by/(used in) investing activities ( 472,228 ) 1,877,638 Financing activities: Net proceeds from line of credit — 592,868 Payments on finance lease obligations ( 18,705 ) ( 34,467 ) Net taxes paid on restricted stock unit grants exercised ( 161,972 ) ( 166,872 ) Net cash provided by/(used in) financing activities ( 180,677 ) 391,529 Net change – cash ( 2,008,497 ) ( 961,832 ) Cash and cash equivalent, beginning of year 4,440,454 2,931,415 Cash and cash equivalent, end of period $ 2,431,957 $ 1,969,583 Supplemental information: Interest paid $ 36,914 $ 29,953 Acquisition of right of use asset for operating lease liability $ 335,286 $ — See accompanying notes to the consolidated financial statements. 6 Table of Contents INUVO, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited) For the Three Months Ended March 31, 2024 Common Stock Additional Paid in Accumulated Accumulated Other Comprehensive Income Shares Stock Capital Deficit (Loss) Total Balance as of December 31, 2023 137,983,918 $ 137,983 $ 184,291,414 $ ( 167,447,211 ) $ — $ 16,982,186 Net loss ( 2,111,658 ) ( 2,111,658 ) Stock-based compensation 396,312 396,312 Stock issued for vested restricted stock awards 1,444,866 1,445 ( 1,445 ) — Shares withheld for taxes on vested restricted stock ( 161,973 ) ( 161,973 ) Balance as of March 31, 2024 139,428,784 $ 139,428 $ 184,524,308 $ ( 169,558,869 ) $ — $ 15,104,867 2023 Common Stock Additional Paid in Accumulated Accumulated Other Comprehensive Income Shares Stock Capital Deficit (Loss) Total Balance as of December 31, 2022 120,137,124 $ 120,138 $ 178,771,604 $ ( 157,057,558 ) $ ( 84,868 ) $ 21,749,316 Net loss ( 3,440,105 ) ( 3,440,105 ) Unrealized loss on debt securities 84,868 84,868 Stock-based compensation 432,084 432,084 Stock issued for vested restricted stock awards 1,503,238 1,503 ( 1,503 ) — Shares withheld for taxes on vested restricted stock ( 166,872 ) ( 166,872 ) Reversal of expense related to a change in warrant vesting ( 9,874 ) ( 9,874 ) Balance as of March 31, 2023 121,640,362 $ 121,641 $ 179,025,439 $ ( 160,497,663 ) $ — $ 18,649,417 7 Table of Contents Inuvo, Inc. Notes to Consolidated Financial Statements (Unaudited) Note 1 – Organization and Business Company Overview Inuvo is an advertising technology and services business selling information technology solutions to brands, agencies and large consolidators of advertising demand (“Platforms”). Inuvo’s revenue is derived from the placement of digital advertising throughout devices, websites, applications and browsers across social, search and programmatic advertising channels. Inuvo facilitates, and gets paid, to deliver millions of advertising messages monthly and counts among its client's numerous world renowned companies across industries. Inuvo’s primary mission is to disrupt the advertising industry with its proprietary and patented generative large language artificial intelligence (AI), a technology capable of identifying and targeting audiences without using a consumer’s identity or data. The AI was designed to replace the consumer data, analytics, segmentation and lookalike modeling technologies that have traditionally served the advertising industry as it transitions to a new paradigm where a consumer’s identity and data are no longer available for advertising decisions due to legislative and technological changes. Rather than targeting people, the AI targets the reasons behind why people are interested in products, services and brands. Inuvo’s AI technology solves this challenge and can be consumed by clients both as a managed service and software-as-a-service. For certain clients, Inuvo has also developed various proprietary technology and assets that include digital content, websites, automated campaigns, ad fraud detection, performance reporting and predictive media mix modeling. The Inuvo products and services use analytics, data and artificial intelligence in a manner that optimizes the purchase and placement of advertising in real time. These capabilities are typically sold with services both individually and in combination with each other based on client needs. These products and services include: · IntentKey : An artificial intelligence-based consumer intent recognition system designed to reach highly targeted mobile and desktop In-Market audiences with precision; and · Bonfire : A marketing and advertising solution where a collection of data, analytics, software and publishing is used to align advertising messages with consumers across websites online. There are many barriers to entry associated with the Inuvo business model, including a proficiency in large language model based artificial intelligence, large scale information processing, software development, consumer data products, analytics, IOT (internet of things) integration and the relationships required to execute within the IOT. Inuvo’s intellectual property is protected by 19 issued and eight pending patents. Liquidity Our principal sources of liquidity are the sale of our common stock and our credit facility discussed in Note 5 - Bank Debt. On May 28, 2021, we entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners, as sales agent (the “Sales Agent”), pursuant to which we may offer and sell through or to the Sales Agent shares of our common stock (the “ATM Program”) up to an aggregate amount of gross proceeds of $ 35,000,000 . During the year ended December 31, 2023, we sold 173,558 shares of common stock for gross proceeds totaling $ 63,136 under the ATM Program and paid the Sales Agent a commission of $ 1,902 , all of which occurred during the second quarter of 2023. For the three-month period ended March 31, 2024, we did not issue any shares of common stock or receive any aggregate proceeds under the ATM Program, and we did not pay any commissions to the Sales Agent. Any shares of common stock offered and sold in the ATM Program were issued pursuant to our universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”). The ATM Program terminated on March 15, 2024, the third (3rd) anniversary of the initial effective date of the Shelf Registration Statement. Under the terms of the Sales Agreement, the Sales Agent was entitled to a commission at a fixed rate of 3.0 % of the gross proceeds from each sale of shares under the Sales Agreement. 8 Table of Contents On May 30, 2023, we raised $ 4.0 million in gross proceeds in a registered direct offering, before expenses, through the sale of an aggregate of 16,000,000 shares of our common stock. The shares were offered pursuant to the Shelf Registration Statement and a prospectus supplement relating to the offering was filed with the SEC on May 26, 2023. We have focused our resources behind a plan to market our collective multi-channel advertising capabilities differentiated by our AI technology, the IntentKey, where we have a technological advantage and higher margins. If we are successful in implementing our plan, we expect to return to positive cash flows from operations. However, there is no assurance that we will be able to achieve this objective. As of March 31, 2024, we have over $ 2 million in cash and cash equivalents. Our net working capital deficit was approximately $ 1.5 million. We have encountered recurring losses and cash outflows from operations, which historically we have funded through equity offerings and debt facilities. In addition, our investment in internally developed software consists primarily of labor costs which are of a fixed nature. Through March 31, 2024, our accumulated deficit was $169.6 million. Management plans to support the Company’s future operations and capital expenditures primarily through cash raised through the sale of stock in May 2023, cash generated from future operations and borrowings from the credit facility until reaching profitability. The credit facility is due upon demand and therefore there can be no assurances that sufficient borrowings will be available to support future operations until profitability is reached. Our collection period is less than 30 days and can also be used to meet accrued obligations. We believe our current cash position and credit facility will be sufficient to sustain operations for at least the next twelve months from the date of this filing. If our plan to grow the IntentKey product is unsuccessful, we may need to fund operations through private or public sales of securities, debt financings or partnering/licensing transactions over the long term. Customer concentration For the three-month period ended March 31, 2024, one platform customer accounted for 75.9 % of our overall revenue. That same customer accounted for 53.8 % of our gross accounts receivable balance as of March 31, 2024. For the three-month period ended March 31, 2023, three customers accounted for 66.3 % of our overall revenue at 26.4 %, 25.3 % and 14.6 %, respectively. As of March 31, 2023, the same customers accounted for 24.0 % of our gross accounts receivable balance. 9 Table of Contents Note 2 – Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements presented are for Inuvo and its subsidiaries. The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2023, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). In our opinion, these consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 29, 2024. Use of estimates The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s regular evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. We regularly evaluate estimates and assumptions related to capitalized labor, goodwill and purchased intangible asset valuations and income tax valuation allowance. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material. Revenue Recognition We generate revenue by identifying audiences and presenting advertisements on behalf of our customers. We provide our products, technologies and services to Agencies & Brands and Platforms (large consolidators of advertising demand). Currently, revenue from our IntentKey products and services are primarily from Agencies & Brands, and revenue from our Bonfire products and services are primarily from Platforms. Our revenue is derived from the placements of advertisements across advertising channels, browsers, applications and devices. Pricing for those advertisement placements is typically either on a cost-per-click or cost per thousand impressions basis. Our revenue is a function of the number of advertisements placed combined with the price we obtain (using our technologies) for the placements made on behalf of our clients. We assume the risk associated of finding placements at a cost below that for which it had been sold. We recognize revenue when control of the contracted services or product is transferred to our customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those services or products. We determine revenue recognition through (i) identification of a contract with a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations in the contract, and (v) recognition of revenue when or as the performance obligations are satisfied. For Agencies and Brands, the terms of an agreement are captured in an Insertion Order ("IO") where revenue is recognized upon delivery of services during the period covered by the IO. For Platforms, terms are generally captured in multi-year master service agreements and revenue is recognized based on the number of advertisements placed or clicked on in the period they occur. We settle advertisement placement prices with our customers net of any adjustments for quality. For the three-month period ended March 31, 2024, we generated $ 17,023,777 in revenue of which 84.1% was from Platforms and 15.9% from Agencies and Brands. For the three-month period ended March 31, 2023, we generated $ 11,847,440 in revenue of which 66.3% was from Platforms and 33.7% from Agencies and Brands. Recently Adopted Accounting Pronouncements There are no new recently adopted accounting pronouncements for the three-month period ended March 31, 2024. 10 Table of Contents Note 3 – Property and Equipment The net carrying value of property and equipment was as follows as of: March 31, 2024 December 31, 2023 Furniture and fixtures $ 293,152 $ 293,152 Equipment 1,317,377 1,292,528 Capitalized software development costs 16,606,896 16,159,517 Leasehold improvements 458,885 458,885 Subtotal 18,676,310 18,204,082 Less: accumulated depreciation and amortization ( 16,950,372 ) ( 16,523,294 ) Total $ 1,725,938 $ 1,680,788 During the three months ended March 31, 2024 and March 31, 2023, depreciation expense was $ 427,078 and $ 392,901 , respectively. Note 4 – Other Intangible Assets and Goodwill The following is a schedule of intangible assets and goodwill as of March 31, 2024: Term Carrying Value Accumulated Amortization and Impairment Net Carrying Value Year-to-date Amortization Customer list, Google 20 years $ 8,820,000 $ ( 5,328,750 ) $ 3,491,250 $ 110,250 Customer list, ReTargeter 5 years 1,931,250 ( 1,802,500 ) 128,750 96,562 Brand name, ReTargeter 5 years 643,750 ( 600,834 ) 42,916 32,188 Customer relationships 20 years 570,000 ( 204,250 ) 365,750 7,125 Trade names, web properties (1) - 390,000 — 390,000 — Intangible assets classified as long-term $ 17,565,000 $ ( 13,146,334 ) $ 4,418,666 $ 246,125 Goodwill, total - $ 9,853,342 $ — $ 9,853,342 $ — (1) The trade names related to our web properties have an indefinite life, and as such are not amortized. Amortization expense over the next five years and thereafter is as follows: 2024 (remainder of year) $ 523,792 2025 469,500 2026 469,500 2027 469,500 2028 469,500 Thereafter 1,626,875 Total $ 4,028,667 11 Table of Contents The following is a schedule of intangible assets and goodwill as of December 31, 2023: Term Carrying Value Accumulated Amortization and Impairment Net Carrying Value 2023 Amortization Customer list, Google 20 years $ 8,820,000 $ ( 5,218,500 ) $ 3,601,500 $ 441,000 Customer list, ReTargeter 5 years 1,931,250 ( 1,705,938 ) 225,312 386,250 Brand name, ReTargeter 5 years 643,750 ( 568,646 ) 75,104 128,750 Customer relationships 20 years 570,000 ( 197,125 ) 372,875 28,500 Trade names, web properties - 390,000 — 390,000 — Intangible assets classified as long-term $ 17,565,000 $ ( 12,900,209 ) $ 4,664,791 $ 984,500 Goodwill, total $ 9,853,342 $ — $ 9,853,342 $ — Note 5 – Bank Debt On March 1, 2023, we entered into Amendment No. 1 to Loan and Security Agreement and Collateral Documents (“Agreement”) with Mitsubishi HC Capital America, Inc., f/k/a/ Hitachi Capital America Corp. (“MHCA”). Under the terms of the Agreement, MHCA has provided us with a $ 5,000,000 line of credit commitment. We are permitted to borrow up to 85 % of the aggregate Eligible Accounts Receivable, up to the maximum credit commitment of $ 5,000,000 . We will pay MHCA monthly interest at the rate of 1.75 % in excess of the Wall Street Journal Prime Rate. The principal and all accrued but unpaid interest are due on demand. In the event of a default under the terms of the Loan and Security Agreement, the interest rate increases to 6 % greater than the interest rate in effect from time to time prior to a default. The Agreement contains certain affirmative and negative covenants to which we are also subject. We agreed to pay MHCA an amendment fee of $ 10,000 on issuance of the Agreement, and thereafter an annual commitment fee of $ 10,000 . We are also obligated to pay MHCA a quarterly service fee of 0.20 % on the monthly unused amount of the maximum credit line. If we terminate the Agreement before February 28, 2025, we are obligated to pay MHCA an exit fee of $ 25,000 . The Loan and Security Agreement continues for an indefinite term. At March 31, 2024, the outstanding balances due under the Loan and Security Agreement was $ 0 . Our borrowing capacity at March 31, 2024 was $ 5,000,000 . Note 6 – Accrued Expenses and Other Current Liabilities The accrued expenses and other current liabilities consist of the following as of: March 31, 2024 December 31, 2023 Accrued marketing costs $ 5,695,372 $ 5,717,983 Accrued commissions and payroll 1,364,098 1,544,460 Accrued expenses and other 938,026 622,960 Arkansas grant contingency 30,000 35,000 Accrued taxes, current portion 2,899 6,076 Total $ 8,030,395 $ 7,926,479 12 Table of Contents Note 7 – Commitments On September 17, 2021, we signed a multi-year agreement with a business development partner to provide referral and support services to us. The agreement required an advance fee of $ 1.5 million with $ 300,000 recorded in other current assets. The advance is being amortized as marketing expenses over five years. As of March 31, 2024, $ 775,000 has been amortized and the total current and non-current balance is $ 725,000 . As part of the agreement, we granted a warrant exercisable into 300,000 shares of our common stock, which vested over two years upon achieving certain performance metrics (see Note 10 - Stockholders' Equity). Additionally, we agreed to pay quarterly support fees upon reaching certain levels of operational activity. In April 2022, we agreed to Amendment No. 2 ("amendment") to the agreement. The amendment replaced the quarterly support fees with a commission on quarterly cumulative programmatic revenue. The amendment also revised the cumulative target media spend and the associated commission. In addition, effective September 26, 2023, Inuvo and the business development partner entered into an Offset Agreement whereby the parties agreed that the commission due to the partner be offset against the outstanding receivable balances due to Inuvo. We offset approximately $ 960,852 in commissions due to the partner against the outstanding receivable of $ 642,202 . The total amount of commission recognized, net of the $ 67 K commission adjustment per our offset agreement, for the year ended December 31, 2023 was approximately $ 52 K. Commission expense of approximately $ 17 K was recognized for the three months ended March 31, 2024. Note 8 – Income Taxes We have no current income tax expense and incur only the minimum state taxes which are included in operating expenses. We have deferred tax assets of $ 42,167,778 . We believe it is more likely than not that essentially none of our deferred tax assets will be realized, and we have recorded a valuation allowance of $ 41,000,516 for the deferred tax assets that may not be realized as of March 31, 2024 and December 31, 2023. We also have deferred tax liabilities totaling $ 1,256,500 as of March 31, 2024, related to intangible assets acquired in March 2012 and February 2017. These balances are presented as a net deferred tax liability of $ 89,238 composed of indefinite lived intangible assets. Note 9 – Stock-Based Compensation We maintain a stock-based compensation program intended to attract, retain and provide incentives for talented employees and directors and align stockholder and employee interests. During the 2024 and 2023 periods, we granted restricted stock units ("RSUs") from the 2017 Equity Compensation Plan, as amended (“2017 ECP”). RSU vesting periods are generally up to three years and/or based upon achieving certain financial targets. As of March 31, 2024, the total number of authorized shares of our common stock under the 2017 ECP was 24,550,000 . Compensation Expense For the three months ended March 31, 2024 and March 31, 2023, we recorded stock-based compensation expense for all equity incentive plans of $ 396,312 and $ 432,084 , respectively. Total compensation cost not yet recognized at March 31, 2024 was $ 2,517,485 , which will be recognized over the next three years. The following table summarizes the stock grants outstanding under 2017 ECP for the three months ended March 31, 2024: Options Outstanding RSUs Outstanding Options and RSUs Exercised Available Shares Total Awards Authorized Total — 8,413,345 8,485,792 7,650,863 24,550,000 13 Table of Contents The fair value of RSUs is determined using market value of the common stock on the date of the grant. The fair value of stock options is determined using the Black-Scholes-Merton 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. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture rate, which is estimated at a weighted average of 0% 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. There were no stock option awards outstanding as of the three months ended March 31, 2024. The following table summarizes the activities for our RSUs for the three months ended March 31, 2024: RSUs Number of Shares Weighted Average Grant Date Fair Value Outstanding, beginning of period 7,010,016 $ 0.48 Granted 3,255,000 $ 0.41 Vested ( 1,851,671 ) $ 0.87 Outstanding, end of period 8,413,345 $ 0.37 Note 10 – Stockholders' Equity Warrants On September 17, 2021, we signed an agreement with a marketing platform and consulting company to provide referral and support services to us for a period of five years (see Note 7 - Commitments). As part of that agreement, we granted a warrant exercisable into 300,000 shares of our common stock at an exercise price of $ 0.72 per share and vests in two tranches when certain performance metrics are achieved. The warrant was valued using the Black Scholes option pricing model at a total of $ 149,551 based on a seven-year term, an implied volatility of 100 %, a risk-free equivalent yield of 1.17 %, and a stock price of $ 0.71 . The warrant is classified as equity and will be expensed on a ratable basis over the vesting period of each tranche. On August 31, 2022, 85,862 shares vested in accordance with the contracted performance criteria. On August 31, 2023, an additional 21,136 shares vested. For the second tranche, we reversed approximately $ 7.9 thousand for the year ended December 31, 2023 due to a change in the probability of performance criteria being achieved. In accordance with our agreement, after the second anniversary of the Original Issue Date, any interests in Warrant shares that have not vested pursuant to the terms and conditions of the agreement shall be deemed forfeited and shall never become exercisable. At the period ended December 31, 2023, approximately 193 thousand shares have been forfeited. Earnings per Share For the three-month period ended March 31, 2024 and 2023, we generated a net loss from continuing operations and as a result, any potential common shares are anti-dilutive. 14 Table of Contents Note 11 – Leases We have entered into operating and finance leases primarily for real estate and equipment rental. These leases have terms which range from three years to five years, and often include one or more options to renew or in the case of equipment rental, to purchase the equipment. These operating and finance leases are listed as separate line items on our consolidated balance sheets and represent our right to use the underlying asset for the lease term. Our obligation to make lease payments is also listed as separate line items on our consolidated balance sheets. As of March 31, 2024 and December 31, 2023, total operating and financed right-of-use assets were $ 1,084,113 and $ 53,911 , and $ 805,786 and $ 72,560 respectively. As of March 31, 2024 and 2023, we recorded $ 18,649 and $ 30,642 , respectively, in amortization expense related to finance leases. In May 2023, we entered into an agreement to lease 4,128 square feet of office space in San Jose, CA commencing on September 1, 2023. The lease has a term of sixty-five months with an abatement period of five months and will cost approximately $ 208,000 during its first year. Thereafter, the lease payments increase by 3 % annually. In January 2024, we amended and renewed our lease at our corporate headquarters in Little Rock, Arkansas. The lease was extended for thirty-six months commencing on February 1, 2024 and expiring on January 31, 2027 and will cost approximately $ 127,000 during its first year. Thereafter, the lease payments increase by 2 % annually. Because the rate implicit in each lease is not readily determinable, we use our incremental borrowing rate to determine the present value of the lease payments. Information related to our operating lease liabilities are as follows: For the Three Months Ended March 31, 2024 Cash paid for operating lease liabilities $ 56,364 Weighted-average remaining lease term 3.4 years Weighted-average discount rate 10.5 % Minimum future lease payments ended March 31, 2024 2024 (remainder of year) 255,719 2025 349,194 2026 354,565 2027 237,867 2028 233,727 Thereafter 19,525 1,450,597 Less imputed interest ( 280,701 ) Total lease liabilities $ 1,169,896 Information related to our financed lease liabilities are as follows: For the Three Months Ended March 31, 2024 Cash paid for finance lease liabilities $ 17,350 Weighted-average remaining lease term 1.2 years Weighted-average discount rate 6.25 % 15 Table of Contents Minimum future lease payments ended March 31, 2024 2024 (remainder of year) 33,057 2025 18,491 51,548 Less imputed interest ( 1,244 ) Total lease liabilities $ 50,304 Note 12 – Allowance for Credit Losses The activity in the allowance for doubtful accounts was as follows during the three-month period ended 2024 and years ended December 31, 2023: 2024 2023 Balance at the beginning of the year $ 1,645,045 $ 1,440,678 Adjustment to expected losses on accounts receivable ( 1,100,000 ) 786,549 Charge-offs ( 62,587 ) ( 582,189 ) Recoveries 4,700 7 Balance at the end of the year $ 487,158 $ 1,645,045 The allowance for doubtful accounts at March 31, 2024 was $ 487,158 , a decrease of $ 1,157,887 from December 31, 2023. During 2024, we made an adjustment to the expected losses for accounts receivable for a balance due from a former client in 2022 that now pays consistently, has significantly reduced its outstanding amount owed and is expected to pay the remaining amount due. Note 13 – Subsequent Events On May 7, 2024, we entered into an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”), to sell shares of our common stock, par value $ 0.001 per share, (the “Shares”) having an aggregate sales price of up to $ 15,000,000 , from time to time, through an “at the market offering” program under which Wainwright will act as sales agent. The sales, if any, of the Shares made under the ATM Agreement will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company will pay Wainwright a commission rate of up to 3.0 % of the aggregate gross proceeds from each sale of Shares. As of the date of this filing, the Company has not sold any shares of common stock under the ATM Agreement. 16 Table of Contents