The financial information set forth below
with respect to the financial statements as of September 30, 2020 and December 31, 2019 and for the three-month and nine-month
periods ended September 30, 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 and nine-month periods ended September 30, 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, notes, and other financial information
rounded to the nearest thousand United States Dollars (“U.S. Dollar”), except for per share data.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited interim financial
statements of AudioEye, Inc. (“we”, “our” or the “Company”) have been prepared in accordance
with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and
the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited
financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (the “2019 Form 10-K”), 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. Certain information and disclosures normally contained in the audited
financial statements as reported in the Company’s Annual Report on Form 10-K have been condensed or omitted in accordance
with the SEC's rules and regulations for interim reporting. 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.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are
presented in “Note 3 – Significant Accounting Policies” in the 2019 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 2019 Form 10-K when reviewing interim financial results.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures
at the date of the financial statements and during the reporting period. On an ongoing basis, management evaluates its estimates
and judgments, including those related to share-based compensation, capitalization of software development costs, and income taxes.
Actual results may differ from these estimates.
Revenue Recognition
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.
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
We generate substantially all our revenue
from Software as a Service (“SaaS”), which are comprised of fixed subscription fees from customer accounts on the Managed
Platform. SaaS (also referred to as “subscription”) revenue is recognized on a ratable basis over the contractual subscription
term of the arrangement beginning on the date that our service is made available to the customer. Certain SaaS fees are invoiced
in advance on an annual, semi-annual, or quarterly basis. Any funds received for services not provided yet are held in deferred
revenue and are recorded as revenue when the related performance obligations have been satisfied.
Non-subscription
revenue consists of PDF remediation services and is recognized upon delivery. Consideration payable under these arrangements
is based on usage.
The following table presents our revenues
disaggregated by sales channel:
|
|
Nine months ended September 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Direct (Enterprise)
|
|
$
|
8,104
|
|
|
$
|
5,135
|
|
Indirect (Vertical partners)
|
|
|
6,698
|
|
|
|
2,063
|
|
Other
|
|
|
83
|
|
|
|
-
|
|
Total revenues
|
|
$
|
14,885
|
|
|
$
|
7,198
|
|
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. Unbilled receivables include amounts related to the Company’s contractual right to consideration for completed
performance obligations not yet invoiced. Deferred revenue includes payments received in advance of performance under the
contract. Our unbilled receivables and deferred revenue are reported on an individual contract basis at the end of each reporting
period. Unbilled receivables are classified as current or noncurrent based on the timing of when we expect to bill the customer.
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 September 30, 2020 and December 31, 2019:
(in thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Deferred revenue - current
|
|
$
|
5,587
|
|
|
$
|
5,372
|
|
Deferred revenue - noncurrent
|
|
|
110
|
|
|
|
153
|
|
Total deferred revenue
|
|
$
|
5,697
|
|
|
$
|
5,525
|
|
In the nine-month period ended September 30,
2020 we recognized $4,724,000, or 85%, in revenue from deferred revenue outstanding as of December 31, 2019.
In the three months ended September 30,
2020, two customers (including affiliates of such customers) accounted for 15% and 11%, respectively, of our total revenue. In
the nine months ended September 30, 2020 one customer accounted for 16% of our total revenue. In the three and nine months
ended September 30, 2019, one customer accounted for 9% and 10% of our total revenue, respectively.
Two customers represented 14% and 11%,
respectively, of total accounts receivable as of September 30, 2020. At December 31, 2019, one customer represented 40%
of the outstanding accounts receivable.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Deferred Costs (Contract acquisition
costs)
The Company capitalizes initial and renewal
sales commission payments in the period a customer contract is obtained and customer payment is received, and amortizes 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 less than one year.
The table below summarizes the deferred
commission costs as of September 30, 2020 and December 31, 2019:
(in thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Deferred costs - current
|
|
$
|
179
|
|
|
$
|
183
|
|
Deferred costs - noncurrent
|
|
|
102
|
|
|
|
145
|
|
Total deferred costs
|
|
$
|
281
|
|
|
$
|
328
|
|
Amortization expense associated with sales
commissions was included in selling and marketing expenses on the consolidated statements of operations and totaled $51,000 and
$162,000 for the three- and nine-month periods ended September 30, 2020, respectively, and $67,000 and $175,000 for the three-
and nine-month periods ended September 30, 2019, respectively. There were no impairment losses for these capitalized costs
for the three and nine months ended September 30, 2020 and 2019.
Share-Based Compensation
The Company periodically issues options,
warrants and restricted stock units (“RSUs”) as compensation for services received. 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.
The fair value of options and warrants
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,
expected term, and forfeiture rates). Future grants of equity awards accounted for as share-based compensation could have a material
impact on reported expenses depending upon the number, value, and vesting period of future awards.
We estimate the fair value of restricted
stock unit awards with time- or performance-based vesting using the value of our common stock on the date of grant. We estimate
the fair value of market-based restricted stock units using a Monte Carlo simulation model on the date of grant.
We expense the compensation cost associated
with time-based options, warrants and RSUs as the restriction period lapses, which is typically a one- to three-year service period
with the Company. Compensation expense related to performance-based options and RSUs is recognized on a straight-line basis over
the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed
on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation
cost is not recognized for service- and performance-based awards that do not vest because service or performance conditions are
not satisfied and any previously recognized compensation cost is reversed. Compensation costs related to awards with market conditions
are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied,
and is not reversed provided that the requisite service period derived from the Monte-Carlo simulation has been completed. If vesting
occurs prior to the end of the requisite service period, expense is accelerated and fully recognized through the vesting date.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
In the three- and nine-month periods ended
September 30, 2020, we awarded 89,900 and 181,092 options, respectively, and 305,145 and 659,821 RSUs,
respectively, to employees, officers, and consultants of the Company, which included a grant to our Interim Chief Executive Officer
of 260,000 RSUs with performance-based and market-based conditions in the third quarter of 2020.
The performance condition for 105,000 of
the RSUs in the CEO award is based on the achievement of Monthly Recurring Revenue (“MRR”) targets. The Company did
not record any stock-based compensation expense related to these performance-based RSUs in the three months ended September 30,
2020 as the achievement of performance targets during the requisite period was not deemed probable. The Company will continue to
evaluate the probability of achieving the performance conditions in future periods and record the appropriate expense if necessary.
The market condition for the remaining 155,000 RSUs in the award is based on the Company’s stock price targets. The Company
used a Monte Carlo simulation to determine the grant-date fair value for the market-based RSUs. The weighted-average assumptions
used in the Monte-Carlo simulation were as follows: 5-year historical volatility of 136.52%, 5-year risk-free
rate of 0.26%, and a performance period of 5 years. The Company recorded $464,000 in stock-based compensation expense related
to these market-based RSUs in the three months ended September 30, 2020.
In the three- and nine-month periods ended
September 30, 2020, no warrants were issued and no stock-based compensation expense related to warrants was incurred. As of
September 30, 2020, there was no remaining unamortized stock-based compensation expense related to warrants.
The following table summarizes the stock-based
compensation expense recorded for the three and nine months ended September 30, 2020 and 2019:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock Options
|
|
$
|
79
|
|
|
$
|
71
|
|
|
$
|
200
|
|
|
$
|
237
|
|
RSUs
|
|
|
1,010
|
|
|
|
202
|
|
|
|
1,804
|
|
|
|
760
|
|
Total
|
|
$
|
1,089
|
|
|
$
|
273
|
|
|
$
|
2,004
|
|
|
$
|
997
|
|
As of September 30, 2020, the
outstanding unrecognized stock-based compensation expense related to options and RSUs was $1,352,000 and $6,058,000,
respectively, which may be recognized through June 2025, subject to achievement of service, performance, and market
conditions.
Earnings (Loss) Per Share (“EPS”)
Basic EPS is calculated by dividing net
income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding
during the period. Diluted EPS is calculated based on the net income (loss) available to common stockholders and the weighted average
number of shares of common stock outstanding during the period, adjusted for the effects of all potential dilutive common stock
issuances related to options, warrants, restricted stock units and convertible preferred stock. The dilutive effect of our share-based
awards and warrants is computed using the treasury stock method, which assumes all share-based awards and warrants are exercised
and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The
incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been
dilutive, are included in the denominator of the diluted EPS calculation. 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.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Potentially dilutive securities excluded
from the computation of basic and diluted net loss per share for the nine months ended September 30, 2020 and 2019 were as
follows:
(in thousands)
|
|
2020
|
|
|
2019
|
|
Preferred stock
|
|
|
290
|
|
|
|
293
|
|
Options
|
|
|
683
|
|
|
|
904
|
|
Warrants
|
|
|
85
|
|
|
|
537
|
|
Restricted stock units
|
|
|
846
|
|
|
|
381
|
|
Total
|
|
|
1,904
|
|
|
|
2,115
|
|
The following table summarizes the stock
option activity for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
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
|
|
|
181,092
|
|
|
|
10.60
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(315,630
|
)
|
|
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(147,091
|
)
|
|
|
8.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
683,414
|
|
|
$
|
5.33
|
|
|
|
2.48
|
|
|
|
444,329
|
|
|
$
|
6,323,007
|
|
The following table summarizes the restricted
stock unit activity for the nine months ended September 30, 2020:
Restricted stock units outstanding as of December 31, 2019
|
|
|
428,919
|
|
Granted
|
|
|
659,821
|
|
Settled
|
|
|
(88,799
|
)
|
Forfeited/Canceled
|
|
|
(154,080
|
)
|
Total restricted stock units outstanding at September 30, 2020
|
|
|
845,861
|
|
Vested at September 30, 2020
|
|
|
268,174
|
|
Unvested restricted stock units as of September 30, 2020
|
|
|
577,687
|
|
The following table summarizes the warrant
activity for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
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
|
|
|
(317,467
|
)
|
|
|
4.76
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(22,188
|
)
|
|
|
9.59
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
85,053
|
|
|
$
|
6.25
|
|
|
|
1.19
|
|
|
$
|
708,917
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 the fair value
of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.
The Company had no assets measured at fair
value on a recurring basis as of September 30, 2020 and December 31, 2019.
The table below provides information on
our liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
Fair Value
|
(in thousands)
|
|
Fair Value
|
|
|
Hierarchy
|
Liabilities
|
|
|
|
|
|
|
Warrant liability (1), September 30, 2020
|
|
$
|
-
|
|
|
Level 3
|
Warrant liability (1), December 31, 2019
|
|
$
|
120
|
|
|
Level 3
|
|
(1)
|
The fair value of the warrant liability was determined using the Black-Scholes pricing model (refer to Note 5 – Debt for additional information on our warrant liability). Fair value adjustments are included within change in fair value of warrant liability in the consolidated statements of operations. In the third quarter of 2020, the warrant liability was extinguished upon full exercise of these warrants, which were issued in connection with our credit facility (see Note 5 – Debt), and we recognized a gain of $593,000 and $120,000 for the three and nine months ended September 30, 2020, respectively, related to the extinguishment of the liability.
|
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.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 3 — CAPITAL RAISE AND LIQUIDITY
In
the third quarter of 2020, we completed a public offering of common stock, whereby we issued 473,239 shares of our common stock
at $17.75 per share, and raised a total of $7,824,000, net of underwriting discounts
and commissions and other costs associated with the offering.
As of September 30, 2020, cash and
working capital totaled $10,295,000 and $6,729,000, respectively. For the nine months ended September 30, 2020, cash used
in operating activities totaled $1,050,000.
We have incurred net losses since inception. Our independent
registered public accounting firm expressed in its report on our financial statements for the years ended December 31, 2019 and
2018 that there was substantial doubt about our ability to continue as a going concern. Following the capital raise during the
third quarter of 2020, which contributed to the improvement in our cash and working capital positions as of September 30,
2020, we believe that the substantial doubt about our ability to continue as a going concern has been alleviated and that we have
sufficient liquidity to continue as a going concern through the next twelve months.
NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS
We determine whether an arrangement is
a lease at inception. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities
represent our obligation to make lease payments arising from the lease.
Finance Leases
The Company has finance leases to purchase
computer equipment. The amortization expense of the leased equipment is included in depreciation expense. As of September 30,
2020 and December 31, 2019, the Company’s outstanding finance lease obligations totaled $80,000 and $104,000,
respectively. The effective interest rate of the finance leases is estimated at 6.0% based on the implicit rate in the lease agreements.
The following summarizes the assets acquired
under finance leases, included in property and equipment:
(in thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Computer equipment
|
|
$
|
177
|
|
|
$
|
157
|
|
Less: accumulated depreciation
|
|
|
(101
|
)
|
|
|
(60
|
)
|
Assets acquired under finance leases, net
|
|
$
|
76
|
|
|
$
|
97
|
|
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 for new leases, or as of January 1, 2019 for existing leases, 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 and Marietta, Georgia. The company also leases office space in Scottsdale, Arizona from a company controlled
by our Executive Chairman, which continues on a month-to-month basis, therefore was not measured under Topic 842.
In addition, the Company entered into membership
agreements to occupy shared office space in New York and Portland, Oregon. The membership agreements do not qualify as a lease
under ASC 842 as the owner has substantive substitution rights, therefore the Company expenses membership fees as they are incurred.
See Note 8 – Commitments and Contingencies for further details on our shared office arrangements.
The Company made operating lease payments
in the amount of $191,000 during the nine months ended September 30, 2020.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS
(continued)
The following summarizes the total lease liabilities and remaining
future minimum lease payments at September 30, 2020 (in thousands):
Year ending December 31,
|
|
Finance
Leases
|
|
|
Operating
Leases
|
|
|
Total
|
|
2020 (3 months remaining)
|
|
$
|
16
|
|
|
$
|
64
|
|
|
$
|
80
|
|
2021
|
|
|
52
|
|
|
|
262
|
|
|
|
314
|
|
2022
|
|
|
17
|
|
|
|
257
|
|
|
|
274
|
|
2023
|
|
|
1
|
|
|
|
118
|
|
|
|
119
|
|
2024
|
|
|
-
|
|
|
|
81
|
|
|
|
81
|
|
Total minimum lease payments
|
|
|
86
|
|
|
|
782
|
|
|
|
868
|
|
Less: present value discount
|
|
|
(6
|
)
|
|
|
(73
|
)
|
|
|
(79
|
)
|
Total lease liabilities
|
|
|
80
|
|
|
|
709
|
|
|
|
789
|
|
Current portion of lease liabilities
|
|
|
57
|
|
|
|
223
|
|
|
|
280
|
|
Long term portion of lease liabilities
|
|
$
|
23
|
|
|
$
|
486
|
|
|
$
|
509
|
|
The following summarizes expenses associated
with our finance and operating leases for the nine months ended September 30, 2020 (in thousands):
Finance lease expenses:
|
|
|
|
|
Depreciation
expense
|
|
$
|
41
|
|
Interest
on lease liabilities
|
|
|
5
|
|
Total Finance lease expense
|
|
|
46
|
|
Operating lease expense
|
|
|
192
|
|
Short-term
lease and related expenses
|
|
|
103
|
|
Total
lease expenses
|
|
$
|
341
|
|
The following table provides information
about the remaining lease terms and discount rates applied as of September 30, 2020:
Weighted average remaining lease term (years)
|
|
|
|
|
Operating Leases
|
|
|
3.18
|
|
Finance Leases
|
|
|
1.59
|
|
Weighted average discount rate (%)
|
|
|
|
|
Operating Leases
|
|
|
6.00
|
|
Finance Leases
|
|
|
6.00
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 5 — DEBT
Related party credit facility
On August 14, 2019, the Company entered
into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC (“Sero Capital”), a stockholder who
owns more than 10% of the outstanding shares of common stock of the Company. The beneficial owner of Sero Capital is David Moradi,
who became a director of the Company on November 8, 2019 and was appointed the Company’s Interim Chief Executive Officer
and Chief Strategy Officer on August 13, 2020. The Loan Agreement provided 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 would bear
interest at a per annum rate of 10% (subject to increase in the event of a default). The term of the Loan Agreement extended through
August 14, 2020 and provided for certain customary covenants, representations and events of default. No amounts had been drawn
under the credit facility through its expiration on August 14, 2020.
In consideration of the Loan Agreement,
the Company issued to Sero Capital common stock warrants 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 were classified as a liability instrument since the holder had the option
to require the Company to repurchase the warrants when certain events occurred that were considered outside of the control of the
Company. In the third quarter of 2020, the Company received $880,000 in cash in connection with Sero Capital’s full exercise
of these warrants. The estimated fair value of the warrants held by Sero Capital was $219,000 at the date of issuance and included
in debt issuance costs on the consolidated balance sheet. Debt issuance cost was amortized as interest expense on a straight-line
basis over the term of the associated credit facility. As of September 30, 2020, the unamortized balance of debt issuance
costs was zero.
Term loan
On April 15, 2020, the Company entered
into a loan agreement in the amount of $1,302,000 with Liberty Capital Bank (“Lender”) pursuant to the Paycheck Protection
Program (“PPP Loan”) of the CARES Act, which is administered by the Small Business Administration (“SBA”).
Pursuant to the terms of the PPP Loan, interest payments are deferred until the date on which the SBA either remits to the Lender
the amount of the PPP Loan that will be forgiven by the SBA or notifies the Lender that the PPP Loan or a portion thereof will
not be forgiven. The loan has a maturity of two years and an interest rate of 1.0% per annum. The PPP Loan is not collateralized
and is not personally guaranteed. No fees were charged in connection with the loan. All or a portion of the PPP Loan may be forgiven
upon application by the Company in accordance with the SBA requirements. As of September 30, 2020, the outstanding principal
balance of the PPP Loan totaled $1,302,000 and accrued interest totaled $6,000.
NOTE 6 — SERIES A CONVERTIBLE PREFERRED STOCK
As of September 30, 2020 and December 31,
2019, the Company had 100,000 and 105,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”)
outstanding, respectively, which Preferred Stock was issued at $10 per share, accrues 5% in a cumulative annual dividend, and is
convertible into the Company’s common stock at a price of $4.385 per share. For the nine months ended September 30,
2020, preferred stockholders collectively earned, but were not paid, approximately $38,000 in quarterly dividends, which is equivalent
to 8,709 shares of common stock based on a conversion price of $4.385 per share. As of September 30, 2020 and December 31,
2019, cumulative and unpaid dividends were approximately $271,000 and approximately $245,000, respectively, which is equivalent
to 61,823 and 55,927 shares of common stock, respectively, based on a conversion price of $4.385 per share.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
On any matter presented to the stockholders
of the Company for vote, 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 and amendments to the Certificate
of Incorporation in a manner that adversely affects any rights of the holders of Preferred Stock.
In addition, the holders of Preferred Stock
have a liquidation preference for purposes of which the Preferred Stock would be valued at $10 per share plus accrued cumulative
annual dividends. At September 30, 2020 and December 31, 2019, the liquidation preference was valued at $1,271,000 and
$1,295,000, respectively. In the event of any liquidity event, holders of Preferred Stock shall be entitled to be paid their liquidation
preference out of the assets of the Company legally available before any sums shall be paid to holders of common stock.
NOTE 7 — RELATED PARTY TRANSACTIONS
As discussed in Note 5 – Debt, we
entered into a Loan Agreement with Sero Capital, a stockholder who owns more than 10% of the outstanding shares of common stock
of the Company. The beneficial owner of Sero Capital is David Moradi, who became a director of the Company on November 8,
2019 and was appointed the Company’s Interim Chief Executive Officer and Chief Strategy Officer on August 13, 2020.
The Loan Agreement extended through August 14, 2020 and provided the Company with an unsecured credit facility under which
we could borrow up to the aggregate principal amount of $2,000,000. No amounts had been drawn under the credit facility though
its expiration on August 14, 2020.
In consideration for the Loan Agreement,
we issued to Sero Capital common stock warrants 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. The warrants were fully exercised in August 2020 and the warrant liability was extinguished.
See Note- 5 – Debt for additional detail on our warrant liability.
As discussed in Note 4 – Lease Liabilities
and Right of Use Assets, we lease office space from a company controlled by our Executive Chairman. For the three- and nine- month
periods ended September 30, 2020, rent payments for this office space totaled $17,000 and $52,000, respectively.
NOTE 8 — COMMITMENTS AND CONTINGENCIES
Membership agreement to occupy shared office space
In the second quarter of 2020, the Company
entered into a membership agreement to occupy shared office space in Portland, Oregon. Our new shared office arrangement commenced
upon taking possession of the space and ends in August 2021. Fees due under the membership agreement are based on the number
of contracted seats and the use of optional office services. As of September 30, 2020, minimum fees due under this shared
office arrangement totaled $41,000.
The Company also amended its original membership
agreement to occupy shared office space in New York, NY through July 2021. As of September 30, 2020, minimum fees due
under this shared office arrangement totaled $81,000.
Litigation
We may become involved in various routine
disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition
of these matters, management believes that the resolution of any such matters, should they arise, is not likely to have a material
adverse effect on our financial position or results of operations.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE 9 — SUBSEQUENT
EVENTS
We have evaluated subsequent events occurring after September 30,
2020 and based on our evaluation we did not identify any events that would have required recognition or disclosure in these consolidated
financial statements.