10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

or

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

For the transition period from [                     ] to [                     ]

Commission File Number: 001-38640

AudioEye, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

As of November 1, 2021, 11,354,397 shares of the registrant’s common stock were issued and outstanding.

		Page
PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited)	2
	Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (unaudited)	3
	Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited)	4
	Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)	6
	Notes to Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II	OTHER INFORMATION	27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Issuer Purchases of Equity Securities	27
Item 5.	Other Information	28
Item 6.	Exhibits	29
SIGNATURES		31

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

The financial information set forth below with respect to the financial statements as of September 30, 2021 and December 31, 2020 and for the three- and nine-month periods ended September 30, 2021 and 2020 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, 2021 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31. Certain prior period amounts have been reclassified to conform to current period classification. The Company presents its unaudited financial statements, notes, and other financial information rounded to the nearest thousand United States Dollars (“U.S. Dollar”), except for per share data.

1

AUDIOEYE, INC.

BALANCE SHEETS

(unaudited)

	September 30,		December 31,
(in thousands, except per share data)	2021		2020
ASSETS
Current assets:
Cash	$	21,953	$	9,095
Accounts receivable, net of allowance for doubtful accounts of $195 and $79, respectively		3,798		5,096
Deferred costs, short term		120		152
Prepaid expenses and other current assets		594		288
Total current assets		26,465		14,631
Property and equipment, net of accumulated depreciation of $187 and $209, respectively		173		91
Right of use assets		452		617
Deferred costs, long term		49		77
Intangible assets, net of accumulated amortization of $5,211 and $4,328, respectively		2,524		2,137
Goodwill		701		701
Total assets	$	30,364	$	18,254
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	3,131	$	2,190
Finance lease liabilities		62		49
Operating lease liabilities		246		229
Deferred revenue		6,075		6,328
Term loan, short term		—		219
Total current liabilities		9,514		9,015
Long term liabilities:
Finance lease liabilities		57		12
Operating lease liabilities		240		427
Deferred revenue		20		83
Term loan, long term		—		1,083
Total liabilities		9,831		10,620
Stockholders' equity:
Preferred stock, $0.00001 par value, 10,000 shares authorized
Series A Convertible Preferred Stock, $0.00001 par value, 200 shares designated, zero and 90 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		—		1
Common stock, $0.00001 par value, 50,000 shares authorized, 11,352 and 10,130 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		1		1
Additional paid-in capital		86,822		64,716
Accumulated deficit		(66,290)		(57,084)
Total stockholders' equity		20,533		7,634
Total liabilities and stockholders' equity	$	30,364	$	18,254

See Notes to Unaudited Financial Statements

2

AUDIOEYE, INC.

STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended September 30,				Nine months ended September 30,
(in thousands, except per share data)	2021		2020		2021		2020
Revenue	$	6,202	$	5,341	$	18,011	$	14,885
Cost of revenue		1,567		1,551		4,432		4,478
Gross profit		4,635		3,790		13,579		10,407
Operating expenses:
Selling and marketing		4,504		2,028		10,638		5,551
Research and development		1,611		203		3,950		801
General and administrative		3,175		3,197		9,502		8,185
Total operating expenses		9,290		5,428		24,090		14,537
Operating loss		(4,655)		(1,638)		(10,511)		(4,130)
Other income (expense):
Change in fair value of warrant liability		—		593		—		120
Gain on loan forgiveness		—		—		1,316		—
Interest expense		(2)		(35)		(11)		(141)
Total other income (expense)		(2)		558		1,305		(21)
Net loss		(4,657)		(1,080)		(9,206)		(4,151)
Dividends on Series A Convertible Preferred Stock		—		(13)		(69)		(39)
Net loss available to common stockholders	$	(4,657)	$	(1,093)	$	(9,275)	$	(4,190)
Net loss per common share-basic and diluted	$	(0.41)	$	(0.12)	$	(0.85)	$	(0.46)
Weighted average common shares outstanding-basic and diluted		11,329		9,385		10,929		9,067

See Notes to Unaudited Financial Statements

3

AUDIOEYE, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(unaudited)

							Additional
	Common stock			Preferred stock			Paid-in		Accumulated
(in thousands)	Shares	Amount		Shares	Amount		Capital		Deficit		Total
Balance, December 31, 2020	10,130	$	1	90	$	1	$	64,716	$	(57,084)	$	7,634
Issuance of common stock for cash, net of transaction expenses	472		—	—		—		16,534		—		16,534
Common stock issued upon exercise of warrants and options on a cash basis	22		—	—		—		148		—		148
Common stock issued upon exercise of warrants and options on a cashless basis	121		—	—		—		—		—		—
Common stock issued upon settlement of restricted stock units	92		—	—		—		—		—		—
Issuance of common stock for services	2		—	—		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(16)		—	—		—		(373)		—		(373)
Stock-based compensation	—		—	—		—		1,781		—		1,781
Net loss	—		—	—		—		—		(2,765)		(2,765)
Balance, March 31, 2021	10,823	$	1	90	$	1	$	82,806	$	(59,849)	$	22,959
Common stock issued upon conversion of preferred stock	279		—	(90)		(1)		1		—		—
Common stock issued upon exercise of warrants and options on a cash basis	53		—	—		—		255		—		255
Common stock issued upon exercise of warrants and options on a cashless basis	33		—	—		—		—		—		—
Common stock issued upon settlement of restricted stock units	78		—	—		—		—		—		—
Issuance of common stock for services	13		—	—		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(2)		—	—		—		(39)		—		(39)
Stock-based compensation	—		—	—		—		1,763		—		1,763
Net loss	—		—	—		—		—		(1,784)		(1,784)
Balance, June 30, 2021	11,277	$	1	—	$	—	$	84,786	$	(61,633)	$	23,154
Common stock issued upon exercise of warrants and options on a cash basis	47		—	—		—		218		—		218
Common stock issued upon settlement of restricted stock units	22		—	—		—		—		—		—
Issuance of common stock for services	11		—	—		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(5)		—	—		—		(63)		—		(63)
Stock-based compensation	—		—	—		—		1,881		—		1,881
Net loss	—		—	—		—		—		(4,657)		(4,657)
Balance, September 30, 2021	11,352	$	1	—	$	—	$	86,822	$	(66,290)	$	20,533

4

							Additional
	Common stock			Preferred stock			Paid-in		Accumulated
(in thousands)	Shares	Amount		Shares	Amount		Capital		Deficit		Total
Balance, December 31, 2019	8,877	$	1	105	$	1	$	51,490	$	(49,926)	$	1,566
Stock-based compensation	—		—	—		—		256		—		256
Net loss	—		—	—		—		—		(1,664)		(1,664)
Balance, March 31, 2020	8,877	$	1	105	$	1	$	51,746	$	(51,590)	$	158
Common stock issued upon conversion of preferred stock	14		—	(5)		—		—		—		—
Common stock issued in exchange for exercise of warrants and options on a cashless basis	177		—	—		—		—		—		—
Common stock issued in exchange for options exercised on a cash basis	45		—	—		—		44		—		44
Stock-based compensation	—		—	—		—		659		—		659
Net loss	—		—	—		—		—		(1,407)		(1,407)
Balance, June 30, 2020	9,113	$	1	100	$	1	$	52,449	$	(52,997)	$	(546)
Issuance of common stock for cash, net of transaction expenses	473		—	—		—		7,824		—		7,824
Common stock issued in exchange for exercise of warrants and options on a cashless basis	21		—	—		—		—		—		—
Common stock issued in exchange for options exercised on a cash basis	225		—	—		—		1,047		—		1,047
Common stock issued upon settlement of restricted stock units	89		—	—		—		—		—		—
Stock-based compensation	—		—	—		—		1,089		—		1,089
Net loss	—		—	—		—		—		(1,080)		(1,080)
Balance, September 30, 2020	9,921	$	1	100	$	1	$	62,409	$	(54,077)	$	8,334

See Notes to Unaudited Financial Statements

5

AUDIOEYE, INC.

STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended September 30,
(in thousands)	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(9,206)	$	(4,151)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		957		639
Loss on impairment of long-lived assets		10		—
Loss on disposal of property and equipment		12		—
Stock-based compensation expense		5,425		2,004
Amortization of deferred commissions		145		162
Amortization of debt issuance costs		—		137
Amortization of right of use assets		165		156
Change in fair value of warrant liability		—		(120)
Gain on loan forgiveness		(1,316)		—
Provision for accounts receivable		111		109
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables		1,187		(482)
Prepaid expenses and other assets		(391)		(136)
Accounts payable and accruals		916		615
Operating lease liability		(170)		(155)
Deferred revenue		(316)		172
Net cash used in operating activities		(2,471)		(1,050)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(7)		—
Software development costs		(1,213)		(659)
Patent costs		(67)		(141)
Net cash used in investing activities		(1,287)		(800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering, net of transaction costs		16,534		7,824
Proceeds from term loan		—		1,302
Proceeds from exercise of options and warrants		621		1,091
Payments related to settlement of employee shared-based awards		(475)		—
Repayments of finance leases		(64)		(44)
Net cash provided by financing activities		16,616		10,173
Net increase in cash		12,858		8,323
Cash-beginning of period		9,095		1,972
Cash-end of period	$	21,953	$	10,295

See Notes to Unaudited Financial Statements

6

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of AudioEye, Inc. (“we”, “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”), as filed with the SEC on March 11, 2021.

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 3 – Significant Accounting Policies” in the 2020 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the financial statements contained in the 2020 Form 10-K when reviewing interim financial results.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to stock-based compensation, capitalization of software development costs, allowance for doubtful accounts, and impairment of long-lived assets and goodwill. 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 support, through our direct sales force or through third-party resellers. Our SaaS fees include continuous support and maintenance.

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

We determine revenue recognition through the following five steps:

● Identify the contract with the customer;

● Identify the performance obligations in the contract;

7

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

● Determine the transaction price;

● Allocate the transaction price to the performance obligations in the contract; and

● Recognize revenue when, or as, the performance obligations are satisfied.

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

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

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

The following table presents our revenues disaggregated by sales channel:

	Nine months ended
	September 30,
(in thousands)	2021		2020
Partner and Marketplace	$	9,936	$	6,781
Enterprise		8,075		8,104
Total revenues	$	18,011	$	14,885

The Company records accounts receivable for amounts invoiced to customers for which the Company has an unconditional right to consideration as provided under the contractual arrangement. Unbilled receivables include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenue includes payments received in advance of performance under the contract. Our unbilled receivables and deferred revenue are reported on an individual contract basis at the end of each reporting period. Unbilled receivables are classified as current or noncurrent based on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of when we expect to recognize revenue.

The table below summarizes our deferred revenue as of September 30, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred revenue - current	$	6,075	$	6,328
Deferred revenue - noncurrent		20		83
Total deferred revenue	$	6,095	$	6,411

8

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the nine-month period ended September 30, 2021 we recognized $5,642,000, or 88%, in revenue from deferred revenue outstanding as of December 31, 2020.

In the three months ended September 30, 2021, two customers (including affiliates of such customers) accounted for 20% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2021, two customers (including affiliates of such customers) accounted for 20% and 10%, respectively, of our total revenue. In the three months ended September 30, 2020, two customers accounted for 15% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2020, one customer accounted for 16% of our total revenue.

Three customers represented 19%, 14% and 11%, respectively, of total accounts receivable as of September 30, 2021. Three customers with long standing relationships with the Company represented 25%, 13% and 13%, respectively, of total accounts receivable as of December 31, 2020.

Deferred Costs (Contract acquisition costs)

We capitalize initial and renewal sales commissions in the period in which the commission is earned, which generally occurs when a customer contract is obtained, and amortize deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term, except when the commission payment is expected to provide economic benefit for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected, and renewal commissions are not commensurate with initial commissions. 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, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred costs - current	$	120	$	152
Deferred costs - noncurrent		49		77
Total deferred costs	$	169	$	229

Amortization expense associated with sales commissions was included in selling and marketing expenses on the statements of operations and totaled $46,000 and $145,000 for the three- and nine-month periods ended September 30, 2021, respectively, and $51,000 and $162,000 for the three- and nine-month periods ended September 30, 2020, respectively. There were no impairment losses for these capitalized costs for the three and nine months ended September 30, 2021 and 2020.

Stock-Based Compensation

The Company periodically issues options, warrants, restricted stock units (“RSUs”), and shares of its common stock as compensation for services received from its employees, directors, and consultants. The fair value of the award is measured on the grant date. The fair value amount is then recognized as expense over the requisite vesting period during which services are required to be provided in exchange for the award. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations as if such amounts were paid in cash.

9

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The fair value of options and warrants awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor, expected term, and forfeiture rates). Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported expenses depending upon their number, value, and vesting period.

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

We expense the compensation cost associated with time-based options, warrants and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based options and RSUs is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for service- and performance-based awards that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is reversed. Compensation costs related to awards with market conditions are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied and is not reversed provided that the requisite service period derived from the Monte-Carlo simulation has been completed. If vesting occurs prior to the end of the requisite service period, expense is accelerated and fully recognized through the vesting date.

The following table summarizes the stock-based compensation expense recorded for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Stock Options	$	143	$	79	$	518	$	200
RSUs		1,602		1,010		4,484		1,804
Unrestricted Shares of Common Stock		136		—		423		—
Total	$	1,881	$	1,089	$	5,425	$	2,004

As of September 30, 2021, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $1,060,000 and $12,799,000, respectively, which may be recognized through March 2026, subject to achievement of service, performance, and market conditions.

10

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the first quarter of 2021, we granted 100,000 RSUs with performance-based and market-based conditions to our Interim Chief Executive Officer (“CEO”). The performance condition for 50,000 of such RSUs is based on the achievement of Monthly Recurring Revenue (“MRR”) targets. In the nine months ended September 30, 2021, stock-based compensation expense associated with performance-based RSUs awarded to our CEO in current and previous years was zero and $411,000, respectively. We did not record any stock-based compensation expense related to the 50,000 performance-based RSUs awarded to our CEO in 2021 as the achievement of performance targets during the requisite period was not deemed probable. The Company will continue to reassess the probability of achieving the performance conditions on any RSUs that remain outstanding in future periods and record the appropriate expense if necessary. The market condition for the remaining 50,000 RSUs in the award is based on the Company’s stock price targets. The Company used a Monte Carlo simulation to determine the grant-date fair value for the market-based RSUs. The weighted-average assumptions used in the Monte-Carlo simulation were as follows: 5-year historical volatility of 116.95%, 5-year risk-free rate of 0.79%, and a performance period of 5 years. The Company recorded $1,509,000 in stock-based compensation expense associated to market-based RSUs in the nine months ended September 30, 2021, $506,000 of which were related to RSUs granted in the current fiscal year.

Earnings (Loss) Per Share (“EPS”)

Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted EPS is calculated based on the net income (loss) available to common stockholders and the weighted average number of shares of common stock outstanding during the period, adjusted for the effects of all potential dilutive common stock issuances related to options, warrants, restricted stock units and convertible preferred stock. The dilutive effect of our stock-based awards and warrants is computed using the treasury stock method, which assumes all stock-based awards and warrants are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. 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 outstanding as of September 30, 2021 and 2020, which were excluded from the computation of basic and diluted net loss per share for the years then ended, are as follows:

	September 30,
( in thousands)	2021	2020
Preferred stock (1)	—	290
Options	213	683
Warrants	41	85
Restricted stock units	1,217	846
Total	1,471	1,904

(1) Represents number of shares of common stock that are issuable upon conversion of outstanding shares of Series A Convertible Preferred Stock.

11

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following table summarizes the stock option, warrants, and RSUs activity for the nine months ended September 30, 2021:

	Options	Warrants	RSUs
Outstanding at December 31, 2020	516,911	81,053	958,378
Granted	39,186	—	597,055
Exercised/Settled	(265,118)	(32,480)	(192,218)
Forfeited/Expired	(78,093)	(7,200)	(145,726)
Outstanding at September 30, 2021	212,886	41,373	1,217,489
Vested at September 30, 2021	78,903	41,373	336,701
Unvested at September 30, 2021	133,983	—	880,788

NOTE 3 — CAPITAL RAISE AND LIQUIDITY

On February 11, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“Agent”) under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock to or through the Agent as its sales agent, having an aggregate offering price of up to $30,000,000. In the nine months ended September 30, 2021, we sold a total of 471,970 shares of common stock under this Sales Agreement for total proceeds of approximately $16.5 million, net of estimated transaction costs.

NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS

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

Finance Leases

The Company has finance leases to purchase computer equipment. The amortization expense of the leased equipment is included in depreciation expense. As of September 30, 2021 and December 31, 2020, the Company’s outstanding finance lease obligations totaled $119,000 and $61,000, respectively. The effective interest rate of the finance leases is estimated at 6.0% based on the implicit rate in the lease agreements.

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

	September 30,		December 31,
(in thousands)	2021		2020
Computer equipment	$	256	$	177
Less: accumulated depreciation		(140)		(116)
Assets acquired under finance leases, net	$	116	$	61

12

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

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

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 Marietta, Georgia.

In addition, the Company entered into membership agreements to occupy shared office space in New York, Austin, Texas, Portland, Oregon, and Seattle, Washington. The membership agreements do not qualify as a lease under ASC 842, therefore the Company expenses membership fees as they are incurred. See Note 8 - Commitments and Contingencies for further details on our shared office arrangements.

The Company made operating lease payments in the amount of $196,000 during the nine months ended September 30, 2021.

The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2021 (in thousands):

Year ending December 31,	Finance Leases		Operating Leases		Total
2021 (3 months remaining)	$	19	$	66	$	85
2022		61		257		318
2023		40		118		158
2024		7		81		88
Total minimum lease payments		127		522		649
Less: present value discount		(8)		(36)		(44)
Total lease liabilities		119		486		605
Current portion of lease liabilities		62		246		308
Long term portion of lease liabilities	$	57	$	240	$	297

The following summarizes expenses associated with our finance and operating leases for the nine months ended September 30, 2021 (in thousands):

Finance lease expenses:
Depreciation expense	$	60
Interest on lease liabilities		6
Total Finance lease expense		66
Operating lease expense		192
Short-term lease and related expenses		174
Total lease expenses	$	432

13

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

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

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

Weighted average remaining lease term (years)
Operating Leases	2.31
Finance Leases	2.10
Weighted average discount rate (%)
Operating Leases	6.00
Finance Leases	6.00

NOTE 5 — DEBT

Term loan

On April 15, 2020, the Company entered into a loan agreement in the amount of $1,302,000 with Liberty Capital Bank (“Lender”) pursuant to the Paycheck Protection Program (“PPP Loan”) of the CARES Act, which is administered by the Small Business Administration (“SBA”). The loan had a maturity of two years and bore an interest rate of 1.0% per annum. In the second quarter of 2021, the SBA approved the Company’s PPP Loan forgiveness application and paid to the Lender the full amount of the PPP Loan and accrued interest thereon on the Company’s behalf, releasing AudioEye from any obligations. In connection with the full forgiveness of the outstanding principal and interest on our PPP Loan, we recorded a $1,316,000 gain on loan forgiveness in the nine months ended September 30, 2021.

NOTE 6 — SERIES A CONVERTIBLE PREFERRED STOCK

In the second quarter of 2021, all 90,000 shares of the outstanding Series A Convertible Preferred Stock (the “Preferred Stock”) were converted to common stock prior to their authorized redemption date of May 25, 2021, as previously announced by the Company. In connection with the Preferred Stock conversion, we issued 279,137 shares of our common stock.  As of September 30, 2021, there were no shares of Preferred Stock outstanding.

NOTE 7 — RELATED PARTY TRANSACTIONS

In the second quarter of 2021, we terminated the lease with a company controlled by our Executive Chairman and closed our Scottsdale, AZ office. For the three- and nine-month period ended September 30, 2021, rent payments for this office space totaled zero and $24,000, respectively.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Membership agreement to occupy shared office space

The Company occupies shared office space in Austin, TX, and Seattle, WA under membership agreements which end in May 2022 and July 2022, respectively. Fees due under these membership agreements are based on the number of contracted seats and the use of optional office services. As of September 30, 2021, minimum fees due under these shared office arrangements totaled $81,000.

14

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

NOTE 8 — COMMITMENTS AND CONTINGENCIES (continued)

Litigation

We may become involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, management believes that the resolution of any such matters, should they arise, is not likely to have a material adverse effect on our financial position or results of operations.

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

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

NOTE 9 — SUBSEQUENT EVENTS

We have evaluated subsequent events occurring after September 30, 2021 and based on our evaluation we did not identify any events that would have required recognition or disclosure in these financial statements, except for the following:

In October 2021, we assumed two lease agreements for office space in Miami Beach, Florida, from Sero Capital, LLC (“Sero Capital”), a stockholder who owns more than 10% of the outstanding shares of common stock of the Company. The sole member of Sero Capital is David Moradi, a director and the Company’s Interim Chief Executive Officer and Chief Strategy Officer. Because the office space is predominately used by Mr. Moradi for his work with the Company and is used by other key company executives, the audit committee deemed the lease and the related expense to be appropriately borne by the Company. The audit committee also determined that the material terms of the lease were market and no less favorable than the Company could have received on an arm’s length basis. The lease agreements assigned to the Company expire in May 2024 and provide for aggregate future lease payments totaling $554,000. In connection with the assignment of the leases, the Company paid Sero Capital $32,000 for the assignment of its rights to the security deposit.

In November 2021, at the request of David Moradi, the Compensation Committee cancelled the 100,000 RSUs with performance-based and market-based conditions that had been granted to him in the first quarter of 2021. No consideration was provided in exchange for the cancellation, which was performed to replenish the shares available under the 2020 Equity Incentive Plan for additional awards to Company employees.

15

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

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

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

Cautionary Note Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

● the inherent uncertainties and costs associated with litigation;

● 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.

16

Background

AudioEye, Inc. (“AudioEye” or the “Company”) was formed as a Delaware corporation on May 20, 2005. On August 1, 2018, the Company amended its Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 25 shares of common stock and to reduce the number of authorized shares of common stock from 250,000,000 to 50,000,000. As a result, 186,994,384 shares of the Company’s common stock were exchanged for 7,479,775 shares of the Company’s common stock.

Overview

AudioEye is an industry-leading software solution provider delivering website accessibility compliance at all price points to businesses of all sizes. Our solutions advance accessibility with patented technology that reduces barriers, expands access for individuals with disabilities, and enhances the user experience for a broader audience. We believe that, when implemented, our solution offers businesses and organizations the opportunity to reach more customers, improve brand image, build additional brand loyalty, and, most importantly, provide an accessible and usable web experience to the expansive and ever-growing global population of individuals with disabilities.

AudioEye primarily generates revenue through the sale of subscriptions for our software-as-a-service (“SaaS”) accessibility solutions. Our solutions are backed by AudioEye’s machine-learning/AI-driven technology that finds and fixes common accessibility errors. Our core and supplemental solutions are designed to help websites and applications achieve and sustain substantial conformance with AudioEye’s interpretation of the Web Content Accessibility Guidelines (“WCAG”) which are web accessibility standards published by the Web Accessibility Initiative of the World Wide Web Consortium, the main international standards organization for the internet. Our solutions help mitigate a customer’s risk of costly digital accessibility-related legal action. AudioEye customers may purchase solutions directly through the AudioEye Marketplace, through a platform partner or an agency, such as Duda, that integrates our solutions into their marketplace, through a vertical Content Management System (“CMS”) partner, through an authorized reseller, or by working directly with the AudioEye sales team. Our offerings serve businesses and organizations of all sizes and at all price points.

AudioEye stands out among its competitors because it delivers machine-learning/artificial intelligence (“AI”)-driven accessibility without fundamental changes to the website architecture. As another differentiator, we offer transparency. Our offerings provide automated remediations and a transparent compliance score with additional manually driven enhancements. AudioEye pairs its patented technology solutions with certified accessibility experts, which allows our customers to achieve a higher level of compliance than competitors relying solely on automation. Our solution is trusted by some of the largest and most influential companies in the world, including ADP, Tommy Hilfiger, 360 Media, Samsung, Darden, Landry’s and more. Government agencies, from the federal level down to the local level, have also integrated our software in their digital platforms, including the Federal Communications Commission and the Social Security Administration.

The AudioEye Solutions

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

Intellectual Property

Our intellectual property is primarily comprised of copyrights, trademarks, trade secrets, issued patents and pending patent applications. We have a patent portfolio comprised of twenty-three (23) issued patents in the United States. We also have three (3) pending US patent applications and three (3) international 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.

17

Our Annual Report filed on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 11, 2021 provides additional information about our business and operations.

Results of Operations

Our unaudited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP” or “GAAP”). The discussion of the results of our operations compares the three and nine months ended September 30, 2021 with the three and nine months ended September 30, 2020.

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)	2021		2020		$		%
Revenue	$	6,202	$	5,341	$	861	16	%
Cost of revenue		(1,567)		(1,551)		(16)	1	%
Gross profit		4,635		3,790		845	22	%
Operating expenses:
Selling and marketing		4,504		2,028		2,476	122	%
Research and development		1,611		203		1,408	694	%
General and administrative		3,175		3,197		(22)	(1)	%
Total operating expenses		9,290		5,428		3,862	71	%
Operating loss		(4,655)		(1,638)		(3,017)	184	%
Other income (expense):
Change in fair value of warrant liability		—		593		(593)	(100)	%
Interest expense		(2)		(35)		33	(94)	%
Total other income (expense)		(2)		558		(560)	100	%
Net loss	$	(4,657)	$	(1,080)	$	(3,577)	331	%

	Nine months ended
	September 30,				Change
(in thousands)		2021		2020		$	%
Revenue	$	18,011	$	14,885	$	3,126	21	%
Cost of revenue		(4,432)		(4,478)		46	(1)	%
Gross profit		13,579		10,407		3,172	30	%
Operating expenses:
Selling and marketing		10,638		5,551		5,087	92	%
Research and development		3,950		801		3,149	393	%
General and administrative		9,502		8,185		1,317	16	%
Total operating expenses		24,090		14,537		9,553	66	%
Operating loss		(10,511)		(4,130)		(6,381)	155	%
Other income (expense):
Change in fair value of warrant liability		—		120		(120)	(100)	%
Gain on loan forgiveness		1,316		—		1,316	100	%
Interest expense		(11)		(141)		130	(92)	%
Total other income (expense)		1,305		(21)		1,326	6,314	%
Net loss	$	(9,206)	$	(4,151)	$	(5,055)	122	%

18

Revenue

The following tables present our revenues disaggregated by sales channel:

	Three months ended September 30,				Change
(in thousands)	2021		2020		$		%
Partner and Marketplace	$	3,384	$	2,549	$	835	33	%
Enterprise		2,818		2,792		26	1	%
Total revenues	$	6,202	$	5,341	$	861	16	%

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
Partner and Marketplace	$	9,936	$	6,781	$	3,155	47	%
Enterprise		8,075		8,104		(29)	—	%
Total revenues	$	18,011	$	14,885	$	3,126	21	%

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.

For the three and nine months ended September 30, 2021, total revenue increased by 16% and 21%, respectively, over the prior year comparable periods. This increase in total revenues was driven by higher Partner and Marketplace channel revenue as a result of our continued focus on highly transactional industry verticals to achieve higher penetration within our existing partnerships. The Enterprise channel revenue remained consistent with prior year periods as a decrease in customer demand for our PDF remediation services was offset by an increase in recurring revenue sources. The recurring revenue sources were 12% higher in the three and nine months ended September 30, 2021, respectively, than in the prior year comparable periods.

Cost of Revenue and Gross Profit

	Three months ended September 30,				Change
(in thousands)	2021		2020		$		%
Revenue	$	6,202	$	5,341	$	861	16	%
Cost of Revenue		(1,567)		(1,551)		(16)	1	%
Gross profit	$	4,635	$	3,790	$	845	22	%

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
Revenue	$	18,011	$	14,885	$	3,126	21	%
Cost of Revenue		(4,432)		(4,478)		46	(1)	%
Gross profit	$	13,579	$	10,407	$	3,172	30	%

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, 2021, cost of revenue remained consistent with the prior year comparable periods as the reduction in delivery support costs from continued operating efficiencies was offset by an increase in the cost of hosting fees and the increased amortization of capitalized software development costs.

19

For the three and nine months ended September 30, 2021, gross profit increased by 22% and 30%, respectively, over the prior year comparable periods. The increase in gross profit was a result of increased revenue and continued improvement in technology driven efficiencies as we scale, offset in part by higher costs to support the revenue growth.

Selling and Marketing Expenses

	Three months ended September 30,				Change
(in thousands)	2021		2020		$		%
Selling and marketing	$	4,504	$	2,028	$	2,476	122	%

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
Selling and marketing	$	10,638	$	5,551	$	5,087	92	%

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

For the three and nine months ended September 30, 2021, selling and marketing expenses increased by 122% and 92%, respectively, over the prior year comparable periods. The increase in selling and marketing expenses resulted primarily from an increase in personnel costs, driven by focused talent acquisition, and higher digital and third-party marketing agency expenses as we continue to expand our business.

Research and Development Expenses

	Three months ended September 30,				Change
(in thousands)	2021		2020		$		%
Research and development expense	$	1,611	$	203	$	1,408	694	%
Plus: Capitalized research and development cost		370		289		81	28	%
Total research and development cost	$	1,981	$	492	$	1,489	303	%

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
Research and development expense	$	3,950	$	801	$	3,149	393	%
Plus: Capitalized research and development cost		1,213		659		554	84	%
Total research and development cost	$	5,163	$	1,460	$	3,703	254	%

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

20

For the three and nine months ended September 30, 2021, research and development expenses increased by 694% and 393%, respectively, over the prior year comparable periods. This increase was driven by higher investment in non-capitalizable R&D efforts related to our new product and platform development as we test new capabilities and continuously enhance our offerings. For the three and nine months ended September 30, 2021, capitalized research and development cost increased 28% and 84%, respectively, over the prior year comparable periods, driven by increased investment in our platforms and products as we continue to improve our technology and product delivery to help our customers and gain efficiencies as we scale. For the three and nine months ended September 30, 2021, total research and development cost, which includes both R&D expenses and capitalized R&D costs, increased by 303% and 254%, respectively, over the prior year comparable periods.

General and Administrative Expenses

	Three months ended September 30,				Change
(in thousands)	2021		2020		$		%
General and administrative	$	3,175	$	3,197	$	(22)	(1)	%

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
General and administrative	$	9,502	$	8,185	$	1,317	16	%

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

For the nine months ended September 30, 2021, general and administrative expenses increased by 16% over the prior year comparable period. The increase in general and administrative expenses was due primarily to higher compensation costs, including stock-based compensation expense, driven by increased headcount to support the Company’s growth, systems infrastructure improvement and legal expenses towards intellectual property litigation pursued by the Company.

Change in fair value of warrant liability

	Three months ended September 30,				Change
(in thousands)	2021		2020		$		%
Change in fair value of warrant liability	$	—	$	593	$	(593)	(100)	%

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
Change in fair value of warrant liability	$	—	$	120	$	(120)	(100)	%

Change in fair value of warrant liability consists of fair value adjustments associated with warrants to purchase 146,667 shares of the Company’s common stock, which were issued in consideration for the credit facility extended by Sero Capital in the third quarter of 2019. In the third quarter of 2020, the warrants were fully exercised and the related liability was extinguished.

Gain on loan forgiveness

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
Gain on loan forgiveness	$	1,316	$	—	$	1,316	100	%

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

21

Interest Expense

	Three months ended September 30,				Change
(in thousands)	2021		2020		$		%
Interest expense	$	2	$	35	$	(33)	(94)	%

	Nine months ended
	September 30,				Change
(in thousands)	2021		2020		$		%
Interest expense	$	11	$	141	$	(130)	(92)	%

Interest expense for the three months ended September 30, 2021 consists of interest on our finance lease liabilities. Interest expense for the nine months ended September 30, 2021 also includes interest on our PPP Loan. The higher interest expense for the three and nine months ended September 30, 2020 was attributable to the amortization of deferred issuance costs associated with our line of credit, which expired in August 2020.

Key Operating Metrics

We consider monthly recurring revenue (“MRR”) as a key operating metric and a key indicator of our overall business. We also use MRR as (i) 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; and (ii) as a performance metric for certain executive stock-based compensation awards.

We define MRR as the sum of (i) for our Enterprise channel, the total of the average monthly recurring fee amount under each active paid contract at the date of determination, plus (ii) for our Partner and Marketplace channel, the recognized monthly fee amount for all paying customers at the date of determination, in each case, assuming no changes to the subscription and without taking into account any usage above the subscription or recurring revenue base, if any, that may be applicable to such subscription. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are cancelable, which may impact future MRR. MRR excludes revenue from our PDF remediation services business and Mobile App report business. As of September 30, 2021, MRR was $2.1 million, which represents an increase of 24% year-over-year driven by both our Partner and Marketplace channel and Enterprise Channel.

Use of Non-GAAP Financial Measures

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

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

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

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

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

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

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

	Three months ended September 30,				Nine months ended September 30,
(in thousands, except per share data)	2021		2020		2021		2020
Non-GAAP Earnings (Loss) Reconciliation
Net loss (GAAP)	$	(4,657)	$	(1,080)	$	(9,206)	$	(4,151)
Non-cash valuation adjustments to liabilities		—		(593)		—		(120)
Interest expense		2		35		11		141
Stock-based compensation expense		1,881		1,089		5,425		2,004
Severance (1)		—		360		—		360
Loss on impairment of long-lived assets		—		—		10		—
Loss on disposal of property and equipment		—		—		12		—
Gain on loan forgiveness		—		—		(1,316)		—
Non-GAAP loss	$	(2,774)	$	(189)	$	(5,064)	$	(1,766)
Non-GAAP Earnings (Loss) per Diluted Share Reconciliation
Net loss per common share (GAAP) — diluted	$	(0.41)	$	(0.12)	$	(0.85)	$	(0.46)
Non-cash valuation adjustments to liabilities		—		(0.06)		—		(0.01)
Interest expense		—		—		—		0.02
Stock-based compensation expense		0.17		0.12		0.50		0.22
Severance (1)		—		0.04		—		0.04
Loss on impairment of long-lived assets		—		—		—		—
Loss on disposal of property and equipment		—		—		—		—
Gain on loan forgiveness		—		—		(0.12)		—
Non-GAAP loss per diluted share (2)	$	(0.24)	$	(0.02)	$	(0.47)	$	(0.19)
Diluted weighted average shares (3)		11,329		9,385		10,929		9,067

(1) Represents severance expense associated with the move of our technology center to Portland, Oregon, and is exclusive of accrued vacation paid upon termination of employment.

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

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

Liquidity and Capital Resources

Working Capital

As of September 30, 2021, we had $21,953,000 in cash and working capital of $16,951,000. The increase in working capital in the nine months ended September 30, 2021 was primarily a result of capital raised under the previously announced At The Market offering (“ATM offering”) initiated in the first quarter of 2021. In the nine months ended September 30, 2021, the Company issued 471,970 shares of its common stock under the ATM offering and raised $16,534,000, net of transaction expenses.

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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.

(in thousands)	September 30, 2021		December 31, 2020
Current assets	$	26,465	$	14,631
Current liabilities		(9,514)		(9,015)
Working capital	$	16,951	$	5,616

Cash Flows

	Nine months ended September 30,
(in thousands)	2021		2020
Net cash used in operating activities	$	(2,471)	$	(1,050)
Net cash used in investing activities		(1,287)		(800)
Net cash provided by financing activities		16,616		10,173
Net increase in cash	$	12,858	$	8,323

For the nine months ended September 30, 2021, in relation to the prior year comparable period, cash used in operating activities increased primarily due to an increase in sales and marketing costs, primarily driven by higher digital, consulting and third-party costs to support the Company’s growth, as well as increased product development headcount.

For the nine months ended September 30, 2021, in relation to the prior year comparable period, cash used in investing activities increased primarily due to investment in new technologies for enhancements to our product offerings.

For the nine months ended September 30, 2021, in relation to the prior year comparable period, cash provided by financing activities increased primarily due to capital raised under the ATM Offering initiated in the first quarter of 2021. In the nine months ended September 30, 2021, the Company issued 471,970 shares of its common stock under the ATM offering and raised $16,534,000, net of transaction expenses. In the third quarter of 2020, we received net proceeds of $7,824,000 from a public offering whereby we issued 473,239 shares of our common stock. In addition, in the second quarter of 2020, we obtained a $1,302,000 PPP loan, which was fully forgiven in the second quarter of 2021.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. Preparing financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by our management’s application of accounting policies.

Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, relate to revenue recognition, allowance for doubtful accounts, capitalized software development costs, and stock-based compensation. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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

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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 Interim 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. In light of the material weaknesses noted in our Annual Report on Form 10-K for our fiscal year ended December 31, 2020, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.

Changes in Internal Controls over Financial Reporting

There were no material changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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, 2020 (“2020 Form 10-K”), which could materially affect our business, financial condition and results of operations. The risks described in our 2020 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, 2021:

				Total Number of	Maximum Number
				Shares Purchased	of Shares that May
	Total Number of			as Part of Publicly	Yet Be Purchased
	Shares Purchased	Average Price		Announced Plans or	under the Plans or
	(1)	Paid per Share		Programs	Programs
July 1 - July 31	506	$	13.86	—	—
August 1 - August 31	657		12.95	—	—
September 1 - September 30	3,566		11.43	—	—
Total	4,729	$	11.90	—	—

(1) Amount represents shares surrendered by employees to satisfy tax withholding obligations resulting from restricted stock units settled during the three months ended September 30, 2021.

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Item 5. Other Information

Because the Company is filing this Quarterly Report on Form 10-Q within four business days after the triggering event, we are making the following disclosure under this Item 5 instead of filing a Current Report on Form 8-K under Item 5.02, Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers:

On November 11, 2021, the Compensation Committee of the Board of Directors of the Company cancelled the 100,000 performance stock units (the “PSUs”) that had been granted on March 11, 2021 to David Moradi, the Company’s Interim Chief Executive Officer and Chief Strategy Officer, under the Company’s 2020 Equity Incentive Plan (the “2020 Plan”). The grant of PSUs had been reported by the Company on a Form 8-K filed on March 15, 2021.

At the request of Mr. Moradi, the Compensation Committee cancelled the PSUs for no consideration in order to facilitate the granting of additional awards under the 2020 Plan to Company employees.  Pursuant to the 2020 Plan, the 100,000 shares of Company common stock underlying the cancelled PSUs are now again available for awards under the 2020 Plan and the share reserve under the 2020 Plan is correspondingly replenished.

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Item 6. Exhibits

Exhibit  No.	Description
3.1	Certificate of Incorporation of AudioEye, Inc., dated as of May 20, 2005 (1)
3.2	Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of February 12, 2010 (1)
3.3	Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of August 16, 2012 (2)
3.4	Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of March 26, 2014 (3)
3.5	Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of August 1, 2018 (4)
3.6	Certificate of Designations - Series A Convertible Preferred Stock (5)
3.7	Certificate of Correction to the Certificate of Validation relating to the Series A Convertible Preferred Stock (included to correct a previously provided hyperlink that linked to an incorrect exhibit) (6)
3.8	Amended and Restated ByLaws as of August 13, 2020 (7)
10.1*	Amendment dated September 17, 2021 to Executive Employment Agreement between Dominic Varacalli and AudioEye, Inc.
10.2*	Employee Offer Letter dated March 16, 2021 between Christopher Hundley and AudioEye, Inc.
10.3*	Amendment dated September 17, 2021 to Employee Offer Letter between to Christopher Hundley and AudioEye, Inc.
10.4*	Confidentiality, Proprietary Rights, Non-Competition, and Non-Solicitation Agreement dated March 21, 2021 between Christopher Hundley and AudioEye, Inc.
31.1*	Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)

* Filed herewith.

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(1) Incorporated by reference to Form S-1, filed with the U.S. Securities and Exchange Commission (the “SEC”) on October 21, 2011 (File No. 333-177463).

(2) Incorporated by reference to Form S-1/A, filed with the SEC on October 1, 2012 (File No. 333-177463).

(3) Incorporated by reference to Form 10-K, filed with the SEC on March 31, 2014.

(4) Incorporated by reference to Form 8-K, filed with the SEC on August 7, 2018.

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

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

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

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SIGNATURES

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

		AUDIOEYE, INC.
Date:	November 12, 2021	By:	/s/ David Moradi
			David Moradi
			Principal Executive Officer
Date:	November 12, 2021	By:	/s/ Kelly Georgevich
			Kelly Georgevich
			Principal Financial Officer

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EX-10.1

Exhibit 10.1

AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

THIS AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT (the “Amendment”) is made and entered into as of September 17, 2021 (the “Amendment Effective Date”), by and between AudioEye, Inc. (the “Company”) and Dominic Varacalli (“Executive”).

WHEREAS, Executive and the Company are parties to an August 13, 2020 Executive Employment Agreement (the “Employment Agreement”); and

WHEREAS, the parties wish to amend the Employment Agreement as provided herein.

NOW, THEREFORE, in consideration of the mutual covenants, and intending to be legally bound, the parties agree as follows:

1.The third “WHEREAS” clause of the Employment Agreement is amended such that it is deleted and replaced with the following:

WHEREAS, since the Effective Date, Executive has served as the President, and the Company now wishes to offer Executive the position of Chief Operating Officer (the “Position”) and Executive wishes to accept such Position and the associated additional compensation and benefits.

2.Section 1 of the Employment Agreement is amended such that the first paragraph is deleted and replaced in its entirety as follows:

Effective on the Effective Date, the Company promoted Executive to the position of President. Effective on the Amendment Effective Date, by mutual agreement, Executive shall cease being the President and shall serve in the Position. In the Position, Executive shall report to the Chief Executive Officer (“CEO”). The duties and responsibilities of Executive in the Position shall include the duties and responsibilities typical of a Chief Operating Officer and such other duties and responsibilities as the CEO may from time to time reasonably assign to Executive.

3.Section 4 of the Employment Agreement is amended such that the number $210,000 is deleted and replaced with the number $275,000.

4.Section 5 of the Employment Agreement is amended such that the entire section is deleted and replaced with the following:

Executive was paid a prorated performance bonus for calendar year 2020. Thereafter, including with respect to calendar year 2021, Executive’s performance bonus opportunity terminated.

5.This Amendment shall supersede and replace all prior communications and agreements, formal or informal, concerning the amendment of the Employment Agreement,

and this Amendment may not be amended or revised except by written agreement by the Parties.

6.Except as provided herein, the Employment Agreement shall remain unchanged and in full force and effect.

[Remainder of page intentionally left blank; signature page follows.]

IN WITNESS WHEREOF, Executive and the Company have caused this Amendment to Executive Employment Agreement to be executed as of the Amendment Effective Date.

THE COMPANY	EXECUTIVE
/s/ David Moradi	/s/ Dominic Varacalli
By: David Moradi	Dominic Varacalli

EX-10.2

Exhibit 10.2

March 16, 2021

Christopher Hundley

[redacted]

RE: Offer of Employment

Dear Mr. Hundley,

On behalf of AudioEye, Inc., a Delaware corporation, I am pleased to offer you a position as Chief Technology Officer. This offer is contingent upon your ability to provide proof of valid work authorization, and if applicable, the renewal of any temporary work authorization or change to permanent work authorization, compliance with AudioEye’s Policies and Procedures which include a Non-compete clause and your passing of AudioEye, Inc.’s prospective employee background review. The background review consists of a drug test, reference checks, a state and federal criminal background check. Furthermore, you certify your understanding that the first three months of your employment is an introductory period as outlined in the employee handbook.

We anticipate your first day of employment to be on or about March 22, 2021and you will be reporting directly to David Moradi, Chief Executive Officer.

Your base compensation will be a bi-monthly salary of $14,583.34, which equates to an annual base salary of $350,000.

In addition, you will be granted $1.7 million worth of Restricted Stock Units (RSUs). Sixty-percent (60%) of such RSU’s will vest annually in equal installments on each of the first three anniversaries of that date that your employment with the Company commences, provided you are continuously employed through those dates. Forty-percent (40%) of such RSU’s (the “Performance RSU’s”) will vest annually in equal amounts over the same three (3)-year period subject to the achievement of

annual performance targets agreed upon by you and the Company, provided that you are continually employed through those dates. The value of the RSUs will be determined on your start date by reference to the prior 10-day VWAP of our shares of Common Stock on Nasdaq.  Any such RSUs are subject to the terms of the Company’s applicable incentive compensation plan, the attendant RSU agreement and approval by the Board of Directors of the Company, and may be adjusted in the event of any stock split, stock dividend or other similar, recapitalization or other similar event.

Furthermore, as an AudioEye, Inc. employee, you will have the opportunity to participate, subject to the expressed terms and conditions of the respective plans, in a comprehensive package of benefit plans subject to plan or program eligibility requirements. The Company reserves the right to change or rescind its benefit plans and programs and the Company may, in its discretion, alter employee contribution levels. At present, Company benefits include, among other things, flexible paid time off and certain other permitted leaves as described more fully in the Company’s Employee Handbook. The Company also currently maintains a medical insurance and 401K plan with respect to which you will be provided appropriate information and enrollment documents.

During New Hire Orientation you will be provided a copy of the employee handbook, which describes AudioEye’s policies and procedures that will govern certain aspects of your employment. This information will also include an outline of the benefits that are available to you, as well as the eligibility dates.

In accepting our offer of employment, you certify your understanding that your employment will be on an at-will basis, and that neither you nor AudioEye, Inc. has entered into a contract regarding the terms or the duration of your employment. As an at-will employee, you will be free to terminate your employment with AudioEye, Inc. at any time, with or without cause or advance notice. Likewise, AudioEye, Inc. will have the right to reassign you, to change your compensation, or to terminate your employment at any time, with or without cause or advance notice.

Christopher, we are excited about having you join the AudioEye team. Should you have any questions in the meantime, please do not hesitate to contact me.

To indicate acceptance of this offer, please sign this letter in the space provided and return as soon as possible. We look forward to having you join AudioEye, Inc.

Sincerely,

/s/ Brittani Morelli

Brittani Morelli

Director of Human Resources

If you agree with the above outline, please sign below and return. This offer will expire in three (3) days.

Agreed to and accepted:

Name: Christopher Hundley

/s/ Christopher Hundley

(Signature)

3/16/21

Date:

EX-10.3

Exhibit 10.3

September 17, 2021

Christopher Hundley

[redacted]

RE: Revised Offer of Employment

Dear Mr. Hundley,

On behalf of AudioEye, Inc. (the “Company”), I am pleased to provide you this letter, which amends the offer of employment extended to you by my March 16, 2021 letter (the “Original Offer Letter”).

Effective on September 17, 2021, you shall no longer serve as the Company’s Chief Technology Officer and shall instead become the Company’s President. It this role, you shall perform duties typical of the position of President and such additional or different duties as the Company may assign from time to time. You will continue to report to David Moradi, Chief Executive Officer, in your new role.

To the extent this letter does not address terms in the Original Offer Letter (e.g., compensation and benefits), those terms remain unchanged. Additionally, the AudioEye Confidentiality, Proprietary Rights, Non-Competition, and Non-Solicitation Agreement that you signed in connection with commencing employment with the Company will remain in full force and effect, without change, and by your signature below you reaffirm your obligations as set forth in that agreement.

This letter supersedes and replaces any prior discussions that you have had with anyone at the Company concerning moving into the President position.

To indicate your agreement with the above, please sign this letter in the space provided below and return it as soon as you have had sufficient time to review and consider it. We thank you for your contributions to date and look forward to continuing to work with you in your new role.

Sincerely,

/s/ Brittani Morelli

Brittani Morelli

Director of Human Resources

If you agree with the above, please sign below and return.

Agreed to and accepted:

Name: Christopher Hundley

/s/ Christopher Hundley

(Signature)

9/23/2021

Date:

EX-10.4

Exhibit 10.4

AUDIOEYE, INC.

CONFIDENTIALITY, PROPRIETARY RIGHTS, NON-COMPETITION, AND NON-SOLICITATION AGREEMENT

THIS CONFIDENTIALITY, PROPRIETARY RIGHTS, NON-COMPETITION, AND NON-SOLICITATION AGREEMENT  (this  “Agreement”)  is  entered  into  on  3/21/21  (the  “Effective  Date”)  by  and  between AUDIOEYE, INC., a Delaware corporation (the “Company”) and Chris Hundley (the “Employee”).

In consideration of the mutual covenants and promises of the parties hereto, including, without limitation, the employment or continued employment of the Employee by the Company and the Employee’s receipt of Confidential Information (as defined below)  and  access  to  customer  goodwill,  and  other  good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows.

1.DEFINITIONS. All capitalized terms not defined elsewhere in this Agreement shall have the following meanings, unless the context clearly require otherwise.

“Company’s Business” means the business of (i) developing, marketing, selling, and licensing technology, software, and related products and services relating to ADA and other digital accessibility federal, state and local compliance requirements and (ii) such other business in which the Company is engaged, or actively preparing to engage, during the last year of the Employee’s employment with the Company or any of its affiliates.

“Intellectual Property Rights” means all rights in and to U.S. and foreign (i) patent applications, patents, patent disclosures, and inventions (whether patentable or not), (ii) trademarks, service marks, trade dress, trade names, logos, corporate names, and domain names, and other similar designations of source or origin, together with the goodwill symbolized by any of the foregoing, (iii) copyrights and works of authorship (whether copyrightable or not), including computer programs, and rights in data and databases, (iv) trade secrets, know- how, and other Confidential Information, and (v) all other intellectual property rights, in each case whether registered or unregistered, and including all registrations and applications for, and renewals or extensions of, such rights, and all similar or equivalent rights or forms of protection in any part of the world.

“Pre-Existing Intellectual Property Rights” means all Intellectual Property Rights owned by the Employee, whether solely or jointly with any third party, that were created or invented by the Employee prior to the Employee’s employment by the Company and relate in any way to the Company’s Business, including, but not limited to, any invention and works of authorship, and any registrations and applications arising from or related to the foregoing.

“Restricted Period” means a period of one (1) year following the termination of the Employee’s employment with the Company or, if later, with any of its affiliates, regardless of the reason for termination and whether caused by the Employee or the Company.

“Territory” means (i) the United States and, (ii) any other country(ies) in which the Company comes to operate, either directly or through the engagement of a distributor or joint or co-venturer, or sell a significant amount of its products and services during the Employee’s employment with the Company or any of its affiliates.

“Work  Product”  means  all  writings,  technology,  inventions,  discoveries,  processes,  techniques,

or result from any work performed by the Employee for the Company (in each case, regardless of when or where the work product is prepared or whose equipment or other resources is used in preparing the same), all rights and claims related to the foregoing, and all printed, physical, and electronic copies, and other tangible embodiments thereof. Work Product also includes, but is not limited to, contracts, negotiations, know-how, computer programs, computer applications, software design, web design, work in process, databases, manuals, results, developments, reports, graphics, market studies, notes, communications, algorithms, product designs, audiovisual programs, inventions, unpublished patent applications, original works of authorship, discoveries, specifications, customer information, customer lists, advertising information, and sales information.

2. CONFIDENTIALITY.

2.1 Confidential Information.

The Employee understands and acknowledges that during the course of employment by the Company, the Employee will have access to and learn about trade secret, confidential, secret, and proprietary documents, materials, data, and other information, in tangible and intangible form, of and relating to the Company’s Business, and including but not limited to, existing and prospective customers, suppliers, distributors, investors, and other associated third parties (“Confidential Information”). The Employee further understands and acknowledges that this Confidential Information and the Company’s ability to reserve it for the exclusive knowledge and use of the Company is of great competitive importance and commercial value to the Company, and that unauthorized use or disclosure of the Confidential Information by the Employee will cause irreparable harm to the Company, for which remedies at law will not be adequate, and may also cause the Company to incur financial costs, loss of business advantage, liability under confidentiality agreements with third parties, and civil damages.

For purposes of this Agreement, Confidential Information also includes, but is not limited to, all information not generally known to the public or to the Company’s competitors, business plans, documents, research, operations, strategies, techniques, agreements, negotiations, know-how, trade secrets, computer software, operating systems, software design, databases, manuals, financial and accounting information, marketing and advertising information, pricing information, internal controls, sales information, designs, inventions, unpublished patent applications, original works of authorship, discoveries, experimental processes, and specifications, of the Company or of any other person or entity that has entrusted information to the Company in confidence.

The Employee understands that the above list is not exhaustive, and that Confidential Information also includes other information that is marked or otherwise identified as confidential or proprietary, or that would otherwise appear to a reasonable person to be confidential or proprietary in the context and circumstances in which the information is known or used.

Confidential Information shall not include information that is generally available to and known by the public, provided that such disclosure to the public is through no direct or indirect fault of the Employee or person(s) acting on the Employee’s behalf.

2.2Disclosure and Use Restrictions. The Employee agrees and covenants:

(i)to treat all Confidential Information as strictly confidential;

(ii)not to directly or indirectly disclose, publish, communicate, or make available Confidential Information, or allow it to be disclosed, published, communicated, or made available, in whole or part, to any entity or person whatsoever (including other employees of the Company) not having a need to know and authority

to know and use the Confidential Information in connection with the Company’s Business and, in any event, not to anyone outside of the direct employ of the Company, except as required in the performance of any of the Employee’s authorized employment duties to the Company, and only after execution of a confidentiality agreement by the third party with whom Confidential Information will be shared or with the prior consent of an authorized officer acting on behalf of the Company in each instance (and then, such disclosure shall be made only within the limits and to the extent of such duties or consent); and

(iii)not to access or use any Confidential Information, and not to copy any documents, records, files, media, or other resources containing any Confidential Information, or remove any such documents, records, files, media, or other resources from the premises or control of the Company, except as required in the performance any of the Employee’s authorized employment duties to the Company or with the prior consent of an authorized officer acting on behalf of the Company in each instance (and then, such disclosure shall be made only within the limits and to the extent of such duties or consent).

2.3Permitted Disclosures. Nothing in this Agreement prohibits or restricts the Employee (or the Employee’s attorney) from filing a charge or complaint with the Securities and Exchange Commission (the “SEC”) or any self-regulatory organization or federal or state regulatory authority (collectively with the SEC, “Government Agencies”). The Employee further understands that this Agreement does not limit the Employee’s ability to communicate with or provide information to any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency in connection with reporting a possible securities law or other violation without notice to the Company. This Agreement does not limit the Employee’s right to receive an award for information provided to any Government Agencies.

Nothing in this Agreement in any way prohibits or is intended to restrict or impede the Employee from discussing the terms and conditions of the Employee’s employment with co-workers, exercising protected rights under Section 7 of the National Labor Relations Act, or exercising protected rights to the extent that such rights cannot be waived by agreement, or otherwise disclosing information as permitted by law.

2.4Notice of Immunity Under the Economic Espionage Act of 1996, as amended by the Defend Trade Secrets Act of 2016. Notwithstanding any other provision of this Agreement:

(i)The Employee will not be held criminally or civilly liable under any federal or state trade secret law for any disclosure of a trade secret that is made: (a) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney and solely for the purpose of reporting or investigating a suspected violation of law; or (b) in a complaint or other document that is filed under seal in a lawsuit or other proceeding; and

(ii)If the Employee files a lawsuit for retaliation by the Company for reporting a suspected violation of law, the Employee may disclose the Company’s trade secrets to the Employee’s attorney and use the trade secret information in the court proceeding if the Employee (a) files any document containing the trade secret under seal; and (b) does not disclose the trade secret, except pursuant to court order.

2.5Duration of Confidentiality Obligations. The Employee understands and acknowledges that the Employee’s obligations under this Agreement regarding any particular Confidential Information begin immediately and shall continue during and after the Employee’s employment by the Company until the Confidential Information has become public knowledge other than as a result of the Employee’s breach of this Agreement or a breach by those acting in concert with the Employee or on the Employee’s behalf.

3. PROPRIETARY RIGHTS.

3.1 Pre-Existing Intellectual Property Rights.

The Employee has attached as Exhibit “A” to this Agreement, or has attached to a previously executed version of this Agreement, a list describing with particularity any Pre-Existing Intellectual Property Rights, including, if applicable, titles and registration and application numbers. The Pre-Existing Intellectual Property Rights will be retained by the Employee and will not be owned by or assigned to the Company under this Agreement. If no list is attached as Exhibit “A” to this Agreement, and no list was attached to any previously executed version of this Agreement then the Employee hereby represents and warrants that there are no Pre- Existing Intellectual Property Rights.

To the extent that the Employee incorporates any Pre-Existing Intellectual Property Rights into any Work Product during the period of the Employee’s employment by the Company, the Employee hereby irrevocably grants to the Company a royalty-free, fully paid-up, perpetual, transferable, worldwide non-exclusive license (with the right to sublicense) to make, have made, copy, modify, make derivative works of, use, offer to sell, sell, import, and otherwise distribute such Pre-Existing Intellectual Property Rights as part of or in connection with such Work Product, and to practice any method related thereto.

The Employee shall not incorporate any Pre-Existing Intellectual Property Rights or any Intellectual Property Rights that are owned by any third party, including any former employer, into any Work Product without obtaining the prior written consent of the Company.

3.2 Work Product. The Employee hereby acknowledges and agrees that:

(i)All right, title, and interest in and to all Work Product as well as any and all Intellectual Property Rights therein and all improvements thereto shall be the sole and exclusive property of the Company;

(ii)The Company shall have the unrestricted right (but not any obligation), in its sole and absolute discretion, to (a) use, commercialize, or otherwise exploit any Work Product or (b) file patent applications, copyright registration, or registration of any other Intellectual Property Rights, and prosecute or abandon such application prior to issuance or registration. No royalty or other consideration shall be due or owing to the Employee now or in the future as a result of such activities; and

(iii)The Work Product is and shall at all times remain the Confidential Information of the Company.

3.3Disclosure of Work Product; Maintenance of Records. During the Employee’s employment, the Employee shall promptly make written disclosures to the Company of all Work Product, and shall at all times keep and maintain adequate, current, accurate, and authentic records of all Work Product. Such records may be in the form of notes, drawings, flow charts, electronic files, notebooks, reports, or any other format that may be specified by the Company. The records shall at all times be the sole and exclusive property of the Company and the Employee agrees not to remove such records from the Company’s premises, except as may be expressly permitted by the Company in its written policies or by its prior written consent.

3.4Ownership and Assignment.  The Employee acknowledges that, by reason of being employed by the Company at the relevant times, to the extent permitted by law, all Work Product consisting of copyrightable subject matter is “work made for hire” as defined in the Copyright Act of 1976 (17 U.S.C. § 101), and such copyrights are therefore owned by the Company. To the extent that the foregoing does not apply, the Employee

hereby irrevocably assigns to the Company, and its successors and assigns, for no additional consideration, the Employee’s entire right, title, and interest in and to all Work Product and Intellectual Property Rights, including without limitation the right to sue, counterclaim, and recover for all past, present, and future infringement, misappropriation, or dilution thereof, and all rights corresponding thereto throughout the world. Nothing contained in this Agreement shall be construed to reduce or limit the Company’s right, title, or interest in any Work Product or Intellectual Property Rights so as to be less in any respect than the Company would have had in the absence of this Agreement.

3.5State Law Limitations on Assignment. The Employee understands and acknowledges that Work Product does not include, and any provision in this Agreement requiring the Employee to assign (or otherwise providing for ownership by the Company of) rights to Work Product does not apply to, any Work Product that the Employee develops entirely on the Employee’s own time without using the Company’s equipment, supplies, facilities, or trade secret information, except for Work Product which either (i) relates at the time of creation directly to the Company’s Business, or actual or demonstrably anticipated research or development of the Company; or (ii) results from any work performed by the Employee for the Company.

3.6Further Assurances; Power of Attorney. During and after the Employee’s employment, the Employee agrees to reasonably cooperate with the Company at the Company’s expense to (i) apply for, obtain, perfect, and transfer to the Company the Work Product as well as any and all Intellectual Property Rights in the Work Product in any jurisdiction throughout the world, and (ii) maintain, protect and enforce the same, including without limitation giving testimony and executing and delivering to the Company any and all applications, oaths, declarations, affidavits, waivers, assignments, and other documents and instruments as may be requested by the Company. The Employee hereby irrevocably grants the Company power of attorney to execute and deliver any such documents on the Employee’s behalf in the Employee’s name and to do all other lawfully permitted acts to transfer legal ownership of the Work Product to the Company and further the transfer, prosecution, issuance, and maintenance of all Intellectual Property Rights therein, to the full extent permitted by law, if the Employee does not promptly cooperate with the Company’s request (without limiting the rights the Company shall have in such circumstances by operation of law). This power of attorney is coupled with an interest and shall not be affected by the Employee’s subsequent incapacity.

3.7Moral Rights. To the extent any copyrights are assigned under this Section 3, the Employee hereby irrevocably waives in favor of the Company, to the extent permitted by applicable law, any and all claims the Employee may now or hereafter have in any jurisdiction to all rights of paternity or attribution, integrity, disclosure, and withdrawal and any other rights that may be known as “moral rights” in relation to all works of authorship to which the assigned copyrights apply.

4. NON-COMPETITION AND NON-SOLICITATION.

4.1Acknowledgements. The Employee acknowledges that, through the Employee’s employment with the Company, the Employee will be exposed to and gain information concerning the Company and its operations, including Confidential Information. Moreover, through the Employee’s employment with the Company, the Employee may have direct contact with customers and may develop customer goodwill and relationships on behalf of the Company. If the Employee used such information and/or contacts, among other things, to compete with or assist another company or entity in competing with the Company, it would cause immediate, substantial and irreparable harm to the Company. The Employee represents to the Company that the Employee is willing and able, after any separation from the Company, to engage in a business that does not compete with the Company’s Business and that enforcement of the restrictions set forth below would not be unduly burdensome to the Employee. The Employee also acknowledges that the technology, software, and related products and services developed or provided by the Company and its affiliates relating to ADA-related and other digital accessibility compliance requirements and enhancements are or are intended to be sold, provided, licensed and/or distributed to customers and clients primarily in and throughout the Territory.

4.2Restrictions. The Employee hereby agrees and covenants that, during his employment with the Company and any of its affiliates and the Restricted Period, the Employee will not, either individually or as an employee, stockholder, partner, member, agent, independent contractor, consultant, controlling creditor, representative, interested party or otherwise, within the Territory, without the prior written consent of the Company, directly or indirectly:

(i)Engage in the Company’s Business or any other business activity that competes with the Company’s Business;

(ii)Perform services the same or substantially similar to those the Employee provided to the Company, or any other executive or managerial-level functions, for any person or entity engaged in the Company’s Business;

(iii)Recruit, solicit or hire; attempt to recruit, solicit or hire; or assist another person or entity to recruit, solicit or hire any current or former employee, or independent contractor of the Company with whom the Employee had contact while employed with the Company and who was employed by or contracted with the Company any time during the final year of the Employee’s employment with the Company, to leave the employment (or independent contractor relationship) thereof; or

(iv)(A) Attempt to solicit any customer, or active customer prospect, of the Company with whom the Employee had material contact, or about which he received or had access to Confidential Information, during the last year of the Employee’s employment with the Company for the purpose of offering, selling or providing any product or service related to or competitive with the Company’s Business to such customer or active customer prospect, (B) perform services related to or competitive with the Company’s Business for such customer or active customer prospect, or (C) assist another person or entity to engage in conduct prohibited by clauses (A) or (B) above if performed by the Employee.

In the event the Employee breaches this Section 4.2, the Restricted Period shall be extended by the amount of time that the Employee is in breach.

5. NO LICENSE.

The Employee understands that this Agreement does not, and shall not be construed to, grant the Employee any license or right of any nature with respect to any Work Product or Intellectual Property Rights or any Confidential Information, materials, software, or other tools made available to him/her by the Company.

6. EXIT AND OTHER OBLIGATIONS.

Upon (i) voluntary or involuntary termination of the Employee’s employment or (ii) the Company’s request at any time during the Employee’s employment, the Employee shall (a) provide or return to the Company any and all Company property, including keys, key cards, access cards, identification cards, security devices, employer credit cards, network access devices, computers, smartphones, manuals, reports, files, books, compilations, email messages, thumb drives, or other removable information storage devices, hard drives, and data and all Company documents and materials belonging to the Company and stored in any fashion, including but not limited to those that constitute or contain any Confidential Information or Work Product, that are in the possession or control of the Employee, whether they were provided to the Employee by the Company or created by the Employee in connection with the Employee’s employment by the Company; and (b) delete or destroy all copies of any such documents and materials not returned to the Company that remain in the Employee’s possession or control, including those stored on any non-Company devices, networks, storage locations, and media in the Employee’s possession or control. Additionally, the Employee consents to the Company’s inspection, at any time, of any personal computers, phones and other storage devices belonging to the Employee to the extent they contain any Company property or materials, so that the Company can review and/or remove Company property maintained on such devices, and upon request the Employee shall immediately make those devices available to the Company.

7. ACKNOWLEDGMENT.

The Employee acknowledges and agrees that the services to be rendered by the Employee to the Company are of a special and unique character; that the Employee will obtain knowledge and skill relevant to the Company’s industry, methods of doing business, and marketing strategies by virtue of the Employee’s employment; and that the terms and conditions of this Agreement are reasonable under these circumstances. The Employee further acknowledges that the amount of the Employee’s compensation reflects, in part, the Employee’s obligations and the Company’s rights under this Agreement; that the Employee has no expectation of any additional compensation, royalties, or other payment of any kind not otherwise referenced herein in connection herewith; that the Employee will not be subject to undue hardship by reason of the Employee’s full compliance with the terms and conditions of this Agreement or the Company’s enforcement thereof; and that this Agreement is not a contract of employment for a particular period of time and shall not be construed as a commitment by either of the parties to continue an employment relationship for any certain period of time. Nothing in this Agreement shall be construed to in any way terminate, supersede, undermine, or otherwise modify the at-will status of the employment relationship between the Company and the Employee, pursuant to which either the Company or the Employee may terminate the employment relationship at any time, with or without cause, with or without notice.

By signing this Agreement, the Employee gives the Company assurance that the Employee has carefully read and considered all of the terms and conditions of this Agreement, including the restraints imposed under this Agreement. The Employee agrees that these restraints are necessary for the reasonable and proper protection of the Company and its Confidential Information and Intellectual Property Rights, and that each and every one of

the restraints is reasonable in respect to subject matter and length of time. The Employee further covenants that the Employee will not challenge the reasonableness or enforceability of any of the covenants set forth in this Agreement, and that the Employee will reimburse the Company and its affiliates for all costs (including reasonable attorneys’ fees) incurred in connection with any action to enforce any of the provisions of this Agreement if either the Company prevails in such dispute.

8. REMEDIES.

In the event of a breach or threatened breach by the Employee of any of the provisions of this Agreement, the Employee hereby consents and agrees that the Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that monetary damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall be in addition to, not in lieu of, legal remedies, monetary damages, or other available forms of relief.

9. ADDITIONAL PROVISIONS.

9.1Successors and Assigns. Neither this Agreement, nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise by the Employee without the prior written consent of the Company, and any such assignment without such prior written consent shall be null and void. The Company may assign this Agreement to any subsidiary or corporate affiliate in the Company or otherwise, or to any successor or assign (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company, and upon any such assignment the references herein to the Company shall be deemed to include the assignee or successor. This Agreement shall inure to the benefit of the Company and permitted successors and assigns.

9.2Entire Agreement. This Agreement (including all Exhibits attached hereto) embodies the complete agreement and understanding between the parties hereto with respect to the subject matter hereof, and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way; provided, however, that nothing contained herein shall supersede or replace any other covenants applicable to the Employee related to confidential or proprietary information, non-competition, or non-solicitation or any other post-separation obligations. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto, their respective successors, heirs, estates, representatives and permitted assigns. In the event of any inconsistency between the provisions of this Agreement and the Company’s Handbook, this Agreement shall control.

9.3Governing Law; Jurisdiction. This Agreement shall be construed in accordance with, and governed by the internal laws of, the State of Arizona, without regard to its conflict of law principles. Each party agrees that exclusive jurisdiction with respect to any dispute arising out of or related to this Agreement shall be in the state or federal courts located in Maricopa County, Arizona. THE PARTIES HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN CONNECTION WITH ANY DISPUTE ARISING OUT OF OR RELATED TO THIS AGREEMENT.

9.4Severability. If any term, provision, covenant or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, the remainder of this Agreement and such term, provision, covenant or condition as applied to other persons, places and circumstances shall remain in full force and effect. Any court of competent jurisdiction is authorized to “blue-pencil” any unenforceable or unreasonable portion of

this Agreement to eliminate grammatically severable words, phrases, sentences, or paragraphs, or to step down overly broad restrictions, to the minimal extent necessary in order to render the remaining language enforceable and reasonable.

9.5Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Employee and the Company and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall be construed as a waiver of its provisions or affect the validity, binding effect or enforceability of this Agreement or any provision hereof.

9.6Survival. The provisions set forth in Sections 1, 2, 3, 4, 5, 6, 8, 9, and any other obligations of, and benefits afforded to, the Company and the Employee which by their express terms or clear intent should survive termination of the Employee’s employment with the Company, will survive and remain in full force and effect according to their terms.

9.7Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. One or more counterparts of this Agreement may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart thereof.

9.8Notices. All notices, requests, demands, claims, consents and other communications which are required or otherwise delivered hereunder shall be in writing and shall be deemed to have been duly given if (i) personally delivered or transmitted by electronic mail, (ii) sent by nationally recognized overnight courier, or (iii) mailed by registered or certified mail with postage prepaid, return receipt requested, to the parties at the addresses set forth below their signatures hereto (or as changed by a party hereafter) and shall be deemed to be effective upon that personal or overnight delivery to the party, five (5) days after deposit in the US Mail, or upon that electronic transmission, provided that, in each case, notices delivered after 5:00 p.m. on a given day or on any day that is not a business day shall be deemed delivered on the next succeeding business day.

– Signature Page Follows –

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date above.

AUDIOEYE, INC.

By:	/s/ Brittani Morelli
Name:	Brittani Morelli
Title:	Director of Human Resources

THE EMPLOYEE

By:	/s/ Chris Hundley
Name:	Chris Hundley
Address:	[redacted]
Email:	[redacted]
Phone:	[redacted]

[Confidentiality & Invention Assignment Agreement]

EX-31.1

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, 2021 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 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 12, 2021	By:	/s/ David Moradi
		Name:	David Moradi
		Title:	Principal Executive Officer

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, 2021 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 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 12, 2021	By:	/s/ Kelly Georgevich
		Name:	Kelly Georgevich
		Title:	Principal Financial Officer

EX-32.1

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, 2021 (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 12, 2021	By:	/s/ David Moradi
		Name:	David Moradi
		Title:	Principal Executive Officer

By:	/s/ Kelly Georgevich
	Name:	Kelly Georgevich
	Title:	Principal Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2021	Nov. 01, 2021
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Sep. 30, 2021
Entity File Number	001-38640
Entity Registrant Name	AudioEye, Inc.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	20-2939845
Entity Address, Address Line One	5210 East Williams Circle
Entity Address, Address Line Two	Suite 750
Entity Address, City or Town	Tucson
Entity Address, State or Province	AZ
Entity Address, Postal Zip Code	85711
City Area Code	866
Local Phone Number	331-5324
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Trading Symbol	AEYE
Security Exchange Name	NASDAQ
Entity Central Index Key	0001362190
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2021
Document Fiscal Period Focus	Q3
Title of 12(b) Security	Common Stock, par value $0.00001 per share
Amendment Flag	false
Entity Common Stock, Shares Outstanding		11,354,397

XML

BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
Current assets:
Cash	$ 21,953	$ 9,095
Accounts receivable, net of allowance for doubtful accounts of $195 and $79, respectively	3,798	5,096
Deferred costs, short term	120	152
Prepaid expenses and other current assets	594	288
Total current assets	26,465	14,631
Property and equipment, net of accumulated depreciation of $187 and $209, respectively	173	91
Right of use assets	452	617
Deferred costs, long term	49	77
Intangible assets, net of accumulated amortization of $5,211 and $4,328, respectively	2,524	2,137
Goodwill	701	701
Total assets	30,364	18,254
Current liabilities:
Accounts payable and accrued expenses	3,131	2,190
Finance lease liabilities	62	49
Operating lease liabilities	246	229
Deferred revenue	6,075	6,328
Term loan, short term	0	219
Total current liabilities	9,514	9,015
Long term liabilities:
Finance lease liabilities	57	12
Operating lease liabilities	240	427
Deferred revenue	20	83
Term loan, long term	0	1,083
Total liabilities	9,831	10,620
Stockholders' equity:
Common stock, $0.00001 par value, 50,000 shares authorized, 11,352 and 10,130 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	1	1
Additional paid-in capital	86,822	64,716
Accumulated deficit	(66,290)	(57,084)
Total stockholders' equity	20,533	7,634
Total liabilities and stockholders' equity	30,364	18,254
Series A Preferred Stock
Stockholders' equity:
Preferred stock, value	$ 0	$ 1

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BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
Allowance for doubtful accounts	$ 195	$ 79
Property plant and equipment, accumulated depreciation	187	209
Intangible assets, accumulated amortization	$ 5,211	$ 4,328
Preferred Stock, Par or Stated Value Per Share	$ 0.00001	$ 0.00001
Preferred Stock, Shares Authorized	10,000,000	10,000,000
Common Stock, Par or Stated Value Per Share	$ 0.00001	$ 0.00001
Common Stock, Shares Authorized	50,000,000	50,000,000
Common Stock, Shares, Issued	11,352,000	10,130,000
Common Stock, Shares, Outstanding	11,352,000	10,130,000
Series A Preferred Stock
Preferred Stock, Par or Stated Value Per Share	$ 0.00001	$ 0.00001
Preferred Stock, Shares Authorized	200,000	200,000
Preferred Stock, Shares Issued	0	90,000
Preferred Stock, Shares Outstanding	0	90,000

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STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
STATEMENTS OF OPERATIONS
Revenue	$ 6,202	$ 5,341	$ 18,011	$ 14,885
Cost of revenue	1,567	1,551	4,432	4,478
Gross profit	4,635	3,790	13,579	10,407
Operating expenses:
Selling and marketing	4,504	2,028	10,638	5,551
Research and development	1,611	203	3,950	801
General and administrative	3,175	3,197	9,502	8,185
Total operating expenses	9,290	5,428	24,090	14,537
Operating loss	(4,655)	(1,638)	(10,511)	(4,130)
Other income (expense):
Change in fair value of warrant liability	0	593	0	120
Gain on loan forgiveness	0	0	1,316	0
Interest expense	(2)	(35)	(11)	(141)
Total other income (expense)	(2)	558	1,305	(21)
Net loss	(4,657)	(1,080)	(9,206)	(4,151)
Dividends on Series A Convertible Preferred Stock	0	(13)	(69)	(39)
Net loss available to common stockholders	$ (4,657)	$ (1,093)	$ (9,275)	$ (4,190)
Net loss per common share-basic	$ (0.41)	$ (0.12)	$ (0.85)	$ (0.46)
Net loss per common share-diluted	$ (0.41)	$ (0.12)	$ (0.85)	$ (0.46)
Weighted average common shares outstanding-basic	11,329	9,385	10,929	9,067
Weighted average common shares outstanding-diluted	11,329	9,385	10,929	9,067

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STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) shares in Thousands, $ in Thousands	Common Stock	Preferred Stock	Additional Paid-in Capital [Member]	Accumulated Deficit [Member]	Total
Balance at Dec. 31, 2019	$ 1	$ 1	$ 51,490	$ (49,926)	$ 1,566
Balance (in shares) at Dec. 31, 2019	8,877	105
Stock-based compensation			256		256
Net loss				(1,664)	(1,664)
Balance at Mar. 31, 2020	$ 1	$ 1	51,746	(51,590)	158
Balance (in shares) at Mar. 31, 2020	8,877	105
Balance at Dec. 31, 2019	$ 1	$ 1	51,490	(49,926)	1,566
Balance (in shares) at Dec. 31, 2019	8,877	105
Net loss					(4,151)
Balance at Sep. 30, 2020	$ 1	$ 1	62,409	(54,077)	8,334
Balance (in shares) at Sep. 30, 2020	9,921	100
Balance at Mar. 31, 2020	$ 1	$ 1	51,746	(51,590)	158
Balance (in shares) at Mar. 31, 2020	8,877	105
Common stock issued upon conversion of preferred stock (in shares)	14	(5)
Common stock issued in exchange for exercise of warrants and options on a cashless basis (in shares)	177
Common stock issued in exchange for options exercised on a cash basis			44		44
Common stock issued in exchange for options exercised on a cash basis (in shares)	45
Stock-based compensation			659		659
Net loss				(1,407)	(1,407)
Balance at Jun. 30, 2020	$ 1	$ 1	52,449	(52,997)	(546)
Balance (in shares) at Jun. 30, 2020	9,113	100
Issuance of common stock for cash, net of transaction expenses			7,824		7,824
Issuance of common stock for cash, net of transaction expenses (in shares)	473
Common stock issued in exchange for exercise of warrants and options on a cashless basis (in shares)	21
Common stock issued upon settlement of restricted stock units (in shares)	89
Common stock issued in exchange for options exercised on a cash basis			1,047		1,047
Common stock issued in exchange for options exercised on a cash basis (in shares)	225
Stock-based compensation			1,089		1,089
Net loss				(1,080)	(1,080)
Balance at Sep. 30, 2020	$ 1	$ 1	62,409	(54,077)	8,334
Balance (in shares) at Sep. 30, 2020	9,921	100
Balance at Dec. 31, 2020	$ 1	$ 1	64,716	(57,084)	7,634
Balance (in shares) at Dec. 31, 2020	10,130	90
Issuance of common stock for cash, net of transaction expenses			16,534		16,534
Issuance of common stock for cash, net of transaction expenses (in shares)	472
Common stock issued upon exercise of warrants and options on a cash basis			148		148
Common stock issued upon exercise of warrants and options on a cash basis (in shares)	22
Common stock issued upon exercise of warrants and options on a cashless basis (in shares)	121
Common stock issued upon settlement of restricted stock units (in shares)	92
Issuance of common stock for services (in shares)	2
Surrender of stock to cover tax liability on settlement of employee stock-based awards			(373)		(373)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in share)	(16)
Stock-based compensation			1,781		1,781
Net loss				(2,765)	(2,765)
Balance at Mar. 31, 2021	$ 1	$ 1	82,806	(59,849)	22,959
Balance (in shares) at Mar. 31, 2021	10,823	90
Balance at Dec. 31, 2020	$ 1	$ 1	64,716	(57,084)	7,634
Balance (in shares) at Dec. 31, 2020	10,130	90
Net loss					(9,206)
Balance at Sep. 30, 2021	$ 1		86,822	(66,290)	20,533
Balance (in shares) at Sep. 30, 2021	11,352
Balance at Mar. 31, 2021	$ 1	$ 1	82,806	(59,849)	22,959
Balance (in shares) at Mar. 31, 2021	10,823	90
Common stock issued upon conversion of preferred stock		$ (1)	1
Common stock issued upon conversion of preferred stock (in shares)	279	(90)
Common stock issued upon exercise of warrants and options on a cash basis			255		255
Common stock issued upon exercise of warrants and options on a cash basis (in shares)	53
Common stock issued upon exercise of warrants and options on a cashless basis (in shares)	33
Common stock issued upon settlement of restricted stock units (in shares)	78
Issuance of common stock for services (in shares)	13
Surrender of stock to cover tax liability on settlement of employee stock-based awards			(39)		(39)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in share)	(2)
Stock-based compensation			1,763		1,763
Net loss				(1,784)	(1,784)
Balance at Jun. 30, 2021	$ 1		84,786	(61,633)	23,154
Balance (in shares) at Jun. 30, 2021	11,277
Common stock issued upon exercise of warrants and options on a cash basis			218		218
Common stock issued upon exercise of warrants and options on a cash basis (in shares)	47
Common stock issued upon settlement of restricted stock units (in shares)	22
Issuance of common stock for services (in shares)	11
Surrender of stock to cover tax liability on settlement of employee stock-based awards			(63)		(63)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in share)	(5)
Stock-based compensation			1,881		1,881
Net loss				(4,657)	(4,657)
Balance at Sep. 30, 2021	$ 1		$ 86,822	$ (66,290)	$ 20,533
Balance (in shares) at Sep. 30, 2021	11,352

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STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (9,206,000)	$ (4,151,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	957,000	639,000
Loss on impairment of long-lived assets	10,000	0
Loss on disposal of property and equipment	12,000	0
Stock-based compensation expense	5,425,000	2,004,000
Amortization of deferred commissions	145,000	162,000
Amortization of debt issuance costs	0	137,000
Amortization of right of use assets	165,000	156,000
Change in fair value of warrant liability	0	(120,000)
Gain on loan forgiveness	(1,316,000)	0
Provision for accounts receivable	111,000	109,000
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables	1,187,000	(482,000)
Prepaid expenses and other assets	(391,000)	(136,000)
Accounts payable and accruals	916,000	615,000
Operating lease liability	(170,000)	(155,000)
Deferred revenue	(316,000)	172,000
Net cash used in operating activities	(2,471,000)	(1,050,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment	(7,000)	0
Software development costs	(1,213,000)	(659,000)
Patent costs	(67,000)	(141,000)
Net cash used in investing activities	(1,287,000)	(800,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering, net of transaction costs	16,534,000	7,824,000
Proceeds from term loan	0	1,302,000
Proceeds from exercise of options and warrants	621,000	1,091,000
Payments related to settlement of employee shared-based awards	(475,000)	0
Repayments of finance leases	(64,000)	(44,000)
Net cash provided by financing activities	16,616,000	10,173,000
Net increase in cash	12,858,000	8,323,000
Cash-beginning of period	9,095,000	1,972,000
Cash-end of period	$ 21,953,000	$ 10,295,000

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BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2021

BASIS OF PRESENTATION

BASIS OF PRESENTATION

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of AudioEye, Inc. (“we”, “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”), as filed with the SEC on March 11, 2021.

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.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2021

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 3 – Significant Accounting Policies” in the 2020 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the financial statements contained in the 2020 Form 10-K when reviewing interim financial results.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to stock-based compensation, capitalization of software development costs, allowance for doubtful accounts, and impairment of long-lived assets and goodwill. 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 support, through our direct sales force or through third-party resellers. Our SaaS fees include continuous support and maintenance.

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

We determine revenue recognition through the following five steps:

● Identify the contract with the customer;

● Identify the performance obligations in the contract;

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

● Determine the transaction price;

● Allocate the transaction price to the performance obligations in the contract; and

● Recognize revenue when, or as, the performance obligations are satisfied.

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

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

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

The following table presents our revenues disaggregated by sales channel:

	Nine months ended
	September 30,
(in thousands)	2021		2020
Partner and Marketplace	$	9,936	$	6,781
Enterprise		8,075		8,104
Total revenues	$	18,011	$	14,885

The Company records accounts receivable for amounts invoiced to customers for which the Company has an unconditional right to consideration as provided under the contractual arrangement. Unbilled receivables include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenue includes payments received in advance of performance under the contract. Our unbilled receivables and deferred revenue are reported on an individual contract basis at the end of each reporting period. Unbilled receivables are classified as current or noncurrent based on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of when we expect to recognize revenue.

The table below summarizes our deferred revenue as of September 30, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred revenue - current	$	6,075	$	6,328
Deferred revenue - noncurrent		20		83
Total deferred revenue	$	6,095	$	6,411

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the nine-month period ended September 30, 2021 we recognized $5,642,000, or 88%, in revenue from deferred revenue outstanding as of December 31, 2020.

In the three months ended September 30, 2021, two customers (including affiliates of such customers) accounted for 20% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2021, two customers (including affiliates of such customers) accounted for 20% and 10%, respectively, of our total revenue. In the three months ended September 30, 2020, two customers accounted for 15% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2020, one customer accounted for 16% of our total revenue.

Three customers represented 19%, 14% and 11%, respectively, of total accounts receivable as of September 30, 2021. Three customers with long standing relationships with the Company represented 25%, 13% and 13%, respectively, of total accounts receivable as of December 31, 2020.

Deferred Costs (Contract acquisition costs)

We capitalize initial and renewal sales commissions in the period in which the commission is earned, which generally occurs when a customer contract is obtained, and amortize deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term, except when the commission payment is expected to provide economic benefit for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected, and renewal commissions are not commensurate with initial commissions. 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, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred costs - current	$	120	$	152
Deferred costs - noncurrent		49		77
Total deferred costs	$	169	$	229

Amortization expense associated with sales commissions was included in selling and marketing expenses on the statements of operations and totaled $46,000 and $145,000 for the three- and nine-month periods ended September 30, 2021, respectively, and $51,000 and $162,000 for the three- and nine-month periods ended September 30, 2020, respectively. There were no impairment losses for these capitalized costs for the three and nine months ended September 30, 2021 and 2020.

Stock-Based Compensation

The Company periodically issues options, warrants, restricted stock units (“RSUs”), and shares of its common stock as compensation for services received from its employees, directors, and consultants. The fair value of the award is measured on the grant date. The fair value amount is then recognized as expense over the requisite vesting period during which services are required to be provided in exchange for the award. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations as if such amounts were paid in cash.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The fair value of options and warrants awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor, expected term, and forfeiture rates). Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported expenses depending upon their number, value, and vesting period.

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

We expense the compensation cost associated with time-based options, warrants and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based options and RSUs is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for service- and performance-based awards that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is reversed. Compensation costs related to awards with market conditions are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied and is not reversed provided that the requisite service period derived from the Monte-Carlo simulation has been completed. If vesting occurs prior to the end of the requisite service period, expense is accelerated and fully recognized through the vesting date.

The following table summarizes the stock-based compensation expense recorded for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Stock Options	$	143	$	79	$	518	$	200
RSUs		1,602		1,010		4,484		1,804
Unrestricted Shares of Common Stock		136		—		423		—
Total	$	1,881	$	1,089	$	5,425	$	2,004

As of September 30, 2021, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $1,060,000 and $12,799,000, respectively, which may be recognized through March 2026, subject to achievement of service, performance, and market conditions.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the first quarter of 2021, we granted 100,000 RSUs with performance-based and market-based conditions to our Interim Chief Executive Officer (“CEO”). The performance condition for 50,000 of such RSUs is based on the achievement of Monthly Recurring Revenue (“MRR”) targets. In the nine months ended September 30, 2021, stock-based compensation expense associated with performance-based RSUs awarded to our CEO in current and previous years was zero and $411,000, respectively. We did not record any stock-based compensation expense related to the 50,000 performance-based RSUs awarded to our CEO in 2021 as the achievement of performance targets during the requisite period was not deemed probable. The Company will continue to reassess the probability of achieving the performance conditions on any RSUs that remain outstanding in future periods and record the appropriate expense if necessary. The market condition for the remaining 50,000 RSUs in the award is based on the Company’s stock price targets. The Company used a Monte Carlo simulation to determine the grant-date fair value for the market-based RSUs. The weighted-average assumptions used in the Monte-Carlo simulation were as follows: 5-year historical volatility of 116.95%, 5-year risk-free rate of 0.79%, and a performance period of 5 years. The Company recorded $1,509,000 in stock-based compensation expense associated to market-based RSUs in the nine months ended September 30, 2021, $506,000 of which were related to RSUs granted in the current fiscal year.

Earnings (Loss) Per Share (“EPS”)

Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted EPS is calculated based on the net income (loss) available to common stockholders and the weighted average number of shares of common stock outstanding during the period, adjusted for the effects of all potential dilutive common stock issuances related to options, warrants, restricted stock units and convertible preferred stock. The dilutive effect of our stock-based awards and warrants is computed using the treasury stock method, which assumes all stock-based awards and warrants are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. 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 outstanding as of September 30, 2021 and 2020, which were excluded from the computation of basic and diluted net loss per share for the years then ended, are as follows:

	September 30,
( in thousands)	2021	2020
Preferred stock (1)	—	290
Options	213	683
Warrants	41	85
Restricted stock units	1,217	846
Total	1,471	1,904

(1) Represents number of shares of common stock that are issuable upon conversion of outstanding shares of Series A Convertible Preferred Stock.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following table summarizes the stock option, warrants, and RSUs activity for the nine months ended September 30, 2021:

	Options	Warrants	RSUs
Outstanding at December 31, 2020	516,911	81,053	958,378
Granted	39,186	—	597,055
Exercised/Settled	(265,118)	(32,480)	(192,218)
Forfeited/Expired	(78,093)	(7,200)	(145,726)
Outstanding at September 30, 2021	212,886	41,373	1,217,489
Vested at September 30, 2021	78,903	41,373	336,701
Unvested at September 30, 2021	133,983	—	880,788

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CAPITAL RAISE AND LIQUIDITY

9 Months Ended

Sep. 30, 2021

CAPITAL RAISE AND LIQUIDITY

CAPITAL RAISE AND LIQUIDITY

NOTE 3 — CAPITAL RAISE AND LIQUIDITY

On February 11, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“Agent”) under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock to or through the Agent as its sales agent, having an aggregate offering price of up to $30,000,000. In the nine months ended September 30, 2021, we sold a total of 471,970 shares of common stock under this Sales Agreement for total proceeds of approximately $16.5 million, net of estimated transaction costs.

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LEASE LIABILITIES AND RIGHT OF USE ASSETS

9 Months Ended

Sep. 30, 2021

LEASE LIABILITIES AND RIGHT OF USE ASSETS

LEASE LIABILITIES AND RIGHT OF USE ASSETS

NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS

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

Finance Leases

The Company has finance leases to purchase computer equipment. The amortization expense of the leased equipment is included in depreciation expense. As of September 30, 2021 and December 31, 2020, the Company’s outstanding finance lease obligations totaled $119,000 and $61,000, respectively. The effective interest rate of the finance leases is estimated at 6.0% based on the implicit rate in the lease agreements.

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

	September 30,		December 31,
(in thousands)	2021		2020
Computer equipment	$	256	$	177
Less: accumulated depreciation		(140)		(116)
Assets acquired under finance leases, net	$	116	$	61

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

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 Marietta, Georgia.

In addition, the Company entered into membership agreements to occupy shared office space in New York, Austin, Texas, Portland, Oregon, and Seattle, Washington. The membership agreements do not qualify as a lease under ASC 842, therefore the Company expenses membership fees as they are incurred. See Note 8 - Commitments and Contingencies for further details on our shared office arrangements.

The Company made operating lease payments in the amount of $196,000 during the nine months ended September 30, 2021.

The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2021 (in thousands):

Year ending December 31,	Finance Leases		Operating Leases		Total
2021 (3 months remaining)	$	19	$	66	$	85
2022		61		257		318
2023		40		118		158
2024		7		81		88
Total minimum lease payments		127		522		649
Less: present value discount		(8)		(36)		(44)
Total lease liabilities		119		486		605
Current portion of lease liabilities		62		246		308
Long term portion of lease liabilities	$	57	$	240	$	297

The following summarizes expenses associated with our finance and operating leases for the nine months ended September 30, 2021 (in thousands):

Finance lease expenses:
Depreciation expense	$	60
Interest on lease liabilities		6
Total Finance lease expense		66
Operating lease expense		192
Short-term lease and related expenses		174
Total lease expenses	$	432

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

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

Weighted average remaining lease term (years)
Operating Leases	2.31
Finance Leases	2.10
Weighted average discount rate (%)
Operating Leases	6.00
Finance Leases	6.00

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DEBT

9 Months Ended

Sep. 30, 2021

DEBT

DEBT

NOTE 5 — DEBT

Term loan

On April 15, 2020, the Company entered into a loan agreement in the amount of $1,302,000 with Liberty Capital Bank (“Lender”) pursuant to the Paycheck Protection Program (“PPP Loan”) of the CARES Act, which is administered by the Small Business Administration (“SBA”). The loan had a maturity of two years and bore an interest rate of 1.0% per annum. In the second quarter of 2021, the SBA approved the Company’s PPP Loan forgiveness application and paid to the Lender the full amount of the PPP Loan and accrued interest thereon on the Company’s behalf, releasing AudioEye from any obligations. In connection with the full forgiveness of the outstanding principal and interest on our PPP Loan, we recorded a $1,316,000 gain on loan forgiveness in the nine months ended September 30, 2021.

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SERIES A CONVERTIBLE PREFERRED STOCK

9 Months Ended

Sep. 30, 2021

Series A Preferred Stock

Class of Stock [Line Items]

SERIES A CONVERTIBLE PREFERRED STOCK

NOTE 6 — SERIES A CONVERTIBLE PREFERRED STOCK

In the second quarter of 2021, all 90,000 shares of the outstanding Series A Convertible Preferred Stock (the “Preferred Stock”) were converted to common stock prior to their authorized redemption date of May 25, 2021, as previously announced by the Company. In connection with the Preferred Stock conversion, we issued 279,137 shares of our common stock.  As of September 30, 2021, there were no shares of Preferred Stock outstanding.

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RELATED PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 2021

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 7 — RELATED PARTY TRANSACTIONS

In the second quarter of 2021, we terminated the lease with a company controlled by our Executive Chairman and closed our Scottsdale, AZ office. For the three- and nine-month period ended September 30, 2021, rent payments for this office space totaled zero and $24,000, respectively.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2021

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Membership agreement to occupy shared office space

The Company occupies shared office space in Austin, TX, and Seattle, WA under membership agreements which end in May 2022 and July 2022, respectively. Fees due under these membership agreements are based on the number of contracted seats and the use of optional office services. As of September 30, 2021, minimum fees due under these shared office arrangements totaled $81,000.

NOTE 8 — COMMITMENTS AND CONTINGENCIES (continued)

Litigation

We may become involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, management believes that the resolution of any such matters, should they arise, is not likely to have a material adverse effect on our financial position or results of operations.

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

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

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2021

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 9 — SUBSEQUENT EVENTS

We have evaluated subsequent events occurring after September 30, 2021 and based on our evaluation we did not identify any events that would have required recognition or disclosure in these financial statements, except for the following:

In October 2021, we assumed two lease agreements for office space in Miami Beach, Florida, from Sero Capital, LLC (“Sero Capital”), a stockholder who owns more than 10% of the outstanding shares of common stock of the Company. The sole member of Sero Capital is David Moradi, a director and the Company’s Interim Chief Executive Officer and Chief Strategy Officer. Because the office space is predominately used by Mr. Moradi for his work with the Company and is used by other key company executives, the audit committee deemed the lease and the related expense to be appropriately borne by the Company. The audit committee also determined that the material terms of the lease were market and no less favorable than the Company could have received on an arm’s length basis. The lease agreements assigned to the Company expire in May 2024 and provide for aggregate future lease payments totaling $554,000. In connection with the assignment of the leases, the Company paid Sero Capital $32,000 for the assignment of its rights to the security deposit.

In November 2021, at the request of David Moradi, the Compensation Committee cancelled the 100,000 RSUs with performance-based and market-based conditions that had been granted to him in the first quarter of 2021. No consideration was provided in exchange for the cancellation, which was performed to replenish the shares available under the 2020 Equity Incentive Plan for additional awards to Company employees.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2021

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Use of Estimates

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

Revenue Recognition

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 support, through our direct sales force or through third-party resellers. Our SaaS fees include continuous support and maintenance.

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

We determine revenue recognition through the following five steps:

● Identify the contract with the customer;

● Identify the performance obligations in the contract;

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

● Determine the transaction price;

● Allocate the transaction price to the performance obligations in the contract; and

● Recognize revenue when, or as, the performance obligations are satisfied.

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

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

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

The following table presents our revenues disaggregated by sales channel:

	Nine months ended
	September 30,
(in thousands)	2021		2020
Partner and Marketplace	$	9,936	$	6,781
Enterprise		8,075		8,104
Total revenues	$	18,011	$	14,885

The Company records accounts receivable for amounts invoiced to customers for which the Company has an unconditional right to consideration as provided under the contractual arrangement. Unbilled receivables include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenue includes payments received in advance of performance under the contract. Our unbilled receivables and deferred revenue are reported on an individual contract basis at the end of each reporting period. Unbilled receivables are classified as current or noncurrent based on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of when we expect to recognize revenue.

The table below summarizes our deferred revenue as of September 30, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred revenue - current	$	6,075	$	6,328
Deferred revenue - noncurrent		20		83
Total deferred revenue	$	6,095	$	6,411

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the nine-month period ended September 30, 2021 we recognized $5,642,000, or 88%, in revenue from deferred revenue outstanding as of December 31, 2020.

In the three months ended September 30, 2021, two customers (including affiliates of such customers) accounted for 20% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2021, two customers (including affiliates of such customers) accounted for 20% and 10%, respectively, of our total revenue. In the three months ended September 30, 2020, two customers accounted for 15% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2020, one customer accounted for 16% of our total revenue.

Three customers represented 19%, 14% and 11%, respectively, of total accounts receivable as of September 30, 2021. Three customers with long standing relationships with the Company represented 25%, 13% and 13%, respectively, of total accounts receivable as of December 31, 2020.

Deferred Costs (Contract acquisition costs)

Deferred Costs (Contract acquisition costs)

We capitalize initial and renewal sales commissions in the period in which the commission is earned, which generally occurs when a customer contract is obtained, and amortize deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term, except when the commission payment is expected to provide economic benefit for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected, and renewal commissions are not commensurate with initial commissions. 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, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred costs - current	$	120	$	152
Deferred costs - noncurrent		49		77
Total deferred costs	$	169	$	229

Amortization expense associated with sales commissions was included in selling and marketing expenses on the statements of operations and totaled $46,000 and $145,000 for the three- and nine-month periods ended September 30, 2021, respectively, and $51,000 and $162,000 for the three- and nine-month periods ended September 30, 2020, respectively. There were no impairment losses for these capitalized costs for the three and nine months ended September 30, 2021 and 2020.

Stock-Based Compensation

Stock-Based Compensation

The Company periodically issues options, warrants, restricted stock units (“RSUs”), and shares of its common stock as compensation for services received from its employees, directors, and consultants. The fair value of the award is measured on the grant date. The fair value amount is then recognized as expense over the requisite vesting period during which services are required to be provided in exchange for the award. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations as if such amounts were paid in cash.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The fair value of options and warrants awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor, expected term, and forfeiture rates). Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported expenses depending upon their number, value, and vesting period.

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

We expense the compensation cost associated with time-based options, warrants and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based options and RSUs is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for service- and performance-based awards that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is reversed. Compensation costs related to awards with market conditions are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied and is not reversed provided that the requisite service period derived from the Monte-Carlo simulation has been completed. If vesting occurs prior to the end of the requisite service period, expense is accelerated and fully recognized through the vesting date.

The following table summarizes the stock-based compensation expense recorded for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Stock Options	$	143	$	79	$	518	$	200
RSUs		1,602		1,010		4,484		1,804
Unrestricted Shares of Common Stock		136		—		423		—
Total	$	1,881	$	1,089	$	5,425	$	2,004

As of September 30, 2021, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $1,060,000 and $12,799,000, respectively, which may be recognized through March 2026, subject to achievement of service, performance, and market conditions.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the first quarter of 2021, we granted 100,000 RSUs with performance-based and market-based conditions to our Interim Chief Executive Officer (“CEO”). The performance condition for 50,000 of such RSUs is based on the achievement of Monthly Recurring Revenue (“MRR”) targets. In the nine months ended September 30, 2021, stock-based compensation expense associated with performance-based RSUs awarded to our CEO in current and previous years was zero and $411,000, respectively. We did not record any stock-based compensation expense related to the 50,000 performance-based RSUs awarded to our CEO in 2021 as the achievement of performance targets during the requisite period was not deemed probable. The Company will continue to reassess the probability of achieving the performance conditions on any RSUs that remain outstanding in future periods and record the appropriate expense if necessary. The market condition for the remaining 50,000 RSUs in the award is based on the Company’s stock price targets. The Company used a Monte Carlo simulation to determine the grant-date fair value for the market-based RSUs. The weighted-average assumptions used in the Monte-Carlo simulation were as follows: 5-year historical volatility of 116.95%, 5-year risk-free rate of 0.79%, and a performance period of 5 years. The Company recorded $1,509,000 in stock-based compensation expense associated to market-based RSUs in the nine months ended September 30, 2021, $506,000 of which were related to RSUs granted in the current fiscal year.

Earnings (Loss) Per Share ("EPS")

Earnings (Loss) Per Share (“EPS”)

Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted EPS is calculated based on the net income (loss) available to common stockholders and the weighted average number of shares of common stock outstanding during the period, adjusted for the effects of all potential dilutive common stock issuances related to options, warrants, restricted stock units and convertible preferred stock. The dilutive effect of our stock-based awards and warrants is computed using the treasury stock method, which assumes all stock-based awards and warrants are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. 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 outstanding as of September 30, 2021 and 2020, which were excluded from the computation of basic and diluted net loss per share for the years then ended, are as follows:

	September 30,
( in thousands)	2021	2020
Preferred stock (1)	—	290
Options	213	683
Warrants	41	85
Restricted stock units	1,217	846
Total	1,471	1,904

(1) Represents number of shares of common stock that are issuable upon conversion of outstanding shares of Series A Convertible Preferred Stock.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following table summarizes the stock option, warrants, and RSUs activity for the nine months ended September 30, 2021:

	Options	Warrants	RSUs
Outstanding at December 31, 2020	516,911	81,053	958,378
Granted	39,186	—	597,055
Exercised/Settled	(265,118)	(32,480)	(192,218)
Forfeited/Expired	(78,093)	(7,200)	(145,726)
Outstanding at September 30, 2021	212,886	41,373	1,217,489
Vested at September 30, 2021	78,903	41,373	336,701
Unvested at September 30, 2021	133,983	—	880,788

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2021

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of disaggregation of revenue

The following table presents our revenues disaggregated by sales channel:

	Nine months ended
	September 30,
(in thousands)	2021		2020
Partner and Marketplace	$	9,936	$	6,781
Enterprise		8,075		8,104
Total revenues	$	18,011	$	14,885

Schedule of deferred revenue

The table below summarizes our deferred revenue as of September 30, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred revenue - current	$	6,075	$	6,328
Deferred revenue - noncurrent		20		83
Total deferred revenue	$	6,095	$	6,411

Schedule of commission cost

The table below summarizes the deferred commission costs as of September 30, 2021 and December 31, 2020:

	September 30,		December 31,
(in thousands)	2021		2020
Deferred costs - current	$	120	$	152
Deferred costs - noncurrent		49		77
Total deferred costs	$	169	$	229

Schedule of stock-based compensation expense

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Stock Options	$	143	$	79	$	518	$	200
RSUs		1,602		1,010		4,484		1,804
Unrestricted Shares of Common Stock		136		—		423		—
Total	$	1,881	$	1,089	$	5,425	$	2,004

Schedule of antidilutive securities outstanding excluded from computation of earnings Per share

Potentially dilutive securities outstanding as of September 30, 2021 and 2020, which were excluded from the computation of basic and diluted net loss per share for the years then ended, are as follows:

	September 30,
( in thousands)	2021	2020
Preferred stock (1)	—	290
Options	213	683
Warrants	41	85
Restricted stock units	1,217	846
Total	1,471	1,904

(1) Represents number of shares of common stock that are issuable upon conversion of outstanding shares of Series A Convertible Preferred Stock.

Summary the stock option, warrants, and RSUs activity

The following table summarizes the stock option, warrants, and RSUs activity for the nine months ended September 30, 2021:

	Options	Warrants	RSUs
Outstanding at December 31, 2020	516,911	81,053	958,378
Granted	39,186	—	597,055
Exercised/Settled	(265,118)	(32,480)	(192,218)
Forfeited/Expired	(78,093)	(7,200)	(145,726)
Outstanding at September 30, 2021	212,886	41,373	1,217,489
Vested at September 30, 2021	78,903	41,373	336,701
Unvested at September 30, 2021	133,983	—	880,788

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LEASE LIABILITIES AND RIGHT OF USE ASSETS (Tables)

9 Months Ended

Sep. 30, 2021

LEASE LIABILITIES AND RIGHT OF USE ASSETS

Schedule of finance leased assets included in property plant and equipment

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

	September 30,		December 31,
(in thousands)	2021		2020
Computer equipment	$	256	$	177
Less: accumulated depreciation		(140)		(116)
Assets acquired under finance leases, net	$	116	$	61

Schedule of total remaining future minimum lease payments for finance leases

The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2021 (in thousands):

Year ending December 31,	Finance Leases		Operating Leases		Total
2021 (3 months remaining)	$	19	$	66	$	85
2022		61		257		318
2023		40		118		158
2024		7		81		88
Total minimum lease payments		127		522		649
Less: present value discount		(8)		(36)		(44)
Total lease liabilities		119		486		605
Current portion of lease liabilities		62		246		308
Long term portion of lease liabilities	$	57	$	240	$	297

Schedule of lease expense

The following summarizes expenses associated with our finance and operating leases for the nine months ended September 30, 2021 (in thousands):

Finance lease expenses:
Depreciation expense	$	60
Interest on lease liabilities		6
Total Finance lease expense		66
Operating lease expense		192
Short-term lease and related expenses		174
Total lease expenses	$	432

Schedule of lease terms and discount rates

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

Weighted average remaining lease term (years)
Operating Leases	2.31
Finance Leases	2.10
Weighted average discount rate (%)
Operating Leases	6.00
Finance Leases	6.00

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Disaggregate revenue (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Partner and Marketplace			$ 9,936	$ 6,781
Enterprise			8,075	8,104
Total revenues	$ 6,202	$ 5,341	$ 18,011	$ 14,885

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Deferred Revenue, by Arrangement (Details) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred revenue - current	$ 6,075	$ 6,328
Deferred revenue - noncurrent	20	83
Total deferred revenue	$ 6,095	$ 6,411

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Deferred commission cost (Details) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
Deferred costs - current	$ 120	$ 152
Deferred costs - noncurrent	49	77
Accounting Standards Update 2014-09 [Member]
Deferred costs - current	120	152
Deferred costs - noncurrent	49	77
Total deferred costs	$ 169	$ 229

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Stock compensation expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Allocated Share-based Compensation Expense	$ 1,881	$ 1,089	$ 5,425	$ 2,004
Stock Options
Allocated Share-based Compensation Expense	143	79	518	200
Restricted Stock Units
Allocated Share-based Compensation Expense	1,602	1,010	4,484	1,804
Common Stock
Allocated Share-based Compensation Expense	$ 136	$ 0	$ 423	$ 0

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Antidilutive Securities Excluded from Computation of Earnings Per Share (Details) - shares shares in Thousands	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	1,471	1,904
Preferred Stock
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	0	290
Stock Options
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	213	683
Warrants
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	41	85
Restricted Stock Units
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	1,217	846

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Summary of Stock Option, Warrants, and RSUs Activity (Details)	9 Months Ended
	Sep. 30, 2021 shares
Stock Options
Number of Options
Balance at beginning of the period (in shares)	516,911
Granted	39,186
Exercised/Settled	(265,118)
Forfeited/Expired	(78,093)
Balance at end of the period (in shares)	212,886
Vested (in shares)	78,903
Unvested (in shares)	133,983
Number of warrants
Exercised/Settled	(133,983)
Warrants
Number of warrants
Balance at beginning of the period (In shares)	81,053
Exercised/Settled	(32,480)
Forfeited/Expired	(7,200)
Balance at end of the period (In shares)	41,373
Vested (in shares)	41,373
Unvested (in shares)	41,373
Restricted Stock Units
Number of Options
Unvested (in shares)	192,218
Number of warrants
Balance at end of the period (In shares)	880,788
Balance at beginning of the period (In shares)	958,378
Granted	597,055
Exercised/Settled	(192,218)
Forfeited/Expired	(145,726)
Balance at end of the period (In shares)	1,217,489
Vested (in shares)	336,701
Unvested (in shares)	880,788

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Additional Information (Details) - USD ($)	3 Months Ended			9 Months Ended		12 Months Ended
	Sep. 30, 2021	Mar. 31, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2021	Dec. 31, 2020
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Deferred revenue recognized to revenue				$ 5,642,000
Deferred revenue recognized through the period (as a percent)							88.00%
Amortization of Deferred Sales Commissions	$ 46,000		$ 51,000	145,000	$ 162,000
Impairment loss	0		0	0	0
Stock-based compensation expense	1,881,000		$ 1,089,000	5,425,000	$ 2,004,000
Stock Options
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Outstanding unamortized share-based compensation expense	1,060,000			1,060,000
Restricted Stock Units
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Outstanding unamortized share-based compensation expense	$ 12,799,000			$ 12,799,000
Performance-based and market-based conditions
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period				50,000		506,000
Stock-based compensation expense				$ 1,509,000
Performance-based and market-based conditions | Interim Chief Executive Officer
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period		100,000
Performance Based Restricted Stock Units (RSUs) [Member]
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Volatility rate				116.95%
Risk free interest rate				0.79%
Performance period				5 years
Stock-based compensation expense				$ 50,000
Performance Based Restricted Stock Units (RSUs) [Member] | Interim Chief Executive Officer
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Stock-based compensation expense				$ 411,000			$ 0
Monthly Recurring Revenue Targets, Restricted Stock Units [Member] | Interim Chief Executive Officer
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period		50,000
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Major Customer Number One [Member]
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Concentration Risk, Percentage	20.00%		15.00%	20.00%	16.00%
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Major Customer Number Two [Member]
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Concentration Risk, Percentage	11.00%		11.00%	10.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Major Customer Number One [Member]
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Concentration Risk, Percentage				19.00%			25.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Major Customer Number Two [Member]
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Concentration Risk, Percentage				14.00%			13.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Major Customer Number Three [Member]
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Concentration Risk, Percentage				11.00%			13.00%
Minimum
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Service period				1 year
Maximum
Organization Consolidation And Presentation Of Financial Statements Line Items [Line Items]
Service period				3 years

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CAPITAL RAISE AND LIQUIDITY (Details) - USD ($)	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Feb. 11, 2021
Collaborative Arrangement and Arrangement Other than Collaborative [Line Items]
Proceeds from common stock offering, net of transaction costs	$ 16,534,000	$ 7,824,000
Sales agreement with B. Riley Securities, Inc.
Collaborative Arrangement and Arrangement Other than Collaborative [Line Items]
Number of shares sold	471,970
Proceeds from common stock offering, net of transaction costs	$ 16,500,000
Maximum aggregate offering price			$ 30,000,000

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Right to use assets under finance leases (Details) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
Lessee, Finance Lease, Description [Abstract]
Computer equipment	$ 256	$ 177
Less: accumulated depreciation	(140)	(116)
Assets acquired under finance leases, net	$ 116	$ 61

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Future minimum finance lease payments (Details) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
LEASE LIABILITIES AND RIGHT OF USE ASSETS
2021 (3 months remaining)	$ 19,000
2022	61,000
2023	40,000
2024	7,000
Total minimum lease payments	127,000
Less: present value discount	(8,000)
Total lease liabilities	119,000	$ 61,000
Current portion of lease liabilities	62,000	49,000
Long term portion of lease liabilities	$ 57,000	$ 12,000

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Future minimum operating lease payments (Details) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
LEASE LIABILITIES AND RIGHT OF USE ASSETS
2021 (3 months remaining)	$ 66
2022	257
2023	118
2024	81
Total minimum lease payments	522
Less: present value discount	(36)
Total lease liabilities	486
Current portion of lease obligations	246	$ 229
Long term portion of lease liabilities	$ 240	$ 427

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Finance Leases and Operating Leases (Details) $ in Thousands	Sep. 30, 2021 USD ($)
LEASE LIABILITIES AND RIGHT OF USE ASSETS
2021 (3 months remaining)	$ 85
2022	318
2023	158
2024	88
Total minimum lease payments	649
Less: present value discount	(44)
Total lease liabilities	605
Current portion of lease liabilities	308
Long term portion of lease liabilities	$ 297

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Lease expenses (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2021 USD ($)
Finance lease expenses:
Depreciation expense	$ 60
Interest on lease liabilities	6
Total Finance lease expense	66
Operating lease expense	192
Short-term lease and related expenses	174
Total lease expenses	$ 432

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Remaining lease terms and discount rates (Details)	Sep. 30, 2021
LEASE LIABILITIES AND RIGHT OF USE ASSETS
Weighted average remaining lease term (years) - Operating Leases	2 years 3 months 21 days
Weighted average remaining lease term (years) - Finance Leases	2 years 1 month 6 days
Weighted average discount rate (%) - Operating Leases	6.00%
Weighted average discount rate (%) - Finance Leases	6.00%

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Additional Information (Details) - USD ($)	9 Months Ended
	Sep. 30, 2021	Dec. 31, 2020
LEASE LIABILITIES AND RIGHT OF USE ASSETS
Total finance lease liabilities	$ 119,000	$ 61,000
Effective interest rate of the finance leases (Percentage)	6.00%
Operating lease payments	$ 196,000

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DEBT (Details) - USD ($)		3 Months Ended		9 Months Ended
	Apr. 15, 2020	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Line of Credit Facility [Line Items]
Gain on loan forgiveness		$ 0	$ 0	$ 1,316,000	$ 0
PPP Loan
Line of Credit Facility [Line Items]
Maturity term of loan	2 years
Interest rate (as a percent)	1.00%
Agreement amount	$ 1,302,000
Gain on loan forgiveness				$ 1,316,000

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SERIES A CONVERTIBLE PREFERRED STOCK - Additional Information (Details) - Series A Preferred Stock - shares	9 Months Ended
	Sep. 30, 2021	Dec. 31, 2020
Class of Stock [Line Items]
Preferred stock outstanding shares	0	90,000
Common stock dividends shares	279,137

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RELATED PARTY TRANSACTIONS (Details) - USD ($)	3 Months Ended	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2021
RELATED PARTY TRANSACTIONS
Total rent payments for office space	$ 0	$ 24,000

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COMMITMENTS AND CONTINGENCIES - Additional Information (Details)	9 Months Ended
	Sep. 30, 2021 USD ($)
COMMITMENTS AND CONTINGENCIES
Shared office arrangement minimum fees due	$ 81,000

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SUBSEQUENT EVENTS (Details)	1 Months Ended
	Nov. 30, 2021 shares	Oct. 31, 2021 USD ($) item	Sep. 30, 2021 USD ($)
Subsequent Event [Line Items]
Aggregate future lease payments			$ 127,000
Subsequent event | Sero Capital LLC
Subsequent Event [Line Items]
Number of lease agreements | item		2
Outstanding shares of common stock (In percentage)		10.00%
Aggregate future lease payments		$ 554,000
Assignment of rights to security deposit		$ 32,000
David Moradi | Subsequent event
Subsequent Event [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period | shares	100,000