Good afternoon and welcome to AudioEye's Second Quarter 2020 Earnings Conference Call. Joining us for today's call are AudioEye's Executive Chairman, Dr. Carr Bettis, and CFO, Mr. Sach Barot. Following their remarks, we'll open up the call for questions from the company's publishing analysts. I would like to remind everyone that this call will be recorded and made available for replay via link available in the Investor Relations section of the company's website at www.audioeye.com. Before I turn the call over to AudioEye's Executive Chairman, the company would like to remind all participants that statements made by AudioEye management during the course of this conference call that are not historical facts are considered to be forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements. These statements are predictions, projections or other statements about future events and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of those factors discussed in today's press release and the comments made during this conference call and in the Risk Factors section of the company's annual report on Form 10- K, its quarterly report on Form 10-Q and our reports and filings with the Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflects management's beliefs only as of the date hereof. AudioEye does not undertake any duty to update or correct any forward-looking statements. Now I would like to turn the call over to AudioEye's Executive Chairman, Dr. Carr Bettis. Sir, please proceed.

Thank you, operator. Welcome, everyone. Thank you for joining us today. After the market closed, we issued a press release announcing our results for the second quarter ended June 30, 2020. A copy of the press release will be available later in the Investors section of our website at audioeye.com. I'd like to open with recognition of a really important milestone for accessibility, the 30th anniversary of the ADA and the ongoing need for digital accessibility. Just a few weeks ago, we celebrated the 30th anniversary of the ADA becoming law. This important legislation transformed the US and much of the world by making the world a more physically inclusive place for everyone. But the digital world now being as important, perhaps even more so lately, especially due to the global pandemic, and with about 98% of all websites still having critical accessibility barriers, it's clear that much more work is needed to create a truly digitally inclusive world. As we recognize this important milestone in the journey to an inclusive world, the true underlying demand for digital accessibility has never been stronger, and AudioEye is well positioned to lead this continued transformation. I'll begin, as we always do, with an overview of our business. AudioEye is a leading provider of SaaS-based digital content accessibility solutions. I'll remind you of our mission – to eradicate all barriers to digital accessibility. We provide ourselves in addressing the largest range of services and issues that impact many people around the globe. At AudioEye, we do more than just identify these accessibility issues. We strive to fix, to maintain and continuously monitor them. We also certify websites to demonstrate compliance with both the ADA and the latest Web Content Accessibility Guidelines, or WCAG 2.1. Because many of the remediation capabilities we provide are…

Thanks, Carr. Welcome, David, Dominic and Khurrum. I'm really excited to work with David in his new capacity and continue to drive strategy execution and profitable growth for AudioEye. I will review the financial highlights and then we'll open the call up for questions. Let's jump into it. Starting with revenue. Revenue in Q2 was about $5.3 million, reflecting a 117% increase over the last year. The increase in revenue was mainly driven by continued growth in our vertical partner channel as we build our end customer base. This revenue performance also benefited from timing of PDF delivery where we're able to procure and deliver a couple of projects ahead of time. As mentioned earlier, we continue to better our gross margins that stand at 70% for this quarter. While it may fluctuate, we expect our margins to continue to grow over time. Moving to operating expenses. In Q2, OpEx was $4.5 million, which was an increase of 36% versus Q2 last year. This increase in OpEx was driven by increased investments in talent across various functions, infrastructure and product development. As we grow the business, we continue to have some variability in expenses from quarter-to-quarter. As we move our technology center to Portland, we'll be investing in technology and intellectual property development. Additionally, we'll continue to invest in marketing and infrastructure as well. Our investments will help us build scalable technology stack and help drive profitable growth. The company also expects to pay separation costs as we make executive and team member changes, resulting in a higher normalized run rate for the next couple of quarters. Turning towards the bottom line. Net loss available to common stockholders for the second quarter of 2020 totaled $1.4 million or $0.16 per share. This compares with net loss of $2 million or…

[Operator Instructions]. Our first question comes from the line of Zach Cummins with B. Riley FBR.

Just starting off with that indirect vertical partner channel, were there any particular verticals that stand out in terms of adoption?

We're seeing some traction across some of the different verticals, Zach. That's not all one focused area. We are seeing some pretty broad and interest in adoption and finding accessibility solutions. So, continuing to make progress within the channel.

And then, I know you don't break it out by partner. But in terms of the entire base, can you give us a sense of where you're at for penetration rate and kind of give us a sense of what's the opportunity that's still ahead?

Within many of the partners, we're in early innings and we're making good progress, but early innings. So, we're not publishing, as you said, penetration rates, but there's a lot of runway left. Significantly – the majority of the runway left across the majority of the partners that we're still having success with. So, we still remain optimistic that we have a lot of runway with them on average.

And then, you did note, there was a little bit of attrition in the quarter. Was this related to any specific verticals or any sort of trends you could point out?

No. There's no alarming trends here at all. We did have what I would call selective cases. There have been some bankruptcies, and there's been some other things that have occurred that have had an impact on us. Again, it's not material to where we are in the business during the business cycle and we'd like for that to continue, of course.

And then, I guess, in terms of the renewal cycle, it seems like you had a few clients that are taking a little longer than normal. What are you seeing thus far just in recent months and maybe even into the start of Q3 here in terms of the pace of renewal cycles?

Overall, it's pretty good, actually. There are isolated cases, I would call them, where they're a little slower. But I would say, actually, it's going pretty well overall. Nothing alarming at all. And it is selective cases where renewals are a little slower, and we're being more flexible. It's not the norm.

And then, I guess, just got to go across all the customer bases. For your marketplace offering, could you give us a sense of the adoption trends you've seen there thus far? I know when you were rolling this out, you were giving 90-day free trials. So, I was wondering if you're starting to get to the end of those where you're seeing – if customers are deciding to proceed for it and actually become a paying customer.

Zach, we're pleased with the progress we're making there. We really do. We've been learning a lot also in that new channel for us. So, yeah, we are starting to see conversions. We're pleased with the progress we're making there. And I'll point out, you may have noticed we have a new hire, the CMO, who's going to bring a wealth of experience and skill that we believe is going to benefit all channels and certainly, I think, will continue to benefit what we're doing in that marketplace on our own channel. So, we have a – we're early, but I would say it's going well and we're pleased with the progress we're making in that channel right now.

And then, pretty nice transition into the next question. Why now in terms of all the executive changes that you're making and moving much of your development resources from Atlanta to Portland?

We're really trying hard to put in place what we started last November really. With the organizational teams, we're making now are just trying to accelerate our efforts to build out the scalable tech and our IT and the infrastructure necessary to succeed. We're not here to – we're here to eradicate the barriers of digital accessibility. Dominic and his team, which has joined us not too long ago, are really, really strong in directions that we're taking the technology. We're going to continue to focus our efforts there on scalable tech. That's going to grow – help us grow our customer base and bring MRR higher and margins higher. So, I feel like we're – David is joining as interim CEO, but he's also joining us as Chief Strategy Officer. He's really been very important since he joined the board in early November. So, we really thought as a board the best way to achieve our objectives to go fast, hard and lean is to make the changes that we made. And it's been very – and by the way, it's been a very amicable and smooth transition as we've unfolded it here today.

And then, Carr, in terms of the legal environment, with the surge in e-commerce and the digital world really becoming that much more important during COVID-19, can you give us an update in terms of what you're seeing on the front for digital accessibility lawsuits? Has there been an uptick in any specific verticals with the rise in e-commerce?

I would say that the activity has been high this year again. And it's not just in the federal courts. It's in the state courts. So, it's continued to be a focus area. We continue to remain optimistic that there are tailwinds here that are strong. So, yeah, there's a lot of demand that are still in play, probably more diverse than they were nine months or a year ago in terms of the segments. It's clearly more diverse. I think the issue is going to remain. There's just not enough websites providing accessibility. And it's caught the attention of, as you know, the legal community. I think it's in the minds of many more people than it was nine months or a year ago. And so, we see the tailwinds still very, very strong for the market for digital accessibility.

And, Sach, I guess just closing out, I figure I might as well ask a financial question. But excluding the loan from the PPP this quarter, I think cash burn was close to $950,000 [indiscernible] one way or the other. You're going to have another almost $900,000 coming on to the balance sheet next quarter. I guess how are you thinking about the progression of the cash burn rate as we move towards your target of positive free cash flow at some point in FY 2021?

The way I think about cash burn, you have to consider year-to-date. And when you compare year-over-year first half of the year, the cash burn is significantly down. It's a third of what it used to be in the first half last year. And you know we'll be getting some capital infusion from Sero Capital exercising warrants as well. Look, as we continue to grow revenues and continue to expand margins, we strongly believe that we'll continue to generate more cash versus what we are generating today from sales. And we are confident in becoming cash flow positive in 2021.

Our next question comes from the line of Allen Klee with National Securities.

You guys have been doing a really nice job with steadily improving the gross margin, coming up with 70% in this quarter. I was just wondering if there was anything about the mix this quarter. I know you mentioned PDF was pretty active. Does that have a higher margin than the average? Or is there anything unusual or would you say that the mix was kind of a reasonable number to think about going forward?

Allen, thank you for that question. The place we're going to have our highest margins over time is going to be the continued expansion within our relationships and the continued high margins that we can get through enterprise efforts as well. We're going to continue to expect margins to grow and improve over time. There's no question that we are investing in the earlier cycles of the new product markets that we're serving where our margins are going to reflect the mix of sort of acceleration in margins for our historical product offering in segments that are SaaS-based and earlier stage markets where initial margins may be lower or PDFs or margins may not be quite as sustainably high over time. I think we're set up well to continue to grow and improve it over time, and that's our expectation. Some of the moves we've made today are centered around – continuing to remind us that we are focused on MRR, growing MRR and improving margins over time, and we expect to be able to do that on our path to being cash flow positive next year.

And can you remind us the exercise of the warrants? Is that going to increase your diluted share count? And if so, by how many shares?

Yeah. It's about 146,000 shares. And yes, it will increase the dilution amount once we convert it.

And then, you talked about that you were going to do some certain type of higher expenses in the next few quarters, but I missed what you said that was related to. Could you delve into that?

There's a mix, right? Because we're going to gain – we're going to continue to gain efficiencies, but we are going to carry around some separation costs over the next several weeks, even months, and as we reallocate resources into Portland. So, it's a little overlap there. We're continuing to invest in key people. I mentioned the CMO. So, we're going to continue to make investments. But, look, all of this is designed to do what, to make us accelerate growth and to accelerate growth faster, which over time is going to show up in MRR and in improved margins. So, the board feels very confident about this strategy and the decisions that – that's the ultimate goal here. And they were on the right path. We have the right pieces in place to continue on that path, accelerating MRR and improving margins over time here.

I would agree that it sounds like it's definitely the right thing to do for the long run. Is there any way you can help us with our models in terms of the magnitude of what these kind of temporary type additional costs would be?

The Q is going to disclose some information, I think, that you'll be able obtain tonight and work through in terms of what some of the severances – how the severance will show up. That's probably a good starting point. But we are still making adjustments along this path. Again, in the long term, we're going to be gaining the – we really believe we're going to be gaining efficiencies and improved margins as a result of the sort of dynamic moves that we're making today. Or we wouldn't be making them. We're focused on – like I say, we're focused on MRR growth, customer acquisition and improving the margins, and we think these steps are the right steps to do that for the longer term.

Thank you. At this time, this concludes our question-and-answer session. I'd like to turn the call back over to Dr. Bettis for any closing remarks.

I just want to say thank you to all of you for joining us today. We had good attendance. I really appreciate you being here. I also want to thank our employees, partners and investors for their continued support in general. And we certainly look forward to updating you on our next call. Thanks, everyone. Be well.

Thank you. Before we conclude today's call, I would like to remind everyone that a recording of today's call will be available for replay via link available in the Investors section of the company's website. Thank you for joining us today for AudioEye's second quarter 2020 earnings conference call. You may now disconnect.