Note 2 – Summary of Significant Accounting Policies

Basis of presentation

The condensed consolidated financial statements presented are for Inuvo and its subsidiaries. The accompanying unaudited condensed 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 condensed consolidated balance sheet as of December 31, 2025, 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 condensed 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 condensed consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on March 5, 2026.

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 condensed consolidated financial statements 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.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The fair value standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. The Company uses the hierarchy prescribed in the accounting guidance for fair value measurements, based upon the available inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

•          Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date;

•          Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and

•          Level 3 – Unobservable inputs reflecting the Company's own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.

The carrying amounts of certain financial assets and liabilities, including cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable, and accrued liabilities, approximate fair value because of the short maturity and liquidity of those instruments. The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. See Note 5 for fair value disclosures related to the Company's convertible note.

Convertible Note – Fair Value Option

The Company evaluated its convertible note and determined that it includes embedded features that would otherwise require potential bifurcation. Neither the note nor any embedded features were required to be classified as equity. Therefore, the Company elected the fair value option ("FVO") under ASC 825, Financial Instruments, for the convertible note at its date of issuance. Under the FVO, the convertible note is recorded at fair value upon initial recognition and is subsequently remeasured at fair value at each reporting date. Changes in fair value, excluding changes attributable to instrument-specific credit risk, are recognized in other income (expense) within the condensed consolidated statements of operations. The portion of the total change in fair value resulting from changes in instrument-specific credit risk is recognized separately in other comprehensive income (loss). Upon derecognition of the convertible note, any cumulative gain or loss previously recognized in other comprehensive income as a result of changes in instrument specific credit risk will be reclassified to net income. The Company determined that the change in fair value of its FVO liabilities attributable to instrument-specific credit risk was not significant. Accordingly, net income or loss equals comprehensive income or loss for all periods presented. Interest expense on the convertible note is included in financing expense within the condensed consolidated statements of operations. The election of the FVO is irrevocable and is applied on an instrument-by-instrument basis. As a result of the FVO election, the embedded conversion feature is not required to be separately accounted for. Debt issuance costs incurred in connection with the convertible note measured at fair value under the FVO are expensed as incurred.

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 and brands (collectively, “Audience Modeling”) along with large consolidators of advertising demand (“Legacy Search”). Currently, revenue from Audience Modeling is primarily through our IntentKey products and services and revenue from Legacy Search is primarily through our Bonfire products and services. 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 thousand impressions or cost-per-click 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 Audience Modeling, 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 Legacy Search, 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, 2026, we generated $7,927,553 in revenue of which 57.1% was from Legacy Search and 42.9% from Audience Modeling. For the three-month period ended March 31, 2025, we generated $26,708,032 in revenue of which 88.7% was from Legacy Search and 11.3% from Audience Modeling.

Customer concentration

For the three-month period ended March 31, 2026, four customers accounted for 32.1%,  23.2%, 13.7%, and 13.2% of our overall revenue, respectively. Those same customers accounted for 37.1%, 14.1%, 15.6%, and 12.5% of our gross accounts receivable balance as of March 31, 2026. For the three-month period ended March 31, 2025, two customers accounted for 70.8% and 17.4%, of our overall revenue, respectively. Those same customers accounted for 51.9% and 27.5% of our gross accounts receivable balance as of  March 31, 2025.

Recently Issued Accounting Pronouncements

In September 2025, the Financial Accounting Standards Board (FASB) issued ASU No. 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software, which modernizes guidance for internal-use software costs and relocates the website development-costs guidance (previously in Subtopic 350-50) into Subtopic 350-40. The amendments require enhanced disclosures for capitalized software costs under ASC 350-40 and ASC 360-10, effective for annual periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.

In September 2025, the FASB issued ASU 2025-07, Derivatives and Hedging (Topic 815) and Revenue from Contract with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-based Noncash Consideration from a Customer in a Revenue Contract which refines the scope of derivative accounting and clarifies the interaction between derivative accounting and revenue recognition guidance. The amendments are effective for fiscal years beginning after December 15, 2026. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.

In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires public companies to disclose additional information about certain expense categories within the income statement in the notes to the financial statements. The amendments are effective for fiscal years beginning after December 15, 2026, and for interim periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statement disclosures.

In May 2024, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2024-04, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, which clarifies the accounting for the settlement of convertible debt instruments with an induced conversion feature. The amendments are effective for fiscal years beginning after December 15, 2025, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2026. The adoption of ASU 2024-04 did not have a material impact on the Company's condensed consolidated financial statements.