Item 1. Financial Statements
The financial information set forth
below with respect to the financial statements as of March 31, 2020 and December 31, 2019 and for the three-month periods ended
March 31, 2020 and 2019 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, 2020 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 classification. The Company
presents its unaudited financial statements, footnotes, and other financial information rounded to the nearest thousand United
States Dollars (“U.S. Dollar”), except for per share data.
AUDIOEYE, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands, except per share data)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,785
|
|
|
$
|
1,972
|
|
Accounts receivable, net
|
|
|
2,505
|
|
|
|
2,958
|
|
Unbilled receivables
|
|
|
483
|
|
|
|
160
|
|
Deferred costs, short term
|
|
|
181
|
|
|
|
183
|
|
Debt issuance costs, net
|
|
|
82
|
|
|
|
137
|
|
Prepaid expenses and other current assets
|
|
|
234
|
|
|
|
198
|
|
Total current assets
|
|
|
5,270
|
|
|
|
5,608
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
138
|
|
|
|
156
|
|
Right of use assets
|
|
|
776
|
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
Deferred costs, long term
|
|
|
137
|
|
|
|
145
|
|
Intangible assets, net
|
|
|
1,655
|
|
|
|
1,715
|
|
Goodwill
|
|
|
701
|
|
|
|
701
|
|
Total assets
|
|
$
|
8,677
|
|
|
$
|
9,152
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,235
|
|
|
$
|
973
|
|
Finance lease liabilities
|
|
|
53
|
|
|
|
52
|
|
Operating lease liabilities
|
|
|
214
|
|
|
|
209
|
|
Warrant liability
|
|
|
92
|
|
|
|
120
|
|
Deferred revenue
|
|
|
5,143
|
|
|
|
5,372
|
|
Total current liabilities
|
|
|
7,737
|
|
|
|
6,726
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Finance lease liabilities
|
|
|
41
|
|
|
|
52
|
|
Operating lease liabilities
|
|
|
600
|
|
|
|
655
|
|
Deferred revenue
|
|
|
141
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,519
|
|
|
|
7,586
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value, 10,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, $0.00001 par value, 200 shares designated, 105 shares issued and outstanding as of March 31, 2020 and December 31, 2019
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.00001 par value, 50,000 shares authorized, 8,877 shares issued and outstanding as of March 31, 2020 and December 31, 2019
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
51,746
|
|
|
|
51,490
|
|
Accumulated deficit
|
|
|
(51,590
|
)
|
|
|
(49,926
|
)
|
Total stockholders' equity
|
|
|
158
|
|
|
|
1,566
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
8,677
|
|
|
$
|
9,152
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(unaudited)
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands, except per share data)
|
|
Revenues
|
|
$
|
4,261
|
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,320
|
|
|
|
922
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,941
|
|
|
|
1,064
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
1,818
|
|
|
|
1,313
|
|
Research and development
|
|
|
333
|
|
|
|
142
|
|
General and administrative
|
|
|
2,486
|
|
|
|
1,749
|
|
Total operating expenses
|
|
|
4,637
|
|
|
|
3,204
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,696
|
)
|
|
|
(2,140
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability
|
|
|
28
|
|
|
|
-
|
|
Interest income (expense), net
|
|
|
4
|
|
|
|
(1
|
)
|
Total other (loss) income
|
|
|
32
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,664
|
)
|
|
|
(2,141
|
)
|
|
|
|
|
|
|
|
|
|
Dividends on Series A Convertible Preferred Stock
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(1,677
|
)
|
|
$
|
(2,154
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic and diluted
|
|
|
8,877
|
|
|
|
7,611
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
THREE MONTHS ENDED MARCH 31, 2020 AND
2019
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Preferred stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance, December 31, 2018
|
|
|
7,580
|
|
|
$
|
1
|
|
|
|
105
|
|
|
$
|
1
|
|
|
$
|
48,017
|
|
|
$
|
(42,144
|
)
|
|
$
|
5,875
|
|
Common stock issued in exchange for exercise of options and warrants
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
|
|
-
|
|
|
|
42
|
|
Restricted stock units, warrants and options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
449
|
|
|
|
-
|
|
|
|
449
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,141
|
)
|
|
|
(2,141
|
)
|
Balance, March 31, 2019
|
|
|
7,623
|
|
|
$
|
1
|
|
|
|
105
|
|
|
$
|
1
|
|
|
$
|
48,508
|
|
|
$
|
(44,285
|
)
|
|
$
|
4,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
8,877
|
|
|
$
|
1
|
|
|
|
105
|
|
|
$
|
1
|
|
|
$
|
51,490
|
|
|
$
|
(49,926
|
)
|
|
$
|
1,566
|
|
Restricted stock units, warrants and options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
256
|
|
|
|
-
|
|
|
|
256
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,664
|
)
|
|
|
(1,664
|
)
|
Balance, March 31, 2020
|
|
|
8,877
|
|
|
$
|
1
|
|
|
|
105
|
|
|
$
|
1
|
|
|
$
|
51,746
|
|
|
$
|
(51,590
|
)
|
|
$
|
158
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,664
|
)
|
|
$
|
(2,141
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
201
|
|
|
|
173
|
|
Option, warrant, restricted stock unit and performance stock unit expense
|
|
|
256
|
|
|
|
449
|
|
Amortization of deferred commissions
|
|
|
56
|
|
|
|
51
|
|
Amortization of debt issuance costs
|
|
|
55
|
|
|
|
-
|
|
Noncash operating lease expense
|
|
|
51
|
|
|
|
43
|
|
Change in fair value of warrant liability
|
|
|
(28
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
453
|
|
|
|
(138
|
)
|
Unbilled receivables
|
|
|
(323
|
)
|
|
|
22
|
|
Deferred costs
|
|
|
(46
|
)
|
|
|
(65
|
)
|
Prepaid expenses and other current assets
|
|
|
(36
|
)
|
|
|
(79
|
)
|
Accounts payable and accruals
|
|
|
1,262
|
|
|
|
247
|
|
Operating lease liabilities
|
|
|
(50
|
)
|
|
|
(43
|
)
|
Deferred revenue
|
|
|
(241
|
)
|
|
|
(144
|
)
|
Net cash used in operating activities
|
|
|
(54
|
)
|
|
|
(1,625
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Software development costs
|
|
|
(124
|
)
|
|
|
(60
|
)
|
Net cash used in investing activities
|
|
|
(124
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options and warrants
|
|
|
-
|
|
|
|
42
|
|
Repayments of finance leases
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(9
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(187
|
)
|
|
|
(1,652
|
)
|
Cash-beginning of period
|
|
|
1,972
|
|
|
|
5,742
|
|
Cash-end of period
|
|
$
|
1,785
|
|
|
$
|
4,090
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1
|
|
|
$
|
1
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Right of use assets and operating lease obligations recognized upon adoption of ASU 2016-02
|
|
|
-
|
|
|
|
568
|
|
Equipment acquired through finance leases
|
|
|
-
|
|
|
|
20
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BASIS
OF PRESENTATION
The accompanying unaudited interim
financial statements of AudioEye, Inc. (the “Company”) have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. 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, 2019,
as filed with the SEC on March 30, 2020.
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. Notes to the financial statements that would substantially duplicate
the disclosures contained in the audited financial statements for the year ended December 31, 2019 as reported in the Company’s
Annual Report on Form 10-K have been omitted. Certain prior period amounts have been reclassified to conform to current period
classification. Reclassifications had no material effect on prior year net loss, earnings per share, or shareholders’ equity.
Corporate Information and Background
AudioEye, Inc. (“we”,
“our” or the “Company”) was incorporated on May 20, 2005 in the state of Delaware. The Company has
developed patented, Internet content publication and distribution software that enables conversion of media into accessible
formats and allows for real time distribution to end users on any Internet connected device. The Company’s focus is to create
more comprehensive access to Internet and other media to all people regardless of their network connection, device, location, or
disabilities.
The Company is focused on developing innovations
in the field of networked and device embedded technology. Our intellectual property is primarily comprised of trade secrets, trademarks,
issued, published and pending patent applications, copyrights and technological innovations. We have a patent portfolio comprised
of eight issued patents in the United States. We also have two pending patent applications and two international patent applications
filed via the Patent Cooperation Treaty (“PCT”) and the European Patent Office. The patents have been extended and
cover a period from 2002 through 2026. We have a trademark portfolio comprised of eight United States trademark registrations.
Our common stock has been listed on the
NASDAQ Capital Market under the symbol “AEYE” since September 4, 2018. Prior to September 4, 2018, our common stock
was quoted on the OTCQB and the OTC Bulletin Board beginning on April 15, 2013 under the same symbol.
In August 2018, the Company sold 1,000,000
shares (the “Shares”) of its common stock at $6.25 per Share for net proceeds of approximately $5,609,000, after costs
and expenses of approximately $641,000 (the “Private Placement”). At the closing of the Private Placement, the Company
entered into a registration rights agreement (the “Registration Rights Agreement”) with the investors pursuant to which
the Company agreed to register the Shares for resale. On September 4, 2018, the Company filed a registration statement on Form
S-1 covering the resale of the securities subject to the Registration Rights Agreement, as well as certain other securities of
the Company. On July 5, 2019, the Company filed a post-effective amendment to the registration statement on Form S-1 covering the
resale of such securities in order to, among other things, incorporate into the filing information included in the Company’s
Annual Report on Form 10-K filed with the SEC on March 27, 2019.
On August 1, 2018, the Company amended its Certificate of Incorporation
to implement a reverse stock split in the ratio of 1 share for every 25 shares of common stock and to reduce the number of authorized
shares of common stock from 250,000,000 to 50,000,000. As a result, 186,994,384 shares of the Company’s common stock
were exchanged for 7,479,775 shares of the Company's common stock. These financial statements have been retroactively restated
to reflect the reverse stock split.
In April 2020, the Company filed a shelf
registration statement on Form S-3 with the SEC to register the sale, in future offerings, of up to $7,000,000 in the aggregate
of debt securities, common stock, preferred stock, warrants, rights or units consisting of any two or more of such securities.
We intend to use the net proceeds of any offering of securities sold by us under the registration statement for general corporate
purposes, which may include acquisitions, repayment of debt, capital expenditures and working capital requirements.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BASIS
OF PRESENTATION (continued)
Revenue Recognition
Revenue is recognized when delivery of
the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that
the Company expects to be entitled to 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.
|
Certain Software as a Service (“SaaS”)
invoices are prepared on an annual 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. 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. Payments received in advance of services being rendered are recorded as deferred revenue. Any funds received for services
not provided yet are held in deferred revenue and are recorded as revenue when the performance obligation has been satisfied. We
generate substantially all our revenue from subscription services, which are comprised of subscription fees from customer accounts
on the Managed Platform.
The following table presents our revenues
disaggregated by sales channel:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Direct (Enterprise)
|
|
$
|
2,387
|
|
|
$
|
1,461
|
|
Indirect (Vertical partners)
|
|
|
1,862
|
|
|
|
525
|
|
Other
|
|
|
12
|
|
|
|
-
|
|
Total revenues
|
|
$
|
4,261
|
|
|
$
|
1,986
|
|
In accordance with Accounting Standard
Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and all related and subsequent amendments,
the Company records accounts receivable for amounts invoiced to customers for which performance obligations have been satisfied,
and for amounts invoiced and are in deferred revenue but for which the Company has an unconditional right to consideration as provided
under the contractual arrangement. The Company recognizes unbilled receivables for those amounts the Company has the unconditional
right to invoice and for which the performance obligations have been satisfied.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BASIS
OF PRESENTATION (continued)
The Company had
one customer (including affiliates of such customer) which generated approximately 18% and 12% of the Company’s revenue in
each of the three months ended March 31, 2020 and 2019, respectively.
The table below compares the deferred revenue
balance as of March 31, 2020 versus December 31, 2019:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Deferred revenue
|
|
$
|
5,284
|
|
|
$
|
5,525
|
|
As of March 31, 2020, approximately $5,143,000
was classified as short-term deferred revenue and is expected to be recognized over the next twelve months following March 31,
2020. The remaining approximately $141,000 is long-term deferred revenue to be recognized thereafter. Approximately $2,087,000,
or approximately 38%, of deferred revenue from December 31, 2019 has been recognized as revenue through March 31, 2020.
At March 31, 2020, the Company had one
customer representing 18% of the outstanding accounts receivable. At December 31, 2019, the Company had one customer representing
40% of the outstanding accounts receivable.
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 and
liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based
compensation and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.
On March 27, 2020, the Coronavirus Aid,
Relief, and Economic Security Act (the “CARES Act”) was signed into law in the United States. The CARES Act, among
other things, includes modifications to net operating loss carryforwards provisions and the net interest expense deduction, and
deferment of social security tax payments. We are currently evaluating the provisions of the CARES Act and how certain elections
may impact our financial position, results of operations, and disclosures if elected.
Stock-Based Compensation
The Company measures the cost of services
received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured
on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in
exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense
classifications in the consolidated statements of operations, as if such amounts were paid in cash.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BASIS
OF PRESENTATION (continued)
Earnings (Loss) Per Share
Basic earnings (loss) per share 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 earnings per share” reflects the potential dilution that could
occur if our share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of
our share-based awards is computed using the treasury stock method, which assumes all share-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. The dilutive effect of our convertible preferred stock is computed
using the if-converted method, which assumes conversion at the beginning of the year. 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 excluded
from the computation of basic and diluted net earnings (loss) per share for the three months ended March 31, 2020 and 2019 are
as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Preferred stock
|
|
|
298
|
|
|
|
286
|
|
Options to purchase common stock
|
|
|
924
|
|
|
|
881
|
|
Warrants to purchase common stock
|
|
|
403
|
|
|
|
1,743
|
|
Restricted stock units
|
|
|
419
|
|
|
|
223
|
|
Totals
|
|
|
2,044
|
|
|
|
3,133
|
|
Fair Value Measurements
Fair value is an estimate of the exit price,
representing the amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction
cost. Fair value measurement under U.S. GAAP provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques
used to measure fair value into three levels:
Level 1: Unadjusted quoted prices in active
markets for identical assets or liabilities.
Level 2: Inputs other than quoted market
prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions
market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent
of the Company.
Level 3: Unobservable inputs reflect the
assumptions that the Company develops based on available information about what market participants would use in valuing the asset
or liability.
An asset or liability’s level within
the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability
of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets
and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.
On August 14, 2019, the Company
entered into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC, a shareholder that owns more than 10%
of the outstanding shares of common stock of the Company. The Loan Agreement has a one-year term and provides the Company with
an unsecured credit facility under which the Company may borrow up to the aggregate principal amount of $2,000,000. No amounts
have been drawn under the Loan Agreement as of March 31, 2020. The Company does not at this time expect this loan agreement
to be renewed.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BASIS
OF PRESENTATION (continued)
In consideration of the Loan Agreement,
the Company issued to Sero Capital LLC a common stock warrant to acquire up to a total of 146,667 shares of the Company’s
common stock at an exercise price of $6.00 per share, which exercise price may be paid in cash or at the election of the holder,
in a cashless, or “net,” exercise transaction. The warrant expires one year from the date of issuance.
The estimated fair value of the Sero Capital
LLC warrant was approximately $219,000 at date of issuance and approximately $92,000 at March 31, 2020. The Company valued the
warrants as of March 31, 2020 using the Black-Scholes pricing model and the following assumptions: contractual term of six (6)
months, a risk-free interest rate of 0.17%, a dividend yield of 0.0%, and volatility of 101.7%. The warrants are classified as
a liability instrument since the holder has the option to require the Company to repurchase the warrants when certain events occur
that are considered outside of the control of the Company. The unamortized balance was approximately $82,000 on March 31, 2020
and included as debt issuance costs in current assets on the consolidated balance sheet.
The Company has no assets measured at fair
value on a recurring basis as of March 31, 2020 and December 31, 2019.
The following are the Company’s liabilities
measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
|
Hierarchy
|
|
|
|
(in thousands)
|
|
Liabilities
|
|
|
|
|
|
|
Warrant liability, March 31, 2020
|
|
$
|
92
|
|
|
|
Level 3
|
|
Warrant liability, December 31, 2019
|
|
$
|
120
|
|
|
|
Level 3
|
|
Recent Accounting Pronouncements
In August 2018, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles –
Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That Is a Service Contract.” This ASU clarifies the accounting treatment for implementation
costs for cloud computing arrangements (hosting arrangements) that is a service contract. This guidance is effective for fiscal
years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective
January 1, 2020. The adoption of this guidance did not have a material impact our financial position, results of operations or
disclosures.
In August 2018, the FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.”
This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair
value in accordance with Topic 820, “Fair Value Measurement.” This guidance is effective for fiscal years beginning
after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective January 1, 2020.
The adoption of this guidance did not impact our financial position, results of operations or disclosures.
There are various other updates recently
issued, most of which represented technical corrections to the accounting literature or application to specific industries and
are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 2 — GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of March 31, 2020, the Company had cash
and cash equivalents of approximately $1,785,000 and a working capital deficit of approximately $2,467,000. In addition, the Company
used actual net cash in operations of approximately $54,000 during the quarter ended March 31, 2020. The Company has incurred net
losses since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
On August 14, 2019, the Company entered
into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC, a stockholder who owns more than 10% of the outstanding
shares of common stock of the Company. The beneficial owner of Sero Capital LLC is David Moradi, who became a director of the Company
on November 8, 2019. The Loan Agreement provides the Company with an unsecured credit facility under which the Company may borrow
up to the aggregate principal amount of $2,000,000. Any advances under the Loan Agreement will bear interest at a per annum rate
of 10.0% (subject to increase in the event of a default), which is payable monthly and may, at the Company’s option, be paid
either in cash or by the issuance of shares of the Company’s common stock. The term of the Loan Agreement extends through
August 14, 2020, subject to earlier termination as provided in the Loan Agreement. The Company’s obligations under the Loan
Agreement are subject to acceleration upon the occurrence of an event of default (as defined in the Loan Agreement). The Company
may prepay its obligations under the Loan Agreement without penalty, but subject to certain limitations regarding the number, timing
and dollar amounts of prepayments. The Loan Agreement provides for certain customary covenants, representations, and events of
default provisions. No amounts have been drawn under the Loan Agreement as of March 31, 2020. In consideration of the Loan Agreement,
the Company issued to Sero Capital LLC a common stock warrant to acquire up to a total of 146,667 shares of the Company’s
common stock at an exercise price of $6.00 per share, which exercise price may be paid in cash or, at the election of the holder,
in a cashless, or “net,” exercise transaction. The warrant expires one year from the date of issuance.
On April 15, 2020, the Company entered
into a note agreement in the amount of $1.3 million with Liberty Capital Bank (“Loan”) pursuant to the Paycheck Protection
Program (“PPP”) of the CARES Act, which is being administered by the Small Business Administration (“SBA”).
The Loan has been funded. All or a portion of the Loan may be forgiven upon application by the Company in accordance with the SBA
requirements. Under the PPP, loan forgiveness is available for the sum of payroll costs, rent payments, mortgage interest and utilities
during the eight-week period beginning on the date of loan approval. For purposes of the PPP, payroll costs exclude compensation
of an individual employee in excess of $100,000, prorated annually. Not more than 25.0% of the forgiven amount may be for non-payroll
costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000
or less annually are reduced by more than 25.0%. Loan payments are deferred for six months. The loan has a maturity of two years
and an interest rate of 1.0%. The loan is not collateralized and is not personally guaranteed. No fees were charged in connection
with the loan. The Company intends to use all proceeds from the Loan to retain employees, maintain payroll and make lease, mortgage
interest and utility payments.
In April 2020, the Company filed a registration
statement on Form S-3 with SEC to register the sale, in future offerings, of up to $7,000,000 in the aggregate of debt securities,
common stock, preferred stock, warrants, rights or units consisting of any two or more of such securities. We intend to use the
net proceeds of any offering of securities sold by us under the registration statement or otherwise for general corporate purposes,
which may include acquisitions, repayment of debt, capital expenditures and working capital requirements.
The Company expects that cash used in operations
will continue to be negative in the near future. The Company may need to raise additional funds through debt or equity financing,
including those debt and equity agreements and offerings noted previously. If the Company is unsuccessful in raising additional
financing, it will need to reduce costs and operations in the future. Additionally, the Company is currently evaluating the reduction
of salaries or deferral of bonuses for certain individuals.
Accordingly, the accompanying financial
statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and
the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and
liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The
financial statements do not include any adjustment that might result from the outcome of this uncertainty.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2020 and December 31,
2019 is summarized as follows:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Computer equipment
|
|
$
|
64
|
|
|
$
|
64
|
|
Equipment under finance lease
|
|
|
157
|
|
|
|
157
|
|
Furniture and fixtures
|
|
|
59
|
|
|
|
59
|
|
Total
|
|
|
280
|
|
|
|
280
|
|
Less accumulated depreciation
|
|
|
(142
|
)
|
|
|
(124
|
)
|
Property and equipment, net
|
|
$
|
138
|
|
|
$
|
156
|
|
Property and equipment are stated at cost
and depreciated using the straight-line method over their estimated useful life of three (3) years. When property or equipment
is retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts
and the net difference, less any amount realized from disposition, is reflected in earnings.
Included in net property and equipment
are assets under finance leases of approximately $157,000, less accumulated depreciation of approximately $73,000 as of March 31,
2020 and approximately $157,000 less accumulated depreciation of approximately $60,000 as of December 31, 2019.
The Company spent $0 in the purchase of
equipment during the three months ended March 31, 2020 and 2019. The Company also leased $0 in equipment during the three months
ended March 31, 2020. Depreciation expense was approximately $18,000 and $13,000 for the three months ended March 31, 2020 and
2019, respectively.
NOTE 4 — INTANGIBLE ASSETS
For the three months ended March 31, 2020
and 2019, the Company invested in Software development costs in the amounts of approximately $124,000 and $60,000 respectively.
Patents, technology and other intangibles with contractual terms are generally amortized over their estimated useful lives of ten
years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible
assets with determinable lives may be adjusted.
Software development costs are amortized over their estimated
useful life of three years.
Intangible assets consisted of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Patents
|
|
$
|
3,698
|
|
|
$
|
3,698
|
|
Capitalized software development
|
|
|
1,841
|
|
|
|
1,717
|
|
Domain name
|
|
|
10
|
|
|
|
10
|
|
Accumulated amortization
|
|
|
(3,894
|
)
|
|
|
(3,710
|
)
|
Intangible assets, net
|
|
$
|
1,655
|
|
|
$
|
1,715
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 4 — INTANGIBLE ASSETS (continued)
Amortization expense for patents totaled
approximately $93,000 and $94,000 for the three months ended March 31, 2020 and 2019, respectively. Amortization expense for software
development totaled approximately $91,000 and $66,000 for the three months ended March 31, 2020 and 2019, respectively.
Total amortization expense totaled approximately
$184,000 and $160,000 for the three months ended March 31, 2020 and 2019, respectively.
NOTE 5 — DEFERRED COSTS
The Company capitalizes initial and renewal
sales commission payments in the period a customer contract is obtained, and payment is received; and the commissions are amortized
consistent with the transfer of the goods or services to the customer over the expected period of benefit, which we have deemed
to be the contract term.
Such commissions are amortized over the
contract term when the underlying contracted products are technology-based. The table below summarizes the activity within the
deferred commission costs account, during the three months ended March 31, 2020:
|
|
December 31,
2019
|
|
|
Commission Costs Deferred
|
|
|
Commission
Amortized
|
|
|
March 31,
2020
|
|
|
|
(in thousands)
|
|
Deferred costs, short term
|
|
$
|
183
|
|
|
$
|
54
|
|
|
$
|
(56
|
)
|
|
$
|
181
|
|
Deferred costs, long term
|
|
|
145
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
137
|
|
Deferred commission costs
|
|
$
|
328
|
|
|
$
|
46
|
|
|
$
|
(56
|
)
|
|
$
|
318
|
|
During the three months ended March 31,
2020, the Company deferred an aggregate of approximately $46,000 for commissions paid of which approximately $27,000 was classified
as long-term and approximately $19,000 was classified as short-term. During the three months ended March 31, 2020, the Company
reclassified approximately $35,000 of previously deferred commissions cost from long-term to short-term classification. Amortization
of deferred costs for the three months ended March 31, 2020 was approximately $56,000.
During the three months ended March 31,
2019, the Company deferred an aggregate of approximately $65,000 for commissions paid. Amortization of deferred costs for the three
months ended March 31, 2019 was approximately $51,000.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 6 — LEASE LIABILITIES AND RIGHT OF USE ASSETS
Finance Leases
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Finance equipment lease dated April 5, 2018
|
|
$
|
7
|
|
|
$
|
8
|
|
Finance equipment lease dated May 8, 2018
|
|
|
8
|
|
|
|
9
|
|
Finance equipment lease dated June 27, 2018
|
|
|
12
|
|
|
|
13
|
|
Finance equipment lease dated September 18, 2018
|
|
|
9
|
|
|
|
10
|
|
Finance equipment lease dated September 28, 2018
|
|
|
10
|
|
|
|
11
|
|
Finance equipment lease dated February 20, 2019
|
|
|
13
|
|
|
|
14
|
|
Finance equipment lease dated June 4, 2019
|
|
|
16
|
|
|
|
18
|
|
Finance equipment lease dated September 30, 2019
|
|
|
19
|
|
|
|
21
|
|
Total finance lease liabilities
|
|
|
94
|
|
|
|
104
|
|
Less current portion
|
|
|
(53
|
)
|
|
|
(52
|
)
|
Long term portion
|
|
$
|
41
|
|
|
$
|
52
|
|
The Company did not enter any finance leases
during the quarter ended March 31, 2020.
During the year ended December 31, 2019,
the Company entered into three finance leases for computer equipment for three-year terms. The Company recognized these arrangements
as finance leases based on the determination that the leases exceeded 75% of the economic life of the underlying assets.
The Company initially recorded the equipment and finance leases liability at the estimated present value of the aggregate amount
of the minimum lease payments of approximately $61,000.
The leases include base monthly payments
in aggregate of approximately $5,000, due on the contract monthly anniversary of each calendar month. At the expiration of
the lease, the Company is required to return all leased equipment to the lessor with right of repurchase at fair value. The Company
has made payments in the amount of approximately $14,000 during the quarter ended March 31, 2020. 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 right to use
assets under finance leases included in property and equipment:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Classes of property
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
157
|
|
|
$
|
157
|
|
Less: accumulated depreciation
|
|
|
(73
|
)
|
|
|
(60
|
)
|
|
|
$
|
84
|
|
|
$
|
97
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 6 — LEASE LIABILITIES AND RIGHT OF USE ASSETS
(continued)
The following summarizes the total remaining future minimum
finance lease payments at March 31, 2020 (in thousands):
Period ending December 31,
|
|
|
|
2020
|
|
$
|
46
|
|
2021
|
|
|
43
|
|
2022
|
|
|
10
|
|
Total minimum lease payments
|
|
|
99
|
|
Amount representing interest
|
|
|
(5
|
)
|
Present value of minimum lease payments
|
|
|
94
|
|
Current portion of finance lease obligations
|
|
|
53
|
|
Finance lease obligations, less current portion
|
|
$
|
41
|
|
Operating Leases
The Company’s principal offices are
located at 5210 E. Williams Circle, Suite 750, Tucson, Arizona 85711, consisting of approximately 5,151 square feet as of December
31, 2019. The Company’s principal office originally consisted of approximately 2,362 square feet. On December 21, 2017, effective
February 1, 2018, the Company amended its existing lease to expand its principal office to approximately 4,248 square feet and
to extend the expiration date to September 30, 2021. Beginning February 1, 2018, the basic rent increased to $9,598 per month.
On October 2, 2018, effective December 1, 2018, the Company further amended its existing lease to expand its principal office to
approximately 5,151 square feet. In accordance with the amended lease, rent increased to $11,810 on January 1, 2019, escalating
over time to $12,977 at the end of the lease, which was further extended to October 31, 2022.
On December 29, 2017, effective February
1, 2018, the Company amended its existing lease to expand its Atlanta office from approximately 2,739 square feet to approximately
3,831 square feet. Beginning February 1, 2018, the basic rent increased by $1,500 through the remainder of the lease term. In February
2019, the Company entered into a lease for new offices in Marietta, Georgia located at 450 Franklin Gateway, Marietta, Georgia
consisting of approximately 9,662 square feet. The new lease commenced on June 1, 2019, with move-in on June 15, 2019.
Beginning in 2017, the Company leased office
space in New York for $300 per month, which was increased to $850 per month in October 2018 through May 31, 2019. Beginning in
June 2019, the Company moved to larger office space in New York, leased for $4,482 per month, for a term of 12 months ending May
31, 2020. Beginning November 1, 2015, we subleased an office in Scottsdale, Arizona from a company controlled by our Executive
Chairman for $3,578 per month, which continues on a month to month basis as of March 31, 2020. These New York and Scottsdale properties
were considered short-term leases and therefore were not measured under Topic 842.
The Company has made operating lease payments
in the amount of approximately $63,000 during the three months ended March 31, 2020. Rent expense charged to operations, which
differs from rent paid due to rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments
on a straight-line basis over the term of the lease. Operating lease liabilities at March 31, 2020 and December 31, 2019 consist
of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Tucson Arizona office lease
|
|
$
|
371
|
|
|
$
|
402
|
|
Marietta Georgia office lease
|
|
|
443
|
|
|
|
462
|
|
Total operating lease liabilities
|
|
|
814
|
|
|
|
864
|
|
Less current portion
|
|
|
(214
|
)
|
|
|
(209
|
)
|
Long term portion
|
|
$
|
600
|
|
|
$
|
655
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 6 — LEASE LIABILITIES AND
RIGHT OF USE ASSETS (continued)
As of January 1, 2019, the Company adopted
the provisions of ASC Topic 842 using the modified retrospective method. In adopting ASC Topic 842, Leases (Topic 842),
the Company elected the ‘package of practical expedients’, which permitted it not to reassess under the new standard
its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the
use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition,
the Company elected not to apply ASC Topic 842 to arrangements with lease terms of twelve (12) months or less. Effective January
1, 2019, the Company initially recognized operating lease liabilities of approximately $568,000 based on the present value of the
remaining minimum rental payments under current leasing standards for existing operating leases. The discount rate utilized in
such present value calculation was 6% based on an estimate of the Company’s incremental borrowing rate. At such time, the
Company also recognized corresponding right-of-use (“ROU”) assets of approximately $557,000 and eliminated the prior
period deferred rent of approximately $11,000.
During the fiscal year ended December 31,
2019, the Company entered into an operating lease for new office space in Marietta, Georgia, for a five-year term. The Company
measured and recorded a right of use asset and corresponding operating lease liability of approximately $484,000 at the lease commencement
date in June 2019.
The following summarizes the total remaining future minimum
operating lease payments at March 31, 2020 (in thousands):
Period ending December 31,
|
|
|
|
|
2020
|
|
$
|
192
|
|
2021
|
|
|
262
|
|
2022
|
|
|
257
|
|
2023
|
|
|
118
|
|
2024
|
|
|
81
|
|
Total minimum lease payments
|
|
|
910
|
|
Less: present value discount
|
|
|
(96
|
)
|
Present value of minimum lease payments
|
|
|
814
|
|
Current portion of operating lease obligations
|
|
|
214
|
|
Operating lease obligations, less current portion
|
|
$
|
600
|
|
The following summarizes lease expenses for the three months
ended March 31, 2020 (in thousands):
Finance lease expenses:
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
14
|
|
Interest on lease liabilities
|
|
|
1
|
|
Finance lease expense
|
|
|
15
|
|
Operating lease expense
|
|
|
64
|
|
Short-term lease expense
|
|
|
31
|
|
Total lease expenses
|
|
$
|
110
|
|
The following table provides information about the remaining
lease terms and discount rates applied as of March 31, 2019:
Weighted average remaining lease term (years)
|
|
|
|
|
Operating Leases
|
|
|
3.64
|
|
Finance Leases
|
|
|
1.79
|
|
Weighted average discount rate (%)
|
|
|
|
|
Operating Leases
|
|
|
6.00
|
|
Finance Leases
|
|
|
6.00
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 7 — CREDIT FACILITY-RELATED
PARTY
On August 14, 2019, the Company entered
into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC, a stockholder who owns more than 10% of the outstanding
shares of common stock of the Company. The beneficial owner of Sero Capital LLC is David Moradi, who became a director of the Company
on November 8, 2019. The Loan Agreement provides the Company with an unsecured credit facility under which the Company may borrow
up to the aggregate principal amount of $2,000,000. Any advances under the Loan Agreement will bear interest at a per annum rate
of 10% (subject to increase in the event of a default), which is payable monthly and may, at the Company’s option, be paid
either in cash or by the issuance of shares of the Company’s common stock. The term of the Loan Agreement extends through
August 14, 2020, subject to earlier termination as provided in the Loan Agreement. The Company’s obligations under the Loan
Agreement are subject to acceleration upon the occurrence of an event of default (as defined in the Loan Agreement). The Company
may prepay its obligations under the Loan Agreement without penalty, but subject to certain limitations regarding the number, timing
and dollar amounts of prepayments. The Loan Agreement provides for certain customary covenants, representations and events of default.
No amounts have been drawn under the Loan Agreement as of March 31, 2020.
In consideration of the Loan Agreement,
the Company issued to Sero Capital LLC a common stock warrant to acquire up to a total of 146,667 shares of the Company’s
common stock at an exercise price of $6.00 per share, which exercise price may be paid in cash or, at the election of the holder,
in a cashless, or “net,” exercise transaction. The warrant expires one year from the date of issuance.
NOTE 8 — STOCKHOLDERS’ EQUITY
Preferred stock
As of March 31, 2020 and December 31,
2019, the Company had 105,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) outstanding, which
was issued at $10 per share, paying a 5% cumulative annual dividend, and convertible into the Company’s common stock at a
price of $4.385 per share. For the three months ended March 31, 2020, preferred stockholders collectively earned, but were not
paid, approximately $13,000 in quarterly dividends, which is equivalent to 2,985 shares of common stock based on a conversion price
of $4.385 per share. As of March 31, 2020 and December 31, 2019, cumulative and unpaid dividends were approximately $258,000 and
approximately $245,000, respectively, which is equivalent to 58,912 and 55,927 shares of common stock, respectively, based on a
conversion price of $4.385 per share.
On any matter presented to the stockholders
of the Company, holders of Preferred Stock are entitled to cast the number of votes equal to the number of shares of common stock
into which their shares of Preferred Stock are convertible as of the record date to vote on such matter. As long as any shares
of Preferred Stock are outstanding, the Company has certain restrictions on share repurchases or amendments to the Certificate
of Incorporation in a manner that adversely affects any rights of the Preferred Stockholders.
In addition, the preferred stockholders
have a liquidation preference for purposes of which the Preferred Stock would be valued at $10 per share plus accrued cumulative
annual dividends. At March 31, 2020 and December 31, 2019, the liquidation preference was valued at approximately $1,308,000 and
approximately $1,295,000, respectively. In the event of any liquidity event, holders of each share of Preferred Stock shall be
entitled to be paid out of the assets of the Company legally available before any sums shall be paid to holders of common stock.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 8 — STOCKHOLDERS’ EQUITY (continued)
Common stock
As of March 31, 2020 and December 31,
2019, the Company had 8,876,553 shares of common stock issued and outstanding. During the three months ended March 31, 2020, the
Company did not issue any shares of its common stock of the Company upon the exercise of options or warrants.
Options
As of March 31, 2020 and December 31,
2019, the Company had outstanding options to purchase 923,653 and 965,043 shares of common stock, respectively.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Value
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
of
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Exercisable
|
|
|
Options
|
|
Outstanding at December 31, 2019
|
|
|
965,043
|
|
|
$
|
3.70
|
|
|
|
3.01
|
|
|
|
759,631
|
|
|
$
|
1,666,266
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(41,390
|
)
|
|
|
10.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
March 31, 2020
|
|
|
923,653
|
|
|
$
|
3.38
|
|
|
|
2.89
|
|
|
|
742,345
|
|
|
$
|
1,498,979
|
|
During the three months ended March 31,
2020, there were no stock options granted or exercised.
Option grants historically were valued
using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of, expected volatility,
risk free interest rate, and expected dividend yield.
For the three months ended March 31, 2020
and 2019, total stock-based compensation expense related to the options totaled approximately $85,000 and $72,000, respectively.
The outstanding unamortized stock-based compensation expense related to options was approximately $700,000 (which will be recognized
through December 2022) as of March 31, 2020.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 8 — STOCKHOLDERS’ EQUITY (continued)
Warrants
Below is a table summarizing the Company’s
outstanding warrants as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Intrinsic
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Value
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
of
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Warrants
|
|
Outstanding at December 31, 2019
|
|
|
424,708
|
|
|
$
|
5.31
|
|
|
|
0.82
|
|
|
$
|
189,450
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(22,188
|
)
|
|
|
9.59
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
402,520
|
|
|
$
|
5.07
|
|
|
|
0.61
|
|
|
$
|
130,400
|
|
For the three months ended March 31, 2020
and 2019, the Company incurred warrant-based compensation expense of $0. There was no outstanding unamortized stock-based
compensation expense related to warrants as of March 31, 2020.
Restricted stock units (“RSUs”)
The following table summarizes the restricted
stock unit activity for the three months ended March 31, 2020:
Restricted stock units issued as of December 31, 2019
|
|
|
428,919
|
|
Granted
|
|
|
15,000
|
|
Forfeited/Canceled
|
|
|
(25,000
|
)
|
Total Restricted stock units issued at March 31, 2020
|
|
|
418,919
|
|
Vested at March 31, 2020
|
|
|
253,794
|
|
Unvested restricted stock units as of March 31, 2020
|
|
|
165,125
|
|
For the three months ended March 31, 2020
and 2019, the Company incurred RSU-based compensation expense of approximately $170,000 and $377,000, respectively. The outstanding
unamortized stock-based compensation expense related to RSUs was approximately $591,000 (which will be recognized through December
2022) as of March 31, 2020.
In January 2020, the Company granted awards
of 10,000 RSUs and 5,000 RSUs to a consultant to the Company. The vesting of each award is subject to (i) a performance condition
based on the extent to which established performance milestones are achieved within a specified timeframe as determined and certified
by the Compensation Committee of the Board of Directors and (ii) continuing service with the Company through the one—year
anniversary of the grant date. The settlement date for such RSUs, to the extent they vest, is the earlier of (a) promptly after
the vesting date or (b) in any event no later than March 15 of the calendar year following the calendar year in which such vesting
occurs. The fair value of the RSUs at the date of grant was approximately $80,000.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 (Unaudited)
NOTE 9 — COMMITMENTS AND CONTINGENCIES
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, 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.
NOTE 10 — SUBSEQUENT EVENTS
Note Payable
As discussed in Note 2 in these footnotes to the unaudited financial
statements, on April 15, 2020, the
Company entered into a note agreement in the amount of $1.3 million with Liberty Capital Bank (“Loan”)
pursuant to the Paycheck Protection Program (“PPP”) of the CARES Act, which is being administered by the Small Business
Administration (“SBA”). The Loan has been funded.
All or a portion of the Loan may be forgiven
upon application by the Company in accordance with the SBA requirements. Under the PPP, loan forgiveness is available for the sum
of payroll costs, rent payments, mortgage interest and utilities during the eight-week period beginning on the date of loan approval.
For purposes of the PPP, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually.
Not more than 25.0% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines,
or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25.0%. Loan payments
are deferred for six months. The loan has a maturity of two years and an interest rate of 1.0%. The loan is not collateralized
and is not personally guaranteed. No fees were charged in connection with the loan.
The application for these funds required
the Company, in good faith, to certify that the current economic uncertainty made the loan request necessary to support the ongoing
operation of the Company. The Company made this certification after analyzing and taking into account, among other things, such
current economic uncertainty and the Company’s financial situation, business operations and potential ability to access other
sources of liquidity sufficient to support ongoing operations in a manner not significantly detrimental to the Company’s
business.
Conversion of Preferred Shares
In April 2020, one of our preferred shareholders
elected to convert 5,000 of the shareholder’s shares of Preferred Stock into the Company’s common stock. The conversion,
including approximately $12,000 of cumulative dividends, resulted in the issuance of 14,239 shares of the Company’s common
stock.
Exercise of Options from former employee
In April 2020, a former employee exercised
35,325 options resulting in the Company issuing an aggregate of 4,477 shares of common stock upon the cashless, or net, exercise
of those outstanding options.
In May 2020, a former employee exercised
10,000 options resulting in the Company issuing an aggregate of 8,746 shares of common stock upon the cashless, or net, exercise
of those outstanding options.