# Audioeye Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Audioeye Inc](/companies/aeye.md) (CIK 1362190)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 17:10 ET
- Period: 2023-09-30
- Accession: 0001410578-23-002170
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1362190/000141057823002170/aeye-20230930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1362190/000141057823002170/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $7.8m | us-gaap:Revenues |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $23.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $1.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $5.3m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $6.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $18.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $2.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $5.7m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$1.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$5.5m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$1.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$5.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.11 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.46 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.11 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.46 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 11,822,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 11,733,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$515.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $142.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $3.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $8.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $19.3m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $11.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $11.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $7.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,677 characters.

*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 AudioEye, Inc., unless otherwise indicated.*

### 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. Risk factors 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;
- judicial applications of accessibility laws to the internet;
- 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.

### AudioEye Solutions

At its core, AudioEye’s offering 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. AudioEye also 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 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-one (21) issued patents in the United States and 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, 2022 as filed with the SEC on March 9, 2023 provides additional information about our business and operations.

### Executive Overview

AudioEye is an industry-leading digital accessibility platform delivering ADA and WCAG compliance at scale. 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 three and nine months ended September 30, 2023, we saw continued revenue growth, increases in customer count, efficiencies in cost of revenue that increased gross margins and decreased total operating expenses.

We have two sales channels to deliver our product, the Partner and Marketplace channel and the Enterprise channel. AudioEye continues to focus on recurring revenue growth in both channels, while still offering our Website and Native Mobile App report services and PDF services. For the nine months ended September 30, 2023, total revenue increased by 6% over the prior year comparable period. As of September 30, 2023, Annual Recurring Revenue (“ARR”) was approximately $30.5 million, which represented an increase of 4% year-over-year. Refer to Other Key Operating Metrics below for details on how we calculate ARR.

As of September 30, 2023, AudioEye had approximately 107,000 customers, a 32% increase from 81,000 customers at September 30, 2022. The increase in customer count is attributed to our Partner and Marketplace channel.

In the nine months ended September 30, 2023, revenue from our Partner and Marketplace grew 14% from prior year comparable period. This channel represented about 61% of ARR at the end of September 2023. In nine months ended September 30, 2023, total Enterprise revenue decreased by 3% from prior year comparable period. The Enterprise channel represented about 39% of ARR at the end of September 2023.

In the three and nine months ended September 30, 2023, we had one customer (including the customer’s affiliates reflecting multiple contracts and a partnership with the Company) which accounted for approximately 17% and 16%, respectively, of our total revenue. In the three and nine months ended September 30, 2022, we had one customer which accounted for approximately 16% and 17%, respectively, of our total revenue.

The Company continued to invest in research and development in the third quarter of 2023. Total research and development cost, as defined under Research and Development Expenses section in the Results of Operations below, was 31% of total revenue in the three months ended September 30, 2023. Total research and development cost increased primarily due to additional investments in engineering and product talent dedicated to further product development and enhancement.

While revenue increased 6% in the nine months ended September 30, 2023, cost of revenue, selling and marketing expense and general and administrative expense decreased from prior year comparable period. This decrease was mainly driven by efficiencies in cost of revenue and selling and marketing implemented during the year, and lower litigation expense.

We provide further commentary on our Results of Operation below.

### Results of Operations

Our unaudited financial statements are stated in United States Dollars 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 and nine months ended September 30, 2023 with the three and nine months ended September 30, 2022.

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.

*(in thousands)*

| ​ ​ | ​ ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | --- | --- | --- | --- | ---: |
| Revenue | ​ | $7,838 | ​ | $7,700 | ​ | $138 | ​ | 2% |
| Cost of revenue | ​ | (1,788) | ​ | ​ (1,923) | ​ | ​ 135 | ​ | (7)% |
| Gross profit | ​ | 6,050 | ​ | ​ 5,777 | ​ | ​ 273 | ​ | 5% |
| Operating expenses: | ​ | ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Selling and marketing | ​ | 2,891 | ​ | ​ 3,351 | ​ | ​ (460) | ​ | (14)% |
| Research and development | ​ | 1,955 | ​ | ​ 1,542 | ​ | ​ 413 | ​ | 27% |
| General and administrative | ​ | 2,594 | ​ | ​ 3,166 | ​ | ​ (572) | ​ | (18)% |
| Total operating expenses | ​ | 7,440 | ​ | ​ 8,059 | ​ | ​ (619) | ​ | (8)% |
| Operating loss | ​ | (1,390) | ​ | ​ (2,282) | ​ | ​ 892 | ​ | (39)% |
| Interest income (expense), net | ​ | 35 | ​ | ​ (1) | ​ | ​ 36 | ​ | (3,600)% |
| Net loss | ​ | $(1,355) | ​ | $(2,283) | ​ | $928 | ​ | (41)% |

*(in thousands)*

| ​ ​ | ​ ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | --- | --- | --- | --- | ---: |
| Revenue | ​ | $23,446 | ​ | $22,175 | ​ | $1,271 | ​ | 6% |
| Cost of revenue | ​ | (5,277) | ​ | ​ (5,474) | ​ | ​ 197 | ​ | (4)% |
| Gross profit | ​ | 18,169 | ​ | ​ 16,701 | ​ | ​ 1,468 | ​ | 9% |
| Operating expenses: | ​ | ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Selling and marketing | ​ | 9,387 | ​ | ​ 10,502 | ​ | ​ (1,115) | ​ | (11)% |
| Research and development | ​ | 5,734 | ​ | ​ 4,477 | ​ | ​ 1,257 | ​ | 28% |
| General and administrative | ​ | 8,520 | ​ | ​ 10,227 | ​ | ​ (1,707) | ​ | (17)% |
| Total operating expenses | ​ | 23,641 | ​ | ​ 25,206 | ​ | ​ (1,565) | ​ | (6)% |
| Operating loss | ​ | (5,472) | ​ | ​ (8,505) | ​ | ​ 3,033 | ​ | (36)% |
| Interest income (expense), net | ​ | 133 | ​ | ​ (4) | ​ | ​ 137 | ​ | (3,425)% |
| Net loss | ​ | $(5,339) | ​ | $(8,509) | ​ | $3,170 | ​ | (37)% |

#### Revenue

The following tables present our revenues disaggregated by sales channel:

*(in thousands)*

| ​ ​ | ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Partner and Marketplace | ​ | $4,605 | ​ | $4,025 | ​ | $580 | ​ | 14% |
| Enterprise | ​ | 3,233 | ​ | ​ 3,675 | ​ | ​ (442) | ​ | (12)% |
| Total revenues | ​ | $7,838 | ​ | $7,700 | ​ | $138 | ​ | 2% |

*(in thousands)*

| ​ ​ | ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Partner and Marketplace | ​ | $13,365 | ​ | $11,749 | ​ | $1,616 | ​ | 14% |
| Enterprise | ​ | 10,081 | ​ | ​ 10,426 | ​ | ​ (345) | ​ | (3)% |
| Total revenues | ​ | $23,446 | ​ | $22,175 | ​ | $1,271 | ​ | 6% |

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 AudioEye sales personnel for custom pricing and solutions. This channel also includes federal, state and local government agencies and revenue attributable to the Bureau of Internet Accessibility Inc. (“BOIA”), which was acquired in March 2022.

For the three and nine months ended September 30, 2023, total revenue increased by 2% and 6%, respectively, over the prior year comparable periods. The increase Partner and Marketplace channel revenue was the result of continued expansion with existing partners and execution of new partnerships agreements in the period. The decrease in Enterprise channel revenue for the three and nine months ended September 30, 2023 was driven primarily by the reduction in revenue from one large customer.

#### Cost of Revenue and Gross Profit

*(in thousands)*

| ​ ​ | ​ ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Revenue | ​ | $7,838 | ​ | $7,700 | ​ | $138 | ​ | 2% |
| Cost of revenue | ​ | (1,788) | ​ | ​ (1,923) | ​ | ​ 135 | ​ | (7)% |
| Gross profit | ​ | $6,050 | ​ | $5,777 | ​ | $273 | ​ | 5% |

*(in thousands)*

| ​ ​ | ​ ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Revenue | ​ | $23,446 | ​ | $22,175 | ​ | $1,271 | ​ | 6% |
| Cost of revenue | ​ | (5,277) | ​ | ​ (5,474) | ​ | ​ 197 | ​ | (4)% |
| Gross profit | ​ | $18,169 | ​ | $16,701 | ​ | $1,468 | ​ | 9% |

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 and nine months ended September 30, 2023, cost of revenue decreased by 7% and 4%, respectively, over the prior year comparable periods as revenue continued to increase. This decrease was primarily related to efficiencies achieved from infrastructure platform improvements and lower overhead costs from facilities.

For the three and nine months ended September 30, 2023, gross profit increased by 5% and 9%, respectively, over the prior year comparable periods. The increase in gross profit was a result of increased revenue with a corresponding decrease to cost of revenue.

#### Selling and Marketing Expenses

*(in thousands)*

| ​ ​ | ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Selling and marketing | ​ | $2,891 | ​ | $3,351 | ​ | $(460) | ​ | (14)% |

*(in thousands)*

| ​ ​ | ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Selling and marketing | ​ | $9,387 | ​ | $10,502 | ​ | $(1,115) | ​ | (11)% |

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 and nine months ended September 30, 2023, selling and marketing expenses decreased by 14% and 11%, respectively, over the prior year comparable periods. The decrease in selling and marketing expenses resulted primarily from a reduction in online media and third-party marketing expenses and a reduction to stock compensation expense which was partially offset by higher personnel costs associated with investment in talent.

#### Research and Development Expenses

*(in thousands)*

| ​ ​ | ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Research and development expense | ​ | $1,955 | ​ | $1,542 | ​ | $413 | ​ | 27% |
| Plus: Capitalized research and development cost | ​ | 482 | ​ | ​ 295 | ​ | ​ 187 | ​ | 63% |
| Total research and development cost | ​ | $2,437 | ​ | $1,837 | ​ | $600 | ​ | 33% |

*(in thousands)*

| ​ ​ | ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Research and development expense | ​ | $5,734 | ​ | $4,477 | ​ | $1,257 | ​ | 28% |
| Plus: Capitalized research and development cost | ​ | 1,481 | ​ | ​ 860 | ​ | ​ 621 | ​ | 72% |
| Total research and development cost | ​ | $7,215 | ​ | $5,337 | ​ | $1,878 | ​ | 35% |

Research and development (“R&D”) expenses consist primarily of compensation and related benefits, independent contractor costs, and an allocated portion of general overhead 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 three and nine months ended September 30, 2023, research and development expense increased by 27% and 28%, respectively, over the prior year comparable periods. This increase was driven by higher personnel cost associated with increased investment in our platform. For the three and nine months ended September 30, 2023, capitalized research and development cost increased by 63% and 72%, respectively, over the prior year comparable periods. The increase to capitalized research cost was the result of engineering personnel spending more time on product development than in previous comparable periods. For the three and nine months ended September 30, 2023, total research and development cost, which includes both R&D expenses and capitalized R&D costs, increased by 33% and 35%, respectively, over the prior year comparable periods.

#### General and Administrative Expenses

*(in thousands)*

| ​ ​ | ​ ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Change $% | ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: |
| General and administrative | ​ | $2,594 | ​ | $3,166 | ​ | $(572) | (18)% |

*(in thousands)*

| ​ ​ | ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| General and administrative | ​ | $8,520 | ​ | $10,227 | ​ | $(1,707) | ​ | (17)% |

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 and nine months ended September 30, 2023, general and administrative expenses decreased by 18% and 17%, respectively, over the prior year comparable periods. The decrease in general and administrative expenses was due primarily to lower legal expenses towards non-recurring litigation and lower stock compensation expense.

#### Interest Income (Expense)

*(in thousands)*

| ​ ​ | ​ | ​ ​ Three months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Interest income (expense), net | ​ | $35 | ​ | $(1) | ​ | $36 | ​ | (3,600)% |

*(in thousands)*

| ​ ​ | ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change $% | ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Interest income (expense), net | ​ | $133 | ​ | $(4) | ​ | $137 | ​ | (3,425)% |

For the three and nine months ended September 30, 2023, interest income, net consisted primarily of income from investment in money market funds. For the three and nine months ended September 30, 2022, interest expense consisted of interest on our finance lease liabilities.

### 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, one-time Website and Mobile App report services business and other miscellaneous non-recurring services. As of September 30, 2023, ARR was $30.5 million, which represents an increase of 4% year-over-year, driven by growth in our Partner and Marketplace 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 significant 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 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.

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 (less) interest expense (income), 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, and plus loss on disposal or impairment of long-lived assets; and (ii) Non-GAAP earnings (loss) per diluted share as net income (loss) per diluted common share, plus (less) interest expense (income), 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, and plus loss on disposal or impairment of long-lived assets, 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 one of 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.

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 earnings (loss) to net loss, the most directly comparable GAAP-based measure, as well as Non-GAAP earnings (loss) per diluted share to net loss per diluted share, the most directly comparable GAAP-based measure.

*(in thousands, except per share data)*

| ​ ​ Non-GAAP Earnings (Loss) Reconciliation | ​ ​ | ​ ​ Three months ended September 30, 2023 ​ | ​ | ​ ​ 2022 ​ | ​ ​ ​ | ​ ​ Nine months ended September 30, 2023 ​ ​ | ​ ​ | ​ ​ 2022 ​ ​ |
| --- | --- | ---: | --- | --- | --- | ---: | --- | ---: |
| Net loss (GAAP) | ​ | $(1,355) | ​ | $(2,283) | ​ | $(5,339) | ​ | $(8,509) |
| Non-cash valuation adjustment to contingent consideration | ​ | (14) | ​ | 24 | ​ | 200 | ​ | 182 |
| Interest (income) expense, net | ​ | (35) | ​ | ​ 1 | ​ | (133) | ​ | 4 |
| Stock-based compensation expense | ​ | 886 | ​ | ​ 1,308 | ​ | 3,035 | ​ | 3,494 |
| Acquisition expense (1) | ​ | ​ — | ​ | ​ 7 | ​ | ​ — | ​ | ​ 247 |
| Litigation expense (2) | ​ | ​ 106 | ​ | ​ 449 | ​ | ​ 300 | ​ | ​ 1,810 |
| Executive team restructuring cost (3) | ​ | ​ 63 | ​ | ​ — | ​ | ​ 63 | ​ | ​ — |
| Depreciation and amortization | ​ | ​ 567 | ​ | ​ 598 | ​ | ​ 1,670 | ​ | ​ 1,607 |
| Loss on disposal or impairment of long-lived assets | ​ | 73 | ​ | ​ 43 | ​ | 220 | ​ | 50 |
| Non-GAAP earnings (loss) | ​ | $291 | ​ | $147 | ​ | $16 | ​ | $(1,115) |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| **Non-GAAP Earnings (Loss) per Diluted Share Reconciliation** | ​ |  | ​ |  | ​ | ​ | ​ | ​ |
| Net loss per common share (GAAP) — diluted | ​ | $(0.11) | ​ | $(0.20) | ​ | $(0.46) | ​ | $(0.74) |
| Non-cash valuation adjustment to contingent consideration | ​ | — | ​ | — | ​ | 0.02 | ​ | 0.02 |
| Interest (income) expense, net | ​ | — | ​ | ​ — | ​ | (0.01) | ​ | — |
| Stock-based compensation expense | ​ | 0.07 | ​ | ​ 0.11 | ​ | 0.26 | ​ | 0.30 |
| Acquisition expense (1) | ​ | ​ — | ​ | ​ — | ​ | ​ — | ​ | ​ 0.02 |
| Litigation expense (2) | ​ | ​ 0.01 | ​ | ​ 0.04 | ​ | ​ 0.03 | ​ | ​ 0.16 |
| Executive team restructuring cost (3) | ​ | ​ 0.01 | ​ | ​ — | ​ | ​ 0.01 | ​ | ​ — |
| Depreciation and amortization | ​ | ​ 0.05 | ​ | ​ 0.05 | ​ | ​ 0.14 | ​ | ​ 0.14 |
| Loss on disposal or impairment of long-lived assets | ​ | 0.01 | ​ | ​ — | ​ | 0.02 | ​ | — |
| Non-GAAP earnings (loss) per diluted share (4) | ​ | $0.02 | ​ | $0.01 | ​ | $0.00 | ​ | $(0.10) |
| Diluted weighted average shares (GAAP) | ​ | 11,822 | ​ | ​ 11,458 | ​ | 11,733 | ​ | 11,464 |
| Includable incremental shares (Non-GAAP) (4) | ​ | ​ 412 | ​ | ​ 760 | ​ | ​ 376 | ​ | ​ — |
| Adjusted diluted shares (Non-GAAP) (5) | ​ | ​ 12,234 | ​ | ​ 12,218 | ​ | ​ 12,109 | ​ | ​ 11,464 |

(1) Represents legal and accounting fees associated with the BOIA acquisition.

(2) Represents legal expenses related primarily to non-recurring 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.

(5) The number of diluted weighted average shares used for this calculation is 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 September 30, 2023, we had $3,274,000 in cash and working capital of $(2,673,000). The decrease in working capital in the nine months ended September 30, 2023 was primarily due to investments in our internally-developed platform and the increase in current liability associated with the contingent consideration relating to a potential BOIA earn-out, which was classified as a noncurrent liability in 2022. As of September 30, 2023, we had $2.2 million in contingent consideration classified as current liability as it is expected to be paid in the second quarter of 2024.

On February 11, 2021, we entered into an At The Market (“ATM”) Sales Agreement with B. Riley Securities, Inc. (“Agent”), under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock to or through the Agent as its sales agent, having an aggregate offering price of up to $30 million. In 2021, the Company issued 471,970 shares of its common stock under the ATM offering and raised $16,534,000, net of transaction expenses. No shares of common stock were sold under the ATM offering in 2022 or 2023.

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.

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)*

| ​ | ​ | ​ ​ September 30, 2023 | ​ | ​ ​ December 31, 2022 |
| --- | --- | ---: | --- | ---: |
| Current assets | ​ | $8,343 | ​ | $12,966 |
| Current liabilities | ​ | (11,016) | ​ | ​ (11,062) |
| Working capital | ​ | $(2,673) | ​ | $1,904 |

#### Cash Flows

*(in thousands)*

| ​ ​ | ​ | ​ ​ Nine months ended September 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| Net cash used in operating activities | ​ | $(515) | ​ | $(4,492) |
| Net cash used in investing activities | ​ | (1,654) | ​ | ​ (5,426) |
| Net cash used in financing activities | ​ | (1,461) | ​ | ​ (1,225) |
| Net decrease in cash | ​ | $(3,630) | ​ | $(11,143) |

For the nine months ended September 30, 2023, in relation to the prior year comparable period, cash used in operating activities decreased primarily due lower patent litigation costs and a reduction in sales and marketing costs, driven mainly by lower digital, consulting and third-party costs.

For the nine months ended September 30, 2023, in relation to the prior year comparable period, cash used in investing activities decreased primarily due to the acquisition of BOIA in 2022. In the nine months ended September 30, 2022, we paid $4.5 million in connection with BOIA’s acquisition, net of cash acquired and receipts associated with net working capital adjustments. Cash used for investing activities in 2023 related primarily to cash outlays for software development costs.

For the nine months ended September 30, 2023, in relation to the prior year comparable period, cash used in financing activities increased due to a $974,000 payment towards our contingent consideration in the first quarter of 2023 in connection with the acquisition of BOIA, of which $908,000 and $66,000 are classified as cash used in financing and operating activities, respectively. Cash used for financing activities in 2022 related primarily to cash outlays for common stock repurchase.

### 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, 2022, relate to stock-based compensation and goodwill, intangible assets and contingent consideration recognized in connection with a business combination. 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, 2022.

## Controls and procedures

As filed, 2,520 characters.

### Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that there is reasonable assurance that the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Exchange Act Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, projections of any evaluation of effectiveness of our disclosure controls and procedures to future periods are subject to the risk that controls or procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls or procedures may deteriorate.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023.

### Changes in Internal Controls over Financial Reporting

During the quarter ended September 30, 2023, there were no material changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

## Risk factors

As filed, 542 characters.

You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”), which could materially affect our business, financial condition and results of operations. The risks described in our 2022 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0001410578-23-002170. Last ingested by Listed: Nov 6, 2026, 18:45 ET. No prices; not investment advice.