Inuvo, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company Overview Inuvo is a market leader in generative artificial intelligence for modeling media audiences. As a leading provider of AI-driven data and advertising technology solutions, we have successfully commercialized a proprietary, patented large language model (“LLM”) that identifies and actions the reasons why consumers are interested in products, services, or brands - rather than who they are - offering a high-performance, privacy-by-design solution for the modern advertising landscape. Intelligence for the Agentic Era . As the industry moves toward "agentic” systems - where autonomous AI agents increasingly handle the planning and execution of media tasks - Inuvo is uniquely positioned as a critical, media audience decisioning layer. Unlike legacy systems that rely on static historical data or consumer IDs (cookies), Inuvo’s technology provides the real-time, intent-based reasoning required for autonomous media planning and activation. By serving as the neural network for these adaptive systems, Inuvo enables brands to move from traditional audience targeting to dynamic model planning & activation. Inuvo’s core competitive advantage lies in intent discovery. While the programmatic industry has traditionally relied on reaching known users based on past behavior, Inuvo’s AI discovers new, high-value audiences as their motivations form. This intelligence is delivered through a suite of advanced visualization and compliance tools: · The Company’s flagship proprietary AI, IntentKey®, analyzes live content consumption across the open web, mapping human motivation to a concept graph of over 25 million ideas. This allows Inuvo to predict purchase intent with precision, often identifying emerging audience shifts 24 hours before they become competitive in the open market. This, in turn, delivers targeting leverage that translates to superior supply/demand yields within bid streams. Speed of insight-to-execution is our competitive advantage. IntentKey delivers value from intent signals in-the-moment and unlocks superior ROAS (return on ad spend) by matching high yield ad inventories in the bid stream before competitors have even identified consumer intent. · IntentPath: A first-of-its-kind visualization that allows marketers to see “intent-in-motion,” mapping the real-time journey from initial discovery to final purchasing decision. · Ranger: An AI-powered quality assurance feature within our Campsight system that ensures ad creatives remain consistent, accurate and compliant across digital networks. Inuvo delivers these capabilities through two primary business channels: · Audience Modeling (formerly Agencies and Brands): Managed and self-service offerings that utilize Inuvo’s intelligence layer for precision audience discovery and brand-safe activation across CTV, Video, Audio, Native, and Display channels. · Legacy Search (formerly Platforms): Inuvo provides strategic integrations for large consolidators of advertising demand. This business is optimized to prioritize advertising quality, scalability, and compliance, leveraging AI to align merchant messaging with online content in a durable, defensible manner. Inuvo’s competitive moat and intellectual property are protected by 15 issued and three pending patents issued by the United States Patent and Trademark Office. Our IP portfolio includes patents, trade secrets and trademarks. We actively seek to protect our IP rights and to deter unauthorized use of our IP and other assets. While our IP rights are important to our success, our business is not significantly dependent on any single patent, trademark, or other IP rights. Significant Business Trends Our business results have been, or are expected to be, impacted by several trends and strategic activities, which are described below. We expect that the trends described below may continue to impact our results of operations, cash flows, and financial position. Forces Impacting the Industry The digital advertising industry in which we operate is experiencing structural change driven by privacy-related regulation, browser and platform policy changes, and changing consumer behaviors, particularly as it relates to consumer use of artificial intelligence in information-gathering. These factors have, among other things, led to a wider distribution of consumer intent signals across media platforms and has reduced availability and utility of third-party cookies and other persistent identifiers that are used by legacy advertising technology platforms to ensure advertising alignment and yield a return on investment for advertisers. As a result, there has been an adverse impact on the entire search ecosystem. In addition, the industry has experienced an increase in sophisticated technologies, often nefarious, that have allowed lower quality traffic to masquerade as legitimate, high-intent consumer demand. This has further driven technology companies that control search engines, browsers, and other technologies, to strengthen compliance requirements for their digital advertising partners to improve the integrity of online traffic. 18 Table of Contents Inuvo Response In response to the systemic industry changes above, Inuvo has taken the following actions: Bonfire platform reset. In response to more stringent compliance requirements, including changes in the Google ecosystem which have suppressed revenue per click (RPC), and as a result of the detection of lower quality traffic on our systems, we developed and deployed an AI compliance system (“Ranger”) to not only enforce our partners’ stricter standards, but to reveal quality differences that had previously been difficult to detect at scale. While this allowed us to take action against bad actors, it also necessitated that we intentionally constrain Bonfire-related revenue in order to have clearer visibility and insight into traffic quality (“Bonfire Reset”). As a result, revenue from our Legacy Search business was lower year-over-year beginning in late fourth quarter 2025 and continued to be lower year-over-year in the first quarter of 2026. As our Legacy Search business generates a higher gross margin and lower operating margin compared to the Audience Modeling business, lower revenue from Legacy Search has also constrained our consolidated gross margins. We have taken, and continue to take, steps to lower costs in our Legacy Search business, including reducing headcount. We currently expect this business to recover gradually as the year progresses, but there can be no guarantees that it will fully recover. Investment focus on IntentKey. We believe IntentKey is positioned to benefit from the aforementioned industry shifts because it is designed to operate as a privacy-safe decisioning layer that does not rely on cookies or persistent identifiers. We further believe that the adoption of autonomous and AI-enabled workflows may increase demand for algorithmic software, like IntentKey, that can translate intent signals into real-time activation across programmatic environments. As a result, we are focused on growing and enhancing the IntentKey AI product. To the extent we are successful in accelerating IntentKey revenue and that IntentKey becomes a larger portion of our overall revenue mix, we expect that direct operating margins will also increase, as Audience Modeling has historically yielded higher direct operating margins than our Legacy Search business. Results of Operations For the Three Months Ended March 31, 2026 2025 Change % Change Net revenue $ 7,927,553 $ 26,708,032 $ (18,780,479 ) (70.3 )% Cost of revenue 4,263,665 5,620,941 (1,357,276 ) (24.1 )% Gross profit $ 3,663,888 $ 21,087,091 $ (17,423,203 ) (82.6 )% Net Revenue Revenue for the three-month period ended March 31, 2026, decreased by 70.3% as compared to the same time period in 2025. This decrease was driven by 81% decline in revenue from Legacy Search resulting from the Bonfire Reset described in Significant Business Trends above. This decrease was partially offset by a 13% increase in revenue from Audience Modeling as we continue to grow our IntentKey platform. Cost of Revenue Cost of revenue is composed of payments to website publishers and app developers that host advertisement as well as payments to advertising exchanges that provide access to digital inventory where we serve advertisements. The decrease in cost of revenue for the period ended March 31, 2026, compared to the same time period in 2025 was driven by a decrease in revenue from our Legacy Search clients. The resulting change in revenue mix drove gross margin lower to 46.2% compared to 79.0% in the same quarter last year. Our Legacy Search business historically carries higher gross margins as a lower proportion of its costs are recorded in cost of revenue, with a greater portion reflected in marketing and other operating expenses. 19 Table of Contents Operating Expenses For the Three Months Ended March 31, 2026 2025 Change % Change Marketing costs $ 2,092,812 $ 17,512,994 $ (15,420,182 ) (88.0 )% Compensation 3,690,203 3,599,321 90,882 2.5 % General and administrative 1,761,827 1,744,563 17,264 1.0 % Operating expenses $ 7,544,842 $ 22,856,878 $ (15,312,036 ) (67.0 )% Marketing costs consist mostly of traffic acquisition (i.e., media) costs and include those expenses required to attract audiences to various web properties. Marketing costs for the three-month period ended March 31, 2026 decreased compared to the same period in 2025 due to the decline in revenue from Legacy Search discussed above in Significant Business Trends . Compensation expense was higher for the three-month period ended March 31, 2026, compared to the same time period in 2025, due primarily to a one-time severance accrual of $914,000 substantially of which relates to the separation agreement of a former executive officer, partially offset by lower salary expense resulting from reduced headcount. Compensation expense for the three-month period ended March 31, 2025 included a one-time accrual of an employee benefit of $335,000. Our total employment, both full- and part-time, was 64 at March 31, 2026 compared to 81 at March 31, 2025. General and administrative costs for the three months ended March 31, 2026, increased 1% compared to the same period in 2025. Financing expense, net Financing expense, net of interest income, for the three months ended March 31, 2026, was $398,439 compared to $27,929 in the same quarter last year. Financing expense, net this year included $359,000 of interest and financing fees related to the issuance of a subordinated convertible note discussed in Note 5 – Debt. Other income, net Other income was approximately $6.2 million and $540,571 for the three months ended March 31, 2026 and 2025, respectively. In January 2026, we received gross proceeds of approximately $6.2 million in connection with a class action settlement. The settlement proceeds represent a one-time, non-recurring cash inflow. During March 2025, we received a payment from the Internal Revenue Service totaling $610,352 in connection with an amended form filed in May 2023 for the Employee Retention Credit related to the first quarter of 2021. Of the total payment, $533,093 was recognized in Other income, while $77,259 of interest was recorded in Financing expense, net. Liquidity and Capital Resources Our principal sources of liquidity are the sale of our common stock and our Financing Agreement with SLR (the “Financing Agreement”), which is discussed in Note 5 – Debt. As of March 31, 2026, we have approximately $2.9 million in cash and cash equivalents. Our net working capital deficit was approximately $2.7 million. Our investing activities totaled $358,944 for the three-month period ended March 31, 2026. This amount primarily consists of internally developed software costs, which are largely comprised of fixed labor costs, along with other capitalized expenditures. We have encountered recurring losses and cash outflows from operations, which historically we have funded through equity offerings and debt facilities. Through March 31, 2026, our accumulated deficit was $176.4 million. On January 29, 2026, we received gross proceeds of approximately $6.2 million in connection with a class action settlement. These proceeds represent a one-time, non-recurring source of liquidity and are not expected to recur in future periods. On January 14, 2026, we entered into a securities purchase agreement with certain investors pursuant to which we issued a subordinated convertible note with an aggregate principal amount of approximately $3.3 million, subject to a 10% original issue discount, resulting in gross proceeds of approximately $3.0 million, prior to the deduction of transaction related expenses. The subordinated convertible note is convertible into shares of the Company’s common stock at a conversion price of $3.10 per share, subject to applicable NYSE American ownership limits and certain registration rights obligations. In connection with the convertible note financing, we also entered into a debt subordination agreement with our senior lender and a registration rights agreement with the investor. This financing supplemented the Company’s available liquidity during the period. See Note 5 –Debt to our Condensed Consolidated Financial Statements. 20 Table of Contents On July 31, 2024, we entered into the Financing Agreement with SLR, effective July 30, 2024. Pursuant to the terms of the Financing Agreement, SLR will finance up to $10 million subject to availability based on the amount of eligible accounts receivable. Eligibility is determined by criteria such as geographic location of the customer and aging of receivables. As of March 31, 2026, our accounts receivable, net of allowance for credit losses, were $4.3 million, of which a substantial portion qualified as eligible under the Financing Agreement. As of March 31, 2026, the outstanding balance due under the Financing Agreement was $0. See Note 5 – Debt to our Condensed Consolidated Financial Statements. 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 million, from time to time, through an “at the market offering” program under which Wainwright will act as sales agent. The sales 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. We will pay Wainwright a commission rate of up to 3.0% of the aggregate gross proceeds from each sale of Shares. For the three-month period ended March 31, 2026, the Company has not sold any additional shares of common stock under the ATM Agreement. During the three-month period ended March 31, 2025, we utilized the ATM Agreement and sold 159,431 shares of common stock for gross proceeds of $1.2 million. As of March 31, 2026, approximately $13.8 million remained available for issuance under the ATM Agreement, based on cumulative gross sales of shares under the program to date. The Company’s liquidity during the period was impacted by reduced revenue levels associated with actions taken within its Legacy Search business to improve traffic quality and compliance, as further discussed in Results of Operations . During the fourth quarter of 2025, we deliberately slowed growth in our Legacy Search business in order to better align with more rigorous compliance standards required by our partners. As a result, since that time, revenue has been constrained in our Legacy Search business and this, in turn, has negatively impacted our margins, net income, and cash generation. In response, we have taken steps to contain costs until the Legacy Search business returns to profitability. In addition, 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 and maintain positive cash flows from operations. However, there is no assurance that we will be able to achieve this objective. Management plans to support the Company’s future operations and capital expenditures through cash generated from operations and availability under its Financing Agreement and other available financing sources until such time as we reach 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. We believe our current cash position and credit facility, together with expected cash flows from operations, 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. Cash Flows The table below sets forth a summary of our cash flows for the three months ended March 31, 2026 and 2025: For the Three Months Ended March 31, 2026 2025 Net cash provided by/(used in) operating activities $ 1,589,931 $ (366,912 ) Net cash used in investing activities $ (358,944 ) $ (451,729 ) Net cash provided by/(used in) financing activities $ (1,183,764 ) $ 921,389 Cash Flows - Operating Net cash provided by operating activities was $1,589,931 during the three months ended March 31, 2026. We reported net income of $1,895,655, which included the receipt of approximately $6.2 million in non-recurring settlement proceeds during the current period, non-cash expenses of depreciation and amortization expense of $538,786 and stock-based compensation expense of $302,719. The change in operating assets and liabilities during the three months ended March 31, 2026 was a net use of cash of $1,134,034 primarily due to a decrease in the accounts payable balance of $2,988,808, partially offset by the decrease in accounts receivable balance of $1,625,443 and an increase in accrued expenses and other current liabilities of $431,591. Our terms are such that we generally collect receivables prior to paying trade payables; however, our Media sales arrangements typically have slower payment terms than the terms of related payables. 21 Table of Contents During the comparable three-month period in 2025, cash used in operating activities was $366,912 from a net loss of $1,259,821 that included several non-cash expenses of depreciation and amortization expense of $568,042 depreciation of right of use assets of $6,090, and stock-based compensation expense of $304,284. The change in operating assets and liabilities during the three months ended March 31, 2025, was a net use of cash of $79,752. Cash Flows - Investing Net cash used by investing activities was $358,944 for the three months ended March 31, 2026, and consisted primarily of capitalized internal development costs. Net cash used in investing activities was $451,729 for the three months ended March 31, 2025, and consisted primarily of capitalized internal development costs. Cash Flows - Financing Net cash used in financing activities was $1,183,764 and during the three months ended March 31, 2026, and was primarily due to payments of the Financing Agreement partially offset by proceeds of the Convertible Note. Net cash provided by financing activities was $921,389 during the three months ended March 31, 2025, and was primarily from the proceeds from the ATM Agreement as discussed in Note 1 – Organization and Business. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The estimates and assumptions that management makes affect the reported amounts of assets, liabilities, net revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used are based upon management’s regular evaluation of the relevant facts and circumstances as of the date of the condensed consolidated financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying condensed consolidated financial statements, and such differences could be material. Our significant accounting policies related to Revenue Recognition, Equity-Based Compensation, Capitalized Software Costs, Goodwill, Long-lived Assets and others are described in Note 2 – Summary of Significant Accounting Policies of our Condensed Consolidated Financial Statements included elsewhere in this Report. Off Balance Sheet Arrangements As of March 31, 2026, 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.