AudioEye, Inc.

how AudioLite stepped in to stand behind their solution and customer, and how effective they were in resolving the claim. AudioLite was an invaluable partner throughout the entire process. In most website accessibility lawsuits or demand letters, the party receiving the lawsuit will spend money on legal fees, pay a settlement, and fix the digital property later. Most competitors use point-in-time audits or automated-only approaches. neither work effectively. Many companies want to do the right thing and address digital accessibility, but because of ineffective solutions, remain vulnerable to future legal actions, brand risk, and subpar customer experiences. AudioEye utilizes a unique combination of automation technology, including artificial intelligence, coupled with industry experts in accessibility compliance and law to help businesses become and stay compliant. We were pleased to provide clear evidence our solution is effective while eliminating risk for our customers and making the Internet a better place for people with disabilities. The next item I'd like to highlight is our AI initiative centered on accessibility with members of the disability community. We are developing AI models with direct input from people with disabilities to ensure the products and models developed. work in our efforts to eradicate digital accessibility errors at scale. We will have further announcements soon on the specific impact of these initiatives. Moving on to guidance. We are guiding for sequential revenue growth with revenue of between $7.8 and $7.9 million for the second quarter of 2023, representing year-over-year growth of approximately 4% at the midpoint. As discussed in the previous earnings call, our results in the first half have been impacted by certain renegotiations. Even with these renegotiations, we are pleased to see sequential revenue and ARR growth. We continue to expect that revenue and ARR growth will accelerate meaningfully in the second half of the year. With increased R&D investment, We continue to expect a non-GAAP operating loss in the second quarter with non-GAAP operating profit in the second half, generating breakeven operating profit for the full year. We continue to be well capitalized with $5.5 million of cash as of March 31st, 2023. We believe the current cash on hand is sufficient to fund operations, and we still expect to generate positive cash flow by the fourth quarter of this year. I'll now turn the call over to Audio Eye CFO, Kelly Georgievich.

Kelly. Thank you, David. As just mentioned, we are pleased with our first quarter 2023 performance. Q1 2023 marks the 29th straight quarter of record revenue, ending Q1 at 7.8 million, which was 13% growth year over year. Annual recurring revenue, or ARR, at the end of the first quarter of 2023 was 29.6 million, a $1.5 million increase from ARR at the end of the first quarter of 2022. Our two revenue channels are continuing to perform well. As discussed in previous updates, the partner and marketplace channel includes all revenue from our SMB-focused marketplace products and revenue from a variety of partners who deploy these same products for their SMB customers. In the first quarter of 2023, this revenue channel grew 14% year-over-year, and represented approximately 56% of revenue and 59% of ARR. We expect to continue to see this channel contribute significantly to our growth in revenue as we build for further traction and expand with larger partners. The enterprise channel continued to perform well in the quarter, growing 11% year-over-year and contributing approximately 44% of revenue and 41% of ARR. We continue to see longer sales cycles and more price conscious customers, but overall we are seeing some of our best logo retention rates. Total customer count increased notably in Q1 2023 to approximately 95,000 customers from approximately 74,000 customers at March 31st, 2022 and 86,000 customers at December 31st, 2022. Both revenue channels contributed towards customer count growth in the quarter, with the expansion of platforms as the most material driver customer count increases. Growth profit for the first quarter was $6.1 million, or about 78% of revenue, compared to $5.2 million and 75% of revenue in Q1 of last year. We are pleased to see growth margins continue to increase, given the significant investment in our platform, including research and development, and customer success costs. We expect gross margin to continue around the 77% to 78% range throughout the remainder of 2023. While revenues increased 13% over the comparable period of prior year, operating expense decreased approximately 8% or $700,000 to $8.1 million. This decrease was the result of continued efficiencies in sales and marketing in G&A areas, slightly offset by continued investment in R&D. Our total R&D spend in Q1 2023 was approximately $2.2 million, with approximately $475,000 reflected as software development costs in the investing section of the cash flow statement. This total R&D spend is about 29% of our revenue this quarter versus 26% last year and continues to reflect a commitment towards investing in our product and technology to deliver the best product in the market and to ensure companies are protected from risk. Net loss for the first quarter of 2023 was $2 million, or 17 cents per share, compared to $3.6 million, or 32 cents per share in the same year-ago period. Total operating loss decreased 44%, or $1.6 million, from the comparable period of prior year, thanks to the increase in gross profit, as well as strategic and efficient spending in all departments. On a non-GAAP basis, our Q1 net loss was near break-even at a $53,000 net loss, or less than a $0.01 loss per share, compared to a net loss of $1 million, or $0.09 per share, in the same year-ago period. The primary adjustments to GAAP earnings and EPS for Q1 2023 were non-GAAP share-based compensation, litigation, depreciation, and amortization. Acquisition costs were also a non-GAAP adjustment in Q1 2022. Cash usage for the quarter was $1.4 million, which included a $1 million earn-out payment related to the acquisition of the Bureau of Internet Accessibility. The remaining $400,000 of cash earned in the quarter was primarily related to tax payments from employee share-based grants of approximately $250,000 and non-GAAP litigation expenses of approximately $120,000. With that, we open up the call for questions. Operator, please give instructions.

Thank you. We will now take questions from the company's publishing analysts. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble a roster. Our first question comes from Zach Cummins from B. Reilly FBR. Please go ahead.