UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [ ] to [ ]
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
The |
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.
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).
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 | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
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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
As of April 25, 2024,
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
The financial information set forth below with respect to the consolidated financial statements as of March 31, 2024 and December 31, 2023 and for the three-month periods ended March 31, 2024 and 2023 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-month period ended March 31, 2024 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 consolidated 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.
CONSOLIDATED BALANCE SHEETS
(unaudited)
| March 31, |
| December 31, | |||
(in thousands, except per share data) | 2024 | 2023 | ||||
ASSETS |
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Current assets: |
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Cash | $ | |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation of $ |
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Right of use assets |
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Intangible assets, net of accumulated amortization of $ |
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Goodwill |
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Other | |
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Total assets | $ | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses | $ | |
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Operating lease liabilities |
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Finance lease liabilities |
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Deferred revenue |
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Contingent consideration | |
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Total current liabilities |
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Long term liabilities: |
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Term loan, net | | | ||||
Operating lease liabilities |
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Deferred revenue |
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Other |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | |
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See Notes to Unaudited Consolidated Financial Statements
2
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three months ended March 31, | |||||
(in thousands, except per share data) |
| 2024 |
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Revenue |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Selling and marketing |
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Research and development |
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General and administrative |
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Total operating expenses |
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Operating loss |
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Interest income (expense), net |
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Net loss | ( |
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Net loss per common share-basic and diluted | $ | ( | $ | ( | ||
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Weighted average common shares outstanding-basic and diluted |
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See Notes to Unaudited Consolidated Financial Statements
3
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(unaudited)
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Common stock | Paid-in | Accumulated | ||||||||||||
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Balance, December 31, 2023 | | $ | | $ | | $ | ( | $ | | |||||
Common stock issued upon settlement of restricted stock units | | — | — | — | — | |||||||||
Issuance of common stock for services | | — | — | — | — | |||||||||
Surrender of stock to cover tax liability on settlement of employee stock-based awards | ( | — | ( | — | ( | |||||||||
Common stock repurchased for retirement | ( | — | — | ( | ( | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Net loss | — | — | — | ( | ( | |||||||||
Balance, March 31, 2024 | | $ | | $ | | $ | ( | $ | | |||||
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(in thousands) |
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Balance, December 31, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Common stock issued upon settlement of restricted stock units | | — | — | — | — | |||||||||
Issuance of common stock for services | | — | — | — | — | |||||||||
Surrender of stock to cover tax liability on settlement of employee stock-based awards | ( | — | ( | — | ( | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Net loss | — | — | — | ( | ( | |||||||||
Balance, March 31, 2023 | | $ | | $ | | $ | ( | $ | | |||||
See Notes to Unaudited Consolidated Financial Statements
4
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31, | ||||||
(in thousands) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss | $ | ( |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Loss on disposal or impairment of long-lived assets |
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Stock-based compensation expense |
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Amortization of deferred commissions |
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Amortization of debt discount and issuance costs |
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Amortization of right of use assets | |
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Change in fair value of contingent consideration |
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Provision for accounts receivable |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other assets |
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Accounts payable and accruals |
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Operating lease liability |
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Deferred revenue |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of equipment |
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Software development costs |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments related to settlement of employee shared-based awards | ( |
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Settlement of contingent consideration |
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Repurchase of common stock | ( | — | ||||
Repayments of finance leases |
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Net cash used in financing activities |
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Net decrease in cash |
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Cash-beginning of period |
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Cash-end of period | $ | |
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See Notes to Unaudited Consolidated Financial Statements
5
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of AudioEye, Inc. and its wholly-owned subsidiary, Springtime, 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 consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Form 10-K”), as filed with the SEC on March 7, 2024.
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 consolidated 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 2023 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the consolidated financial statements contained in the 2023 Form 10-K when reviewing interim financial results.
Use of Estimates
The preparation of consolidated 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 consolidated 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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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 Website and Mobile App report services, and is recognized upon delivery. Consideration payable under PDF remediation arrangements is based on usage. Consideration payable under non-subscription Website and Mobile App report services arrangements is based on fixed fees.
The following table presents our revenues disaggregated by sales channel:
Three months ended March 31, | ||||||
(in thousands) |
| 2024 |
| 2023 | ||
Partner and Marketplace | $ | |
| $ | | |
Enterprise |
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Total revenues | $ | |
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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 March 31, 2024 and December 31, 2023:
| March 31, |
| December 31, | |||
(in thousands) | 2024 | 2023 | ||||
Deferred revenue — current | $ | |
| $ | | |
Deferred revenue — noncurrent | | | ||||
Total deferred revenue | $ | |
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In the three-month period ended March 31, 2024, we recognized $
We had
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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 March 31, 2024 and December 31, 2023, which are included in Prepaid expenses and other current assets on our consolidated balance sheets:
March 31, | December 31, | |||||
(in thousands) |
| 2024 |
| 2023 | ||
Deferred costs — current | $ | | $ | | ||
Deferred costs — noncurrent |
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Total deferred costs | $ | | $ | | ||
Amortization expense associated with sales commissions was included in Selling and marketing expenses on the consolidated statements of operations and totaled $
Debt Discount and Debt Issuance Costs
Costs related to the issuance of debt due to the lender (debt discount) or to third parties (debt issuance costs) are capitalized and amortized to interest expense based on the effective interest method over the term of the related debt. Debt discount and debt issuance costs are presented on the Company's consolidated balance sheets as a direct deduction from the carrying amount of our term loan.
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
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 consolidated 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).
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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 - to
The following table summarizes the stock-based compensation expense recorded for the three months ended March 31, 2024 and 2023:
Three months ended March 31, | ||||||
(in thousands) |
| 2024 |
| 2023 | ||
Options | $ | | $ | | ||
RSUs |
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Unrestricted shares of common stock | | | ||||
Total | $ | | $ | | ||
As of March 31, 2024, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $
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 and restricted stock units. The dilutive effect of our stock-based awards is computed using the treasury stock method, which assumes all stock-based awards 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.
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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Potentially dilutive securities outstanding as of March 31, 2024 and 2023, which were excluded from the computation of basic and diluted net loss per share for the periods then ended, are as follows:
March 31, | ||||
(in thousands) |
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| 2023 |
Options |
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Restricted stock units |
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Total |
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The following table summarizes the stock option and RSUs activity for the three months ended March 31, 2024:
| Options |
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Outstanding at December 31, 2023 |
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Granted |
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Exercised/Settled |
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Forfeited/Expired |
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Outstanding at March 31, 2024 |
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Vested at March 31, 2024 | | | ||
Unvested at March 31, 2024 | | |
Stock Repurchases
In the fourth quarter of 2023, the Board of Directors of the Company approved a program to repurchase up to $
Shares repurchased by the Company are immediately retired. The Company made an accounting policy election to charge the excess of repurchase price over par value entirely to retained earnings.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. The ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We plan to adopt ASU 2023-09 in our fiscal year 2025 annual financial statements. The adoption of this ASU will not affect the Company’s consolidated results of operations, financial position or cash flows.
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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 $
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, we allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, and recognized goodwill for the excess of purchase price over the estimated fair value of net tangible and intangible assets acquired.
Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of
As of March 31, 2024, contingent consideration totaled $
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 that expire in the second quarter of 2024. The amortization expense of the leased equipment is included in depreciation expense. As of March 31, 2024 and December 31, 2023, the Company’s outstanding finance lease obligations totaled $
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
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NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS (continued)
In the second quarter of 2023, we terminated one of the leases for the Miami Beach office, reducing the leased space to approximately
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 $
In addition, the Company entered into membership agreements to occupy shared office space in Lehi, Utah, and Portland, Oregon. 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 $
The following summarizes the total lease liabilities and remaining future minimum lease payments at March 31, 2024 (in thousands):
Year ending December 31, |
| Finance Leases |
| Operating Leases |
| Total | |||
2024 (9 months remaining) | $ | | $ | | $ | | |||
2025 |
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2026 |
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Total minimum lease payments | | | | ||||||
Less: present value discount |
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Total lease liabilities |
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Current portion of lease liabilities |
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Long term portion of lease liabilities | $ | — | $ | | $ | | |||
The following summarizes expenses associated with our finance and operating leases for the three months ended March 31, 2024 and 2023:
Three months ended March 31, | ||||||
(in thousands) | 2024 |
| 2023 | |||
Finance lease expenses: |
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Depreciation expense | $ | | $ | |||
Interest on lease liabilities |
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Total Finance lease expense |
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Operating lease expense |
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Short-term lease and related expenses |
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Total lease expenses | $ | | $ | |||
The following table provides information about the remaining lease terms and discount rates applied as of March 31, 2024 and 2023:
March 31, | ||||
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| 2023 | |
Weighted average remaining lease term (years) |
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Operating Leases |
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Finance Leases |
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Weighted average discount rate (%) |
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Operating Leases |
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Finance Leases |
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NOTE 5 — DEBT
On November 30, 2023, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with SG Credit Partners, Inc., a Delaware corporation (the “Lender”). The Loan Agreement provides for a $
The Company paid a commitment fee equal to $
The Loan Agreement secured by substantially all of our assets and contains certain customary financial covenants, including the requirements that the Company maintain (i) minimum liquidity of $
As of March 31, 2024, outstanding principal balance of the term loan totaled $
NOTE 6 — COMMITMENTS AND CONTINGENCIES
Membership agreement to occupy shared office space
The Company occupies shared office space in Lehi, UT under a membership agreement which ends in August 2024. Fees due under these membership agreements are based on the number of contracted seats and the use of optional office services. As of March 31, 2024, minimum fees due under these shared office arrangements totaled $
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 7 — SUBSEQUENT EVENTS
We have evaluated subsequent events occurring after March 31, 2024, and based on our evaluation we did not identify any events that would have required recognition or disclosure in these consolidated financial statements, except for the following.
In April 2024, we made a $
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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 consolidated 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 Web Content Accessibility Guidelines (“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
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fixing most of the common accessibility errors and addresses a wide range of disabilities including dyslexia, color blindness, epilepsy and more. AudioEye also offers additional solutions to provide for enhanced compliance and accessibility, including periodic auditing, human assisted technological 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 Native Mobile App and Audit 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-two (22) issued patents in the United States and two (2) 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, 2023 as filed with the SEC on March 7, 2024 provides additional information about our business and operations.
Legal and Regulatory Framework Update
On April 8, 2024, the U.S. Department of Justice (“DOJ”) signed a rule to add specific requirements about web and mobile application accessibility under Title II of the ADA that would apply to state and local governments.
Executive Overview
AudioEye is an industry-leading digital accessibility platform delivering Americans with Disabilities Act (“ADA”) and WCAG compliance at scale. Our solutions advance accessibility with patented technology that reduces barriers, expands access for individuals with disabilities, and enhances the user experience for a broader audience. In the three months ended March 31, 2024, we continued to focus on product innovation, expanding revenue and managing expenses.
We have two sales channels to deliver our product, the Partner and Marketplace channel and the Enterprise channel. AudioEye continues to focus on recurring revenue growth in both channels, while still offering our Native Mobile App report services and PDF services that provide non-recurring revenue. For the three months ended March 31, 2024, total revenue increased by 4% over the prior year comparable period. As of March 31, 2024, Annual Recurring Revenue (“ARR”) was approximately $32.0 million, which represented an increase of 8% year-over-year. Refer to Other Key Operating Metrics below for details on how we calculate ARR.
As of March 31, 2024, AudioEye had approximately 112,000 customers, a 18% increase from 95,000 customers at March 31, 2023. The increase in customer count is attributed to our Partner and Marketplace channel.
In the three months ended March 31, 2024, revenue from our Partner and Marketplace channel grew 9% over the prior year comparable period. This channel represented about 60% of ARR at the end of March 2024. In three months ended March 31, 2024, total Enterprise channel revenue decreased by 2% from the prior year comparable period. The Enterprise channel represented about 40% of ARR at the end of March 2024.
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 each of the three months ended March 31, 2024 and 2023.
The Company continued to invest in research and development in the first quarter of 2024. Total research and development cost, as defined under Research and Development Expenses section in the Results of Operations below, was 22% of total revenue in the three months ended March 31, 2024. Total research and development cost decreased from the prior year comparable period primarily due to the completion of significant initiatives in research and development.
While revenue increased 4% in the three months ended March 31, 2024, selling and marketing expense and general and administrative expense decreased from the prior year comparable period. This decrease was mainly driven by efficiencies in selling and marketing, lower stock compensation expense and a reduction in overall legal expenses, including non-recurring litigation expenses.
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We provide further commentary on our Results of Operation below.
Results of Operations
Our unaudited consolidated 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 months ended March 31, 2024 with the three months ended March 31, 2023.
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 March 31, | Change |
| ||||||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Revenue | $ | 8,083 |
| $ | 7,772 |
| $ | 311 | 4 | % | ||
Cost of revenue |
| (1,761) |
|
| (1,702) |
|
| (59) | 3 | % | ||
Gross profit |
| 6,322 |
|
| 6,070 |
|
| 252 | 4 | % | ||
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Selling and marketing |
| 3,003 |
|
| 3,243 |
|
| (240) | (7) | % | ||
Research and development |
| 1,322 |
|
| 1,746 |
|
| (424) | (24) | % | ||
General and administrative |
| 2,628 |
|
| 3,135 |
|
| (507) | (16) | % | ||
Total operating expenses |
| 6,953 |
|
| 8,124 |
|
| (1,171) | (14) | % | ||
Operating loss |
| (631) |
|
| (2,054) |
|
| 1,423 | (69) | % | ||
Interest income (expense), net |
| (198) |
| 43 |
| (241) | (560) | % | ||||
Net loss | $ | (829) |
| $ | (2,011) |
| $ | 1,182 | (59) | % | ||
Revenue
The following tables present our revenues disaggregated by sales channel:
| Three months ended March 31, |
| Change |
| ||||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % | ||||
Partner and Marketplace | $ | 4,734 |
| $ | 4,342 |
| $ | 392 | 9 | % | ||
Enterprise |
| 3,349 |
|
| 3,430 |
|
| (81) | (2) | % | ||
Total revenues | $ | 8,083 |
| $ | 7,772 |
| $ | 311 | 4 | % | ||
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.
For the three months ended March 31, 2024, total revenue increased by 4% over the prior year comparable period. 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 March 31, 2024 was driven primarily by lower one-time Website and Mobile App report services revenue.
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Cost of Revenue and Gross Profit
Three months ended March 31, |
| Change |
| |||||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Revenue | $ | 8,083 |
| $ | 7,772 |
| $ | 311 | 4 | % | ||
Cost of revenue |
| (1,761) |
|
| (1,702) |
|
| (59) | 3 | % | ||
Gross profit | $ | 6,322 |
| $ | 6,070 |
| $ | 252 | 4 | % | ||
Cost of revenue consists primarily of compensation and related benefits costs for our customer experience team, as well as a portion of our technology operations team that supports the delivery of our services, fees paid to our managed hosting and other third-party service providers, amortization of capitalized software development costs and patent costs, and allocated overhead costs.
For the three months ended March 31, 2024, cost of revenue increased by 3% over the prior year comparable period, primarily due to higher amortization expense related to capitalized software development costs.
For the three months ended March 31, 2024, gross profit increased by 4% over the prior year comparable period. The increase in gross profit was a result of increased revenue with a lower increase in cost of revenue.
Selling and Marketing Expenses
| Three months ended March 31, |
| Change |
| ||||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Selling and marketing | $ | 3,003 | $ | 3,243 |
| $ | (240) | (7) | % | |||
Selling and marketing expenses consist primarily of compensation and benefits related to our sales and marketing staff, as well as third-party advertising and marketing expenses.
For the three months ended March 31, 2024, selling and marketing expenses decreased by 7% over the prior year comparable period. The decrease in selling and marketing expenses resulted primarily from a reduction in online media and third-party marketing expenses and a reduction to stock compensation expense.
Research and Development Expenses
| Three months ended March 31, |
| Change |
| ||||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Research and development expense | $ | 1,322 |
| $ | 1,746 |
| $ | (424) | (24) | % | ||
Plus: Capitalized research and development cost |
| 490 |
|
| 473 |
|
| 17 | 4 | % | ||
Total research and development cost | $ | 1,812 |
| $ | 2,219 |
| $ | (407) | (18) | % | ||
Research and development (“R&D”) expenses consist primarily of compensation and related benefits, independent contractor costs, and an allocated portion of general overhead costs related to our employees involved in research and development activities. Total research and development cost includes the amount of research and development expense reported within operating expenses as well as development cost that was capitalized during the fiscal period.
For the three months ended March 31, 2024, research and development expense decreased by 24% over the prior year comparable period. This decrease was driven by lower personnel cost associated with a realignment in our product and development teams following the completion of significant initiatives in R&D. For the three months ended March 31, 2024, capitalized research and development cost increased by 4% over the prior year comparable period. The increase to capitalized research cost was the result of engineering personnel spending more time on product development than in the prior year comparable period. For the three months ended March 31, 2024, total research and development cost, which includes both R&D expenses and capitalized R&D costs, decreased by 18% over the prior year comparable period.
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General and Administrative Expenses
Three months ended March 31, | Change |
| ||||||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % | ||||
General and administrative | $ | 2,628 | $ | 3,135 | $ | (507) |
| (16) | % | |||
General and administrative expenses consist primarily of compensation and benefits related to our executives, directors and corporate support functions, general corporate expenses including legal fees, and occupancy costs.
For the three months ended March 31, 2024, general and administrative expenses decreased by 16% over the prior year comparable period. The decrease in general and administrative expenses was due primarily to lower stock compensation expense and a reduction in overall legal expenses, including non-recurring litigation expenses.
Interest Income (Expense)
| Three months ended March 31, |
| Change |
| ||||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Interest income (expense), net | $ | (198) |
| $ | 43 |
| $ | (241) | (560) | % | ||
For the three months ended March 31, 2024, interest expense, net consisted primarily of interest on our term loan borrowed in the fourth quarter of 2023, which was partially offset by interest income from investment in money market funds. For the three months ended March 31, 2023, interest income, net consisted primarily of income from investment in money market funds.
Other Key Operating Metrics
We consider annual recurring revenue (“ARR”) as a key operating metric and a key indicator of our overall business. We also use ARR as one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations.
We define ARR as the sum of (i) for our Enterprise channel, the total of the annualized recurring fee at the date of determination under each active contract, plus (ii) for our Partner and Marketplace channel, the monthly fee for all active customers at the date of determination, in each case, assuming no changes to the subscription, multiplied by 12. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are cancelable, which may impact future ARR. ARR excludes revenue from our PDF remediation services business, one-time Mobile App report services business and other miscellaneous non-recurring services. As of March 31, 2024, ARR was $32.0 million, which represents an increase of 8% year-over-year, driven by growth in both our Partner and Marketplace channel and Enterprise channel.
Liquidity and Capital Resources
Working Capital
(in thousands) |
| March 31, 2024 |
| December 31, 2023 | ||
Current assets | $ | 12,962 | $ | 14,776 | ||
Current liabilities |
| (11,421) |
| (11,529) | ||
Working capital | $ | 1,541 | $ | 3,247 | ||
As of March 31, 2024, we had $7,040,000 in cash and working capital of $1,541,000. The $1.7 million decrease in working capital in the three months ended March 31, 2024 was primarily due to the use of $1.69 million in cash to repurchase shares of our common stock.
In November 2023, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $5 million of our common stock through December 31, 2025. The stock repurchase program may be suspended or discontinued at any time and does not commit the Company to repurchase any dollar amount or particular number of shares of stock. Shares repurchased under the program are subsequently retired and restored to the status of authorized but unissued shares of common stock. As of March 31, 2024, we had $2.19 million remaining for the repurchase of shares.
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As of March 31, 2024, we had $2.4 million in current contingent consideration liability recognized in connection with the acquisition of BOIA, and $7.0 million in noncurrent term loan which matures on November 30, 2026. In April 2024, we made the $2.4 million cash payment to settle the contingent consideration associated with the BOIA acquisition in full.
As of March 31, 2024, we had no off-balance sheet arrangements, and we believe that the Company has sufficient liquidity to continue as a going concern through the next twelve months.
While the Company has been successful in raising capital, there is no assurance that it will be successful at raising additional capital in the future. Additionally, if the Company’s plans are not achieved and/or if significant unanticipated events occur, the Company may have to further modify its business plan, which may require us to raise additional capital or reduce expenses.
Cash Flows
| Three months ended March 31, | |||||
(in thousands) |
| 2024 |
| 2023 | ||
Net cash provided by operating activities | $ | 203 |
| $ | 297 | |
Net cash used in investing activities |
| (547) |
|
| (480) | |
Net cash used in financing activities |
| (1,852) |
|
| (1,178) | |
Net decrease in cash | $ | (2,196) |
| $ | (1,361) | |
For the three months ended March 31, 2024, in relation to the prior year comparable period, cash provided by operating activities decreased primarily due timing of customer collections and vendor payments.
For the three months ended March 31, 2024, in relation to the prior year comparable period, cash used in investing activities increased primarily due to the purchase of new computers in connection with the expiration of certain finance leases. For the three months ended March 31, 2024 and 2023, cash used for investing activities related primarily to cash outlays for software development costs.
For the three months ended March 31, 2024, cash outflows from financing activities included $1.69 million in common stock repurchases. For the three months ended March 31, 2023, cash outfows included $974,000 payment towards our contingent consideration in connection with the acquisition of BOIA, of which $908,000 and $66,000 are classified as cash used in financing and operating activities, respectively.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported and disclosed in our consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates under different assumptions or conditions.
Our critical accounting estimates, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, relate to stock-based compensation and goodwill, intangible assets and contingent consideration recognized in connection with a business combination. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that there is reasonable assurance that the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Exchange Act Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, projections of any evaluation of effectiveness of our disclosure controls and procedures to future periods are subject to the risk that controls or procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls or procedures may deteriorate.
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2024.
Changes in Internal Controls over Financial Reporting
During the quarter ended March 31, 2024, there were no material changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended March 31, 2024, no director or executive officer adopted, modified or terminated a “10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as each term is defined in Item 408(a) of Regulation S-K.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
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, our 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.
Item 1A. Risk Factors
You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”), which could materially affect our business, financial condition and results of operations. There have been no material changes to the risk factors set forth in the 2023 Form 10-K. The risks described in our 2023 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2. Issuer Purchases of Equity Securities
The following table sets forth information with respect to our repurchases of common stock during the three months ended March 31, 2024:
|
|
|
| Maximum Number | ||||||
Total Number of | of Shares (or | |||||||||
Shares Purchased | Approximate Dollar Value) | |||||||||
as Part of Publicly | that May Yet Be Purchased | |||||||||
Total Number of | Average Price | Announced Plans or | under the Plans or | |||||||
| Shares Purchased |
| Paid per Share |
| Programs |
| Programs (2) | |||
January 1 - January 31: |
| |||||||||
Employee transactions (1) | 15,988 |
| $ | 5.03 |
| — |
| $ | — | |
Share repurchase program (2) | 109,426 | 5.06 | 109,426 | 3,324,000 | ||||||
February 1 - February 28: |
| |||||||||
Employee transactions (1) | 1,982 |
|
| 6.14 |
| — |
| — | ||
Share repurchase program (2) | 78,755 | 5.69 | 78,755 | 2,876,000 | ||||||
March 1 - March 31: | ||||||||||
Employee transactions (1) | 7,238 |
|
| 9.29 |
| — |
| — | ||
Share repurchase program (2) | 77,789 | 8.80 | 77,789 | 2,192,000 | ||||||
Total: | ||||||||||
Employee transactions (1) | 25,208 | $ | 6.34 | — | $ | — | ||||
Share repurchase program (2) | 265,970 | $ | 6.34 | 265,970 | $ | 2,192,000 | ||||
| (1) | Includes shares surrendered by employees to satisfy tax withholding obligations in connection with the settlement of restricted stock units, exercise of stock options, or issuance of unrestricted shares of common stock. |
| (2) | In November 2023, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $5 million of our common stock through December 31, 2025. Shares repurchased under the program are subsequently retired. The average price paid per share includes any broker commissions. |
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Item 6. Exhibits
| Incorporation by Reference | |||||||||
Exhibit No. |
| Description |
| Form |
| Date of Filing |
| Exhibit No. |
| Filed Herewith |
3.1 | Restated Certificate of Incorporation of AudioEye, Inc., dated as of August 8, 2022 | 10-Q | August 9, 2022 | 3.1 | ||||||
3.2 | 8-K | March 28, 2023 | 3.1 | |||||||
10.1 | 8-K | March 6, 2024 | 10.1 | |||||||
31.1 | X | |||||||||
31.2 | X | |||||||||
32.1 | X | |||||||||
101.INS | XBRL Instance Document | |||||||||
| ||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||
| ||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||
| ||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||
| ||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||
| ||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||
104 | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AUDIOEYE, INC. | |||||
Date: | April 30, 2024 |
| By: | /s/ David Moradi | |
David Moradi | |||||
Principal Executive Officer | |||||
Date: | April 30, 2024 | By: | /s/ Kelly Georgevich | ||
Kelly Georgevich | |||||
Principal Financial Officer | |||||
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