AudioEye (AEYE) 10-Q 2022 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2022

or

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

For the transition period from [                     ] to [                     ]

Commission File Number: 001-38640

AudioEye, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-2939845
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5210 East Williams Circle, Suite 750, Tucson, Arizona	85711
(Address of principal executive offices)	(Zip Code)

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

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

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

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

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

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

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

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

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

As of July 31, 2022, 11,447,776 shares of the registrant’s common stock were issued and outstanding.

		Page
PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited)	2
	Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited)	3
	Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)	4
	Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
PART II	OTHER INFORMATION	27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Issuer Purchases of Equity Securities	27
Item 5.	Other Information	27
Item 6.	Exhibits	29
SIGNATURES		31

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The financial information set forth below with respect to the financial statements as of June 30, 2022 and December 31, 2021 and for the three- and six-month periods ended June 30, 2022 and 2021 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three- and six-month periods ended June 30, 2022 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31. 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.

1

AUDIOEYE, INC.

BALANCE SHEETS

(unaudited)

	June 30,		December 31,
(in thousands, except per share data)	2022		2021
ASSETS
Current assets:
Cash	$	9,251	$	18,966
Accounts receivable, net of allowance for doubtful accounts of $240 and $157, respectively		5,148		5,311
Deferred costs, short term		72		103
Prepaid expenses and other current assets		681		451
Total current assets		15,152		24,831
Property and equipment, net of accumulated depreciation of $236 and $210, respectively		160		196
Right of use assets		1,432		834
Deferred costs, long term		23		34
Intangible assets, net of accumulated amortization of $6,246 and $5,285, respectively		6,548		2,622
Goodwill		4,317		701
Other		93		95
Total assets	$	27,725	$	29,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	3,258	$	3,542
Finance lease liabilities		48		57
Operating lease liabilities		511		415
Deferred revenue		7,093		7,068
Contingent consideration		921		134
Total current liabilities		11,831		11,216
Long term liabilities:
Finance lease liabilities		23		45
Operating lease liabilities		984		450
Deferred revenue		10		5
Contingent consideration, long term		1,888		0
Total liabilities		14,736		11,716
Stockholders’ equity:
Preferred stock, $0.00001 par value, 10,000 shares authorized
Common stock, $0.00001 par value, 50,000 shares authorized, 11,481 and 11,435 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		1		1
Additional paid-in capital		90,917		88,889
Accumulated deficit		(77,929)		(71,293)
Total stockholders’ equity		12,989		17,597
Total liabilities and stockholders’ equity	$	27,725	$	29,313

See Notes to Unaudited Financial Statements

2

AUDIOEYE, INC.

STATEMENTS OF OPERATIONS

(unaudited)

		Three months ended June 30,			Six months ended June 30,
(in thousands, except per share data)	2022		2021		2022		2021
Revenue	$	7,569	$	6,021	$	14,475	$	11,809
Cost of revenue		1,841		1,512		3,551		2,865
Gross profit		5,728		4,509		10,924		8,944
Operating expenses:
Selling and marketing		3,425		3,380		7,151		6,134
Research and development		1,406		1,307		2,935		2,339
General and administrative		3,505		2,917		7,061		6,327
Total operating expenses		8,336		7,604		17,147		14,800
Operating loss		(2,608)		(3,095)		(6,223)		(5,856)
Other income (expense):
Gain on loan forgiveness		0		1,316		—		1,316
Interest expense		(2)		(5)		(3)		(9)
Total other income (expense)		(2)		1,311		(3)		1,307
Net loss		(2,610)		(1,784)		(6,226)		(4,549)
Dividends on Series A Convertible Preferred Stock		0		(58)		—		(69)
Net loss available to common stockholders	$	(2,610)	$	(1,842)	$	(6,226)	$	(4,618)
Net loss per common share-basic and diluted	$	(0.23)	$	(0.17)	$	(0.54)	$	(0.43)
Weighted average common shares outstanding-basic and diluted		11,489		10,992		11,467		10,726

See Notes to Unaudited Financial Statements

3

AUDIOEYE, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(unaudited)

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

							Additional
	Common stock			Preferred stock			Paid-in		Accumulated
(in thousands)	Shares	Amount		Shares	Amount		Capital		Deficit		Total
Balance, December 31, 2020	10,130	$	1	90	$	1	$	64,716	$	(57,084)	$	7,634
Issuance of common stock for cash, net of transaction expenses	472		—	—		—		16,534		—		16,534
Common stock issued upon exercise of warrants and options on a cash basis	22		—	—		—		148		—		148
Common stock issued upon exercise of warrants and options on a cashless basis	121		—	—		—		—		—		—
Common stock issued upon settlement of restricted stock units	92		—	—		—		—		—		—
Issuance of common stock for services	2		—	—		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(16)		—	—		—		(373)		—		(373)
Stock-based compensation	—		—	—		—		1,781		—		1,781
Net loss	—		—	—		—		—		(2,765)		(2,765)
Balance, March 31, 2021	10,823	$	1	90	$	1	$	82,806	$	(59,849)	$	22,959
Common stock issued upon conversion of preferred stock	279		—	(90)		(1)		1		—		—
Common stock issued upon exercise of warrants and options on a cash basis	53		—	—		—		255		—		255
Common stock issued upon exercise of warrants and options on a cashless basis	33		—	—		—		—		—		—
Common stock issued upon settlement of restricted stock units	78		—	—		—		—		—		—
Issuance of common stock for services	13		—	—		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(2)		—	—		—		(39)		—		(39)
Stock-based compensation	—		—	—		—		1,763		—		1,763
Net loss	—		—	—		—		—		(1,784)		(1,784)
Balance, June 30, 2021	11,277	$	1	—	$	—	$	84,786	$	(61,633)	$	23,154

See Notes to Unaudited Financial Statements

4

AUDIOEYE, INC.

STATEMENTS OF CASH FLOWS

(unaudited)

		Six months ended June 30,
(in thousands)	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,226)	$	(4,549)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,009		600
Loss on impairment of long-lived assets		0		10
Loss on disposal of property and equipment		7		12
Stock-based compensation expense		2,186		3,544
Amortization of deferred commissions		65		99
Amortization of right of use assets		278		109
Change in fair value of contingent consideration		158		0
Gain on loan forgiveness		0		(1,316)
Provision for accounts receivable		111		76
Changes in operating assets and liabilities:
Accounts receivable		489		1,258
Prepaid expenses and other assets		(223)		(243)
Accounts payable and accruals		(244)		984
Operating lease liability		(246)		(112)
Deferred revenue		(1,010)		(405)
Net cash provided by (used in) operating activities		(3,646)		67
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(22)		0
Software development costs		(565)		(843)
Patent costs		(17)		(50)
Payment for acquisition, net of cash received		(4,734)		0
Net cash used in investing activities		(5,338)		(893)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering, net of transaction costs		0		16,534
Proceeds from exercise of options and warrants		0		403
Payments related to settlement of employee shared-based awards		(158)		(412)
Settlement of contingent consideration		(132)		0
Repurchase of common stock		(410)		0
Repayments of finance leases		(31)		(43)
Net cash provided by (used in) financing activities		(731)		16,482
Net increase (decrease) in cash		(9,715)		15,656
Cash-beginning of period		18,966		9,095
Cash-end of period	$	9,251	$	24,751
Supplemental disclosures of noncash activities:
Right-of-use assets and operating lease obligations recognized during the period	$	876	$	0

See Notes to Unaudited Financial Statements

5

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(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, 2021 (the “2021 Form 10-K”), as filed with the SEC on March 11, 2022.

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the 2021 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the financial statements contained in the 2021 Form 10-K when reviewing interim financial results.

Use of Estimates

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

Revenue Recognition

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

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

We determine revenue recognition through the following five steps:

● Identify the contract with the customer;

● Identify the performance obligations in the contract;

6

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

● 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.

Performance obligations are the unit of accounting for revenue recognition and generally represent the distinct goods or services that are promised to the customer. If we determine that we have not satisfied a performance obligation, we will defer recognition of the revenue until the performance obligation is deemed to be satisfied. SaaS agreements are generally non-cancelable, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations.

Our SaaS revenue is comprised of fixed subscription fees from customer accounts on our platform. Our support revenue is comprised of subscription fees for customers which are not on our SaaS platform to access our customer support services. SaaS and support (also referred to as “subscription”) revenue is recognized on a ratable basis over the contractual subscription term of the arrangement beginning on the date that our service is made available to the customer. Certain SaaS and support fees are invoiced in advance on an annual, semi-annual, or quarterly basis. Any funds received for services not provided yet are held in deferred revenue and are recorded as revenue when the related performance obligations have been satisfied.

Non-subscription revenue consists primarily of PDF remediation, and Website and Mobile App report services, and is recognized upon delivery. Consideration payable under PDF remediation arrangements is based on usage. Consideration payable under Website and Mobile App report services arrangements is based on fixed fees.

The following table presents our revenues disaggregated by sales channel:

	Six months ended June 30,
(in thousands)	2022		2021
Partner and Marketplace	$	7,724	$	6,552
Enterprise		6,751		5,257
Total revenues	$	14,475	$	11,809

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

The table below summarizes our deferred revenue as of June 30, 2022 and December 31, 2021:

	June 30,		December 31,
(in thousands)	2022		2021
Deferred revenue - current	$	7,093	$	7,068
Deferred revenue - noncurrent		10		5
Total deferred revenue	$	7,103	$	7,073

7

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the six-month period ended June 30, 2022 we recognized $4,601,000, or 65%, in revenue from deferred revenue outstanding as of December 31, 2021.

In the three months ended June 30, 2022, one customer (including affiliates of such customer) accounted for 17% of our total revenue. In the six months ended June 30, 2022, one customer accounted for 18% of our total revenue. In the three months ended June 30, 2021, two customers accounted for 20% and 10%, respectively, of our total revenue. In the six months ended June 30, 2021, three customers accounted for 20%, 10%, and 10%, respectively, of our total revenue.

One customer with a long-standing relationship with the Company represented 15% of total accounts receivable as of June 30, 2022. Three customers represented 21%, 15% and 10%, respectively, of total accounts receivable as of December 31, 2021.

Deferred Costs (Contract acquisition costs)

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

The table below summarizes the deferred commission costs as of June 30, 2022 and December 31, 2021:

	June 30,		December 31,
(in thousands)	2022		2021
Deferred costs - current	$	72	$	103
Deferred costs - noncurrent		23		34
Total deferred costs	$	95	$	137

Amortization expense associated with sales commissions was included in selling and marketing expenses on the statements of operations and totaled $29,000 and $65,000 for the three- and six-month periods ended June 30, 2022, respectively, and $52,000 and $99,000 for the three- and six-month periods ended June 30, 2021, respectively.

Business Combinations

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

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

8

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based Compensation

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

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 and expected term).

We estimate the fair value of restricted stock unit awards with time- or performance-based vesting using the value of our common stock on the grant date. We estimate the fair value of market-based restricted stock unit awards as of the grant date using the Monte Carlo simulation model.

We expense the compensation cost associated with time-based options, 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.

The following table summarizes the stock-based compensation expense recorded for the three and six months ended June 30, 2022 and 2021:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Stock Options	$	103	$	226	$	210	$	375
RSUs		889		1,284		1,877		2,882
Unrestricted Shares of Common Stock		49		253		99		287
Total	$	1,041	$	1,763	$	2,186	$	3,544

As of June 30, 2022, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $544,000 and $8,147,000, respectively, which may be recognized through June 2027, subject to achievement of service, performance, and market conditions.

9

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) Per Share (“EPS”)

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

Potentially dilutive securities outstanding as of June 30, 2022 and 2021, which were excluded from the computation of basic and diluted net loss per share for the periods then ended, are as follows:

	June 30,
( in thousands)	2022	2021
Options	174	274
Warrants	29	45
Restricted stock units	1,878	1,125
Total	2,081	1,444

The following table summarizes the stock option, warrants, and RSUs activity for the six months ended June 30, 2022:

	Options	Warrants	RSUs
Outstanding at December 31, 2021	191,340	30,173	1,033,240
Granted	—	—	1,025,006
Exercised/Settled	—	—	(136,542)
Forfeited/Expired	(17,340)	(1,600)	(43,943)
Outstanding at June 30, 2022	174,000	28,573	1,877,761
Vested at June 30, 2022	116,499	28,573	353,434
Unvested at June 30, 2022	57,501	—	1,524,327

Stock Repurchases

In the second quarter of 2022, the Board of Directors of the Company approved a program to repurchase up to $3 million of its outstanding shares of common stock. In the six months ended June 30, 2022, we repurchased $410,000 of shares. As of June 30, 2022, we had $2.59 million remaining for the repurchase of shares. Shares repurchased by the Company are accounted for under the constructive retirement method, in which the shares repurchased are immediately retired, as there is no plan to reissue those shares. The Company made an accounting policy election to charge the excess of repurchase price over par value entirely to retained earnings.

10

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

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

NOTE 3 — ACQUISITIONS

Bureau of Internet Accessibility Inc.

On March 9, 2022, we entered into a Stock Purchase Agreement (“Purchase Agreement”) to acquire all the outstanding equity interests of Bureau of Internet Accessibility Inc. (“BOIA”), a Delaware corporation which provides web accessibility services including audits, training, remediation and implementation support. The acquisition represents another step forward in strengthening our suite of products and services by adding additional capabilities for enterprise accessibility compliance. The aggregate consideration for the purchase of BOIA was approximately $7.8 million (at fair value), consisting of $5.1 million cash payment at closing and an estimated $2.7 million in aggregate contingent consideration to be paid in cash following the one- and two-year anniversary of the closing date. Actual aggregate cash consideration is based on BOIA’s revenues for 2022 and 2023 and may differ from estimated contingent consideration. In addition, the purchase price is subject to certain adjustments related principally to net working capital, which will be settled in the third quarter of 2022.

11

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 3 — ACQUISITIONS (continued)

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

( in thousands)	Balance at March 9, 2022
Assets purchased:
Cash	$	398
Accounts receivable		437
Other assets		29
Client relationships (1)		3,600
Internally-developed software (1)		700
Trade name (1)		50
Goodwill (2)		3,616
Total assets purchased		8,830
Liabilities assumed:
Accounts payable and accrued liabilities		7
Deferred revenue		1,040
Total liabilities assumed		1,047
Net assets acquired		7,783
Consideration:
Cash paid		5,132
Contingent consideration liability (3)		2,651
Total consideration	$	7,783

(1) Acquired intangible assets will be amortized on a straight-line basis over their estimated useful lives of 2 to 7 years. In the six months ended June 30, 2022, amortization expense associated with these acquired intangible assets totaled $221,000.

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

(3) The fair value of the contingent consideration liability was determined using the Monte-Carlo simulation. The key assumptions used in the Monte-Carlo simulation were as follows: non-recurring and recurring revenue metrics for the earn-out periods, non-recurring revenue discount rate of 11.75%, recurring revenue discount rate of 10.75%, expected revenue volatility of 28.83%, risk-free rate of 2.84%, buyer specific discount rate of 12.35%, and discount periods of 0.7 year and 1.91 year. The change in the fair value of contingent consideration was $158,000 from the date of BOIA acquisition, March 9, 2022, to the end of the quarter, June 30, 2022, and is included in General and administrative in the accompanying Statement of Operations. The balance of contingent consideration is subject to further change in subsequent periods through settlement based on actual and estimated non-recurring and recurring revenues from the BOIA offering relative to certain thresholds, as well as adjustments for discount periods, discount rates, risk-free rate, volatility, and buyer specific discount rate.

The provisional purchase price allocated to goodwill and assumed liabilities are subject to adjustments as information is obtained about facts and circumstances that existed at the acquisition date.

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

12

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 3 — ACQUISITIONS (continued)

Pro Forma Financials

The following unaudited pro forma results of operations for the three and six months ended June 30, 2022 and 2021 assumes BOIA had been acquired on January 1, 2021.

The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on January 1, 2021, nor does it purport to project the results of operations of the combined Company in future periods. The pro forma financial information does not give effect to any anticipated integration costs savings or expenses related to the acquired company and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated.

	Pro Forma Combined Financials (unaudited)
	Three months ended June 30,				Six months ended June 30,
( in thousands)	2022		2021		2022		2021
Revenue	$	7,569	$	6,692	$	15,138	$	13,019
Net loss attributed to common shareholders		(2,568)		(1,814)		(5,834)		(4,725)

For purposes of the pro forma disclosures above, results for the three and six months ended June 30, 2022 exclude $240,000 in acquisition expense.

Square ADA LLC

On December 28, 2021, the Company completed the acquisition of substantially all of the assets of Square ADA LLC (“Square ADA”), a provider of accessibility solution to websites built or hosted by Squarespace, Inc. The aggregate consideration for the purchase of Square ADA was $185,000, consisting of (i) $53,000 paid in cash upon closing, and (ii) $132,000 in contingent consideration paid in cash in the second quarter of 2022.

We accounted for the acquisition of Square ADA as an asset acquisition in accordance with ASC 805 and ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. Based on our assessment of the screen test as required by ASU 2017-01, the transaction does not meet the definition of a business as substantially all the fair value of the gross assets acquired is concentrated in one single identifiable intangible asset, the acquired customer relationships. Accordingly, we allocated the total cost of the acquisition to customer relationships following the cost accumulation model. NaN external direct transaction costs were incurred in connection with Square ADA’s acquisition.

NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS

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

Finance Leases

The Company has finance leases to purchase computer equipment. The amortization expense of the leased equipment is included in depreciation expense. As of June 30, 2022 and December 31, 2021, the Company’s outstanding finance lease obligations totaled $71,000 and $102,000, respectively. The effective interest rate of the finance leases is estimated at 6.0% based on the implicit rate in the lease agreements.

13

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

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

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

	June 30,		December 31,
(in thousands)	2022		2021
Computer equipment	$	234	$	256
Less: accumulated depreciation		(167)		(156)
Assets acquired under finance leases, net	$	67	$	100

Operating Leases

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

The Company has operating leases for office space in Tucson, Arizona, Marietta, Georgia, Miami Beach, Florida, and New York, New York. The lease for the principal office located in Tucson consists of approximately 5,200 square feet and ends in October 2022. The lease for the Marietta office, which consists of approximately 6,700 square feet, commenced in June 2019 and expires in August 2024. The lease for the Miami Beach office, which consists of approximately 2,739 square feet, commenced in October 2021 and will expire in May 2024.

The Company entered into a lease agreement for new office space in New York, New York, consisting of approximately 5,000 square feet. The new lease commenced in January 2022 and will expire in December 2026. Upon commencement of the new lease, we recorded a right-of-use asset and corresponding operating lease liability of $876,000.

In addition, the Company entered into membership agreements to occupy shared office space in Austin, Texas, Portland, Oregon, and Seattle, Washington. The membership agreements do not qualify as a lease under ASC 842, therefore the Company expenses membership fees as they are incurred. See Note 5 - Commitments and Contingencies for further details on our shared office arrangements.

The Company made operating lease payments in the amount of $291,000 and $130,000 during the six months ended June 30, 2022 and 2021, respectively.

14

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(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 June 30, 2022 (in thousands):

Year ending June 30,	Finance Leases		Operating Leases		Total
2022 (6 months remaining)	$	28	$	323	$	351
2023		40		528		568
2024		7		362		369
2025		0		219		219
2026		0		225		225
Total minimum lease payments		75		1,657		1,732
Less: present value discount		(4)		(162)		(166)
Total lease liabilities		71		1,495		1,566
Current portion of lease liabilities		48		511		559
Long term portion of lease liabilities	$	23	$	984	$	1,007

The following summarizes expenses associated with our finance and operating leases for the six months ended June 30, 2022 and 2021:

	Six months ended June 30,
(in thousands)	2022			2021
Finance lease expenses:
Depreciation expense	$	29	$	42
Interest on lease liabilities		2		4
Total Finance lease expense		31		46
Operating lease expense		323		128
Short-term lease and related expenses		79		104
Total lease expenses	$	433	$	278

The following table provides information about the remaining lease terms and discount rates applied as of June 30, 2022 and 2021:

	June 30,
	2022	2021
Weighted average remaining lease term (years)
Operating Leases	3.40	2.52
Finance Leases	1.57	2.26
Weighted average discount rate (%)
Operating Leases	6.00	6.00
Finance Leases	6.00	6.00

NOTE 5 — COMMITMENTS AND CONTINGENCIES

Membership agreement to occupy shared office space

The Company occupies shared office space in Austin, TX, and Seattle, WA under membership agreements which end in May 2023 and February 2023, respectively. Fees due under these membership agreements are based on the number of contracted seats and the use of optional office services. As of June 30, 2022, minimum fees due under these shared office arrangements totaled $36,000.

15

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2022

(Unaudited)

NOTE 5 — COMMITMENTS AND CONTINGENCIES (continued)

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.

On October 26, 2020, AudioEye filed a complaint (amended on December 29, 2020) against accessiBe Ltd. (“accessiBe”) in District Court in the Western District of Texas, Waco Division. The complaint alleges infringement of nine of AudioEye’s patents and various claims under the Lanham Act and New York law and seeks damages, costs, and injunctive relief. On November 1, 2021, accessiBe answered denying infringement, alleging invalidity of the patents at issue and counterclaimed with similar claims and remedies. On March 9, 2022, the District Court ordered the case transferred to the Western District of New York.

On July 14, 2021, AudioEye filed a second complaint (amended on August 4, 2021) against accessiBe in the same court alleging infringement of six of AudioEye’s patents and seeking damages, costs, and injunctive relief.

On June 16, 2022, accessiBe filed a complaint against AudioEye in the U.S. District Court for the District of Delaware. The complaint alleges infringement of three of accessiBe’s patents and seeks damages, costs, and injunctive relief.

16

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with our financial statements and related notes in Part I, Item 1 of this report.

As used in this quarterly report, the terms “we,” “us,” “our” and similar references refer to AudioEye, Inc., unless otherwise indicated.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you may be able to identify forward-looking statements by terms such as “may,” “should,” “will,” “forecasts,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential” or “continue,” the negative of these terms and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions and speak only as of the date on which they are made.

Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed in “Part I, Item 1A. Risk Factors” contained in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to:

● the uncertain market acceptance of our existing and future products;

● our need for, and the availability of, additional capital in the future to fund our operations and the development of new products;

● the success, timing and financial consequences of new strategic relationships or licensing agreements we may enter into;

● rapid changes in Internet-based applications that may affect the utility and commercial viability of our products;

● the timing and magnitude of expenditures we may incur in connection with our ongoing product development activities;

● the inherent uncertainties and costs associated with litigation;

● judicial applications of accessibility laws to the internet;

● the adverse impact of the COVID-19 pandemic on our business and results of operations;

● the level of competition from our existing competitors and from new competitors in our marketplace; and

● the regulatory environment for our products and services.

Readers of this report are cautioned not to rely on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This cautionary note is applicable to all forward-looking statements contained in this report.

17

The AudioEye Solutions

At its core, AudioEye’s offering provides an always-on testing, remediation, and monitoring solution that continually improves conformance with WCAG. This in turn helps businesses and organizations comply with WCAG standards as well as applicable U.S. and foreign accessibility laws. Our technology is capable of immediately identifying and fixing most of the common accessibility errors and addresses a wide range of disabilities including dyslexia, color blindness, epilepsy and more. AudioEye also offers additional solutions to provide for enhanced compliance and accessibility, including periodic manual auditing, manual remediations and legal support services. Our solutions may be purchased through a subscription service on a month-to-month basis or with one or multi-year terms. We also offer PDF remediation services and Website and Native Mobile App audit reports to help our customers with their digital accessibility needs.

Intellectual Property

Our intellectual property is primarily comprised of copyrights, trademarks, trade secrets, issued patents and pending patent applications. We have a patent portfolio comprised of twenty-three (23) issued patents in the United States and four (4) pending US patent applications. The commercial value of these patents is unknown.

We plan to continue to invest in research and development and expand our portfolio of proprietary intellectual property.

Our Annual Report filed on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 11, 2022 provides additional information about our business and operations.

Executive Overview

AudioEye is an industry-leading digital accessibility platform delivering website accessibility compliance at all price points to businesses of all sizes. Our solutions advance accessibility with patented technology that reduces barriers, expands access for individuals with disabilities, and enhances the user experience for a broader audience. In the second quarter of 2022 we continued to focus on product innovation and expanding revenue.

We have two sales channels to deliver our product, the Partner and Marketplace channel and the Enterprise channel. AudioEye continues to focus on growth in both channels, while still offering our Website and Native Mobile App and PDF services. On March 9, 2022, AudioEye acquired the Bureau of Internet Accessibility which has contributed to Enterprise revenue in 2022. As of June 30, 2022, Annual Recurring Revenue (“ARR”) was approximately $28.7 million, which represented an increase of 19% year-over-year. Refer to Other Key Operating Metrics below for details on how we calculate ARR.

As of June 30, 2022, AudioEye had approximately 76,000 customers, an increase from 75,000 customers at June 30, 2021. Customer count increased primarily due to continued customer expansion in the Partnership and Marketplace channel. In the three months ended June 30, 2022, revenue from our Partners and Marketplace grew 16% from prior year comparable period. This channel represented about 55% of ARR contribution at the end of June 2022.

In the six months ended June 30, 2022, total Enterprise revenue inclusive of revenue from the Bureau of Internet Accessibility grew by 28% from prior year comparable period. Enterprise revenue from recurring sources increased by 22% in the six months ended June 30, 2022 over prior year comparable period. This increase was driven by both the contribution of BOIA revenue after its March 9, 2022 acquisition and organic growth. The Enterprise channel represented about 45% of ARR contribution at the end of June 2022.

In the three months ended June 30, 2022, one customer (including affiliates of such customer) accounted for 17% of our total revenue. In the three months ended June 30, 2021, two customers accounted for 20% and 10%, respectively, of our total revenue.

The Company continued to invest in Research and Development in the second quarter of 2022. Total Research and Development cost, as defined under Research and Development Expenses below, was 23% of total revenue in Q2 2022. Both Research and Development and Sales and Marketing expense held relatively consistent with the comparable quarter of 2021 while we continued to grow revenue and gross profit.

We provide further commentary on our Results of Operation below.

18

Results of Operations

Our unaudited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP” or “GAAP”). The discussion of the results of our operations compares the three and six months ended June 30, 2022 with the three and six months ended June 30, 2021.

Our results of operations in these interim periods are not necessarily indicative of the results which may be expected for any subsequent period. Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.

	Three months ended June 30,				Change
(in thousands)	2022		2021		$		%
Revenue	$	7,569	$	6,021	$	1,548	26	%
Cost of revenue		(1,841)		(1,512)		(329)	22	%
Gross profit		5,728		4,509		1,219	27	%
Operating expenses:
Selling and marketing		3,425		3,380		45	1	%
Research and development		1,406		1,307		99	8	%
General and administrative		3,505		2,917		588	20	%
Total operating expenses		8,336		7,604		732	10	%
Operating loss		(2,608)		(3,095)		487	(16)	%
Other income (expense):
Gain on loan forgiveness		—		1,316		(1,316)	(100)	%
Interest expense		(2)		(5)		3	(60)	%
Total other income (expense)		(2)		1,311		(1,313)	(100)	%
Net loss	$	(2,610)	$	(1,784)	$	(826)	46	%

	Six months ended June 30,				Change
(in thousands)	2022		2021		$		%
Revenue	$	14,475	$	11,809	$	2,666	23	%
Cost of revenue		(3,551)		(2,865)		(686)	24	%
Gross profit		10,924		8,944		1,980	22	%
Operating expenses:
Selling and marketing		7,151		6,134		1,017	17	%
Research and development		2,935		2,339		596	25	%
General and administrative		7,061		6,327		734	12	%
Total operating expenses		17,147		14,800		2,347	16	%
Operating loss		(6,223)		(5,856)		(367)	6	%
Other income (expense):
Gain on loan forgiveness		—		1,316		(1,316)	(100)	%
Interest expense		(3)		(9)		6	(67)	%
Total other income (expense)		(3)		1,307		(1,310)	(100)	%
Net loss	$	(6,226)	$	(4,549)	$	(1,677)	37	%

Revenue

The following tables present our revenues disaggregated by sales channel:

	Three months ended June 30,				Change
(in thousands)	2022		2021		$		%
Partner and Marketplace	$	3,912	$	3,374	$	538	16	%
Enterprise		3,657		2,647		1,010	38	%
Total revenues	$	7,569	$	6,021	$	1,548	26	%

19

	Six months ended June 30,				Change
(in thousands)	2022		2021		$		%
Partner and Marketplace	$	7,724	$	6,552	$	1,172	18	%
Enterprise		6,751		5,257		1,494	28	%
Total revenues	$	14,475	$	11,809	$	2,666	23	%

Partner and Marketplace channel consists of our CMS partners, platform & agency partners, authorized resellers and the Marketplace. This channel serves small & medium sized businesses that are on a partner or reseller’s web-hosting platform or that purchase our solutions from our Marketplace and revenue from BOIA acquired in March 2022.

Enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites, who generally engage directly with AudioEye sales personnel for custom pricing and solutions. This channel also includes federal, state and local government agencies.

For the three and six months ended June 30, 2022, total revenue increased by 26% and 23%, respectively, over the prior year comparable periods. We experienced revenue growth in both of our sales channels. The increase Partner and Marketplace channel revenue was a result of our continued focus on highly transactional industry verticals to achieve higher penetration with new and existing partnerships. The increase in Enterprise channel revenue was driven primarily by contributions from BOIA’s recurring support and non-recurring audit report revenue, as well as additional recurring revenue from our current Enterprise offering. Our Enterprise channel revenue from recurring sources were 27% and 22% higher in the three and six months ended June 30, 2022, respectively, than in the prior year comparable periods.

Cost of Revenue and Gross Profit

	Three months ended June 30,				Change
(in thousands)	2022		2021		$		%
Revenue	$	7,569	$	6,021	$	1,548	26	%
Cost of Revenue		(1,841)		(1,512)		(329)	22	%
Gross profit	$	5,728	$	4,509	$	1,219	27	%

	Six months ended June 30,				Change
(in thousands)	2022		2021		$		%
Revenue	$	14,475	$	11,809	$	2,666	23	%
Cost of Revenue		(3,551)		(2,865)		(686)	24	%
Gross profit	$	10,924	$	8,944	$	1,980	22	%

Cost of revenue consists primarily of compensation and related benefits costs for our customer experience team, as well as a portion of our technology operations team that supports the delivery of our services, fees paid to our managed hosting and other third-party service providers, amortization of capitalized software development costs and patent costs, and allocated overhead costs.

For the three and six months ended June 30, 2022, cost of revenue increased by 22% and 24%, respectively, over the prior year comparable periods. The increase in cost of revenue is primarily due to enhancements to our service delivery through investment in customer experience and platform support, costs associated with acquired BOIA operations, as well as increased amortization of capitalized software development costs.

For the three and six months ended June 30, 2022, gross profit increased by 27% and 22%, respectively, over the prior year comparable periods. The increase in gross profit was a result of increased revenue, offset in part by higher costs to support the revenue growth.

Selling and Marketing Expenses

	Three months ended June 30,				Change
(in thousands)	2022		2021		$		%
Selling and marketing	$	3,425	$	3,380	$	45	1	%

20

	Six months ended June 30,				Change
(in thousands)	2022		2021		$		%
Selling and marketing	$	7,151	$	6,134	$	1,017	17	%

Selling and marketing expenses consist primarily of compensation and benefits related to our sales and marketing staff, as well as third-party advertising and marketing expenses.

For the three and six months ended June 30, 2022, selling and marketing expenses increased by 1% and 17% over the prior year comparable periods. The increase in selling and marketing expenses resulted primarily from the acquisition of BOIA, as well as higher personnel costs associated with the increase in headcount and in stock-based compensation expense and was partially offset by the reduction in online media and third-party marketing agency expenses.

Research and Development Expenses

	Three months ended June 30,				Change
(in thousands)	2022		2021		$		%
Research and development expense	$	1,406	$	1,307	$	99	8	%
Plus: Capitalized research and development cost		324		597		(273)	(46)	%
Total research and development cost	$	1,730	$	1,904	$	(174)	(9)	%

	Six months ended June 30,				Change
(in thousands)	2022		2021		$		%
Research and development expense	$	2,935	$	2,339	$	596	25	%
Plus: Capitalized research and development cost		565		843		(278)	(33)	%
Total research and development cost	$	3,500	$	3,182	$	318	10	%

Research and development (“R&D”) expenses consist primarily of compensation and related benefits, independent contractor costs, and an allocated portion of general overhead costs, including occupancy costs related to our employees involved in research and development activities. Total research and development cost includes the amount of research and development expense reported within operating expenses as well as development cost that was capitalized during the fiscal period.

For the three and six months ended June 30, 2022, research and development expenses increased by 8% and 25%, respectively, over the prior year comparable periods. This increase was driven by less capitalized research and development costs, and was partially offset by lower stock-based compensation in the three months ended June 30, 2022. In the six months ended June 30, 2022, higher personnel cost associated with the increase in headcount also contributed to the increase. For the three and six months ended June 30, 2022, capitalized research and development cost decreased by 46% and 33%, respectively, over the prior year comparable periods. This decrease is attributable to specific projects and products developed and the allocation of time spent on those projects. For the three months ended June 30, 2022, total research and development cost, which includes both R&D expenses and capitalized R&D costs, decreased by 9% over the prior year comparable period. For the six months ended June 30, 2022, total research and development cost increased by 10% over the prior year comparable period.

General and Administrative Expenses

	Three months ended June 30,				Change
(in thousands)	2022		2021		$		%
General and administrative	$	3,505	$	2,917	$	588	20	%

	Six months ended June 30,				Change
(in thousands)	2022		2021		$		%
General and administrative	$	7,061	$	6,327	$	734	12	%

General and administrative expenses consist primarily of compensation and benefits related to our executives, directors and corporate support functions, general corporate expenses including legal fees, and occupancy costs.

21

For the three and six months ended June 30, 2022, general and administrative expenses increased by 20% and 12%, respectively over the prior year comparable periods. The increase in general and administrative expenses was due primarily to higher legal expenses associated with patent litigation pursued by the Company, the change in fair value of contingent consideration, as well as higher personnel costs and professional fees incurred in connection with the BOIA acquisition in the first quarter of 2022, and was partially offset by the decrease in stock-based compensation expense.

Gain on loan forgiveness

	Three and six months ended
	June 30,				Change
(in thousands)	2022		2021		$		%
Gain on loan forgiveness	$	—	$	1,316	$	(1,316)	(100)	%

In the second quarter of 2021, we recorded a $1,316,000 gain on loan forgiveness in connection with the full forgiveness of the outstanding principal and interest on our PPP Loan.

Interest Expense

	Three months ended June 30,				Change
(in thousands)	2022		2021		$		%
Interest expense	$	2	$	5	$	(3)	(60)	%

	Six months ended June 30,				Change
(in thousands)	2022		2021		$		%
Interest expense	$	3	$	9	$	(6)	(67)	%

Interest expense for the three and six months ended June 30, 2022 consists of interest on our finance lease liabilities. Interest expense for the three and six months ended June 30, 2021 also included interest on our PPP Loan, which was fully forgiven in the second quarter of 2021.

Key Operating Metrics

We consider annual recurring revenue (“ARR”) as a key operating metric and a key indicator of our overall business. We also use ARR as one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations.

We define ARR as the sum of (i) for our Enterprise channel, the total of the annual recurring fee amount under each active paid contract at the date of determination, plus (ii) for our Partner and Marketplace channel, the recognized monthly fee amount for all paying customers at the date of determination, in each case, assuming no changes to the subscription, multiplied by 12. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are cancelable, which may impact future ARR. ARR excludes revenue from our PDF remediation services business and Website and Mobile App report business and other report services. As of June 30, 2022, ARR was $28.7 million, which represents an increase of 19% year-over-year, driven by both our Partner and Marketplace channel and Enterprise channel.

Use of Non-GAAP Financial Measures

From time to time, we review adjusted financial measures that assist us in comparing our operating performance consistently over time, as such measures remove the impact of certain items, as applicable, such as our capital structure (primarily interest charges), items outside the control of the management team (taxes), and expenses that do not relate to our core operations, including transaction-related expenses and other costs that are expected to be non-recurring. In order to provide investors with greater insight, and allow for a more comprehensive understanding of the information used in our financial and operational decision-making, the Company has supplemented the Financial Statements presented on a GAAP basis in this Quarterly Report on Form 10-Q with the following non-GAAP financial measures: Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share.

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These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.

Non-GAAP Earnings (Loss) and Non-GAAP Earnings (Loss) per Diluted Share

We define: (i) Non-GAAP earnings (loss) as net income (loss), plus interest expense, plus depreciation and amortization expense, plus stock-based compensation expense, plus non-cash valuation adjustment to contingent consideration, plus certain litigation expense, plus certain acquisition expense, plus loss on impairment of long-lived assets, plus loss on disposal of property and equipment, and less gain on loan forgiveness; and (ii) Non-GAAP earnings (loss) per diluted share as net income (loss) per diluted common share, plus interest expense, plus depreciation and amortization expense, plus stock-based compensation expense, plus non-cash valuation adjustment to contingent consideration, plus certain litigation expense, plus certain acquisition expense, plus loss on impairment of long-lived assets, plus loss on disposal of property and equipment, and less gain on loan forgiveness, each on a per share basis. Non-GAAP earnings per diluted share would include incremental shares in the share count that are considered anti-dilutive in a GAAP net loss position. However, no incremental shares apply when there is a Non-GAAP loss per diluted share, as is the case for the periods presented in this Quarterly Report on Form 10-Q.

Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. All of the items adjusted in the Non-GAAP earnings (loss) to net loss and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, such as stock-based compensation expense and valuation adjustments to assets and liabilities, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are expected to be less susceptible to variances in actual performance resulting from expenses that do not relate to our core operations and are more reflective of other factors that affect operating performance. In the case of items that do not relate to our core operations, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

Non-GAAP earnings (loss) is not a measure of liquidity under GAAP, or otherwise, and is not an alternative to cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned above. Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share, as disclosed in this Quarterly Report on Form 10-Q, have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use.

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To properly and prudently evaluate our business, we encourage readers to review the GAAP financial statements included elsewhere in this Quarterly Report on Form 10-Q, and not rely on any single financial measure to evaluate our business. The following table sets forth reconciliations of Non-GAAP loss to net loss, the most directly comparable GAAP-based measure, as well as Non-GAAP loss per diluted share to net loss per diluted share, the most directly comparable GAAP-based measure.

	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2022		2021		2022		2021
Non-GAAP Earnings (Loss) Reconciliation
Net loss (GAAP)	$	(2,610)	$	(1,784)	$	(6,226)	$	(4,549)
Non-cash valuation adjustment to contingent consideration		158		—		158		—
Interest expense		2		5		3		9
Stock-based compensation expense		1,041		1,763		2,186		3,544
Acquisition expense (1)		42		—		240		—
Litigation expense (2)		499		367		1,361		594
Depreciation and amortization		622		317		1,009		600
Loss on impairment of long-lived assets		—		—		—		10
Loss on disposal of property and equipment		7		5		7		12
Gain on loan forgiveness		—		(1,316)		—		(1,316)
Non-GAAP loss	$	(239)	$	(643)	$	(1,262)	$	(1,096)
Non-GAAP Earnings (Loss) per Diluted Share Reconciliation
Net loss per common share (GAAP) — diluted	$	(0.23)	$	(0.17)	$	(0.54)	$	(0.43)
Non-cash valuation adjustment to contingent consideration		0.01		—		0.01		—
Interest expense		—		—		—		—
Stock-based compensation expense		0.09		0.16		0.19		0.33
Acquisition expense (1)		—		—		0.02		—
Litigation expense (2)		0.04		0.03		0.12		0.06
Depreciation and amortization		0.05		0.03		0.09		0.06
Loss on impairment of long-lived assets		—		—		—		—
Loss on disposal of property and equipment		—		—		—		—
Gain on loan forgiveness		—		(0.12)		—		(0.12)
Non-GAAP loss per diluted share (3)	$	(0.02)	$	(0.06)	$	(0.11)	$	(0.10)
Diluted weighted average shares (4)		11,489		10,992		11,467		10,726

(1) Represents legal and accounting fees associated with the BOIA acquisition.

(2) Represents legal expenses related primarily to patent litigation pursued by the Company.

(3) Non-GAAP earnings per adjusted diluted share for our common stock is computed using the more dilutive of the two-class method or the if-converted method.

(4) The number of diluted weighted average shares used for this calculation is the same as the weighted average common shares outstanding share count when the Company reports a GAAP and non-GAAP net loss.

Liquidity and Capital Resources

Working Capital

As of June 30, 2022, we had $9,251,000 in cash and working capital of $3,321,000. The decrease in working capital in the six months ended June 30, 2022 was primarily due to the acquisition of BOIA, for which we made an initial payment of $4.7 million and recognized $0.8 million in noncurrent contingent liability. In addition, in the six months ended June 30, 2022, we repurchased $0.4 million of shares our common stock under a program to repurchase up to $3.0 million of our outstanding shares.

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As of June 30, 2022, we had $2.8 million in estimated contingent consideration liabilities recognized in connection with the acquisition of BOIA. We have no debt obligations or off-balance sheet arrangements and we believe that the Company has sufficient liquidity to continue as a going concern through the next twelve months.

While the Company has been successful in raising capital, there is no assurance that it will be successful at raising additional capital in the future. Additionally, if the Company’s plans are not achieved and/or if significant unanticipated events occur, the Company may have to further modify its business plan, which may require us to raise additional capital or reduce expenses.

(in thousands)	June 30, 2022		December 31, 2021
Current assets	$	15,152	$	24,831
Current liabilities		(11,831)		(11,216)
Working capital	$	3,321	$	13,615

Cash Flows

	Six months ended June 30,
(in thousands)	2022		2021
Net cash provided by (used in) operating activities	$	(3,646)	$	67
Net cash used in investing activities		(5,338)		(893)
Net cash provided by (used in) financing activities		(731)		16,482
Net increase (decrease) in cash	$	(9,715)	$	15,656

For the six months ended June 30, 2022, in relation to the prior year comparable period, cash used in operating activities increased primarily due to an increase in headcount and compensation costs to support the Company’s growth, higher patent litigation costs, and timing of customer collections and vendor payments.

For the six months ended June 30, 2022, in relation to the prior year comparable period, cash used in investing activities increased primarily due to the acquisition of BOIA, for which we paid $4.7 million, net of cash acquired.

For the six months ended June 30, 2021, cash provided by financing activities was higher primarily due to capital raised under the ATM Offering initiated in the first quarter of 2021. In the six months ended June 30, 2021, the Company issued 471,970 shares of its common stock under the ATM offering and raised $16,534,000, net of transaction expenses. In addition, in the six months ended June 30, 2022, we repurchased $410,000 of shares our common stock.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported and disclosed in our financial statements and the accompanying notes. Actual results could differ materially from these estimates under different assumptions or conditions.

Our critical accounting estimates, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, relate to stock-based compensation. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that there is reasonable assurance that the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Exchange Act Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, projections of any evaluation of effectiveness of our disclosure controls and procedures to future periods are subject to the risk that controls or procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls or procedures may deteriorate.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2022.

Changes in Internal Controls over Financial Reporting

During the quarter ended June 30, 2022, there were no material changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On October 26, 2020, AudioEye filed a complaint (amended on December 29, 2020) against accessiBe Ltd. (“accessiBe”) in District Court in the Western District of Texas, Waco Division. The complaint alleges infringement of nine of AudioEye’s patents and various claims under the Lanham Act and New York law and seeks damages, costs, and injunctive relief. On November 1, 2021, accessiBe answered denying infringement, alleging invalidity of the patents at issue and counterclaimed with similar claims and remedies. On March 9, 2022, the District Court ordered the case transferred to the Western District of New York.

On July 14, 2021, AudioEye filed a second complaint (amended on August 4, 2021) against accessiBe in the same court alleging infringement of six of AudioEye’s patents and seeking damages, costs, and injunctive relief.

On June 16, 2022, accessiBe filed a complaint against AudioEye in the U.S. District Court for the District of Delaware. The complaint alleges infringement of three of accessiBe’s patents and seeks damages, costs, and injunctive relief.

Item 1A. Risk Factors

You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”), which could materially affect our business, financial condition and results of operations. The risks described in our 2021 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Item 2. Issuer Purchases of Equity Securities

The following table sets forth information with respect to our repurchases of common stock during the three months ended June 30, 2022:

					Maximum Number
				Total Number of	of Shares (or
				Shares Purchased	Approximate Dollar Value)
	Total Number of			as Part of Publicly	that May Yet Be Purchased
	Shares Purchased	Average Price		Announced Plans or	under the Plans or
	(1)	Paid per Share (2)		Programs	Programs (3)
April 1 - April 30	6,935	$	5.51	—	$	—
May 1 - May 31	3,632		3.27	—		—
June 1 - June 30	96,130		5.12	78,597		2,590,000
Total	106,697	$	5.08	78,597	$	2,590,000

(1) Amount includes shares surrendered by employees to satisfy tax withholding obligations in connection with the settlement restricted stock units, the exercise of stock options, or the issuance of unrestricted shares of common stock.

(2) Average Price Paid Per Share includes commissions.

(3) In June 2022, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $3 million of our common stock through June 30, 2024. The stock repurchase program may be suspended or discontinued at any time and does not obligate the Company to repurchase any dollar amount or particular number of shares of stock. Shares repurchased under the program will be subsequently retired.

Item 5. Other Information

The following information is being provided in this Item 5 in lieu of being provided on a Current Report on Form 8-K under Item 5.03:

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Certificate of Elimination

On August 8, 2022, the Company filed a Certificate of Elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware. The Certificate of Elimination, which was effective upon filing, eliminated from the Company’s Certificate of Incorporation all references related to the Company’s Series A Convertible Preferred Stock, par value $0.00001 per share, which had been set forth in a Certificate of Designations filed on May 4, 2015 and corrected by the Certificate of Correction to the Certificate of Validation filed on June 23, 2021. The foregoing description of the Certificate of Elimination does not purport to be complete and is qualified in its entirety by reference to the Certificate of Elimination, which is filed as Exhibit 3.4 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

Restated Certificate of Incorporation

On August 8, 2022, the Company filed with the Secretary of State of the State of Delaware a Restated Certificate of Incorporation, which restates and integrates into a single document all previous amendments to, but does not further amend, the Company’s Certificate of Incorporation. The foregoing description of the Restated Certificate of Incorporation is qualified in its entirety by reference to the Restated Certificate of Incorporation, which is filed as Exhibit 3.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

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Item 6. Exhibits

Exhibit  No.	Description
3.1*	Restated Certificate of Incorporation of AudioEye, Inc., dated as of August 8, 2022
3.2	Certificate of Designations - Series A Convertible Preferred Stock (1)
3.3	Certificate of Correction to the Certificate of Validation relating to the Series A Convertible Preferred Stock (2)
3.4*	Certificate of Elimination of the Series A Convertible Preferred Stock, dated as of August 8, 2022
3.5	Amended and Restated ByLaws as of August 13, 2020 (3)
10.1	AudioEye, Inc. 2020 Equity Incentive Plan, as amended through May 20, 2022 (4)
10.2	AudioEye, Inc. Employee Stock Purchase Plan (4)
10.3	Amended and Restated Employment Agreement by and between AudioEye, Inc. and David Moradi, dated April 5, 2022 (5)
10.4	Separation Agreement and Release dated as of April 15, 2022, between AudioEye, Inc. and Christopher Hundley (6)
31.1*	Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)

* Filed herewith.

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(1)Incorporated by reference to Form 10-K, filed with the SEC on March 30, 2020.

(2)Incorporated by reference to Form 8-K, filed with the SEC on June 25, 2021.

(3)Incorporated by reference to Form 8-K/A, filed with the SEC on September 24, 2020.

(4)Incorporated by reference to Form 8-K, filed with the SEC on May 24, 2022.

(5) Incorporated by reference to Form 8-K, filed with the SEC on April 8, 2022.

(6) Incorporated by reference to Form 8-K, filed with the SEC on April 15, 2022.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AUDIOEYE, INC.
Date:	August 9, 2022	By:	/s/ David Moradi
			David Moradi
			Principal Executive Officer
Date:	August 9, 2022	By:	/s/ Kelly Georgevich
			Kelly Georgevich
			Principal Financial Officer

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