AUDIOEYE, INC. The following discussion should be read in conjunction with our audited financial statements and the related notes for the years endedDecember 31, 2020 and 2019 that appear elsewhere in this annual report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those discussed below and elsewhere in this annual report on Form 10-K, particularly in "Risk Factors." The forward-looking statements included in this annual report on Form 10-K are made only as of the date hereof. BackgroundAudioEye, Inc. was formed as aDelaware corporation onMay 20, 2005 . OnAugust 1, 2018 , the Company amended its Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 25 shares of common stock and to reduce the number of authorized shares of common stock from 250,000,000 to 50,000,000. As a result, 186,994,384 shares of the Company's common stock were exchanged for 7,479,775 shares of the Company's common stock. 18 OverviewAudioEye is an industry-leading software solution provider 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. We believe that, when implemented, our solution offers businesses and organizations the opportunity to reach more customers, improve brand image, build additional brand loyalty, and, most importantly, provide an accessible and usable web experience to the expansive and ever-growing global population of individuals with disabilities.AudioEye primarily generates revenue through the sale of subscriptions for our software-as-a-service ("SaaS") accessibility solutions. Our solutions are backed byAudioEye's machine-learning/AI-driven technology that finds and fixes the most common accessibility errors. Our core and supplemental solutions are designed to help websites and applications achieve and sustain substantial conformance with the Web Content Accessibility Guidelines ("WCAG") which are web accessibility standards published by the Web Accessibility Initiative of theWorld Wide Web Consortium , the main international standards organization for the internet. Our solutions help mitigate a customer's risk of costly digital accessibility-related legal action and improve their negotiation leverage when defending against claims of non-compliance.AudioEye customers may purchase solutions directly through theAudioEye website, through a platform or an agency partner, such as Duda, that integrates our solutions into their marketplace, through a vertical Content Management System ("CMS") partner or through an authorized reseller, or by working directly with theAudioEye sales team. We also provide PDF remediation and Mobile App report services. Our offerings serve businesses and organizations of all sizes and at all price points.AudioEye stands out among its competitors because it delivers machine-learning/artificial intelligence ("AI")-driven accessibility without fundamental changes to the website architecture. As another differentiator, we offer greater transparency. Our offerings provide automated remediations and a transparent compliance score with additional manually driven enhancements.AudioEye pairs its patented technology solutions with certified accessibility experts, which allows our customers to achieve a higher level of compliance than competitors relying solely on the reach of automation. Our technology publishes more than one billion remediations daily, and our solution is trusted by some of the largest and most influential companies in the world, including ADP,Tommy Hilfiger , 360 Media, Samsung, Darden, Landry's and more. Government agencies, from the federal level down to the local level, have also integrated our software in their digital platforms, including theFederal Communications Commission and theSocial Security Administration . We manage customers through two primary channels, Enterprise and Partner and Marketplace. Enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites, who generally engage directly withAudioEye sales personnel for custom pricing and solutions. This channel also includes federal, state and local government agencies. The Partner and Marketplace channel consists of our CMS partners, platform & agency partners, authorized resellers and the Marketplace. This channel serves small and medium sized businesses that are on a partner or reseller's web-hosting platform or that purchase anAudioEye solution from our Marketplace. We saw strong growth in both our Enterprise and Partner and Marketplace channels in 2020, with revenue growth in each channel of 48% and 177%, respectively, in 2020 compared to 2019. Our Partner and Marketplace revenue growth was due to a significant number of additional customer implementations that each Partner offers, and represented about 57% of Monthly Recurring Revenue ("MRR") contribution at the end of 2020. We define MRR as the sum of (i) for our Enterprise channel, the total of the average monthly recurring fee amount under each active paid contract at the date of determination, plus (ii) for our Partner and Marketplace channel, the recognized recurring monthly fee amount for all paying customers at the date of determination, in each case, assuming no changes to the subscription and without taking into account any usage above the subscription or recurring revenue base, if any, that may be applicable to such subscription. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are cancelable, which may impact future MRR. MRR excludes revenue from our PDF remediation services and Mobile App report business. As ofDecember 31, 2020 , MRR was approximately$1.9 million , which represented an increase of 54% year-over-year. 19 Results of Operations Our financial statements are stated inUnited 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 year endedDecember 31, 2020 with the year endedDecember 31, 2019 . Our results of operations in these 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 2020, the Company amended the categorization of certain expenses to conform to changes incurred in its operations, including internal department structure changes, employee movements, intellectual property and technology related expenses, and facility expenses. For the purposes of comparability, the company reclassified prior period results to conform with our current period presentation. Year ended Favorable / (Unfavorable) December 31, Change (in thousands) 2020 2019 $ % Revenue$ 20,475 $ 10,765 $ 9,710 90 % Cost of revenue 5,961 4,406 1,555 35 % Gross profit 14,514 6,359 8,155 128 % Operating expenses: Selling and marketing 8,472 5,708 (2,764 ) (48 )%
Research and development 1,230 636 (594 ) (93 )% General and administrative 11,945 7,833
(4,112 ) (52 )%
Total operating expenses 21,647 14,177 (7,470 ) (53 )%
Operating loss (7,133 ) (7,818 ) 685 9 %
Other income (expense):Change in fair value of warrant liability 120 99
21 21 %
Interest expense (145 ) (76 ) (69 ) (91 )%
Other income (expense) - 12 (12 ) (100 )%Total other income (expense) (25 ) 35
(60 ) (171 )%
Net loss $ (7,158 ) $ (7,783 ) $ 625 8 %
20
Revenue
The following table presents our revenues disaggregated by sales channel:
Year ended December 31, Favorable / (Unfavorable) Change
(in thousands) 2020 2019 $ %
Enterprise $ 10,735 $ 7,252 $ 3,483 48 %
Partner and Marketplace 9,740 3,513 6,227 177 %
Total revenues $ 20,475 $ 10,765 $ 9,710 90 %
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.
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 an AudioEye solution from our Marketplace.
For the year ended December 31, 2020 , total revenue increased by 90%, over the
prior year. We experienced revenue growth in both of our sales channels. The
increase in Enterprise channel revenue was driven by growth in our managed
solutions and the benefit from increased contribution by our PDF remediation
services and Mobile App report business. The increase in Partner and Marketplace
channel revenue was a result of our continued focus on highly transactional
industry verticals to achieve higher penetration within our existing
partnerships.
Cost of Revenue and Gross Profit
Year ended December 31, Favorable / (Unfavorable) Change
(in thousands) 2020 2019 $ %
Revenue $ 20,475 $ 10,765 $ 9,710 90 %
Cost of sales 5,961 4,406 (1,555 ) (35 )%
Gross profit $ 14,514 $ 6,359 $ 8,155 128 %
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 December 31, 2020 , cost of sales increased by 35% over the
prior year. The increase in cost of sales was primarily due to additions to our
employee and contractor headcount to support the increase in revenue and
delivery of our services, as well as an increase in amortization of capitalized
software development costs.
For the year ended December 31, 2020 , gross profit increased by 128% over the
prior year. The increase in gross profit was a result of increased revenue and
continued improvement in technology driven efficiencies as we scale, offset in
part by higher costs to support the revenue growth.
Selling and Marketing Expenses
Year ended December 31, Favorable / (Unfavorable) Change
(in thousands) 2020 2019 $ %
Selling and marketing $ 8,472 $ 5,708 $ (2,764 ) (48 )%
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 December 31, 2020 , selling and marketing expenses increased
by 48% over the prior year. The increase in selling and marketing expenses
resulted primarily from an increase in personnel costs driven by focused talent
acquisition, higher commission costs, higher digital and third-party marketing
agency expenses, and higher media spend as we continued to expand our business.
21
Research and Development
Year ended December 31, Favorable / (Unfavorable) Change
(in thousands) 2020 2019 $ %
Research and development expense
(594 ) (93 )%
Plus: Capitalized research and
development cost 1,157 307 (850 ) (277 )%
Total research and development cost $ 2,387 943 $ (1,444 ) (153 )%
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 duringthe fiscal period. For the year endedDecember 31, 2020 , research and development expenses increased by 93% over the prior year. This was driven by increased investment in Machine Learning and non-capitalizable R&D efforts related to our new product and platform development as we test and learn new capabilities. For the year endedDecember 31, 2020 , capitalized research and development cost increased 277% over the prior year, driven by increased investment in our platforms and products as we continue to improve our technology and product delivery to help our customers and gain efficiencies as we scale. Total research and development cost, which includes both R&D expenses and capitalized R&D costs, increased 153% from 2019 to 2020.
General and Administrative Expenses
Year ended December 31, Favorable / (Unfavorable)Change
(in thousands) 2020 2019 $ %
General and administrative $ 11,945 $ 7,833 $ (4,112 ) (52 )%
General and administrative expenses consist primarily of compensation and benefits related to our executives, corporate support functions and administrative staff, general corporate expenses including legal fees, and occupancy costs.
For the year endedDecember 31, 2020 , general and administrative expenses increased by 52% over the prior year. The increase in general and administrative expenses was due primarily to higher compensation costs, including stock-based compensation expense, driven by increased executive headcount to support the Company's growth, systems infrastructure improvement and legal expenses towards corporate governance, litigation and intellectual property defense. In addition, in the third quarter of 2020, we incurred$360,000 in severance expense associated with our strategic decision to move our technology center fromAtlanta, Georgia , toPortland, Oregon .
Change in Fair Value of Warrant Liability
Year ended
December 31 , Favorable / (Unfavorable)Change(in thousands) 2020 2019 $ % Change in fair value of warrant liability$ 120 $ 99
$ 21 21 % Change in fair value of warrant liability consists of fair value adjustments associated with warrants to purchase 146,667 shares of the Company's common stock, which were issued in consideration for the credit facility extended bySero Capital in the third quarter of 2019. In the third quarter of 2020, the warrants were fully exercised and the related liability was extinguished, which led to a$120,000 gain being recognized for the year endedDecember 31, 2020 . Interest Expense Year ended December 31, Favorable / (Unfavorable) Change (in thousands) 2020 2019 $ % Interest expense$ 145 $ 76 $ (69 ) (91 )%
Interest expense consists primarily of amortization of debt issuance costs from our line of credit, and interest on our PPP Loan and finance lease liabilities. The increase in interest expense for the year endedDecember 31, 2020 was attributable to the amortization of deferred issuance costs associated with our line of credit, which was not drawn upon through its one-year term which expired inAugust 2020 . 22 Other Key Operating Metrics
We consider monthly recurring revenue ("MRR") as a key operating metric and a
key indicator of our overall business. We also use MRR as (i) 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;
and (ii) as a performance metric for certain executive stock-based compensation
awards.
We define MRR as the sum of (i) for our Enterprise channel, the total of the
average monthly 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 and without
taking into account any usage above the subscription or recurring revenue base,
if any, that may be applicable to such subscription. This determination includes
both annual and monthly contracts for recurring products. Some of our contracts
are cancelable, which may impact future MRR. MRR excludes revenue from our PDF
remediation services business and Mobile App report business. As of December 31,
2020 , MRR was about $1.9 million , which represents an increase of 54%
year-over-year driven primarily by 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 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 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), less non-cash valuation adjustments to liabilities, plus interest expense, plus stock-based compensation expense and plus certain severance expense; and (ii) Non-GAAP earnings (loss) per diluted share as net income (loss) per diluted common share, less non-cash valuation adjustments to liabilities, plus interest expense, plus stock-based compensation expense and plus certain severance expense, 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
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) 2020
2019
Non-GAAP Earnings (Loss) Reconciliation Net loss (GAAP)$ (7,158 ) $ (7,783 ) Non-cash valuation adjustments to liabilities (120 ) (99 ) Interest expense 145 76 Stock-based compensation expense 4,138
1,216
Severance expense (1) 360 -
Non-GAAP loss $ (2,635 ) $ (6,590 ) Non-GAAP Earnings (Loss) per Diluted Share Reconciliation Net loss per common share (GAAP) - diluted
$ (0.77 ) $ (0.97 ) Non-cash valuation adjustments to liabilities (0.01 ) (0.01 ) Interest expense 0.02 0.01 Stock-based compensation expense 0.44 0.16 Severance expense (1) 0.04 - Non-GAAP loss per diluted share (2)$ (0.28 ) $ (0.81 ) Diluted weighted average shares (3) 9,313
8,107
(1) Represents severance expense associated with the move of our technology
center to
termination of employment.
(2) 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.
(3) 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 ofDecember 31, 2020 , we had$9.1 million in cash and working capital of$5.6 million . The increase in working capital in 2020 was primarily a result of a public offering whereby the Company raised net proceeds of$7.8 million by issuing 473,239 shares of its common stock, as well as$880,000 received from a cash exercise of warrants bySero Capital . We intend to use the net proceeds from this offering for working capital and general corporate purposes. In addition, onFebruary 11, 2021 , we entered into an At Market Issuance Sales Agreement (the "Sales Agreement") withB. 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 . As ofMarch 8, 2021 , we had sold a total of 378,108 shares of common stock under this Sales Agreement for total proceeds of approximately$14.1 million , net of estimated transaction costs.
These capital raises contributed to the improvement in our cash and working capital positions, 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.
At December 31,
(in thousands) 2020 2019
Current assets $ 14,631 $ 5,608
Current liabilities (9,015 ) (6,726 )
Working capital (deficit)
24
Cash Flows
Year ended December 31,
(in thousands) 2020 2019
Net cash used in operating activities
(1,298 ) (363 )
Net cash provided by financing activities 10,327 2,210
Net increase (decrease) in cash $ 7,123 $ (3,770 )
For the year ended December 31, 2020 , in relation to the prior year, cash used
in operating activities decreased primarily due to an increase in our paying
customer base leading to our revenue growth. The effect of higher collections
from this expanded customer base was partially offset by the increased personnel
and sales and marketing costs, primarily driven by the increase in headcount and
related expenses and higher consulting and third-party costs to support the
Company's growth. In addition, the Company paid $360,000 in severance, as well
as $66,000 in accrued vacation, associated with the relocation of our technology
center to Portland, Oregon , as part of our strategic plan to build scalable
technology to improve efficiency.
For the year ended December 31, 2020 , in relation to the prior year, cash used
in investing activities increased primarily due to investment in new
technologies for enhancements to our legacy solutions, product development, as
well as patents costs to protect our intellectual property and solidify our
portfolio.
For the year ended December 31, 2020 , in relation to the prior year, cash
provided by financing activities increased primarily due to net proceeds of $7.8
million that we received from a public offering in the third quarter of 2020,
whereby we issued 473,239 shares of our common stock. We intend to use the
proceeds from this offering for working capital and general corporate purposes,
including the implementation of our business plan and growth of current
operations. In addition, in the second quarter of 2020, we obtained a $1.3
million PPP Loan. The increase in cash from financing activities due to the
capital raise and PPP Loan was partially offset by a $1 million reduction in
proceeds from the exercise of options and warrants, which totaled $1.3 million
and $2.3 million in the years ended December 31, 2020 and 2019, respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Critical Accounting Policies 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 inthe United States . Preparing financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by our management's application of accounting policies. The following is a summary of the Company's most critical accounting policies. Refer to Note 3 - Significant Accounting Policies to our financial statements included in Part II, Item 8 for a complete discussion of the significant accounting policies and methods used in the preparation of our financial statements. 25 Revenue Recognition
The Company derives revenue primarily from the sale of internally-developed
software by a software as a service ("SaaS") delivery model, through our direct
sales force or through our Partner and Marketplace channel. SaaS fees include
support and maintenance. The Company also derives revenue from PDF remediation
and Mobile App report services. The Company recognizes revenue when delivery of
the promised goods or services is transferred to its customers, in an amount
that reflects the consideration that the Company expects to be entitled to in
exchange for those goods or services.
Performance obligations are the unit of accounting for revenue recognition and
generally represent the distinct goods or services that are promised to the
customer. If we determine that we have not satisfied a performance obligation,
we will defer recognition of the revenue until the performance obligation is
deemed to be satisfied. SaaS agreements are generally non-cancelable, although
clients typically have the right to terminate their contracts for cause if we
fail to perform material obligations.
Our SaaS (also referred to as "subscription") revenue is recognized on a ratable
basis over the contractual subscription term of the arrangement beginning on the
date that our service is made available to the customer. Certain SaaS fees are
invoiced in advance on an annual, semi-annual, or quarterly basis. Any funds
received for services not provided yet are held in deferred revenue and are
recorded as revenue when the related performance obligations have been
satisfied.
Non-subscription revenue consists of PDF remediation and Mobile App report services and is recognized upon delivery. Consideration payable under these arrangements is based on usage.
Refer to Note 3 - Significant Accounting Policies to our financial statements included in Part II, Item 8 for additional information regarding our revenue recognition policies.
Allowance for Doubtful Accounts
Accounts receivables are comprised of amounts owed the Company for solutions and services purchased. Contracts with individual clients and resellers determine when receivables are due and payable. In determining the allowances for doubtful accounts, the unpaid receivables are reviewed periodically to determine the payment status based upon the most currently available information. During these periodic reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of its clients or resellers to make required payments. Stock-Based Compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award measured on the grant date. The fair value amount is then recognized over the requisite vesting period during which services are required to be provided in exchange for the award. The fair value of options and warrants awards is measured on the grant date using a Black-Scholes option pricing model. We estimate the fair value of restricted stock unit awards with time- or performance-based vesting using the value of our common stock on the date of grant. We estimate the fair value of restricted stock units with market-based conditions using a Monte Carlo simulation model on the date of grant. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations as if such amounts were paid in cash. Refer to Note 3 - Significant Accounting Policies to our financial statements included in Part II, Item 8 for additional information regarding
our stock-based compensation.
Capitalization of Software Development Costs
In accordance with ASC 350-40, the Company capitalizes certain computer software
and software development costs incurred in connection with developing or
obtaining computer software for internal use when both the preliminary project
stage is completed, and it is probable that the software will be used as
intended. Capitalized software costs include only (i) external direct costs of
materials and services utilized in developing or obtaining computer software and
(ii) compensation and related benefits for employees who are directly associated
with the software project. Capitalized software costs are included in intangible
assets on our balance sheet and amortized on a straight-line basis when placed
into service over the estimated useful lives of the software. Amortization
expense is included in cost of revenue on the statements of operations.
26
© Edgar Online, source
