Audioeye Inc 10-Q for FY2024 Q3
Audioeye Inc (AEYE)
About this 10-Q
Audioeye Inc filed this 10-Q on November 7, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.93M
- up 13.9% from $7.84M a year earlier
- Net loss
- $1.2M
- compared with a net loss of $1.36M a year earlier
- Diluted EPS
- -$0.10
- compared with -$0.11 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [ ] to [ ]
Commission File Number:
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days.
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 31, 2024,
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| Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 (unaudited) | 2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
The financial information set forth below with respect to the consolidated financial statements as of September 30, 2024 and December 31, 2023 and for the three- and nine-month periods ended September 30, 2024 and 2023 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three- and nine-month periods ended September 30, 2024 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 consolidated 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.
CONSOLIDATED BALANCE SHEETS
(unaudited)
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| September 30, |
| December 31, |
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(in thousands, except per share data) | | 2024 | | 2023 | | ||
ASSETS | | | | | | | |
Current assets: |
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Cash | | $ | | | $ | | |
Accounts receivable, net of allowance for doubtful accounts of $ | |
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Prepaid expenses and other current assets | |
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Total current assets | |
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Property and equipment, net of accumulated depreciation of $ | |
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Right of use assets | | | | | | | |
Intangible assets, net of accumulated amortization of $ | |
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Goodwill | | | | | | | |
Other | |
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Total assets | | $ | | | $ | | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | |
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Current liabilities: | |
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Accounts payable and accrued expenses | | $ | | | $ | | |
Note payable | | | | | | — | |
Operating lease liabilities | | | | | | | |
Finance lease liabilities | | | — | | | | |
Deferred revenue | |
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Contingent consideration | | | — | | | | |
Total current liabilities | |
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Long term liabilities: | |
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Term loan, net | | | | | | | |
Operating lease liabilities | | | | | | | |
Deferred revenue | |
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Contingent consideration, long term | |
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Other | | | | | | | |
Total liabilities | |
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Stockholders’ equity: | |
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Preferred stock, $ | |
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Common stock, $ | |
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Additional paid-in capital | |
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Accumulated deficit | |
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Total stockholders’ equity | |
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Total liabilities and stockholders’ equity | | $ | | | $ | | |
See Notes to Unaudited Consolidated Financial Statements
2
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
(in thousands, except per share data) |
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| 2023 |
| 2024 |
| 2023 |
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Revenue | | $ | | | $ | | | $ | | | $ | | |
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Cost of revenue | |
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Gross profit | |
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Operating expenses: | |
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Selling and marketing | |
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Research and development | |
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General and administrative | |
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Total operating expenses | |
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Operating loss | |
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Interest income (expense), net | |
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Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( | |
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Net loss per common share-basic and diluted | | $ | ( | | $ | ( | | $ | ( | | $ | ( | |
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Weighted average common shares outstanding-basic and diluted | |
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See Notes to Unaudited Consolidated Financial Statements
3
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(unaudited)
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| Additional |
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| | Common stock | | Paid-in | | Accumulated | | | | |||||
(in thousands) |
| Shares |
| Amount | | Capital |
| Deficit |
| Total | ||||
Balance, December 31, 2023 |
| | | $ | | | $ | | | $ | ( | | $ | |
Common stock issued upon settlement of restricted stock units | | | | | — | | | — | | | — | | | — |
Issuance of common stock for services | | | | | — | | | — | | | — | | | — |
Surrender of stock to cover tax liability on settlement of employee stock-based awards | | ( | | | — | | | ( | | | — | | | ( |
Common stock repurchased for retirement | | ( | | | — | | | — | | | ( | | | ( |
Stock-based compensation | | — | | | — | | | | | | — | | | |
Net loss |
| — | | | — | | | — | | | ( | | | ( |
Balance, March 31, 2024 | | | | $ | | | $ | | | $ | ( | | $ | |
Issuance of common stock for cash, net of transaction expenses | | | | | — | | | | | | — | | | |
Common stock issued upon exercise of options on a cashless basis | | | | | — | | | — | | | — | | | — |
Common stock issued upon settlement of restricted stock units | | | | | — | | | — | | | — | | | — |
Issuance of common stock for services | | | | | — | | | — | | | — | | | — |
Common stock issued pursuant to employee stock purchase plan | | | | | — | | | | | | — | | | |
Surrender of stock to cover tax liability on settlement of employee stock-based awards | | ( | | | — | | | ( | | | — | | | ( |
Common stock repurchased for retirement | | ( | | | — | | | — | | | ( | | | ( |
Stock-based compensation | | — | | | — | | | | | | — | | | |
Net loss | | — | | | — | | | — | | | ( | | | ( |
Balance, June 30, 2024 | | | | $ | | | $ | | | $ | ( | | $ | |
Issuance of common stock for cash, net of transaction expenses | | | | | — | | | | | | — | | | |
Common stock issued upon exercise of options on a cashless basis | | | | | — | | | — | | | — | | | — |
Common stock issued upon settlement of restricted stock units | | | | | — | | | — | | | — | | | — |
Issuance of common stock for services | | | | | — | | | — | | | — | | | — |
Surrender of stock to cover tax liability on settlement of employee stock-based awards | | ( | | | — | | | ( | | | — | | | ( |
Stock-based compensation | | — | | | — | | | | | | — | | | |
Net loss | | — | | | — | | | — | | | ( | | | ( |
Balance, September 30, 2024 | | | | $ | | | $ | | | $ | ( | | $ | |
4
| | | | | | | Additional | | | | | | | |
| | Common stock | | Paid-in | | Accumulated | | | | |||||
(in thousands) |
| Shares |
| Amount |
| Capital |
| Deficit |
| Total | ||||
Balance, December 31, 2022 | | | | $ | | | $ | | | $ | ( | | $ | |
Common stock issued upon settlement of restricted stock units | | | | | — | | | — | | | — | | | — |
Issuance of common stock for services | | | | | — | | | — | | | — | | | — |
Surrender of stock to cover tax liability on settlement of employee stock-based awards | | ( | | | — | | | ( | | | — | | | ( |
Stock-based compensation | | — | | | — | | | | | | — | | | |
Net loss | | — | | | — | | | — | | | ( | | | ( |
Balance, March 31, 2023 | | | | $ | | | $ | | | $ | ( | | $ | |
Common stock issued upon settlement of restricted stock units | | | | | — | | | — | | | — | | | — |
Issuance of common stock for services | | | | | — | | | — | | | — | | | — |
Common stock issued pursuant to employee stock purchase plan | | | | | — | | | | | | — | | | |
Surrender of stock to cover tax liability on settlement of employee stock-based awards | | ( | | | — | | | ( | | | — | | | ( |
Stock-based compensation | | — | | | — | | | | | | — | | | |
Net loss | | — | | | — | | | — | | | ( | | | ( |
Balance, June 30, 2023 | | | | $ | | | $ | | | $ | ( | | $ | |
Common stock issued upon settlement of restricted stock units | | | | | — | | | — | | | — | | | — |
Issuance of common stock for services | | | | | — | | | — | | | — | | | — |
Surrender of stock to cover tax liability on settlement of employee stock-based awards | | ( | | | — | | | ( | | | — | | | ( |
Stock-based compensation | | — | | | — | | | | | | — | | | |
Net loss | | — | | | — | | | — | | | ( | | | ( |
Balance, September 30, 2023 | | | | $ | | | $ | | | $ | ( | | $ | |
See Notes to Unaudited Consolidated Financial Statements
5
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Nine months ended September 30, | | ||||
(in thousands) |
| 2024 |
| 2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
Net loss | | $ | ( | | $ | ( | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | |
Depreciation and amortization | |
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Loss on disposal or impairment of long-lived assets | | | | | | | |
Stock-based compensation expense | | | | | | | |
Amortization of deferred commissions | | | | | | | |
Amortization of debt discount and issuance costs | |
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Amortization of right-of-use assets | | | | | | | |
Change in fair value of contingent consideration | |
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Provision for accounts receivable | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | | | | | | |
Prepaid expenses and other assets | | | ( | | | ( | |
Accounts payable and accruals | |
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Operating lease liability | |
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Deferred revenue | |
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Net cash provided by (used in) operating activities | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | |
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Purchase of equipment | |
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Software development costs | |
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Patent costs | | | ( | | | ( | |
Payment for acquisition | | | ( | | | — | |
Net cash used in investing activities | |
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CASH FLOWS FROM FINANCING ACTIVITIES: | |
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Proceeds from common stock offering, net of transaction costs | | | | | | — | |
Proceeds from employee stock purchase plan | | | | | | | |
Payments related to settlement of employee shared-based awards | | | ( | | | ( | |
Settlement of contingent consideration | | | ( | | | ( | |
Repurchase of common stock | | | ( | | | — | |
Repayments of finance leases | |
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Net cash used in financing activities | |
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Net decrease in cash | |
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Cash-beginning of period | |
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Cash-end of period | | $ | | | $ | | |
See Notes to Unaudited Consolidated Financial Statements
6
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of AudioEye, Inc. and its wholly-owned subsidiary, ADA Site Compliance, LLC (“we”, “our” or the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Form 10-K”), as filed with the SEC on March 7, 2024.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain information and disclosures normally contained in the audited consolidated financial statements as reported in the Company’s Annual Report on Form 10-K have been condensed or omitted in accordance with the SEC’s rules and regulations for interim reporting.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the 2023 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the consolidated financial statements contained in the 2023 Form 10-K when reviewing interim financial results.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the consolidated financial statements and during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to stock-based compensation, allowance for doubtful accounts, intangible assets, and contingent consideration. Actual results may differ from these estimates.
Revenue Recognition
We derive our revenue primarily from the sale of internally developed software by a software-as-a-service (“SaaS”) delivery model, as well as from professional services, through our direct sales force or through third-party resellers. Our SaaS fees include support and maintenance.
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
We determine revenue recognition through the following five steps:
| ● | Identify the contract with the customer; |
| ● | Identify the performance obligations in the contract; |
| ● | Determine the transaction price; |
| ● | Allocate the transaction price to the performance obligations in the contract; and |
| ● | Recognize revenue when, or as, the performance obligations are satisfied. |
7
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Performance obligations are the unit of accounting for revenue recognition and generally represent the distinct goods or services that are promised to the customer. If we determine that we have not satisfied a performance obligation, we will defer recognition of the revenue until the performance obligation is deemed to be satisfied. SaaS agreements are generally non-cancelable, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations.
Our SaaS revenue is comprised of fixed subscription fees from customer accounts on our platform related to our software products. Our support revenue is comprised of subscription fees for customers for periodic auditing, human-assisted technological remediations, legal support, and other professional 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 one-time website and mobile application reporting services, and is recognized upon delivery. Consideration payable under PDF remediation arrangements is based on usage. Consideration payable under non-subscription website and mobile application reporting services arrangements is based on fixed fees.
The following table presents our revenues disaggregated by sales channel:
| | Nine months ended September 30, | | ||||
(in thousands) |
| 2024 |
| 2023 | | ||
Partner and Marketplace | | $ | |
| $ | | |
Enterprise | |
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Total revenues | | $ | | | $ | | |
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 September 30, 2024 and December 31, 2023:
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| September 30, | | December 31, |
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(in thousands) |
| 2024 |
| 2023 | | ||
Deferred revenue - current | | $ | | | $ | | |
Deferred revenue - noncurrent | | | | | | | |
Total deferred revenue |
| $ | |
| $ | |
|
In the nine-month period ended September 30, 2024, we recognized $
In the three and nine months ended September 30, 2024, we had
8
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Costs (Contract Acquisition Costs)
We capitalize initial and renewal sales commissions in the period the commission is earned, which generally occurs when a customer contract is obtained, and amortize deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term. As a practical expedient, we expense sales commissions as incurred when the amortization period of related deferred commission costs would have been one year or less.
The table below summarizes the deferred commission costs as of September 30, 2024 and December 31, 2023, which are included in Prepaid expenses and other current assets on our consolidated balance sheets:
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| September 30, | | December 31, |
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(in thousands) |
| 2024 |
| 2023 | | ||
Deferred costs – current | | $ | | | $ | | |
Deferred costs - noncurrent | |
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Total deferred costs | | $ | | | $ | | |
Amortization expense associated with sales commissions was included in Selling and marketing expenses on the consolidated statements of operations and totaled $
Business Combinations
The assets acquired, liabilities assumed and any contingent consideration in business combinations 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.
Debt Discount and Debt Issuance Costs
Costs related to the issuance of debt due to the lender (debt discount) or to third parties (debt issuance costs) are capitalized and amortized to interest expense based on the effective interest method over the term of the related debt. Debt discount and debt issuance costs are presented on the Company’s consolidated balance sheets as a direct deduction from the carrying amount of our term loan.
Employee Stock Purchase Plan
In May 2022, the stockholders of the Company approved the Company’s Employee Stock Purchase Plan (the “ESPP”), which provides for the issuance of up to
9
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation
The Company periodically issues options, restricted stock units (“RSUs”), and shares of its common stock as compensation for services received from its employees, directors, and consultants. The fair value of the award is measured on the grant date. The fair value amount is then recognized as expense over the requisite vesting period during which services are required to be provided in exchange for the award. We recognize forfeitures as they occur. Stock-based compensation expense is recorded in the same expense classifications in the consolidated statements of operations as if such amounts were paid in cash.
The fair value of options awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor and expected term).
We estimate the fair value of restricted stock unit awards with time- or performance-based vesting using the value of our common stock on the grant date. We estimate the fair value of market-based restricted stock unit awards as of the grant date using the Monte Carlo simulation model.
We expense the compensation cost associated with time-based options and RSUs as the restriction period lapses, which is typically a - to
The following table summarizes the stock-based compensation expense recorded for the three and nine months ended September 30, 2024 and 2023:
| Three months ended September 30, | | Nine months ended September 30, | |||||||||
(in thousands) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Options | | $ | — | | $ | | | $ | | | $ | |
RSUs | |
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Unrestricted shares of common stock | | | | | | | | | | | | |
Employee stock purchase plan | | | — | | | — | | | | | | |
Total | | $ | | | $ | | | $ | | | $ | |
As of September 30, 2024, the unrecognized stock-based compensation expense related to outstanding RSUs totaled $
10
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(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 and restricted stock units. The dilutive effect of our stock-based awards is computed using the treasury stock method, which assumes all stock-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. However, when a net loss exists, no potential common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in an anti-dilutive per-share amount.
Potentially dilutive securities outstanding as of September 30, 2024 and 2023, which were excluded from the computation of basic and diluted net loss per share for the periods then ended, are as follows:
| | September 30, | | ||
(in thousands) |
| 2024 |
| 2023 | |
Options |
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Restricted stock units |
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Total |
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The following table summarizes the stock option and RSUs activity for the nine months ended September 30, 2024:
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| Options |
| RSUs |
Outstanding at December 31, 2023 |
| |
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Granted |
| — |
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Exercised/Settled |
| ( |
| ( |
Forfeited/Expired |
| ( |
| ( |
Outstanding at September 30, 2024 |
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Vested at September 30, 2024 | | | | |
Unvested at September 30, 2024 | | — | | |
Stock Repurchases
In the fourth quarter of 2023, the Board of Directors of the Company approved a program to repurchase up to $
Shares repurchased by the Company are immediately retired. The Company made an accounting policy election to charge the excess of repurchase price over par value entirely to retained earnings.
Recent Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. The ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We plan to adopt ASU 2023-09 in our fiscal year 2025
11
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
annual financial statements. The adoption of this ASU will not affect the Company’s consolidated results of operations, financial position or cash flows.
NOTE 3 — ACQUISITIONS
ADA Site Compliance, LLC
On September 27, 2024, we entered into a Membership Interest Purchase Agreement and acquired all the outstanding equity interests of ADA Site Compliance, LLC (“ADA Site Compliance”), a Delaware limited liability company which provides audits and best practices to help organizations create websites that are accessible and compliant to Web Content Accessibility Guidelines (“WCAG”) standards. The aggregate consideration for the purchase of ADA Site Compliance was approximately $
We accounted for the acquisition of ADA Site Compliance as a 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 September 27, 2024 | |
Assets purchased: |
| |
|
Cash | | $ | |
Accounts receivable | |
| |
Other assets | |
| |
Customer relationships (1) | |
| |
Goodwill (2) | |
| |
Total assets purchased | |
| |
| | | |
Liabilities assumed: | |
|
|
Accounts payable and accrued liabilities | |
| |
Deferred revenue | |
| |
Total liabilities assumed | |
| |
| | | |
Net assets acquired | |
| |
| | | |
Consideration: | |
|
|
Cash paid | |
| |
Note payable (3) | | | |
Contingent consideration liability (4) | |
| |
Total consideration | | $ | |
| (1) | Represents an acquired intangible asset that will be amortized on a straight-line basis over its estimated useful life of |
| (2) | Goodwill represents the excess of purchase price over the estimated fair value of net tangible and intangible assets acquired. |
| (3) | Represents the fair value of the Note Payable in the aggregate principal amount of $ |
12
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
| (4) | The fair value of the contingent consideration liability under the earn-out was determined using the Monte-Carlo simulation. The key assumptions used in the Monte-Carlo simulation were as follows: ARR and NRR metrics for the earn-out period, NRR discount rate of |
The preliminary purchase price allocations to assets acquired and liabilities assumed are subject to adjustments as information is obtained about facts and circumstances that existed at the acquisition date including, but not limited to, certain customary post-closing adjustments such as the finalization of working capital. The final fair value determination of the assets acquired and liabilities assumed will be completed prior to one year from the acquisition date, consistent with ASC 805.
In the three and nine months ended September 30, 2024, the Company incurred $
Pro Forma Financials
The following unaudited pro forma results of operations for the three and nine months ended September 30, 2024 and 2023 assumes ADA Site Compliance had been acquired on January 1, 2023.
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, 2023, 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.
|
| Pro Forma Combined Financials (unaudited) | | ||||||||||
(in thousands) |
| Three months ended September 30, |
| Nine months ended September 30, | | ||||||||
| | 2024 |
| 2023 |
| 2024 |
| 2023 | | ||||
Revenue | | $ | | | $ | | | $ | | | $ | | |
Net loss attributed to common shareholders | |
| ( | | | ( | | | ( | | | ( | |
For purposes of the pro forma disclosures above, results for the three and nine months ended September 30, 2024 exclude $
Bureau of Internet Accessibility Inc.
On March 9, 2022, we entered into a Stock Purchase Agreement to acquire all the outstanding equity interests of Bureau of Internet Accessibility Inc. (“BOIA”), a Delaware corporation which provides web accessibility services including audits, training, remediation and implementation support. The aggregate consideration for the purchase of BOIA was approximately $
We accounted for the acquisition of BOIA as business combination in accordance with ASC 805. Accordingly, under the acquisition method of accounting, we allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, and recognized goodwill for the excess of purchase price over the estimated fair value of net tangible and intangible assets acquired.
13
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of
For the
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 had finance leases to purchase computer equipment that expired in the second quarter of 2024. The amortization expense of the leased equipment was included in depreciation expense. As of September 30, 2024 and December 31, 2023, the Company’s outstanding finance lease obligations totaled
Operating Leases
Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since our lease arrangements do not provide an implicit rate, we use our estimated incremental borrowing rate for the expected remaining lease term at commencement date in determining the present value of future lease payments. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company has operating leases for office space in Tucson, Arizona, and New York, New York. The lease for the principal office located in Tucson consists of
In the second quarter of 2024, the Company entered into an agreement to sublease office space in Miami Beach, Florida, on a month-to-month basis. In addition, the Company entered into membership agreements to occupy shared office space in Lehi, Utah, Tucson, Arizona, Portland, Oregon, and Seattle, Washington. Because these agreements do not qualify as a lease under ASC 842, we expense the related rent and membership fees as they are incurred.
In the first quarter of 2023, we closed our Marietta, Georgia office. As a result of abandoning the office space prior to its lease expiration in August 2024, we wrote off the associated right-of-use asset in full and recognized a $
The Company made operating lease payments in the amount of $
14
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS (continued)
The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2024 (in thousands):
Year ending December 31, | | Operating Leases | | |
2024 (3 months remaining) | | $ | | |
2025 | |
| | |
2026 | | | | |
Total minimum lease payments | |
| | |
Less: present value discount | |
| ( | |
Total lease liabilities | | | | |
Current portion of lease liabilities | | | | |
Long term portion of lease liabilities | | $ | | |
The following summarizes expenses associated with our finance and operating leases for the nine months ended September 30, 2024 and 2023:
| | Nine months ended September 30, | | ||||
(in thousands) | | 2024 | | 2023 | | ||
Finance lease expenses: |
| |
| | |
|
|
Depreciation expense | | $ | | | $ | | |
Interest on lease liabilities | |
| — | |
| | |
Total Finance lease expense | |
| | |
| | |
Operating lease expense | |
| | |
| | |
Short-term lease and related expenses | |
| | |
| | |
Total lease expenses | | $ | | | $ | | |
The following table provides information about the remaining lease terms and discount rates applied as of September 30, 2024 and 2023:
| | September 30, | | ||
| | 2024 | | 2023 | |
Weighted average remaining lease term (years) |
|
| | | |
Operating Leases |
| | | ||
Finance Leases |
| | | ||
Weighted average discount rate (%) |
|
| | | |
Operating Leases |
| | | | |
Finance Leases |
| — | | | |
NOTE 5 — DEBT
Term Loan
On November 30, 2023, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with SG Credit Partners, Inc., a Delaware corporation (the “Lender”). The Loan Agreement provides for a $
The Company paid a commitment fee equal to $
15
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
balance sheet as of September 30, 2024. The Company also incurred $
On September 27, 2024, concurrently with the acquisition of ADA Site Compliance, we entered into a First Amendment to the Loan Agreement. Pursuant to the First Amendment, the Loan Agreement was amended to allow the Company to (a) make earn-out payments in accordance with the terms and conditions of the purchase agreement for ADA Site Compliance, so long as no event of default has occurred and is continuing immediately prior to such payment or would exist immediately after making such payment and we have liquidity of at least $
The Loan Agreement secured by substantially all of our assets and contains certain customary financial covenants, including the requirements that the Company maintain (i) minimum liquidity of $
As of September 30, 2024, the outstanding principal balance of our term loan totaled $
Note Payable
On September 27, 2024, in connection with the acquisition of ADA Site Compliance, the Company issued the Note Payable, unsecured non-interest bearing promissory notes in the aggregate principal amount of $
NOTE 6 — COMMITMENTS AND CONTINGENCIES
Litigation
We may become involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, management believes that the resolution of any such matters, should they arise, is not likely to have a material adverse effect on our financial position or results of operations.
NOTE 7 — SUBSEQUENT EVENTS
We have evaluated subsequent events occurring after September 30, 2024, and based on our evaluation we did not identify any events that would have required recognition or disclosure in these consolidated financial statements.
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 consolidated financial statements and related notes in Part I, Item 1 of this report.
As used in this quarterly report, the terms “we,” “us,” “our” and similar references refer to AudioEye, Inc., unless otherwise indicated.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you may be able to identify forward-looking statements by terms such as “may,” “should,” “will,” “forecasts,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential” or “continue,” the negative of these terms and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions and speak only as of the date on which they are made.
Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed in “Part I, Item 1A. Risk Factors” contained in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to:
| ● | the uncertain market acceptance of our existing and future products; |
| ● | our need for, and the availability of, additional capital in the future to fund our operations and the development of new products; |
| ● | the success, timing and financial consequences of new strategic relationships or licensing agreements we may enter into; |
| ● | rapid changes in Internet-based applications that may affect the utility and commercial viability of our products; |
| ● | the timing and magnitude of expenditures we may incur in connection with our ongoing product development activities; |
| ● | judicial applications of accessibility laws to the internet; |
| ● | the level of competition from our existing competitors and from new competitors in our marketplace; and |
| ● | the regulatory environment for our products and services. |
Readers of this report are cautioned not to rely on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This cautionary note is applicable to all forward-looking statements contained in this report.
17
AudioEye Solutions
At its core, AudioEye’s offering provides an always-on testing, remediation, and monitoring solution that continually improves conformance with Web Content Accessibility Guidelines (“WCAG”). This in turn helps businesses and organizations comply with WCAG standards as well as applicable U.S. and foreign accessibility laws. Our technology is capable of immediately identifying and fixing most of the common accessibility errors and addresses a wide range of disabilities including dyslexia, color blindness, epilepsy and more. AudioEye also offers additional solutions to provide for enhanced compliance and accessibility, including periodic auditing, human assisted technological remediations and legal support services. Our solutions may be purchased through a subscription service on a month-to-month basis or with one or multi-year terms. We also offer PDF remediation services and mobile application and audit reporting services 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 three (3) pending US patent applications. The commercial value of these patents is unknown.
We plan to continue to invest in research and development and expand our portfolio of proprietary intellectual property.
Our Annual Report filed on Form 10-K for the year ended December 31, 2023 as filed with the SEC on March 7, 2024 provides additional information about our business and operations.
Legal and Regulatory Framework Update
On April 24, 2024, the U.S. Department of Justice (“DOJ”) published a rule to add specific requirements about web and mobile application accessibility under Title II of the ADA that would apply to state and local governments. On May 9, 2024, the U.S. Department of Health and Human Services (“HHS”) published a rule to add, among other things, specific requirements about web and mobile application accessibility under Section 504 of the Rehabilitation Act that would apply to recipients of Federal financial assistance.
Executive Overview
AudioEye is an industry-leading digital accessibility platform delivering Americans with Disabilities Act (“ADA”) and WCAG compliance at scale. Our solutions advance accessibility with patented technology that reduces barriers, expands access for individuals with disabilities, and enhances the user experience for a broader audience. In the three and nine months ended September 30, 2024, we continued to focus on product innovation, expanding revenue and managing expenses.
We have two sales channels to deliver our product, the Partner and Marketplace channel and the Enterprise channel. AudioEye continues to focus on recurring revenue growth in both channels, while still offering our website and mobile application reporting services and PDF remediation services that provide non-recurring revenue.
For the nine months ended September 30, 2024, total revenue increased by 9% over the prior year comparable period. As of September 30, 2024, Annual Recurring Revenue (“ARR”) was approximately $36.2 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 September 30, 2024, AudioEye had approximately 126,000 customers, an 18% increase from 107,000 customers at September 30, 2023. The increase in customer count is attributed to both our Partner and Marketplace and Enterprise channels.
In the nine months ended September 30, 2024, revenue from our Partner and Marketplace channel grew 12% over the prior year comparable period. This channel represented about 58% of ARR at the end of September 2024. In nine months ended September 30, 2024, total Enterprise channel revenue grew 5% over the prior year comparable period. The Enterprise channel represented about 42% of ARR at the end of September 2024.
We had one customer (including the customer’s affiliates reflecting multiple contracts and a partnership with the Company) which accounted for approximately 16% of our total revenue in each of the nine months ended September 30, 2024 and 2023.
18
The Company continued to invest in research and development in the third quarter of 2024. Total research and development cost, as defined under Research and Development Expenses section in the Results of Operations below, was 20% of total revenue in the nine months ended September 30, 2024. Total research and development cost decreased from the prior year comparable period primarily due to the completion of significant initiatives in research and development.
In the nine months ended September 30, 2024, selling and marketing expense decreased from the prior year comparable period. This decrease was mainly driven by efficiencies in selling and marketing. The increase in general and administrative expenses in the nine months ended September 30, 2024 was due primarily to transaction costs incurred in connection with the acquisition of ADA Site Compliance, as well as an increase in litigation expenses.
We provide further commentary on our Results of Operation below.
Results of Operations
Our unaudited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP” or “GAAP”). The discussion of the results of our operations compares the three and nine months ended September 30, 2024 with the three and nine months ended September 30, 2023.
Our results of operations in these interim periods are not necessarily indicative of the results which may be expected for any subsequent period. Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.
| | Three months ended September 30, | | Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Revenue | | $ | 8,925 | | $ | 7,838 | | $ | 1,087 | | 14 | % |
Cost of revenue | |
| (1,823) | | | (1,788) | | | (35) | | 2 | % |
Gross profit | |
| 7,102 | | | 6,050 | | | 1,052 | | 17 | % |
Operating expenses: | |
| | | | | | | | | | |
Selling and marketing | |
| 3,148 | | | 2,891 | | | 257 | | 9 | % |
Research and development | |
| 1,151 | | | 1,955 | | | (804) | | (41) | % |
General and administrative | |
| 3,794 | | | 2,594 | | | 1,200 | | 46 | % |
Total operating expenses | |
| 8,093 | | | 7,440 | | | 653 | | 9 | % |
Operating loss | |
| (991) | | | (1,390) | | | 399 | | (29) | % |
Interest income (expense), net | |
| (211) | | | 35 | | | (246) | | (703) | % |
Net loss | | $ | (1,202) | | $ | (1,355) | | $ | 153 | | (11) | % |
| | Nine months ended September 30, | | Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % | | |||
Revenue | | $ | 25,478 | | $ | 23,446 | | $ | 2,032 | | 9 | % |
Cost of revenue | |
| (5,348) | |
| (5,277) | |
| (71) | | 1 | % |
Gross profit | |
| 20,130 | |
| 18,169 | |
| 1,961 | | 11 | % |
Operating expenses: | |
| | |
| | |
| | | | |
Selling and marketing | |
| 9,122 | |
| 9,387 | |
| (265) | | (3) | % |
Research and development | |
| 3,694 | |
| 5,734 | |
| (2,040) | | (36) | % |
General and administrative | |
| 9,433 | |
| 8,520 | |
| 913 | | 11 | % |
Total operating expenses | |
| 22,249 | |
| 23,641 | |
| (1,392) | | (6) | % |
Operating loss | |
| (2,119) | |
| (5,472) | |
| 3,353 | | (61) | % |
Interest income (expense), net | | | (647) | | | 133 | | | (780) | | (586) | % |
Net loss | | $ | (2,766) | | $ | (5,339) | | $ | 2,573 | | (48) | % |
19
Revenue
The following tables present our revenues disaggregated by sales channel:
|
| Three months ended September 30, |
| Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % | | |||
Partner and Marketplace | | $ | 5,226 | | $ | 4,605 | | $ | 621 | | 13 | % |
Enterprise | |
| 3,699 | | | 3,233 | | | 466 | | 14 | % |
Total revenues | | $ | 8,925 | | $ | 7,838 | | $ | 1,087 | | 14 | % |
|
| Nine months ended September 30, |
| Change |
| |||||||
(in thousands) | | 2024 | | 2023 | | $ | | % |
| |||
Partner and Marketplace | | $ | 14,930 | | $ | 13,365 | | $ | 1,565 | | 12 | % |
Enterprise | |
| 10,548 | |
| 10,081 | |
| 467 | | 5 | % |
Total revenues | | $ | 25,478 | | $ | 23,446 | | $ | 2,032 | | 9 | % |
Partner and Marketplace channel consists of our CMS partners, platform & agency partners, authorized resellers and the Marketplace. This channel serves small & medium sized businesses that are on a partner or reseller’s web-hosting platform or that purchase our solutions from our Marketplace.
Enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites, who generally engage directly with AudioEye sales personnel for custom pricing and solutions. This channel also includes federal, state and local government agencies and revenue attributable to ADA Site Compliance, which was acquired in September 2024.
For the three and nine months ended September 30, 2024, total revenue increased by 14% and 9%, respectively, over the prior year comparable periods. The increase in Partner and Marketplace channel revenue for the three and nine months ended September 30, 2024 was primarily due to continued expansion with existing partners. The increase in Enterprise channel revenue for the three and nine months ended September 30, 2024 was driven primarily by an increase in Enterprise customers.
Cost of Revenue and Gross Profit
| | Three months ended September 30, |
| Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Revenue | | $ | 8,925 | | $ | 7,838 | | $ | 1,087 | | 14 | % |
Cost of Revenue | |
| (1,823) | | | (1,788) | | | (35) | | 2 | % |
Gross profit | | $ | 7,102 | | $ | 6,050 | | $ | 1,052 | | 17 | % |
| | Nine months ended September 30, | | Change |
| |||||||
(in thousands) |
| | 2024 |
| 2023 |
| $ |
| % |
| ||
Revenue | | $ | 25,478 | | $ | 23,446 | | $ | 2,032 | | 9 | % |
Cost of Revenue | |
| (5,348) | |
| (5,277) | |
| (71) | | 1 | % |
Gross profit | | $ | 20,130 | | $ | 18,169 | | $ | 1,961 | | 11 | % |
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 nine months ended September 30, 2024, cost of revenue remained consistent with the prior year comparable periods.
For the three and nine months ended September 30, 2024, gross profit increased by 17% and 11%, respectively, over the prior year comparable periods. The increase in gross profit was a result of increased revenue.
20
Selling and Marketing Expenses
|
| Three months ended September 30, |
| Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Selling and marketing | | $ | 3,148 | | $ | 2,891 | | $ | 257 | | 9 | % |
|
| Nine months ended September 30, | | Change | | |||||||
(in thousands) | | 2024 |
| 2023 |
| $ |
| % |
| |||
Selling and marketing | | $ | 9,122 | | $ | 9,387 | | $ | (265) | | (3) | % |
Selling and marketing expenses consist primarily of compensation and benefits related to our sales and marketing staff, as well as third-party advertising and marketing expenses.
For the three months ended September 30, 2024, selling and marketing expenses increased by 9% over the prior year comparable period. The increase in selling and marketing expenses resulted primarily from higher third-party marketing and stock compensation expense. For the nine months ended September 30, 2024, selling and marketing expenses decreased by 3% over the prior year comparable period. This decrease resulted primarily from a reduction in online media and third-party marketing expenses.
Research and Development Expenses
|
| Three months ended September 30, |
| Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Research and development expense | | $ | 1,151 | | $ | 1,955 | | $ | (804) | | (41) | % |
Plus: Capitalized research and development cost | |
| 432 | | | 482 | | | (50) | | (10) | % |
Total research and development cost | | $ | 1,583 | | $ | 2,437 | | $ | (854) | | (35) | % |
|
| Nine months ended September 30, | | Change | | |||||||
(in thousands) | | 2024 |
| 2023 |
| $ |
| % |
| |||
Research and development expense | | $ | 3,694 | | $ | 5,734 | | $ | (2,040) | | (36) | % |
Plus: Capitalized research and development cost | |
| 1,379 | |
| 1,481 | |
| (102) | | (7) | % |
Total research and development cost | | $ | 5,073 | |
| 7,215 | | $ | (2,142) | | (30) | % |
Research and development (“R&D”) expenses consist primarily of compensation and related benefits, independent contractor costs, and an allocated portion of general overhead costs related to our employees involved in research and development activities. Total research and development cost includes the amount of research and development expense reported within operating expenses as well as development cost that was capitalized during the fiscal period.
For the three and nine months ended September 30, 2024, research and development expense decreased by 41% and 36%, respectively, from the prior year comparable periods. These decreases were driven by lower personnel cost associated with a realignment in our product and development teams following the completion of significant initiatives in R&D. For the three and nine months ended September 30, 2024, capitalized research and development cost decreased by 10% and 7%, respectively, over the prior year comparable periods. These decreases to capitalized research cost were the result of engineering personnel spending less time on product development than in the prior year comparable periods. For the three and nine months ended September 30, 2024, total research and development cost, which includes both R&D expenses and capitalized R&D costs, decreased by 35% and 30%, respectively, from the prior year comparable periods.
21
General and Administrative Expenses
| | Three months ended September 30, | | Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % | | |||
General and administrative | | $ | 3,794 | | $ | 2,594 | | $ | 1,200 | | 46 | % |
| | Nine months ended September 30, | | Change | | |||||||
(in thousands) | | 2024 |
| 2023 | | $ |
| % |
| |||
General and administrative | | $ | 9,433 | | $ | 8,520 | | $ | 913 | | 11 | % |
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, occupancy and transaction costs.
For the three and nine months ended September 30, 2024, general and administrative expenses increased by 46% and 11%, respectively, over the prior year comparable periods. The increases in general and administrative expenses were due primarily to transaction costs incurred in connection with the acquisition of ADA Site Compliance, as well as an increase in litigation expenses. For the three and nine months ended September 30, 2024, litigation expenses totaled $840,000 and $1,339,000, respectively.
Interest Income (Expense)
|
| Three months ended September 30, |
| Change |
| |||||||
(in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Interest income (expense), net | | $ | (211) | | $ | 35 | | $ | (246) | | (703) | % |
|
| Nine months ended September 30, |
| Change |
| |||||||
(in thousands) | | 2024 |
| 2023 | | $ |
| % |
| |||
Interest income (expense), net | | $ | (647) | | $ | 133 | | $ | (780) | | (586) | % |
For the three and nine months ended September 30, 2024, interest expense, net consisted primarily of interest on our term loan borrowed in the fourth quarter of 2023, which was partially offset by interest income from investment in money market funds. For the three and nine months ended September 30, 2023, interest income, net consisted primarily of income from investment in money market funds.
Other Key Operating Metrics
We consider annual recurring revenue (“ARR”) as a key operating metric and a key indicator of our overall business. We also use ARR as one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations.
We define ARR as the sum of (i) for our Enterprise channel, the total of the annualized recurring fee at the date of determination under each active contract, plus (ii) for our Partner and Marketplace channel, the annual or monthly recurring fee for all active customers at the date of determination, in each case, assuming no changes to the subscription, multiplied by 12 if applicable. Recurring fees are defined as revenues expected to be generated from services typically offered as a subscription service or annual service offering such as our automation and platform, periodic auditing, human-assisted technological fixes, legal support and professional service offerings and other services that reoccur on a multi-year contract. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are terminable prior to the expected term, which may impact future ARR. ARR excludes non-recurring fees, which are defined as revenue expected to be generated from services typically not offered as a subscription service or annual service offering such as our PDF remediation services business, one-time mobile application reports, and other miscellaneous services that are offered as non-subscription services or are expected to be one-time in nature. As of September 30, 2024, ARR was $36.2 million, which represents an increase of 19% year-over-year, driven by growth in both our Partner and Marketplace channel and Enterprise channel.
22
Liquidity and Capital Resources
Working Capital
(in thousands) | | September 30, 2024 |
| December 31, 2023 | | ||
Current assets | | $ | 11,396 | | $ | 14,776 | |
Current liabilities | |
| (13,610) | |
| (11,529) | |
Working capital | | $ | (2,214) | | $ | 3,247 | |
As of September 30, 2024, we had $5,478,000 in cash and working capital of ($2,214,000). The $5.5 million decrease in working capital in the nine months ended September 30, 2024 was primarily due to the acquisition of ADA Site Compliance, for which we made an initial payment of $3.1 million, net of cash received, and recognized $2.3 million in noncurrent note payable.
In November 2023, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $5 million of our common stock through December 31, 2025. The stock repurchase program may be suspended or discontinued at any time and does not commit the Company to repurchase any dollar amount or particular number of shares of stock. Shares repurchased under the program are subsequently retired and restored to the status of authorized but unissued shares of common stock. In the nine months ended September 30, 2024, we paid $2.02 million in cash to repurchase 299,371 shares of our common stock. As of September 30, 2024, we had $1.86 million remaining for the repurchase of shares.
In the second quarter of 2024, the Company initiated an At The Market offering (“ATM offering”), under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $7.0 million from time to time. As of September 30, 2024, we had issued 162,524 shares of our common stock and raised $3,473,000, net of transaction expenses, under the ATM offering.
In the second quarter of 2024, we made a $2.4 million cash payment to settle the contingent consideration associated with the BOIA acquisition in full.
As of September 30, 2024, we had $7.0 million in noncurrent term loan which matures on November 30, 2026. As of September 30, 2024, we had Note Payable in the aggregate principal amount of $2.4 million, which matures on November 26, 2024.
As of September 30, 2024, we had no off-balance sheet arrangements, and we believe that the Company has sufficient liquidity to continue as a going concern through the next twelve months.
While the Company has been successful in raising capital, there is no assurance that it will be successful at raising additional capital in the future. Additionally, if the Company’s plans are not achieved and/or if significant unanticipated events occur, the Company may have to further modify its business plan, which may require us to raise additional capital or reduce expenses.
Cash Flows
| | Nine months ended September 30, | | ||||
(in thousands) |
| 2024 |
| 2023 | | ||
Net cash provided by (used in) operating activities |
| $ | 2,166 | | $ | (515) | |
Net cash used in investing activities | |
| (4,603) | |
| (1,654) | |
Net cash used in financing activities | |
| (1,321) | |
| (1,461) | |
Net decrease in cash | | $ | (3,758) | | $ | (3,630) | |
For the nine months ended September 30, 2024, in relation to the prior year comparable period, cash provided by operating activities increased primarily due to increased revenue, cost efficiencies associated with lower personnel expense following a realignment in our product and development teams, as well as lower online media and third-party marketing expenses.
For the nine months ended September 30, 2024, in relation to the prior year comparable period, cash used in investing activities increased primarily due to the acquisition of ADA Site Compliance, for which we paid $3.1 million, net of cash acquired.
23
For the nine months ended September 30, 2024, in relation to the prior year comparable period, cash used in financing activities decreased primarily due to capital raised under the ATM Offering initiated in the second quarter of 2024, under which we issued 162,524 shares of our common stock and raised $3,473,000, net of transaction expenses. The decrease was partially offset by common stock repurchases totaling $2.02 million, as well as higher payouts towards the contingent consideration in connection with the acquisition of BOIA. In the nine months ended September 30, 2024, payments towards this contingent consideration totaled $2,387,000, of which $1,677,000 and $710,000 were classified as cash used in financing and operating activities, respectively. In the nine months ended September 30, 2023, payments towards this contingent consideration totaled $974,000, of which $908,000 and $66,000 were classified as cash used in financing and operating activities, respectively.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported and disclosed in our consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates under different assumptions or conditions.
Our critical accounting estimates, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, relate to stock-based compensation and goodwill, intangible assets and contingent consideration recognized in connection with a business combination. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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 September 30, 2024.
Changes in Internal Controls over Financial Reporting
During the quarter ended September 30, 2024, there were no material changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
24
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2024, no director or executive officer
25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We may become involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, our management believes that the resolution of any such matters, should they arise, is not likely to have a material adverse effect on our financial position or results of operations.
Item 1A. Risk Factors
You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”), which could materially affect our business, financial condition and results of operations. There have been no material changes to the risk factors set forth in the 2023 Form 10-K. The risks described in our 2023 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2. Issuer Purchases of Equity Securities
The following table sets forth information with respect to our repurchases of common stock during the three months ended September 30, 2024:
| | |
| | |
| | | Maximum Number | |
| | | | | | | | | of Shares (or | |
| | | | | | | Total Number of | | Approximate Dollar | |
| | | | | | | Shares Purchased | | Value) that May | |
| | | | | | | as Part of Publicly | | Yet Be Purchased | |
| | Total Number of | | Average Price | | Announced Plans or | | under the Plans or | ||
|
| Shares Purchased |
| Paid per Share |
| Programs |
| Programs (2) | ||
July 1 - July 31: |
| | | | |
| | |
| |
Employee transactions (1) |
| 2,006 | | $ | 20.68 |
| — | | $ | — |
August 1 - August 31: |
| | |
| |
| | |
| |
Employee transactions (1) |
| 5,990 | | | 22.50 |
| — | |
| — |
September 1 - September 30: | | | | | | | | | | |
Employee transactions (1) | | 10,704 | | | 21.71 | | — | | | — |
Total: | | | | | | | | | | |
Employee transactions (1) | | 18,700 | | $ | 21.85 | | — | | $ | — |
Share repurchase program (2) | | — | | $ | — | | — | | $ | 1,860,000 |
| (1) | Includes shares surrendered by employees to satisfy tax withholding obligations in connection with the settlement of restricted stock units, exercise of stock options, or issuance of unrestricted shares of common stock. |
| (2) | In November 2023, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $5 million of our common stock through December 31, 2025. Shares repurchased under the program are subsequently retired. The average price paid per share includes any broker commissions. |
26
Item 6. Exhibits
|
| | Incorporation by Reference | |||||||
Exhibit No. |
| Description |
| Form |
| Date of Filing |
| Exhibit No. |
| Filed Herewith |
3.1 | | Restated Certificate of Incorporation of AudioEye, Inc., dated as of May 24, 2024 | | 8-K | | May 24, 2024 | | 3.3 | | |
| | | | | | | | | | |
3.2 | | | 10-Q | | July 29, 2024 | | 3.3 | | | |
| | | | | | | | | | |
10.1 | | 8-K | | September 30, 2024 | | 10.1 | | | ||
| | | | | | | | | | |
10.2 | | | 8-K | | September 30, 2024 | | 10.2 | | | |
| | | | | | | | | | |
31.1 | | | | | | | | | X | |
| | | | | | | | | | |
31.2 | | | | | | | | | X | |
| | | | | | | | | | |
32.1 | | | | | | | | | X | |
| | | | | | | | | | |
101.INS | | Inline XBRL Instance Document | | | | | | | | |
| | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
104 | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | |
27
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: | November 7, 2024 |
| By: | /s/ David Moradi |
| | | | David Moradi |
| | | | Principal Executive Officer |
| | | | |
Date: | November 7, 2024 | | By: | /s/ Kelly Georgevich |
| | | | Kelly Georgevich |
| | | | Principal Financial Officer |
28
Exhibit 31.1
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David Moradi, Principal Executive Officer of AudioEye, Inc. (the “Registrant”), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2024 of AudioEye, Inc. (the “Quarterly Report”);
2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: November 7, 2024 |
| By: | /s/ David Moradi | |
| | | Name: | David Moradi |
| | | Title: | Principal Executive Officer |
Exhibit 31.2
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelly Georgevich, Principal Financial Officer of AudioEye, Inc. (the “Registrant”), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2024 of AudioEye, Inc. (the “Quarterly Report”);
2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: November 7, 2024 |
| By: | /s/ Kelly Georgevich | |
| | | Name: | Kelly Georgevich |
| | | Title: | Principal Financial Officer |
Exhibit 32.1
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing by AudioEye, Inc. (the “Registrant”) of its Quarterly Report on Form 10-Q for the period ended September 30, 2024 (the “Quarterly Report”) with the Securities and Exchange Commission, we, David Moradi and Kelly Georgevich, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Quarterly Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
Date: November 7, 2024 |
| By: | /s/ David Moradi | |
| | | Name: | David Moradi |
| | | Title: | Principal Executive Officer |
Date: November 7, 2024 |
| By: | /s/ Kelly Georgevich | |
| | | Name: | Kelly Georgevich |
| | | Title: | Principal Financial Officer |