AUDIOEYE INC [AEYE] Filings

June 30,

December 31,

(in thousands)

Deferred costs — current

Deferred costs — noncurrent

Total deferred costs

10-Q 1 aeye-20230630x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from [ ] to [ ]

Commission File Number: 001-38640

AudioEye, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-2939845
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5210 East Williams Circle, Suite 750, Tucson, Arizona		85711
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 866-331-5324

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.00001 per share	AEYE	The Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2023, 11,806,304 shares of the registrant’s common stock were issued and outstanding.

Table of Contents


		Page
PART I	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited)	2

	Statements of Operations for the three and six months ended June 30, 2023 and 2022 (unaudited)	3

	Statements of Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022 (unaudited)	4

	Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited)	5

	Notes to Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION	24

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Issuer Purchases of Equity Securities	24

Item 6.	Exhibits	25

SIGNATURES		26

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The financial information set forth below with respect to the financial statements as of June 30, 2023 and December 31, 2022 and for the three- and six-month periods ended June 30, 2023 and 2022 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three- and six-month periods ended June 30, 2023 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31. Certain prior period amounts have been reclassified to conform to current period presentation. The Company presents its unaudited financial statements, notes, and other financial information rounded to the nearest thousand United States Dollars (“U.S. Dollar”), except for per share data.

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AUDIOEYE, INC.

BALANCE SHEETS

(unaudited)


	June 30,		December 31,
(in thousands, except per share data)	2023		2022

ASSETS
Current assets:
Cash	$	4,317	$	6,904
Accounts receivable, net of allowance for doubtful accounts of $435 and $468, respectively		4,680		5,418
Prepaid expenses and other current assets		531		644
Total current assets		9,528		12,966

Property and equipment, net of accumulated depreciation of $251 and $254, respectively		216		161
Right of use assets		770		1,154
Intangible assets, net of accumulated amortization of $7,036 and $5,978, respectively		5,982		6,041
Goodwill		4,001		4,001
Other		102		105
Total assets	$	20,599	$	24,428

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,480	$	2,452
Finance lease liabilities		23		38
Operating lease liabilities		415		468
Deferred revenue		6,610		7,125
Contingent consideration		2,171		979
Total current liabilities		11,699		11,062

Long term liabilities:
Finance lease liabilities		—		7
Operating lease liabilities		527		745
Deferred revenue		29		73
Contingent consideration, long term		—		1,952
Total liabilities		12,255		13,839

Stockholders’ equity:
Preferred stock, $0.00001 par value, 10,000 shares authorized
Common stock, $0.00001 par value, 50,000 shares authorized, 11,797 and 11,551 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		1		1
Additional paid-in capital		94,809		93,070
Accumulated deficit		(86,466)		(82,482)
Total stockholders’ equity		8,344		10,589

Total liabilities and stockholders’ equity	$	20,599	$	24,428

See Notes to Unaudited Financial Statements

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AUDIOEYE, INC.

STATEMENTS OF OPERATIONS

(unaudited)


		Three months ended June 30,			Six months ended June 30,
(in thousands, except per share data)	2023		2022		2023		2022
Revenue	$	7,836	$	7,569	$	15,608	$	14,475

Cost of revenue		1,787		1,841		3,489		3,551

Gross profit		6,049		5,728		12,119		10,924

Operating expenses:
Selling and marketing		3,253		3,425		6,496		7,151
Research and development		2,033		1,406		3,779		2,935
General and administrative		2,791		3,505		5,926		7,061
Total operating expenses		8,077		8,336		16,201		17,147

Operating loss		(2,028)		(2,608)		(4,082)		(6,223)

Interest income (expense), net		55		(2)		98		(3)

Net loss		(1,973)		(2,610)		(3,984)		(6,226)

Net loss per common share-basic and diluted	$	(0.17)	$	(0.23)	$	(0.34)	$	(0.54)

Weighted average common shares outstanding-basic and diluted		11,738		11,489		11,688		11,467

See Notes to Unaudited Financial Statements

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AUDIOEYE, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2023 AND 2022

(unaudited)


				Additional
	Common stock			Paid-in		Accumulated
(in thousands)	Shares	Amount		Capital		Deficit		Total
Balance, December 31, 2022	11,551	$	1	$	93,070	$	(82,482)	$	10,589
Common stock issued upon settlement of restricted stock units	192		—		—		—		—
Issuance of common stock for services	10		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(56)		—		(258)		—		(258)
Stock-based compensation	—		—		1,118		—		1,118
Net loss	—		—		—		(2,011)		(2,011)
Balance, March 31, 2023	11,697	$	1	$	93,930	$	(84,493)	$	9,438
Common stock issued upon settlement of restricted stock units	108		—		—		—		—
Issuance of common stock for services	14		—		—		—		—
Common stock issued pursuant to employee stock purchase plan	9		—		36		—		36
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(31)		—		(188)		—		(188)
Stock-based compensation	—		—		1,031		—		1,031
Net loss	—		—		—		(1,973)		(1,973)
Balance, June 30, 2023	11,797	$	1	$	94,809	$	(86,466)	$	8,344


				Additional
	Common stock			Paid-in		Accumulated
(in thousands)	Shares	Amount		Capital		Deficit		Total
Balance, December 31, 2021	11,435	$	1	$	88,889	$	(71,293)	$	17,597
Common stock issued upon settlement of restricted stock units	35		—		—		—		—
Issuance of common stock for services	8		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(4)		—		(25)		—		(25)
Stock-based compensation	—		—		1,145		—		1,145
Net loss	—		—		—		(3,616)		(3,616)
Balance, March 31, 2022	11,474	$	1	$	90,009	$	(74,909)	$	15,101
Common stock issued upon settlement of restricted stock units	103		—		—		—		—
Issuance of common stock for services	11		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(28)		—		(133)		—		(133)
Common stock repurchased for retirement	(79)		—		—		(410)		(410)
Stock-based compensation	—		—		1,041		—		1,041
Net loss	—		—		—		(2,610)		(2,610)
Balance, June 30, 2022	11,481		1		90,917		(77,929)		12,989

See Notes to Unaudited Financial Statements

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AUDIOEYE, INC.

STATEMENTS OF CASH FLOWS

(unaudited)


		Six months ended June 30,
(in thousands)	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,984)	$	(6,226)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,103		1,009
Loss on disposal or impairment of long-lived assets		147		7
Stock-based compensation expense		2,149		2,186
Amortization of deferred commissions		36		65
Amortization of right of use assets		199		278
Change in fair value of contingent consideration		214		158
Provision for accounts receivable		(1)		111
Changes in operating assets and liabilities:
Accounts receivable		739		489
Prepaid expenses and other assets		119		(223)
Accounts payable and accruals		(82)		(244)
Operating lease liability		(271)		(246)
Deferred revenue		(559)		(1,010)
Net cash used in operating activities		(191)		(3,646)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(57)		(22)
Software development costs		(999)		(565)
Patent costs		—		(17)
Payment for acquisition, net of cash received		—		(4,734)
Net cash used in investing activities		(1,056)		(5,338)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan		36		—
Payments related to settlement of employee shared-based awards		(446)		(158)
Settlement of contingent consideration		(908)		(132)
Repurchase of common stock		—		(410)
Repayments of finance leases		(22)		(31)
Net cash used in financing activities		(1,340)		(731)

Net decrease in cash		(2,587)		(9,715)
Cash-beginning of period		6,904		18,966
Cash-end of period	$	4,317	$	9,251

Supplemental disclosures of noncash activities:
Right-of-use assets and operating lease obligations recognized during the period	$	—	$	876

See Notes to Unaudited Financial Statements

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of AudioEye, Inc. (“we”, “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”), as filed with the SEC on March 9, 2023.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain information and disclosures normally contained in the audited financial statements as reported in the Company’s Annual Report on Form 10-K have been condensed or omitted in accordance with the SEC’s rules and regulations for interim reporting.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the 2022 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the financial statements contained in the 2022 Form 10-K when reviewing interim financial results.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to stock-based compensation, allowance for doubtful accounts, and intangible assets. Actual results may differ from these estimates.

Revenue Recognition

We derive our revenue primarily from the sale of internally developed software by a software-as-a-service (“SaaS”) delivery model, as well as from professional services, through our direct sales force or through third-party resellers. Our SaaS fees include support and maintenance.

We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

We determine revenue recognition through the following five steps:

●

Identify the contract with the customer;

●

Identify the performance obligations in the contract;

●

Determine the transaction price;

●

Allocate the transaction price to the performance obligations in the contract; and

●

Recognize revenue when, or as, the performance obligations are satisfied.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 revenue is comprised of fixed subscription fees from customer accounts on our platform related to our software products. Our support revenue is comprised of subscription fees for customers for legal, remediation, and other support services. SaaS and support (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 and support 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 primarily of PDF remediation, and one-time Website and Mobile App report services, and is recognized upon delivery. Consideration payable under PDF remediation arrangements is based on usage. Consideration payable under one-time Website and Mobile App report services arrangements is based on fixed fees.

The following table presents our revenues disaggregated by sales channel:


	Six months ended June 30,
(in thousands)	2023		2022
Partner and Marketplace	$	8,760	$	7,724
Enterprise		6,848		6,751
Total revenues	$	15,608	$	14,475

The Company records accounts receivable for amounts invoiced to customers for which the Company has an unconditional right to consideration as provided under the contractual arrangement. Deferred revenue includes payments received in advance of performance under the contract and is reported on an individual contract basis at the end of each reporting period. Deferred revenue is classified as current or noncurrent based on the timing of when we expect to recognize revenue.

The table below summarizes our deferred revenue as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
(in thousands)	2023		2022
Deferred revenue — current	$	6,610	$	7,125
Deferred revenue — noncurrent		29		73
Total deferred revenue	$	6,639	$	7,198

In the six-month period ended June 30, 2023, we recognized $5,554,000, or 77%, in revenue from deferred revenue outstanding as of December 31, 2022.

In the three and six months ended June 30, 2023, we had one customer (including the customer’s affiliates reflecting multiple contracts and a partnership with the Company) which accounted for approximately 16% of our total revenue. In the three and six months ended June 30, 2022, we had one customer which accounted for approximately 17% and 18%, respectively, of our total revenue.

One major customer represented 17% and 22 % of total accounts receivable as of June 30, 2023 and December 31, 2022, respectively.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Deferred Costs (Contract acquisition costs)

We capitalize initial and renewal sales commissions in the period the commission is earned, which generally occurs when a customer contract is obtained, and amortize deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term. As a practical expedient, we expense sales commissions as incurred when the amortization period of related deferred commission costs would have been one year or less.

The table below summarizes the deferred commission costs as of June 30, 2023 and December 31, 2022, which are included in Prepaid expenses and other current assets on our balance sheets:

Amortization expense associated with sales commissions was included in Selling and marketing expenses on the statements of operations and totaled $17,000 and $36,000 for the three- and six-month periods ended June 30, 2023, respectively, and $29,000 and $65,000 for the three- and six-month periods ended June 30, 2022, respectively.

Business Combinations

The assets acquired, liabilities assumed and contingent consideration are recorded at their estimated fair value on the acquisition date with subsequent changes recognized in earnings. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business combination date. As a result, the Company may recognize adjustments to provisional amounts of assets acquired or liabilities assumed in earnings in the reporting period in which the adjustments are determined.

Acquisition-related expenses primarily consist of legal, accounting, and other advisory fees associated and are recorded in the period in which they are incurred.

Employee Stock Purchase Plan

In May 2022, the stockholders of the Company approved the Company’s Employee Stock Purchase Plan (the “ESPP”), which provides for the issuance of up to 500,000 shares of common stock. Eligible employees may elect to have a percentage of eligible compensation withheld to purchase shares of our common stock at the end of each purchase period. The Company expects each purchase period to be the six month periods ending on June 30 or December 31 of each calendar year. The purchase price per share is expected to equal 85% of the fair market value of our common stock on the last trading day of the purchase period. Under the ESPP, a participant may not be granted rights to purchase more than $25,000 worth of common stock for each calendar year and no participant may purchase more than 1,500 shares of our common stock (or such other number as the Compensation Committee may designate) on any one purchase date. As of June 30, 2023, 8,630 shares had been issued under the ESPP and 491,370 shares remained available under the plan.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based Compensation

The Company periodically issues options, restricted stock units (“RSUs”), and shares of its common stock as compensation for services received from its employees, directors, and consultants. The fair value of the award is measured on the grant date. The fair value amount is then recognized as expense over the requisite vesting period during which services are required to be provided in exchange for the award. We recognize forfeitures as they occur. Stock-based compensation expense is recorded in the same expense classifications in the statements of operations as if such amounts were paid in cash.

The fair value of options awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor and expected term).

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 grant date. We estimate the fair value of market-based restricted stock unit awards as of the grant date using the Monte Carlo simulation model.

We expense the compensation cost associated with time-based options and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based RSUs is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for service- and performance-based awards that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is reversed. Compensation costs related to awards with market conditions are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied and is not reversed provided that the requisite service period derived from the Monte-Carlo simulation has been completed. If vesting occurs prior to the end of the requisite service period, expense is accelerated and fully recognized through the vesting date.

The following table summarizes the stock-based compensation expense recorded for the three and six months ended June 30, 2023 and 2022:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2023		2022		2023		2022
Options	$	39	$	103	$	116	$	210
RSUs		900		889		1,887		1,877
Unrestricted shares of common stock		86		49		140		99
Employee stock purchase plan		6		—		6		—
Total	$	1,031	$	1,041	$	2,149	$	2,186

As of June 30, 2023, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $58,000 and $5,990,000, respectively, which may be recognized through June 2027, subject to achievement of service, performance, and market conditions.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) Per Share (“EPS”)

Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted EPS is calculated based on the net income (loss) available to common stockholders and the weighted average number of shares of common stock outstanding during the period, adjusted for the effects of all potential dilutive common stock issuances related to options, warrants and restricted stock units. The dilutive effect of our stock-based awards and warrants is computed using the treasury stock method, which assumes all stock-based awards and warrants are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. However, when a net loss exists, no potential common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in an anti-dilutive per-share amount.

Potentially dilutive securities outstanding as of June 30, 2023 and 2022, which were excluded from the computation of basic and diluted net loss per share for the periods then ended, are as follows:


	June 30,
(in thousands)	2023	2022
Options	134	174
Warrants	—	29
Restricted stock units	1,903	1,878
Total	2,037	2,081

The following table summarizes the stock option and RSUs activity for the six months ended June 30, 2023:


	Options	RSUs
Outstanding at December 31, 2022	156,054	1,802,655
Granted	—	437,703
Exercised/Settled	—	(300,022)
Forfeited/Expired	(22,320)	(37,024)
Outstanding at June 30, 2023	133,734	1,903,312
Vested at June 30, 2023	123,686	477,688
Unvested at June 30, 2023	10,048	1,425,624

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective January 1, 2023 and determined that the update applied to accounts receivable. The adoption did not have a material effect on our financial statements and did not significantly impact the Company’s accounting policies or estimation methods related to the allowance for doubtful accounts.

In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Adoption of the ASU should be applied prospectively. The Company elected to early adopt ASU 2021-08 on a prospective basis during the first quarter of 2022. The adoption did not have a material effect on our financial statements.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 3 — ACQUISITIONS

Bureau of Internet Accessibility Inc.

On March 9, 2022, we entered into a Stock Purchase Agreement (“Purchase Agreement”) to acquire all the outstanding equity interests of Bureau of Internet Accessibility Inc. (“BOIA”), a Delaware corporation which provides web accessibility services including audits, training, remediation and implementation support. The aggregate consideration for the purchase of BOIA was approximately $7.5 million (at fair value), consisting of $5.1 million cash payment at closing, $0.2 million cash received in the third quarter of 2022 resulting from net working capital adjustments, and an estimated $2.6 million in aggregate contingent consideration to be paid in cash following the one- and two-year anniversary of the closing date. Actual aggregate cash consideration is based on BOIA’s revenues for 2022 and 2023 and may differ from estimated contingent consideration at acquisition. In the first quarter of 2023, we made a $974,000 cash payment towards the contingent consideration liability.

We accounted for the acquisition of BOIA as business combination in accordance with FASB ASC 805, “Business Combinations” (“ASC 805”). Accordingly, under the acquisition method of accounting, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date as follows:


(in thousands)	Balance at March 9, 2022
Assets purchased:
Cash	$	398
Accounts receivable		437
Other assets		29
Client relationships (1)		3,600
Internally developed software (1)		700
Trade name (1)		50
Goodwill (2)		3,300
Total assets purchased		8,514

Liabilities assumed:
Accounts payable and accrued liabilities		7
Deferred revenue		1,040
Total liabilities assumed		1,047

Net assets acquired		7,467

Consideration:
Cash paid, net of proceeds from working capital adjustment		4,882
Contingent consideration liability (3)		2,585
Total consideration	$	7,467

(1)

Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of 2 to 7 years. In the six months ended June 30, 2023 and 2022, we recorded $357,000 and $221,000, respectively, in amortization expense associated with these acquired intangible assets.

(2)

Goodwill represents the excess of purchase price over the estimated fair value of net tangible and intangible assets acquired.

(3)

The fair value of the contingent consideration liability was determined using the Monte-Carlo simulation. The key assumptions used in the Monte-Carlo simulation were as follows: non-recurring and recurring revenue metrics for the earn-out periods, non-recurring revenue discount rate of 11.5%, recurring revenue discount rate of 10.5%, expected revenue volatility of 24.65%, risk-free rate of 1.58%, buyer specific discount rate of 9.0%, and discount periods of 1.01 year and 2.22 year.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 3 — ACQUISITIONS (continued)

For the six months ended June 30, 2023 and 2022, we recorded $214,000 and $158,000, respectively, in change in the fair value of contingent consideration, which is included in General and administrative in the accompanying Statement of Operations. The balance of contingent consideration represents the estimated fair value of the second anniversary payment as of the reporting period and is subject to further change in subsequent periods through settlement based on actual and estimated non-recurring and recurring revenues from the BOIA offering relative to certain thresholds, as well as adjustments for discount periods, discount rates, risk-free rate, volatility, and buyer specific discount rate.

In the six months ended June 30, 2023 and 2022, the Company incurred zero and $240,000, respectively, of transaction costs related to the acquisition of BOIA, which were included on our Statement of Operations within General and administrative expenses.

NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS

We determine whether an arrangement is a lease at inception. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease.

Finance Leases

The Company has finance leases to purchase computer equipment. The amortization expense of the leased equipment is included in depreciation expense. As of June 30, 2023 and December 31, 2022, the Company’s outstanding finance lease obligations totaled $23,000 and $45,000, respectively. The effective interest rate of the finance leases is estimated at 6.0% based on the implicit rate in the lease agreements.

The following summarizes the assets acquired under finance leases included in property and equipment, net of disposals:


	June 30,		December 31,
(in thousands)	2023		2022
Computer equipment	$	214	$	214
Less: accumulated depreciation		(192)		(172)
Assets acquired under finance leases, net	$	22	$	42

Operating Leases

Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since our lease arrangements do not provide an implicit rate, we use our estimated incremental borrowing rate for the expected remaining lease term at commencement date in determining the present value of future lease payments. Operating lease expense is recognized on a straight-line basis over the lease term.

The Company has operating leases for office space in Tucson, Arizona, New York, New York, and Miami Beach, Florida. The lease for the principal office located in Tucson consists of 627 square feet and ends in October 2024. The lease for the New York office, which consists of approximately 5,000 square feet, commenced in January 2022 and will expire in December 2026. Upon commencement of the New York lease, we recorded a right-of-use asset and corresponding operating lease liability of $876,000 in the first quarter of 2022.

In the second quarter of 2023, we terminated one of the leases for the Miami Beach office, reducing the leased space to approximately 2,000 square feet. The remaining lease will expire in May 2024. In connection with the early termination of this lease, the right-of-use asset and lease liability were reduced by $38,000 and $40,000, respectively.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS (continued)

In the first quarter of 2023, we closed our Marietta, Georgia office. As a result of abandoning the office space prior to its lease expiration in August 2024, we wrote off the associated right-of-use asset in full and recognized a $146,000 loss on impairment, which is included in General and administrative in the accompanying Statement of Operations. As of June 30, 2023, the lease liability related to the Marietta, GA office was $135,000.

In addition, the Company entered into membership agreements to occupy shared office space in Lehi, Utah, Portland, Oregon, and Seattle, Washington. Because the membership agreements do not qualify as a lease under ASC 842, we expense the membership fees as they are incurred.

The Company made operating lease payments in the amount of $271,000 and $291,000 during the six months ended June 30, 2023 and 2022, respectively.

The following summarizes the total lease liabilities and remaining future minimum lease payments at June 30, 2023 (in thousands):


Year ending December 31,	Finance Leases		Operating Leases		Total
2023 (6 months remaining)	$	17	$	241	$	258
2024		7		345		352
2025		—		219		219
2026		—		225		225
Total minimum lease payments		24		1,030		1,054
Less: present value discount		(1)		(88)		(89)
Total lease liabilities		23		942		965
Current portion of lease liabilities		23		415		438
Long term portion of lease liabilities	$	—	$	527	$	527

The following summarizes expenses associated with our finance and operating leases for the six months ended June 30, 2023 and 2022:


	Six months ended June 30,
(in thousands)	2023			2022
Finance lease expenses:
Depreciation expense	$	20	$	29
Interest on lease liabilities		1		2
Total Finance lease expense		21		31
Operating lease expense		266		323
Short-term lease and related expenses		117		79
Total lease expenses	$	404	$	433

The following table provides information about the remaining lease terms and discount rates applied as of June 30, 2023 and 2022:


	June 30,
	2023	2022
Weighted average remaining lease term (years)
Operating Leases	2.84	3.40
Finance Leases	0.78	1.57
Weighted average discount rate (%)
Operating Leases	6.00	6.00
Finance Leases	6.00	6.00

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

NOTE 5 — COMMITMENTS AND CONTINGENCIES

Membership agreement to occupy shared office space

The Company occupies shared office space in Lehi, UT, and Seattle, WA under membership agreements which end in May 2025 and January 2025, respectively. Fees due under these membership agreements are based on the number of contracted seats and the use of optional office services. The Company has the option to convert the membership agreement for the Lehi office to a month-to-month arrangement beginning October 1, 2023. As of June 30, 2023, minimum fees due under these shared office arrangements totaled $303,000.

Litigation

We may become involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, management believes that the resolution of any such matters, should they arise, is not likely to have a material adverse effect on our financial position or results of operations.

NOTE 6 — SUBSEQUENT EVENTS

We have evaluated subsequent events occurring after June 30, 2023, and based on our evaluation we did not identify any events that would have required recognition or disclosure in these financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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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-three (23) issued patents in the United States and four (4) 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 second quarter of 2023, we saw continued revenue growth, increases in customer count, and expansion in our product features and capabilites.

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 six months ended June 30, 2023, total revenue increased by 8% over the prior year comparable period. As of June 30, 2023, Annual Recurring Revenue (“ARR”) was approximately $29.7 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 June 30, 2023, AudioEye had approximately 104,000 customers, a 37% increase from 76,000 customers at June 30, 2022. Customer count increased in both the Enterprise and Partner and Marketplace channel during this period.

In the six months ended June 30, 2023, revenue from our Partner and Marketplace grew 13% from prior year comparable period. This channel represented about 60% of ARR at the end of June 2023. In six months ended June 30, 2023, total Enterprise revenue grew by 1% from prior year comparable period. The Enterprise channel represented about 40% of ARR at the end of June 2023.

The Company continued to invest in Research and Development in the second quarter of 2023. Total Research and Development cost, as defined under Research and Development section in the Results of Operations below, was 33% of total revenue in the second quarter of 2023. Total research and development cost increased primarily due to additional investments in engineering and product talent.

While revenue increased 8% in the six months ended June 30, 2023, Cost of Revenue, Sales and Marketing expense and General and Administrative expense decreased from prior year comparable period. This decrease was mainly driven by efficiencies implemented during the year in these areas and was partially offset by increased costs associated with BOIA and with other expenses.

We provide further commentary on our Results of Operation below.

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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 six months ended June 30, 2023 with the three and six months ended June 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.


	Three months ended June 30,				Change
(in thousands)	2023		2022		$		%
Revenue	$	7,836	$	7,569	$	267	4	%
Cost of revenue		(1,787)		(1,841)		54	(3)	%
Gross profit		6,049		5,728		321	6	%
Operating expenses:
Selling and marketing		3,253		3,425		(172)	(5)	%
Research and development		2,033		1,406		627	45	%
General and administrative		2,791		3,505		(714)	(20)	%
Total operating expenses		8,077		8,336		(259)	(3)	%
Operating loss		(2,028)		(2,608)		580	(22)	%
Interest income (expense), net		55		(2)		57	(2,850)	%
Net loss	$	(1,973)	$	(2,610)	$	637	(24)	%


	Six months ended June 30,				Change
(in thousands)	2023		2022		$		%
Revenue	$	15,608	$	14,475	$	1,133	8	%
Cost of revenue		(3,489)		(3,551)		62	(2)	%
Gross profit		12,119		10,924		1,195	11	%
Operating expenses:
Selling and marketing		6,496		7,151		(655)	(9)	%
Research and development		3,779		2,935		844	29	%
General and administrative		5,926		7,061		(1,135)	(16)	%
Total operating expenses		16,201		17,147		(946)	(6)	%
Operating loss		(4,082)		(6,223)		2,141	(34)	%
Interest income (expense), net		98		(3)		101	(3,367)	%
Net loss	$	(3,984)	$	(6,226)	$	2,242	(36)	%

Revenue

The following tables present our revenues disaggregated by sales channel:


	Three months ended June 30,				Change
(in thousands)	2023		2022		$		%
Partner and Marketplace	$	4,417	$	3,912	$	505	13	%
Enterprise		3,419		3,657		(238)	(7)	%
Total revenues	$	7,836	$	7,569	$	267	4	%


	Six months ended June 30,				Change
(in thousands)	2023		2022		$		%
Partner and Marketplace	$	8,760	$	7,724	$	1,036	13	%
Enterprise		6,848		6,751		97	1	%
Total revenues	$	15,608	$	14,475	$	1,133	8	%

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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 six months ended June 30, 2023, total revenue increased by 4% and 8%, 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 months ended June 30, 2023 was driven primarily by the reduction in revenue from one large customer. For the six months ended June 30, 2023, Enterprise channel revenue grew by 1% over the prior year comparable period.

Cost of Revenue and Gross Profit


	Three months ended June 30,				Change
(in thousands)	2023		2022		$		%
Revenue	$	7,836	$	7,569	$	267	4	%
Cost of Revenue		(1,787)		(1,841)		54	(3)	%
Gross profit	$	6,049	$	5,728	$	321	6	%


	Six months ended June 30,				Change
(in thousands)	2023		2022		$		%
Revenue	$	15,608	$	14,475	$	1,133	8	%
Cost of Revenue		(3,489)		(3,551)		62	(2)	%

AUDIOEYE INC [AEYE] Filings
10-Q	[2023-08-10]
10-Q	[2023-05-10]
10-K	[2023-03-09]
10-Q	[2022-11-10]
10-Q	[2022-08-09]
10-Q	[2022-05-13]
10-K	[2022-03-11]
10-Q	[2021-11-12]
10-Q	[2021-08-11]
10-Q	[2021-05-13]
10-K	[2021-03-11]
10-Q	[2020-11-13]
10-Q	[2020-08-13]
10-Q	[2020-05-15]
10-K	[2020-03-30]
10-Q	[2019-11-14]
10-Q	[2019-08-14]
10-Q	[2019-05-14]
10-K	[2019-03-27]
10-Q	[2018-11-14]
S-1	[2018-09-04]
10-Q	[2018-08-14]
10-Q	[2018-05-15]
10-K	[2018-04-02]
10-Q	[2017-11-14]
10-Q	[2017-08-14]
10-Q	[2017-05-15]
10-K	[2017-03-30]
10-Q	[2016-11-14]
S-1	[2016-09-30]
10-Q	[2016-08-15]
10-Q	[2016-05-13]
10-K	[2016-03-30]
10-Q	[2015-11-16]
10-Q	[2015-08-12]
10-Q	[2015-07-17]
10-K	[2015-07-10]
10-Q	[2014-11-07]
10-Q	[2014-08-11]
S-1	[2014-07-30]
10-Q	[2014-05-14]
10-K	[2014-03-31]
S-1	[2013-12-27]
10-Q	[2013-11-01]
10-Q	[2013-08-09]
10-Q	[2013-05-14]
10-K	[2013-04-15]