AUDIOEYE, INC. The following discussion should be read in conjunction with our audited
financial statements and the related notes for the years ended
Executive Overview
We have two sales channels to deliver our product, the Partner and Marketplace
channel and the Enterprise channel.
As of
On
In the twelve months ended
In the year ended
The Company continued to invest in Research and Development in 2022.
19
Table of Contents
With revenue for the twelve months ended 2022 increasing 22% from prior year comparable period, both Sales and Marketing expense and General and Administrative expense decreased from 2021. This decrease was mainly driven by efficiencies implemented during the year in these areas and lower stock compensation expense, partially offset by costs associated with BOIA and other expenses.
We provide further commentary on our Results of Operation below.
Results of Operations
Our financial statements are stated in
Year ended
December 31, Change
(in thousands) 2022 2021 $ %
Revenue $ 29,913 $ 24,503 $ 5,410 22 %
Cost of revenue (7,219) (6,121) (1,098) 18 %
Gross profit 22,694 18,382 4,312 23 %
Operating expenses:
Selling and marketing 13,657 14,621 (964) (7) %
Research and development 6,085 5,304 781 15 %
General and administrative 13,381 13,970 (589) (4) %
Total operating expenses 33,123 33,895 (772) (2) %
Operating loss (10,429) (15,513) 5,084 (33) %
Other income (expense):
Gain on loan forgiveness - 1,316 (1,316) (100) %
Interest expense (4) (12) 8 (67) %
Total other income (expense) (4) 1,304 (1,308) (100) %
Net loss $ (10,433) $ (14,209) $ 3,776 (27) %
Revenue
The following table presents our revenues disaggregated by sales channel:
Year ended December 31, Change
(in thousands) 2022 2021 $ %
Partner and Marketplace $ 15,972 $ 13,638 $ 2,334 17 %
Enterprise 13,941 10,865 3,076 28 %
Total revenues $ 29,913 $ 24,503 $ 5,410 22 %
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
For the year ended
20
Table of Contents
additional recurring revenue from our current Enterprise offering. In 2022, our Enterprise channel revenue from recurring sources increased 22% over the prior year.
Cost of Revenue and Gross Profit
Year ended December 31, Change
(in thousands) 2022 2021 $ %
Revenue $ 29,913 $ 24,503 $ 5,410 22 %
Cost of revenue (7,219) (6,121) (1,098) 18 %
Gross profit $ 22,694 $ 18,382 $ 4,312 23 %
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 year ended
For the year ended
Selling and Marketing Expenses
Year ended
December 31, Change
(in thousands) 2022 2021 $ %
Selling and marketing $ 13,657 $ 14,621 $ (964) (7) %
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 year ended
Research and Development
Year ended
December 31, Change
(in thousands) 2022 2021 $ %
Research and development expense $ 6,085 $ 5,304 $ 781 15 %
Plus: Capitalized research and development cost 1,160 1,425 (265) (19) % Total research and development cost
$ 7,245 6,729$ 516 8 %
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.
For the year ended
21
Table of Contents
General and Administrative Expenses
Year ended
December 31, Change
(in thousands) 2022 2021 $ %
General and administrative $ 13,381 $ 13,970 $ (589) (4) %
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 year ended
Gain on Loan Forgiveness
Year ended
December 31, Change
(in thousands) 2022 2021 $ %
Gain on loan forgiveness $ - $ 1,316 $ (1,316) (100) %
In the second quarter of 2021, we recorded a
Interest Expense
Year ended
December 31, Change
(in thousands) 2022 2021 $ %
Interest expense $ 4 $ 12 $ (8) (67) %
Interest expense for the year ended
Other 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 under each active contract at the date of determination,
plus (ii) for our Partner and Marketplace channel, the monthly fee for all
active 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, Website and Mobile App report services business
and other miscellaneous non-recurring services. As of
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 and litigation-related expenses and other costs that are expected to be non-recurring. 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
22
Table of Contents
Company has supplemented the Financial Statements presented on a GAAP basis in this Annual Report on Form 10-K with the following non-GAAP financial measures: Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share.
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 depreciation and amortization expense, plus stock-based compensation expense, plus non-cash valuation adjustment to contingent consideration, plus certain litigation expense, plus certain acquisition expense, plus executive team restructuring cost, plus loss on disposal or impairment of long-lived assets, and less gain on loan forgiveness; and (ii) Non-GAAP earnings (loss) per diluted share as net income (loss) per diluted common share, plus interest expense, plus depreciation and amortization expense, plus stock-based compensation expense, plus non-cash valuation adjustment to contingent consideration, plus certain litigation expense, plus certain acquisition expense, plus executive team restructuring cost, plus loss on disposal or impairment of long-lived assets, and less gain on loan forgiveness, 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 Annual Report on Form 10-K.
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 Annual Report on Form 10-K, 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.
23
Table of Contents
To properly and prudently evaluate our business, we encourage readers to review the GAAP financial statements included elsewhere in this Annual Report on Form 10-K, 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.
Year ended
December 31,
(in thousands, except per share data) 2022 2021
Non-GAAP Earnings (Loss) Reconciliation
Net loss (GAAP) $ (10,433) $ (14,209)
Non-cash valuation adjustment to contingent consideration 346 -
Interest expense, net 4 12
Stock-based compensation expense 4,566 7,616
Acquisition expense (1) 247 -
Litigation expense (2) 1,916 2,099
Executive team restructuring cost (3) 246 -
Depreciation and amortization 2,111 1,322
Loss on disposal or impairment of long-lived assets 51 22
Gain on loan forgiveness - (1,316)
Non-GAAP loss $ (946) $ (4,454) Non-GAAP Earnings (Loss) per Diluted Share Reconciliation Net loss per common share (GAAP) - diluted
$ (0.91) $ (1.29) Non-cash valuation adjustment to contingent consideration 0.03 - Interest expense, net - - Stock-based compensation expense 0.40 0.69 Acquisition expense (1) 0.02 - Litigation expense (2) 0.17 0.19 Executive team restructuring cost (3) 0.02 - Depreciation and amortization 0.18 0.12 Loss on disposal or impairment of long-lived assets - - Gain on loan forgiveness - (0.12) Non-GAAP loss per diluted share (4)$ (0.08) $ (0.41) Diluted weighted average shares (5) 11,477 11,040
(1) Represents legal and accounting fees associated with the BOIA acquisition.
(2) Represents legal expenses related primarily to patent litigation pursued by
the Company.
(3) Represents severance expense associated with the restructuring in executive
roles.
(4) Non-GAAP earnings per adjusted diluted share for our common stock is computed
using the treasury stock method.
The number of diluted weighted average shares used for this calculation is (5) 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
Working Capital
As of
24
Table of Contents
On
As of
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.
At December 31,
(in thousands) 2022 2021
Current assets $ 12,966 $ 24,831
Current liabilities (11,062) (11,216)
Working capital $ 1,904 $ 13,615
Cash Flows
Year ended
December 31,
(in thousands) 2022 2021
Net cash used in operating activities $ (4,999) $ (4,980)
Net cash used in investing activities (5,733) (1,624)
Net cash provided by (used in) financing activities (1,330) 16,475 Net increase (decrease) in cash
$ (12,062) $ 9,871
For the year ended
For the year ended
For the year ended
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 critical accounting estimates discussed below are estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations.
25
Table of Contents
Stock-Based Compensation
Awards with performance conditions
Compensation expense related to performance-based options and RSUs is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved. Management periodically assesses the probability of achievement of each performance condition. Expense recognition only starts when achievement is deemed probable, and the amount recognized in each reporting period varies based on the expected timing of performance completion. Changes in expectations and outcomes different from estimates (such as the achievement or non- achievement of performance conditions) may cause a significant adjustment to earnings in a reporting period as timing and amount of expense recognition is highly dependent on management's estimate.
Awards with market conditions
We estimate the fair value and requisite service period of market-based restricted stock unit awards as of the grant date based on the Monte Carlo simulation model with the assistance of an independent third-party valuation specialist. The Monte Carlo simulation model is built on certain assumptions, including our stock volatility. We cannot predict the prices at which our common stock will trade in the future and achievement of market conditions may occur in period different that estimated. Compensation costs related to awards with market conditions are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied and is not reversed provided that the requisite service period derived from the Monte-Carlo simulation has been completed.
We recognize intangible assets acquired in connection with business combinations based on their fair value at acquisition, which is determined by management with the assistance a third-party valuation specialist. Acquired intangible assets are amortized on a straight-line basis over their estimated useful.
We also recognize the contingent consideration liability resulting from a business combination based on its fair value, which is determined both initially and in each reporting period using the Monte-Carlo simulation model. The model incorporates key assumptions, including non-recurring and recurring revenue metrics. Changes in estimated revenue and outcomes different from estimates may cause a significant adjustment to earnings in a reporting period as the fair value of the liability is highly dependent on management's estimate.
Refer to Note 2 - Significant Accounting Policies to our financial statements for a complete discussion of the significant accounting policies and methods used in the preparation of our financial statements, including our accounting policies related to stock-based compensation and intangible assets.
© Edgar Online, source
