AudioEye(AEYE) - 2022 Q4 - Annual Report

Front Matter Registrant Information AudioEye, Inc is a non-accelerated filer and smaller reporting company with its common stock traded on Nasdaq - Company Name: AudioEye, Inc, State of Incorporation: Delaware[1] - Stock Ticker: AEYE, Exchange: The Nasdaq Capital Market[2] Company Filer Status | Category | Status | | :--- | :--- | | Large Accelerated Filer | No | | Accelerated Filer | No | | Non-Accelerated Filer | Yes | | Smaller Reporting Company | Yes | | Emerging Growth Company | No | Key Equity Data | Metric | Amount/Quantity | | :--- | :--- | | Aggregate market value of common stock held by non-affiliates (as of June 30, 2022) | $42,411,494 | | Common stock issued and outstanding (as of February 28, 2023) | 11,652,726 shares | Documents Incorporated by Reference Portions of the definitive proxy statement are incorporated by reference into Part III of this Annual Report - Portions of the definitive proxy statement for the fiscal year ended December 31, 2022 are incorporated by reference into Part III of this Form 10-K Annual Report[6] CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Forward-Looking Statements Disclaimer This report contains forward-looking statements involving risks and uncertainties that may cause actual results to differ materially - This annual report contains forward-looking statements concerning the company's future plans, objectives, expectations, intentions, and financial performance[9] - Actual results may differ materially from forward-looking statements due to factors discussed in the "Risk Factors" section[10] - The company undertakes no obligation to update or revise any forward-looking statements and advises consulting subsequent 10-Q and 8-K reports[11] Key Risk Factors Highlighted The company's future performance is subject to key risks including market acceptance, capital needs, and competition - Key risk factors include: uncertain market acceptance of products, the need for additional capital for future operations and new product development, the success of new strategic relationships or licensing agreements, rapid changes in internet applications, the timing and amount of product development expenditures, judicial application of accessibility laws, the level of market competition, and the regulatory environment for products and services[13] Part I Business AudioEye provides a leading digital accessibility platform using patented AI technology through a SaaS subscription model - AudioEye is a leading digital accessibility platform that provides website accessibility compliance solutions using patented technology and AI/machine learning to reduce barriers, expand access for individuals with disabilities, and enhance user experience[15][16] - The company primarily generates revenue from selling subscriptions to its SaaS accessibility solutions, offering automated and manual remediations and continuous monitoring without altering website architecture[16][17] - The company's customers include small and medium-sized businesses, enterprise clients, non-profit organizations, and federal, state, and local government agencies, sold through enterprise and partner/marketplace channels[24][26] - The company holds 24 issued U.S. patents and 3 pending U.S. patent applications, and plans to continue investing in R&D to expand its intellectual property portfolio[26][28] - The legal and regulatory landscape for digital accessibility is evolving, including the ADA, Section 508 of the Rehabilitation Act, and California's Unruh Civil Rights Act, with courts often using WCAG as a standard[29][32][33][34] - As of December 31, 2022, the company had 120 full-time employees, primarily operating in remote and hybrid work models[37] Risk Factors The company faces risks from its history of losses, competition, regulatory uncertainty, and common stock market volatility - The company has a history of losses, with a net loss of $10.433 million in 2022 and an accumulated deficit of $82.482 million, and its future profitability is uncertain[43] - The company's future growth will require additional capital, but there is no assurance that financing will be available on favorable terms, which could impact business development and revenue generation[46] - The company acquired Bureau of Internet Accessibility Inc (BOIA) on March 9, 2022, but there is no guarantee of successful integration or realization of expected benefits, posing integration risks[57] - The market is highly competitive, with many competitors being larger and better-funded, which could affect the company's competitive ability and profitability[59] - The company relies on its patented technology and intellectual property, but cannot guarantee full protection of its patent rights, which could negatively impact operations[64][66] - The legal environment for the company's products and services is uncertain, and regulatory changes could adversely affect the business[73] - The company's common stock is listed on The Nasdaq Capital Market but has a history of limited trading volume and high price volatility, which may lead to reduced liquidity[102] - As of February 28, 2023, the company's directors and executive officers collectively held approximately 39% of the voting power of the outstanding common stock, potentially influencing matters requiring shareholder approval[119] Unresolved Staff Comments The company has no unresolved staff comments - Not applicable[122] Properties The company's principal office is in Tucson, Arizona, with additional leased and co-working spaces in other cities - The company's principal office is located in Tucson, Arizona, covering approximately 627 square feet with a lease until October 2024[123] - The company also leases office space in Marietta, Georgia; Miami, Florida; and New York, New York, and has co-working spaces in Portland, Oregon; Austin, Texas; and Seattle, Washington[125] - The company believes its existing space is sufficient for current needs and that suitable alternative space is available for future expansion[125] Legal Proceedings The company is subject to ordinary course litigation and settled all disputes with accessiBe Ltd in October 2022 - The company faces various lawsuits and claims in the normal course of business, which management believes will not have a material financial impact[126] - All pending legal disputes between the company and accessiBe Ltd were globally settled on October 24, 2022, and all related lawsuits have been dismissed[127][128] Mine Safety Disclosures The company has no mine safety disclosures - Not applicable[129] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, and it has an active stock repurchase program initiated in June 2022 - AudioEye's common stock has been listed on The Nasdaq Capital Market under the ticker symbol "AEYE" since September 4, 2018[131] - The Board of Directors approved a stock repurchase program in June 2022, authorizing the repurchase of up to $3.0 million of its common stock through June 30, 2024[132] Fourth Quarter 2022 Common Stock Repurchases | Period | Total Number of Shares Repurchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 1 - October 31 | 4,720 | $5.49 | | November 1 - November 30 | 9,013 | $4.70 | | December 1 - December 31 | 5,715 | $4.48 | | Total | 19,448 | $4.82 | - As of December 31, 2022, $2.24 million remained available for share repurchases under the company's stock repurchase program[132] - As of February 28, 2023, there were 149 registered holders of the company's common stock[133] - The company has never paid any dividends since its inception and anticipates that future earnings will be used for business development[136] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenue grew 22% and ARR increased 13%, though the company incurred a net loss and reduced liquidity - In 2022, the company's total revenue grew by 22% year-over-year, and Annual Recurring Revenue (ARR) increased by 13% to $29.2 million[139][167] - As of December 31, 2022, the company's customer count grew to approximately 86,000, an increase of 4,000 from 2021[140] Comparison of Results of Operations for 2022 and 2021 (in thousands) | Metric | 2022 | 2021 | Change Amount | Change Percent | | :--- | :--- | :--- | :--- | :--- | | 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% | | Total Operating Expenses | $33,123 | $33,895 | $(772) | (2)% | | Loss from Operations | $(10,429) | $(15,513) | $5,084 | (33)% | | Net Loss | $(10,433) | $(14,209) | $3,776 | (27)% | Revenue by Sales Channel for 2022 and 2021 (in thousands) | Sales Channel | 2022 | 2021 | Change Amount | Change Percent | | :--- | :--- | :--- | :--- | :--- | | Partner and Marketplace | $15,972 | $13,638 | $2,334 | 17% | | Enterprise | $13,941 | $10,865 | $3,076 | 28% | | Total Revenue | $29,913 | $24,503 | $5,410 | 22% | - In 2022, total research and development costs were 24% of total revenue, increasing due to additional investments in engineering and product talent[143] - In 2022, selling and marketing expenses decreased by 7% year-over-year, and general and administrative expenses decreased by 4%, primarily due to efficiency gains and lower stock-based compensation expense[145][158][163] Liquidity Metrics as of 2022 and 2021 (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash | $6,904 | $18,966 | | Working Capital | $1,904 | $13,615 | - The decrease in working capital was primarily due to the acquisition of BOIA (net cash outflow of $4.5 million), $3.0 million in legal fees, and $0.8 million in stock repurchases[178] Cash Flows for 2022 and 2021 (in thousands) | Cash Flow Category | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,999) | $(4,980) | | Net cash used in investing activities | $(5,733) | $(1,624) | | Net cash (used in) provided by financing activities | $(1,330) | $16,475 | | Net (decrease) increase in cash | $(12,062) | $9,871 | Quantitative and Qualitative Disclosures About Market Risk The company has no quantitative and qualitative disclosures about market risk - Not applicable[194] Financial Statements and Supplementary Data The company's financial statements and supplementary data are included by reference starting on page F-1 of this report - The financial statements and supplementary data are included in this annual report beginning on page F-1 and are incorporated herein by reference[195] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company has no changes in or disagreements with accountants on accounting and financial disclosure - Not applicable[196] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - As of December 31, 2022, the company's management, including the CEO and CFO, evaluated and concluded that the company's disclosure controls and procedures were effective[197] - Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[199] - This annual report does not include an attestation report from a registered public accounting firm regarding the effectiveness of internal controls[200] - There were no material changes to the company's internal control over financial reporting during the fourth quarter of 2022[201] Other Information The company has no other information to disclose - Not applicable[202] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company has no disclosures regarding foreign jurisdictions that prevent inspections - Not applicable[203] Part III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2023 definitive proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[205] - The company has adopted a Code of Business Conduct and Ethics, which is available on its website[206] Executive Compensation Required information is incorporated by reference from the company's 2023 definitive proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[207] Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters Required information is incorporated by reference from the company's 2023 definitive proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[208] Certain Relationships and Related Transactions and Director Independence Required information is incorporated by reference from the company's 2023 definitive proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[209] Principal Accounting Fees and Services Required information is incorporated by reference from the company's 2023 definitive proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[210] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and various exhibits filed as part of the report - This report includes financial statements and exhibits; as a "smaller reporting company," financial statement schedules are not required[215] - Exhibits include the company's articles of incorporation, incentive compensation plans, employment agreements, acquisition agreements, auditor consent letters, and XBRL data files[215][217][219] Form 10-K Summary This report does not include a Form 10-K summary - None[221] Financial Statements Report of Independent Registered Public Accounting Firm MaloneBailey, LLP issued an unqualified opinion on the company's financial statements for 2022 and 2021 - MaloneBailey, LLP audited the company's financial statements for the years ended December 31, 2022 and 2021[232] - The auditors concluded that the financial statements are fairly presented in all material respects in accordance with U.S. generally accepted accounting principles[232] - The auditors did not identify any critical audit matters[236] Balance Sheets Total assets decreased to $24.4 million in 2022, driven by a reduction in cash, while goodwill increased from the BOIA acquisition Key Balance Sheet Data (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash | $6,904 | $18,966 | | Total Current Assets | $12,966 | $24,831 | | Net Intangible Assets | $6,041 | $2,622 | | Goodwill | $4,001 | $701 | | Total Assets | $24,428 | $29,313 | | Liabilities and Stockholders' Equity | | | | Total Current Liabilities | $11,062 | $11,216 | | Deferred Revenue (Current) | $7,125 | $7,068 | | Contingent Consideration (Current) | $979 | $134 | | Total Liabilities | $13,839 | $11,716 | | Total Stockholders' Equity | $10,589 | $17,597 | | Accumulated Deficit | $(82,482) | $(71,293) | Statements of Operations Revenue grew 22% to $29.9 million in 2022, and the net loss narrowed to $10.4 million from $14.2 million in 2021 Key Statement of Operations Data (in thousands, except per share data) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Revenue | $29,913 | $24,503 | | Cost of Revenue | $7,219 | $6,121 | | Gross Profit | $22,694 | $18,382 | | Total Operating Expenses | $33,123 | $33,895 | | Loss from Operations | $(10,429) | $(15,513) | | Gain on Loan Forgiveness | $0 | $1,316 | | Net Loss | $(10,433) | $(14,209) | | Net Loss Per Share, Basic and Diluted | $(0.91) | $(1.29) | | Weighted-Average Shares Outstanding (Basic and Diluted) | 11,477 | 11,040 | Statements of Stockholders' Equity Total stockholders' equity decreased to $10.6 million in 2022 due to the net loss and stock repurchases Key Stockholders' Equity Data (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Stockholders' Equity | $10,589 | $17,597 | | Accumulated Deficit | $(82,482) | $(71,293) | | Additional Paid-in Capital | $93,070 | $88,889 | | Stock-Based Compensation | $4,566 | $7,616 | | Repurchase of Common Stock | $(756) | $0 | | Net Loss | $(10,433) | $(14,209) | - In 2021, the company raised $16.534 million through the issuance of common stock, net of transaction costs[244] - In the second quarter of 2021, all 90,000 shares of Series A Convertible Preferred Stock were converted into 279,137 shares of common stock, leaving no preferred stock outstanding as of year-end 2021 and 2022[244] Statements of Cash Flows The company's cash decreased by $12.1 million in 2022, driven by operating outflows, the BOIA acquisition, and stock repurchases Key Cash Flow Data (in thousands) | Cash Flow Category | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,999) | $(4,980) | | Net cash used in investing activities | $(5,733) | $(1,624) | | Net cash (used in) provided by financing activities | $(1,330) | $16,475 | | Net (decrease) increase in cash | $(12,062) | $9,871 | | Cash and cash equivalents at end of period | $6,904 | $18,966 | - The increase in cash used in investing activities was primarily due to the $4.484 million payment for the acquisition of BOIA, net of cash acquired and working capital adjustments[183][246] - Cash used in financing activities was mainly due to the absence of ATM offerings in 2022 (which raised $16.534 million in 2021) and the repurchase of $0.756 million of common stock[184][246] Notes to Financial Statements The notes detail the BOIA acquisition, intangible assets, equity compensation, and the company's tax loss carryforwards - On March 9, 2022, the company acquired Bureau of Internet Accessibility Inc (BOIA) for a total fair value consideration of approximately $7.5 million, including $5.1 million in cash and $2.6 million in contingent consideration[307] Net Intangible Assets as of 2022 and 2021 (in thousands) | Intangible Asset Category | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Patents | $3,860 | $3,887 | | Capitalized Software Development Costs | $4,324 | $3,833 | | Customer Relationships | $3,785 | $187 | | Trade Names | $50 | $0 | | Accumulated Amortization | $(5,978) | $(5,285) | | Net Intangible Assets | $6,041 | $2,622 | - In the second quarter of 2021, the company recognized a $1.316 million gain on loan forgiveness from the full forgiveness of its PPP loan[164][335] - As of December 31, 2022, the company had no debt outstanding; all Series A Convertible Preferred Stock was converted to common stock in the second quarter of 2021[334][339] Stock-Based Compensation Expense for 2022 and 2021 (in thousands) | Type of Stock-Based Compensation | 2022 | 2021 | | :--- | :--- | :--- | | Stock Options | $403 | $634 | | Restricted Stock Units (RSUs) | $3,934 | $6,509 | | Unrestricted Common Stock | $229 | $473 | | Total | $4,566 | $7,616 | - As of December 31, 2022, the company had U.S. federal net operating loss carryforwards of $57.88 million and has established a full valuation allowance of $18.938 million[358][359]