The financial information set forth below
with respect to the financial statements as of June 30, 2020 and December 31, 2019 and for the three-month and six-month periods
ended June 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 six-month periods ended June 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, footnotes, 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
JUNE 30, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BASIS
OF PRESENTATION
The accompanying unaudited interim financial
statements of AudioEye, Inc. (the “Company”) have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission
(the “SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on March
30, 2020.
In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations
for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. 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.
Corporate Information and Background
AudioEye, Inc. (“we”,
“our” or the “Company”) was incorporated on May 20, 2005 in the state of Delaware. The Company has
developed patented, Internet content publication and distribution software that enables conversion of media into accessible
formats and allows for real time distribution to end users on any Internet connected device. The Company’s focus is to create
more comprehensive access to Internet and other media to all people regardless of their network connection, device, location, or
disabilities.
The Company is focused on developing innovations
in the field of networked and device embedded technology. Our intellectual property is primarily comprised of trade secrets, trademarks,
issued, published and pending patent applications, copyrights and technological innovations. We have a patent portfolio comprised
of eight issued patents in the United States. We also have two pending patent applications and two international patent applications
filed via the Patent Cooperation Treaty (“PCT”) and the European Patent Office. The patents have been extended and
cover a period from 2002 through 2026. We have a trademark portfolio comprised of eight United States trademark registrations.
Our common stock has been listed on the
NASDAQ Capital Market under the symbol “AEYE” since September 4, 2018. Prior to September 4, 2018, our common stock
was quoted on the OTCQB and the OTC Bulletin Board beginning on April 15, 2013 under the same symbol.
In April 2020, the Company filed a shelf
registration statement on Form S-3 with the SEC to register the sale, in future offerings, of up to $7,000,000 in the aggregate
of debt securities, common stock, preferred stock, warrants, rights or units consisting of any two or more of such securities.
We intend to use the net proceeds of any offering of securities sold by us under the registration statement for general corporate
purposes, which may include acquisitions, repayment of debt, capital expenditures and working capital requirements.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 (Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are presented in “Note 3 –
Significant Accounting Policies” in the fiscal year 2019 Annual Report on 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 Annual Report
on 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 in the financial statements
and accompanying notes. 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.
|
We generate substantially all our revenue
from Software as a Service (“SaaS”), which are comprised of 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 advanced 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:
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Direct (Enterprise)
|
|
$
|
5,312
|
|
|
$
|
3,287
|
|
Indirect (Vertical partners)
|
|
|
4,200
|
|
|
|
1,134
|
|
Other
|
|
|
32
|
|
|
|
-
|
|
Total revenues
|
|
$
|
9,544
|
|
|
$
|
4,421
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 (Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 revenues include 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 compares the deferred revenue
balance as of June 30, 2020 versus December 31, 2019:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Deferred revenue
|
|
$
|
5,246
|
|
|
$
|
5,525
|
|
As of June 30, 2020, $5,078,000 was classified
as short-term deferred revenue and is expected to be recognized over the next twelve months following June 30, 2020. The remaining
$168,000 is long-term deferred revenue to be recognized thereafter. In the six-month period ended June 30, 2020 we recognized $3,762,000,
or 68%, in revenue from deferred revenues outstanding as of December 31, 2019.
The Company had one customer (including
affiliates of such customer) which generated 16% and 17% of the Company’s revenue in each of the three and six months ended
June 30, 2020, respectively, and 10% and 11% of the Company’s revenue in the three and six months ended June 30, 2019, respectively.
At June 30, 2020 and December 31, 2019,
the Company had one customer representing 13% and 40%, respectively, of the outstanding accounts receivable.
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.
The table below summarizes the activity
within the deferred commission costs account for the six months ended June 30, 2020:
|
|
December 31,
2019
|
|
|
Commission
Costs Deferred
|
|
|
Commission
Amortized
|
|
|
June 30,
2020
|
|
|
|
(in thousands)
|
|
Deferred costs, short term
|
|
$
|
183
|
|
|
$
|
112
|
|
|
$
|
(111
|
)
|
|
$
|
184
|
|
Deferred costs, long term
|
|
|
145
|
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
123
|
|
Deferred commission costs
|
|
$
|
328
|
|
|
$
|
90
|
|
|
$
|
(111
|
)
|
|
$
|
307
|
|
Amortization expense associated with sales commissions was included
in selling and marketing expenses on the consolidated statements of operations and totaled $55,000 and $111,000, respectively,
for the three- and six-month periods ended June 30, 2020, and $57,000 and $108,000, respectively, for the three- and six-month
periods ended June 30, 2019. There were no impairment losses for these capitalized costs for the three and six months ended June
30, 2020 and 2019.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 (Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 (such as risk-free rate of interest) and historical (such as volatility factor, expected term, and forfeiture rates)
data. 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.
The fair value of RSUs is based on the
market closing price per share on the date of grant. We expense the compensation cost of these awards as the restriction period
lapses, which is typically a one- to three-year service period to the Company.
In the three- and six-month periods ending
June 30, 2020, we awarded 76,192 options, and 339,667 and 354,667 RSUs, respectively, to employees, officers,
and consultants of the of the Company.
In the three- and six-month periods ending June 30, 2020, no
warrants were issued and no stock compensation expense was incurred. As of June 30, 2020, there was no remaining unamortized stock-based
compensation expense related to warrants.
The following table summarizes the stock
compensation expense for the three and six months ended June 30, 2020 and 2019:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Stock Options
|
|
$
|
36
|
|
|
$
|
94
|
|
|
$
|
121
|
|
|
$
|
167
|
|
RSUs
|
|
|
623
|
|
|
|
181
|
|
|
|
794
|
|
|
|
557
|
|
Total
|
|
$
|
659
|
|
|
$
|
275
|
|
|
$
|
915
|
|
|
$
|
724
|
|
As of June 30, 2020, the outstanding unamortized
stock compensation expense related to options and RSUs was $921,000 and $2,684,000, respectively, which will be recognized through
June 2023.
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated
by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s
common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could
occur if our share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of
our share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the
hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental
shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive,
are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible preferred stock is computed
using the if-converted method, which assumes conversion at the beginning of the year. However, when a net loss exists, no potential
common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in
an anti-dilutive per-share amount.
Potentially dilutive securities excluded
from the computation of basic and diluted net earnings (loss) per share for the six months ended June 30, 2020 and 2019 are as
follows:
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Preferred stock
|
|
|
287
|
|
|
|
289
|
|
Options to purchase common stock
|
|
|
749
|
|
|
|
955
|
|
Warrants to purchase common stock
|
|
|
283
|
|
|
|
1,648
|
|
Restricted stock units
|
|
|
752
|
|
|
|
223
|
|
Total
|
|
|
2,071
|
|
|
|
3,115
|
|
The following table summarizes the stock
options activity for the six months ended June 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
|
|
|
76,192
|
|
|
|
7.98
|
|
|
|
5.00
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(212,428
|
)
|
|
|
1.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(79,316
|
)
|
|
|
9.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
749,491
|
|
|
$
|
4.10
|
|
|
|
2.69
|
|
|
|
548,980
|
|
|
$
|
4,429,076
|
|
The following table summarizes the restricted
stock unit activity for the six months ended June 30, 2020:
Restricted stock units issued as of December 31, 2019
|
|
|
428,919
|
|
Granted
|
|
|
354,667
|
|
Forfeited/Canceled
|
|
|
(31,214
|
)
|
Total Restricted stock units issued at June 30, 2020
|
|
|
752,372
|
|
Vested at June 30, 2020
|
|
|
303,321
|
|
Unvested restricted stock units as of June 30, 2020
|
|
|
449,051
|
|
The following table summarizes the warrants
activity for the six months ended June 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
|
|
|
(120,000
|
)
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(22,188
|
)
|
|
|
9.59
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
282,520
|
|
|
$
|
5.53
|
|
|
|
0.54
|
|
|
$
|
1,263,867
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 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 has no assets measured at fair
value on a recurring basis as of June 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
|
|
|
|
Fair Value
|
|
|
Hierarchy
|
|
|
|
(in thousands)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Warrant liability (1), June 30, 2020
|
|
$
|
593
|
|
|
|
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.
|
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
JUNE 30, 2020 (Unaudited)
NOTE 3 — GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of June 30, 2020, the Company had cash
and cash equivalents of $2,130,000 and a working capital deficit of $1,893,000. In addition, the Company used actual net cash in
operations of $791,000 during the six-month period ended June 30, 2020. The Company has incurred net losses since inception. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern.
On August 14, 2019, the Company entered
into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC, a stockholder who owns more than 10% of the outstanding
shares of common stock of the Company. The beneficial owner of Sero Capital LLC is David Moradi, who became a director of the Company
on November 8, 2019. The Loan Agreement provides the Company with an unsecured credit facility under which the Company may borrow
up to the aggregate principal amount of $2,000,000. Any advances under the Loan Agreement will bear interest at a per annum rate
of 10.0% (subject to increase in the event of a default), which is payable monthly and may, at the Company’s option, be paid
either in cash or by the issuance of shares of the Company’s common stock. The term of the Loan Agreement extends through
August 14, 2020, subject to earlier termination as provided in the Loan Agreement. No amounts have been drawn under the Loan Agreement
as of June 30, 2020. In consideration of the Loan Agreement, the Company issued to Sero Capital LLC a common stock warrant to acquire
up to a total of 146,667 shares of the Company’s common stock at an exercise price of $6.00 per share, which exercise price
may be paid in cash or, at the election of the holder, in a cashless, or “net,” exercise transaction. The warrant expires
on August 14, 2020.
On April 15, 2020, the Company entered
into an agreement in the amount of $1,302,000 with Liberty Capital Bank (“Term Loan”) pursuant to the Paycheck Protection
Program (“PPP”) of the CARES Act, which is administered by the Small Business Administration (“SBA”). The
Loan has been funded. Loan interest payments are deferred for six months. The loan has a maturity of two years and an interest
rate of 1.0% per annum. The loan is not collateralized and is not personally guaranteed. No fees were charged in connection with
the loan. The Company intends to use all proceeds from the Loan to fund payroll and pay for occupancy costs. All or a portion of
the Loan may be forgiven upon application by the Company in accordance with the SBA requirements.
In April 2020, the Company filed a registration
statement on Form S-3 with SEC to register the sale, in future offerings, of up to $7,000,000 in the aggregate of debt securities,
common stock, preferred stock, warrants, rights or units consisting of any two or more of such securities. We intend to use the
net proceeds of any offering of securities sold under the registration statement or otherwise for general corporate purposes, which
may include acquisitions, repayment of debt, capital expenditures and working capital requirements.
The Company expects that cash flows from
operations will continue to be negative in the near future. The company expects to become cash flow positive, under normal economic
circumstances, in 2021. The Company may need to raise additional funds through debt or equity financing if its operating plan doesn’t
come to fruition. If the Company is unsuccessful in raising additional financing, it will need to reduce operating costs in the
future.
Accordingly, the accompanying financial
statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and
the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and
liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The
financial statements do not include any adjustment that might result from the outcome of this uncertainty.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 (Unaudited)
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,
2020 and December 31, 2019, the Company’s outstanding finance lease obligations totaled $97,000 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 right
of use assets under finance leases included in property and equipment:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Computer equipment
|
|
$
|
177
|
|
|
$
|
157
|
|
Less: accumulated depreciation
|
|
|
(86
|
)
|
|
|
(60
|
)
|
|
|
$
|
91
|
|
|
$
|
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 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 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 recognizes expenses membership fees as incurred. In addition,
the membership agreement for the New York office continues on a month-to-month basis. See Note 11 – Commitments and Contingencies
for further details on our shared office arrangements.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 (Unaudited)
NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS
(continued)
The Company has made operating lease payments
in the amount of $127,000 during the six months ended June 30, 2020.
The following summarizes the total lease liabilities and remaining
future minimum lease payments at June 30, 2020 (in thousands):
Year ending December 31,
|
|
Finance Leases
|
|
|
Operating Leases
|
|
|
Total
|
|
2020
|
|
$
|
33
|
|
|
$
|
128
|
|
|
$
|
161
|
|
2021
|
|
|
52
|
|
|
|
262
|
|
|
|
314
|
|
2022
|
|
|
17
|
|
|
|
257
|
|
|
|
274
|
|
2023
|
|
|
1
|
|
|
|
118
|
|
|
|
119
|
|
2024
|
|
|
-
|
|
|
|
81
|
|
|
|
81
|
|
Total minimum lease payments
|
|
|
103
|
|
|
|
846
|
|
|
|
949
|
|
Less: present value discount
|
|
|
(6
|
)
|
|
|
(84
|
)
|
|
|
(90
|
)
|
Total lease liabilities
|
|
|
97
|
|
|
|
762
|
|
|
|
859
|
|
Current portion of lease liabilities
|
|
|
60
|
|
|
|
218
|
|
|
|
278
|
|
Long term portion of lease liabilities
|
|
$
|
37
|
|
|
$
|
544
|
|
|
$
|
581
|
|
The following summarizes lease expenses for the six months ended
June 30, 2020 (in thousands):
Finance lease expenses:
|
|
|
|
|
Depreciation expense
|
|
$
|
26
|
|
Interest on lease liabilities
|
|
|
3
|
|
Total Finance lease expense
|
|
|
29
|
|
Operating lease expense
|
|
|
128
|
|
Short-term lease and related expenses
|
|
|
64
|
|
Total lease expenses
|
|
$
|
221
|
|
The following table provides information about the remaining
lease terms and discount rates applied as of June 30, 2020:
Weighted average remaining lease term (years)
|
|
|
|
|
Operating Leases
|
|
|
3.41
|
|
Finance Leases
|
|
|
1.82
|
|
Weighted average discount rate (%)
|
|
|
|
|
Operating Leases
|
|
|
6.00
|
|
Finance Leases
|
|
|
6.00
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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, a stockholder who owns more than 10% of the outstanding
shares of common stock of the Company. The beneficial owner of Sero Capital LLC is David Moradi, who became a director of the Company
on November 8, 2019. The Loan Agreement provides the Company with an unsecured credit facility under which the Company may borrow
up to the aggregate principal amount of $2,000,000. Any advances under the Loan Agreement will bear interest at a per annum rate
of 10% (subject to increase in the event of a default), which is payable monthly and may, at the Company’s option, be paid
either in cash or by the issuance of shares of the Company’s common stock. The term of the Loan Agreement extends through
August 14, 2020, subject to earlier termination as provided in the Loan Agreement. The Company’s obligations under the Loan
Agreement are subject to acceleration upon the occurrence of an event of default (as defined in the Loan Agreement). The Company
may prepay its obligations under the Loan Agreement without penalty, but subject to certain limitations regarding the number, timing
and dollar amounts of prepayments. The Loan Agreement provides for certain customary covenants, representations and events of default.
No amounts have been drawn under the Loan Agreement as of June 30, 2020.
In consideration of the Loan Agreement,
the Company issued to Sero Capital LLC a 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 exercise price may be paid in cash or, at the election of the holder,
in a cashless, or “net,” exercise transaction. The warrants expire on August 14, 2020 and are classified as a liability
instrument since the holder has the option to require the Company to repurchase the warrants when certain events occur that are
considered outside of the control of the Company. The estimated fair value of the Sero Capital LLC warrant was $219,000 at date
of issuance and included as debt issuance costs in current assets on the consolidated balance sheet. The unamortized balance of
debt issuance costs was $27,000 on June 30, 2020.
Term
loan
On April 15, 2020, the Company entered
into a loan agreement in the amount of $1,302,000 with Liberty Capital Bank pursuant to the Paycheck Protection Program (“PPP
Loan”) of the CARES Act, which is administered by the Small Business Administration (“SBA”). Loan interest payments
are deferred for six months. 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 June 30, 2020, outstanding
principal balance totaled $1,302,000 and was classified as long term liability on the consolidated balance sheets.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 (Unaudited)
NOTE 6 — SERIES A CONVERTIBLE PREFERRED STOCK
As of June 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 was issued at $10 per share, paying a 5% cumulative annual dividend, and convertible into the Company’s
common stock at a price of $4.385 per share. For the six months ended June 30, 2020, preferred stockholders collectively earned,
but were not paid, approximately $26,000 in quarterly dividends, which is equivalent to 5,835 shares of common stock based on a
conversion price of $4.385 per share. As of June 30, 2020 and December 31, 2019, cumulative and unpaid dividends were approximately
$258,000 and approximately $245,000, respectively, which is equivalent to 58,949 and 55,927 shares of common stock, respectively,
based on a conversion price of $4.385 per share.
On any matter presented to the stockholders
of the Company, holders of Preferred Stock are entitled to cast the number of votes equal to the number of shares of common stock
into which their shares of Preferred Stock are convertible as of the record date to vote on such matter. As long as any shares
of Preferred Stock are outstanding, the Company has certain restrictions on share repurchases or amendments to the Certificate
of Incorporation in a manner that adversely affects any rights of the Preferred Stockholders.
In addition, the preferred stockholders
have a liquidation preference for purposes of which the Preferred Stock would be valued at $10 per share plus accrued cumulative
annual dividends. At June 30, 2020 and December 31, 2019, the liquidation preference was valued at $1,258,000 and $1,295,000, respectively.
In the event of any liquidity event, holders of each share of Preferred Stock shall be entitled to be paid out of the assets of
the Company legally available before any sums shall be paid to holders of common stock.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 (Unaudited)
NOTE 7 — RELATED PARTY TRANSACTIONS
As discussed in Note 5 – Debt, we
entered into a Loan Agreement with Sero Capital LLC, a stockholder who owns more than 10% of the outstanding shares of common stock
of the Company. The beneficial owner of Sero Capital LLC is David Moradi, who became a director of the Company on November 8, 2019.
The Loan Agreement extends through August 14, 2020 and provides the Company with an unsecured credit facility under which we may
borrow up to the aggregate principal amount of $2,000,000. No amounts have been drawn under the Loan Agreement as of June 30, 2020.
In consideration of the Loan Agreement,
we issued to Sero Capital LLC 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 expire on August 14, 2020 and are included on the consolidated balance sheets
at a fair value of $593,000 as of June 30, 2020. See Note- 5 – Debt for additional detail on our outstanding 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 six- month periods ended
June 30, 2020, rent payments for this office space totaled $17,000 and $35,000, 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 June 30, 2020, minimum fees due under the shared office arrangement
totaled $49,000.
Litigation
We may become involved in various routine
disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition
of these matters, management believes that the resolution of any such matters, should they arise, is not likely to have a material
adverse effect on our financial position or results of operations.
NOTE 9 — SUBSEQUENT
EVENTS
We have evaluated subsequent events occurring after June 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, except for the following.
In third quarter of 2020, the Company amended its membership
agreement to occupy shared office space in New York, New York. The amendment provides for additional space and establishes a new
commitment term ending on July 2021. Fees due under the membership agreement are based on the number of contracted seats and the
use of optional office services. Total minimum fees due under this shared office arrangement totals $94,000.
On August 11, 2020, warrants to
acquire 146,667 shares of the of the Company’s common stock were exercised at $6.00 per share by Sero Capital LLC, a
stockholder who owns more than 10% of the outstanding shares of common stock of the Company, and which is beneficially owned
by David Moradi, a director of the Company, as discussed in Note 5 - Debt. As consideration for the warrants exercise, the
company will receive $880,000 in cash.
As part of the Company’s strategic
shift to build a more modern, scalable technology stack, we are building our technology center in Portland, Oregon. As a result,
along with executive changes, there will be an impact on our current employees as well, mostly in the technology function. We have
already started hiring personnel in Portland, and will continue to do so in the near future. The Company expects to pay approximately
$400,000 in separation costs, including severance and accrued vacation, of which approximately $70,000 has been accrued as of June
30, 2020.