The following Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with our financial statements and related notes in Part I, Item 1 of this report.
As used in this quarterly report, the terms “we,” “us,” “our” and similar references refer to
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In some cases, you may be able to identify forward-looking statements by terms such as "may," "should," "will," "forecasts," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "projects," "potential" or "continue," the negative of these terms and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions and speak only as of the date on which they are made. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed in "Part I, Item 1A. Risk Factors" contained in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-
Q. Riskfactors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to:
, the uncertain market acceptance of our existing and future products;
, our need for, and the availability of, additional capital in the future to fund
our operations and the development of new products;
, the success, timing and financial consequences of new strategic relationships
or licensing agreements we may enter into;
, rapid changes in Internet-based applications that may affect the utility and
commercial viability of our products;
, the timing and magnitude of expenditures we may incur in connection with our
ongoing product development activities;
, the inherent uncertainties and costs associated with litigation;
, judicial applications of accessibility laws to the internet;
, the adverse impact of the COVID-19 pandemic on our business and results of
, the level of competition from our existing competitors and from new competitors
in our marketplace; and
, the regulatory environment for our products and services.
Readers of this report are cautioned not to rely on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This cautionary note is applicable to all forward-looking statements contained in this report. 17 Table of Contents The AudioEye Solutions At its core,
AudioEye'soffering provides an always-on testing, remediation, and monitoring solution that continually improves conformance with WCAG. This in turn helps businesses and organizations comply with WCAG standards as well as applicable U.S.and foreign accessibility laws. Our technology is capable of immediately identifying and fixing most of the common accessibility errors and addresses a wide range of disabilities including dyslexia, color blindness, epilepsy and more. AudioEyealso offers additional solutions to provide for enhanced compliance and accessibility, including periodic manual auditing, manual remediations and legal support services. Our solutions may be purchased through a subscription service on a month-to-month basis or with one or multi-year terms. We also offer PDF remediation services and Website and Native Mobile App audit reports to help our customers with their digital accessibility needs. Intellectual Property
Our intellectual property is primarily comprised of copyrights, trademarks, trade secrets, issued patents and pending patent applications. We have a patent portfolio comprised of twenty-three (23) issued patents in
the United Statesand three (3) pending US patent applications. The commercial value of these patents is unknown.
We plan to continue to invest in research and development and expand our portfolio of proprietary intellectual property.
Our Annual Report filed on Form 10-K for the year ended
December 31, 2021as filed with the SECon March 11, 2022provides additional information about
our business and operations. Executive Overview
AudioEyeis an industry-leading digital accessibility platform delivering website accessibility compliance at all price points to businesses of all sizes. Our solutions advance accessibility with patented technology that reduces barriers, expands access for individuals with disabilities, and enhances the user experience for a broader audience. In the first quarter of 2022 we focused on the continued expansion of revenue and product innovation. We have two sales channels to deliver our product, the Partner and Marketplace channel and the Enterprise channel. AudioEyecontinues to focus on growth in both channels, with specific focus on growing recurring revenue in 2022, while still offering our Mobile App and PDF services. On March 9, 2022, AudioEyeacquired the Bureau of Internet Accessibilitywhich will contribute to Enterprise revenue in 2022. As of March, 31, 2022, Annual Recurring Revenue ("ARR") was approximately $28.1 million, which represented an increase of 22% year-over-year. Refer to Other Key Operating Metrics below for details on how we calculate ARR. As at March 31, 2022, AudioEyehad approximately 74,000 customers, up from approximately 68,000 at March 31, 2021, but down sequentially from 82,000 customers at December 2021. The customer count decreased from December 31, 2021, due to an ongoing negotiation with a digital agency upgrading from a basic tier to a more advanced offering. Excluding the impact from this digital agency, our customer count grew sequentially. Revenue from our Partners and Marketplace grew 20% from prior year. This channel represented about 55% of ARR contribution at the end of March 2022. Total Enterprise revenue, inclusive of revenue from the Bureau of Internet Accessibilityfrom the period of March 10, 2022, to the end of the first quarter 2022, grew by 18% from prior year. Enterprise revenue from recurring sources increased by 18% in 2022 over prior comparable period. The contribution of non-recurring website audit report revenue from the Bureau of Internet Accessibilityoffset the decrease in PDF project-oriented revenue in the quarter. The Enterprise channel represented about 45% of ARR contribution at the end of March 2022. In the three months ended March 31, 2022, one customer (including affiliates of such customer) accounted for 18% of our total revenue; this is compared to the three months ended March 31, 2021, two customers accounted for 20% and 10%, respectively, of our total revenue. The Company continued to invest in Research and development in the first quarter of 2022. As a percent of revenue, Research and development cost was 26% of total revenue, an increase from 22% in same period of prior year. Sales and marketing expense also 18 Table of Contents
increased from the first quarter of 2021 as we continue to invest to reach a wider, growing, audience and bring further awareness to accessibility on the web.
We provide further commentary on our Results of Operation below.
Results of Operations
Our unaudited financial statements are stated in
United StatesDollars and are prepared in accordance with United States Generally Accepted Accounting Principles (" U.S.GAAP" or "GAAP"). The discussion of the results of our operations compares the three months ended March 31, 2022with the three months ended March 31, 2021. Our results of operations in these interim periods are not necessarily indicative of the results which may be expected for any subsequent period. Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures. Three months ended March 31, Change (in thousands) 2022 2021 $ % Revenue $ 6,906 $ 5,788 $ 1,11819 % Cost of revenue (1,710) (1,353) (357) 26 % Gross profit 5,196 4,435 761 17 % Operating expenses: Selling and marketing 3,726 2,754 972 35 % Research and development 1,529 1,032 497 48 % General and administrative 3,556 3,410 146 4 % Total operating expenses 8,811 7,196 1,615 22 % Operating loss (3,615) (2,761) (854) 31 % Other expense: Interest expense (1) (4) 3 (75) % Total other expense (1) (4) 3 (75) % Net loss $ (3,616) $ (2,765) $ (851)31 % Revenue
The following tables present our revenues disaggregated by sales channel:
Three months ended March 31, Change (in thousands) 2022 2021 $ % Partner and Marketplace
$ 3,812 $ 3,178 $ 63420 % Enterprise 3,094 2,610 484 19 % Total revenues $ 6,906 $ 5,788 $ 1,11819 % Partner and Marketplace channel consists of our CMS partners, platform & agency partners, authorized resellers and the Marketplace. This channel serves small & medium sized businesses that are on a partner or reseller's web-hosting platform or that purchase our solutions from our Marketplace. Enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites, who generally engage directly with AudioEyesales personnel for custom pricing and solutions. This channel also includes federal, state and local government agencies. For the three months ended March 31, 2022, total revenue increased by 19% over the prior year comparable period. We experienced revenue growth in both of our sales channels. The increase Partner and Marketplace channel revenue was a result of our continued focus on highly transactional industry verticals to achieve higher penetration with new and existing partnerships. The increase in Enterprise channel revenue was driven primarily by additional recurring revenue from enterprise customers, with contributions from non-recurring 19
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BOIA audit report revenue offsetting the decrease in PDF project-oriented revenue. Our Enterprise channel revenue from recurring sources were 18% higher in the three months ended
Cost of Revenue and Gross Profit
Three months ended March 31, Change (in thousands) 2022 2021 $ % Revenue
$ 6,906 $ 5,788 $ 1,11819 % Cost of Revenue (1,710) (1,353) (357) 26 % Gross profit $ 5,196 $ 4,435 $ 76117 % Cost of revenue consists primarily of compensation and related benefits costs for our customer experience team, as well as a portion of our technology operations team that supports the delivery of our services, fees paid to our managed hosting and other third-party service providers, amortization of capitalized software development costs and patent costs, and allocated overhead costs. For the three months ended March 31, 2022, cost of revenue increased by 26% over the prior year comparable period. The increase in cost of revenue is primarily due to enhancements to our service delivery through investment in customer experience and platform support, as well as increased amortization of capitalized software development costs. For the three months ended March 31, 2022, gross profit increased by 17%, over the prior year comparable period. The increase in gross profit was a result of increased revenue, offset in part by higher costs to support the revenue growth.
Selling and Marketing Expenses
Three months ended March 31, Change (in thousands) 2022 2021 $ % Selling and marketing
$ 3,726 $ 2,754 $ 97235 % Selling and marketing expenses consist primarily of compensation and benefits related to our sales and marketing staff, as well as third-party advertising and marketing expenses.
For the three months ended
Research and Development Expenses
Three months ended March 31, Change (in thousands) 2022 2021 $ % Research and development expense
$ 1,529 $ 1,032 $ 49748 % Plus: Capitalized research and development cost 241 246 (5) (2) % Total research and development cost $ 1,770$
Research and development ("R&D") expenses consist primarily of compensation and related benefits, independent contractor costs, and an allocated portion of general overhead costs, including occupancy costs related to our employees involved in research and development activities. Total research and development cost includes the amount of research and development expense reported within operating expenses as well as development cost that was capitalized during
the fiscal period. 20 Table of Contents For the three months ended
March 31, 2022, research and development expenses increased by 48% over the prior year comparable period. This was driven by higher personnel cost associated with the increase in headcount and in stock-based compensation expense. For the three months ended March 31, 2022, capitalized research and development cost remained consisted with prior year comparable period. For the three months ended March 31, 2022, total research and development cost, which includes both R&D expenses and capitalized R&D costs, increased by 38% over the prior year comparable period.
General and Administrative Expenses
Three months ended March 31, Change (in thousands) 2022 2021 $ % General and administrative
$ 3,556 $ 3,410 $ 1464 %
General and administrative expenses consist primarily of compensation and benefits related to our executives, directors and corporate support functions, general corporate expenses including legal fees, and occupancy costs.
For the three months ended
March 31, 2022, general and administrative expenses increased by 4% over the prior year comparable period. The increase in general and administrative expenses was due primarily to higher legal expenses associated with patent litigation pursued by the Company, as well as professional fees incurred in connection with the BOIA acquisition in the first quarter of 2022, and was partially offset by the decrease in stock-based compensation expense. Interest Expense Three months ended March 31, Change (in thousands) 2022 2021 $ % Interest expense $ 1 $ 4 $ (3)(75) % Interest expense for the three months ended March 31, 2022consists of interest on our finance lease liabilities. Interest expense for the three months ended March 31, 2021also included interest on our PPP Loan, which was fully forgiven in the second quarter of 2021.
Key Operating Metrics
We consider annual recurring revenue ("ARR") as a key operating metric and a key indicator of our overall business. We also use ARR as one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations. We define ARR as the sum of (i) for our Enterprise channel, the total of the annual recurring fee amount under each active paid contract at the date of determination, plus (ii) for our Partner and Marketplace channel, the recognized monthly fee amount for all paying customers at the date of determination, in each case, assuming no changes to the subscription, multiplied by 12. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are cancelable, which may impact future ARR. ARR excludes revenue from our PDF remediation services business and Website and Mobile App report business and other report services. As of
March 31, 2022, ARR was $28.1 million, which represents an increase of 22% year-over-year, driven by both our Partner and Marketplace channel and Enterprise Channel.
Use of Non-GAAP Financial Measures
From time to time, we review adjusted financial measures that assist us in comparing our operating performance consistently over time, as such measures remove the impact of certain items, as applicable, such as our capital structure (primarily interest charges), items outside the control of the management team (taxes), and expenses that do not relate to our core operations, including transaction-related expenses and other costs that are expected to be non-recurring, such as severance related to strategic shift. In order to provide investors with greater insight, and allow for a more comprehensive understanding of the information used in our financial and operational decision-making, the Company has supplemented the Financial Statements presented on a GAAP basis in this Quarterly Report on Form 10-Q with the following non-GAAP financial measures: Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted
share. 21 Table of Contents
These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.
Non-GAAP Earnings (Loss) and Non-GAAP Earnings (Loss) per Diluted Share
We define: (i) Non-GAAP earnings (loss) as net income (loss), plus interest expense, plus stock-based compensation expense, plus certain litigation expense, plus certain acquisition expense, plus loss on impairment of long-lived assets, and plus loss on disposal of property and equipment; and (ii) Non-GAAP earnings (loss) per diluted share as net income (loss) per diluted common share, plus interest expense, plus stock-based compensation expense, plus certain litigation expense, plus certain acquisition expense, plus loss on impairment of long-lived assets, and plus loss on disposal of property and equipment, each on a per share basis. Non-GAAP earnings per diluted share would include incremental shares in the share count that are considered anti-dilutive in a GAAP net loss position. However, no incremental shares apply when there is a Non-GAAP loss per diluted share, as is the case for the periods presented in this Quarterly Report on Form 10-Q. Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. All of the items adjusted in the Non-GAAP earnings (loss) to net loss and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, such as stock-based compensation expense and valuation adjustments to assets and liabilities, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are expected to be less susceptible to variances in actual performance resulting from expenses that do not relate to our core operations and are more reflective of other factors that affect operating performance. In the case of items that do not relate to our core operations, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance. Non-GAAP earnings (loss) is not a measure of liquidity under GAAP, or otherwise, and is not an alternative to cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned above. Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share, as disclosed in this Quarterly Report on Form 10-Q, have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. 22 Table of Contents To properly and prudently evaluate our business, we encourage readers to review the GAAP financial statements included elsewhere in this Quarterly Report on Form 10-Q, and not rely on any single financial measure to evaluate our business. The following table sets forth reconciliations of Non-GAAP loss to net loss, the most directly comparable GAAP-based measure, as well as Non-GAAP loss per diluted share to net loss per diluted share, the most directly comparable GAAP-based measure. Three months ended
(in thousands, except per share data) 2022
Non-GAAP Earnings (Loss) Reconciliation Net loss (GAAP)
$ (3,616) $ (2,765)Interest expense 1 4 Stock-based compensation expense 1,145
1,781 Acquisition expense (1) 198 - Litigation expense (2) 862 227
Loss on impairment of long-lived assets - 10 Loss on disposal of property and equipment - 7 Non-GAAP loss
Non-GAAP Earnings (Loss) per Diluted Share Reconciliation Net loss per common share (GAAP) – diluted
$ (0.32) $ (0.27)Interest expense - - Stock-based compensation expense 0.10
0.18 Acquisition expense (1) 0.02 - Litigation expense (2) 0.08 0.02
Loss on impairment of long-lived assets - - Loss on disposal of property and equipment - - Non-GAAP loss per diluted share (3)
$ (0.12) $ (0.07)Diluted weighted average shares (4) 11,444 10,457
(1) Represents legal and accounting fees associated with the BOIA acquisition.
(2) Represents legal expenses related primarily to patent litigation pursued by
(3) Non-GAAP earnings per adjusted diluted share for our common stock is computed
using the more dilutive of the two-class method or the if-converted method.
The number of diluted weighted average shares used for this calculation is
(4) the same as the weighted average common shares outstanding share count when
the company reports a GAAP and non-GAAP net loss.
Liquidity and Capital Resources
March 31, 2022, we had $11,962,000in cash and working capital of $4,972,000. The decrease in working capital in the three months ended March 31, 2022was primarily due to a $5 millioninitial payment made in connection with the acquisition of BOIA. As of March 31, 2022, we had $2.8 millionin estimated contingent consideration liabilities recognized in connection with the acquisition of Square ADA and BOIA. We have no debt obligations or off-balance sheet arrangements and we believe that the Company has sufficient liquidity to continue as a going concern through the next twelve months. 23
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While the Company has been successful in raising capital, there is no assurance that it will be successful at raising additional capital in the future. Additionally, if the Company's plans are not achieved and/or if significant unanticipated events occur, the Company may have to further modify its business plan, which may require us to raise additional capital or reduce expenses. (in thousands) March 31, 2022 December 31, 2021 Current assets $ 17,736 $ 24,831 Current liabilities (12,764) (11,216) Working capital $ 4,972 $ 13,615 Cash Flows Three months ended March 31, (in thousands) 2022 2021
Net cash provided by (used in) operating activities
(5,014) (296) Net cash provided by (used in) financing activities (42) 16,385 Net increase (decrease) in cash $
For the three months ended
March 31, 2022, in relation to the prior year comparable period, cash used in operating activities increased primarily due to an increase in sales and marketing costs, primarily driven by higher digital, consulting and third-party costs to support the Company's growth, as well as patent litigation costs and increased product development headcount.
For the three months ended
For the three months ended
March 31, 2021, cash provided by financing activities was higher primarily due to capital raised under the ATM Offering initiated in the first quarter of 2021. In the three months ended March 31, 2021, the Company issued 471,970 shares of its common stock under the ATM offering and raised $16,534,000, net of transaction expenses.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with the accounting principles generally accepted in
the United States. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported and disclosed in our financial statements and the accompanying notes. Actual results could differ materially from these estimates under different assumptions or conditions. Our critical accounting estimates, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, relate to stock-based compensation. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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