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, 2023

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 October 27, 2023, 11,888,851 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, 2023 and December 31, 2022 (unaudited)	2
	Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (unaudited)	3
	Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)	4
	Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II	OTHER INFORMATION	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Issuer Purchases of Equity Securities	24
Item 6.	Exhibits	25
SIGNATURES		26

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The financial information set forth below with respect to the financial statements as of September 30, 2023 and December 31, 2022 and for the three- and nine-month periods ended September 30, 2023 and 2022 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, 2023 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 presentation. 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)	2023		2022
ASSETS
Current assets:
Cash	$	3,274	$	6,904
Accounts receivable, net of allowance for doubtful accounts of $484 and $468, respectively		4,409		5,418
Prepaid expenses and other current assets		660		644
Total current assets		8,343		12,966
Property and equipment, net of accumulated depreciation of $272 and $254, respectively		241		161
Right of use assets		691		1,154
Intangible assets, net of accumulated amortization of $7,044 and $5,978, respectively		5,874		6,041
Goodwill		4,001		4,001
Other		104		105
Total assets	$	19,254	$	24,428
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,113	$	2,452
Operating lease liabilities		374		468
Finance lease liabilities		14		38
Deferred revenue		6,358		7,125
Contingent consideration		2,157		979
Total current liabilities		11,016		11,062
Long term liabilities:
Operating lease liabilities		463		745
Finance lease liabilities		—		7
Deferred revenue		12		73
Contingent consideration, long term		—		1,952
Total liabilities		11,491		13,839
Stockholders’ equity:
Preferred stock, $0.00001 par value, 10,000 shares authorized
Common stock, $0.00001 par value, 50,000 shares authorized, 11,876 and 11,551 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		1		1
Additional paid-in capital		95,583		93,070
Accumulated deficit		(87,821)		(82,482)
Total stockholders’ equity		7,763		10,589
Total liabilities and stockholders’ equity	$	19,254	$	24,428

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)	2023		2022		2023		2022
Revenue	$	7,838	$	7,700	$	23,446	$	22,175
Cost of revenue		1,788		1,923		5,277		5,474
Gross profit		6,050		5,777		18,169		16,701
Operating expenses:
Selling and marketing		2,891		3,351		9,387		10,502
Research and development		1,955		1,542		5,734		4,477
General and administrative		2,594		3,166		8,520		10,227
Total operating expenses		7,440		8,059		23,641		25,206
Operating loss		(1,390)		(2,282)		(5,472)		(8,505)
Interest income (expense), net		35		(1)		133		(4)
Net loss		(1,355)		(2,283)		(5,339)		(8,509)
Net loss per common share-basic and diluted	$	(0.11)	$	(0.20)	$	(0.46)	$	(0.74)
Weighted average common shares outstanding-basic and diluted		11,822		11,458		11,733		11,464

See Notes to Unaudited Financial Statements

3

AUDIOEYE, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(unaudited)

				Additional
	Common stock			Paid-in		Accumulated
(in thousands)	Shares	Amount		Capital		Deficit		Total
Balance, December 31, 2022	11,551	$	1	$	93,070	$	(82,482)	$	10,589
Common stock issued upon settlement of restricted stock units	192		—		—		—		—
Issuance of common stock for services	10		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(56)		—		(258)		—		(258)
Stock-based compensation	—		—		1,118		—		1,118
Net loss	—		—		—		(2,011)		(2,011)
Balance, March 31, 2023	11,697	$	1	$	93,930	$	(84,493)	$	9,438
Common stock issued upon settlement of restricted stock units	108		—		—		—		—
Issuance of common stock for services	14		—		—		—		—
Common stock issued pursuant to employee stock purchase plan	9		—		36		—		36
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(31)		—		(188)		—		(188)
Stock-based compensation	—		—		1,031		—		1,031
Net loss	—		—		—		(1,973)		(1,973)
Balance, June 30, 2023	11,797	$	1	$	94,809	$	(86,466)	$	8,344
Common stock issued upon settlement of restricted stock units	94		—		—		—		—
Issuance of common stock for services	8		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(23)		—		(112)		—		(112)
Stock-based compensation	—		—		886		—		886
Net loss	—		—		—		(1,355)		(1,355)
Balance, September 30, 2023	11,876	$	1	$	95,583	$	(87,821)	$	7,763

				Additional
	Common stock			Paid-in		Accumulated
(in thousands)	Shares	Amount		Capital		Deficit		Total
Balance, December 31, 2021	11,435	$	1	$	88,889	$	(71,293)	$	17,597
Common stock issued upon settlement of restricted stock units	35		—		—		—		—
Issuance of common stock for services	8		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(4)		—		(25)		—		(25)
Stock-based compensation	—		—		1,145		—		1,145
Net loss	—		—		—		(3,616)		(3,616)
Balance, March 31, 2022	11,474	$	1	$	90,009	$	(74,909)	$	15,101
Common stock issued upon settlement of restricted stock units	103		—		—		—		—
Issuance of common stock for services	11		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(28)		—		(133)		—		(133)
Common stock repurchased for retirement	(79)		—		—		(410)		(410)
Stock-based compensation	—		—		1,041		—		1,041
Net loss	—		—		—		(2,610)		(2,610)
Balance, June 30, 2022	11,481		1		90,917		(77,929)		12,989
Common stock issued upon settlement of restricted stock units	83		—		—		—		—
Issuance of common stock for services	11		—		—		—		—
Surrender of stock to cover tax liability on settlement of employee stock-based awards	(22)		—		(134)		—		(134)
Common stock repurchased for retirement	(60)		—		—		(346)		(346)
Stock-based compensation	—		—		1,308		—		1,308
Net loss	—		—		—		(2,283)		(2,283)
Balance, September 30, 2022	11,493	$	1	$	92,091	$	(80,558)	$	11,534

See Notes to Unaudited Financial Statements

4

AUDIOEYE, INC.

STATEMENTS OF CASH FLOWS

(unaudited)

		Nine months ended September 30,
(in thousands)	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,339)	$	(8,509)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,670		1,607
Loss on disposal or impairment of long-lived assets		220		50
Stock-based compensation expense		3,035		3,494
Amortization of deferred commissions		49		91
Amortization of right of use assets		278		422
Change in fair value of contingent consideration		200		182
Provision for accounts receivable		49		236
Changes in operating assets and liabilities:
Accounts receivable		960		455
Prepaid expenses and other assets		(25)		(403)
Accounts payable and accruals		(408)		(1,050)
Operating lease liability		(376)		(393)
Deferred revenue		(828)		(674)
Net cash used in operating activities		(515)		(4,492)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(142)		(65)
Software development costs		(1,481)		(860)
Patent costs		(31)		(17)
Payment for acquisition, net of cash received		—		(4,484)
Net cash used in investing activities		(1,654)		(5,426)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan		36		—
Payments related to settlement of employee shared-based awards		(558)		(292)
Settlement of contingent consideration		(908)		(132)
Repurchase of common stock		—		(756)
Repayments of finance leases		(31)		(45)
Net cash used in financing activities		(1,461)		(1,225)
Net decrease in cash		(3,630)		(11,143)
Cash-beginning of period		6,904		18,966
Cash-end of period	$	3,274	$	7,823
Supplemental disclosures of noncash activities:
Right-of-use assets and operating lease obligations recognized during the period	$	—	$	876

See Notes to Unaudited Financial Statements

5

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(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, 2022 (the “2022 Form 10-K”), as filed with the SEC on March 9, 2023.

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the 2022 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the financial statements contained in the 2022 Form 10-K when reviewing interim financial results.

Use of Estimates

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

Revenue Recognition

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

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

We determine revenue recognition through the following five steps:

● Identify the contract with the customer;

● Identify the performance obligations in the contract;

● Determine the transaction price;

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

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

6

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

The following table presents our revenues disaggregated by sales channel:

	Nine months ended September 30,
(in thousands)	2023		2022
Partner and Marketplace	$	13,365	$	11,749
Enterprise		10,081		10,426
Total revenues	$	23,446	$	22,175

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

The table below summarizes our deferred revenue as of September 30, 2023 and December 31, 2022:

	September 30,		December 31,
(in thousands)	2023		2022
Deferred revenue — current	$	6,358	$	7,125
Deferred revenue — noncurrent		12		73
Total deferred revenue	$	6,370	$	7,198

In the nine-month period ended September 30, 2023, we recognized $6,771,000, or 94%, in revenue from deferred revenue outstanding as of December 31, 2022.

In the three and nine months ended September 30, 2023, we had one customer (including the customer’s affiliates reflecting multiple contracts and a partnership with the Company) which accounted for approximately 17% and 16%, respectively, of our total revenue. In the three and nine months ended September 30, 2022, we had one customer which accounted for approximately 16% and 17%, respectively, of our total revenue.

One major customer represented 18% and 22% of total accounts receivable as of September 30, 2023 and December 31, 2022, respectively.

7

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Deferred Costs (Contract acquisition costs)

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

The table below summarizes the deferred commission costs as of September 30, 2023 and December 31, 2022, which are included in Prepaid expenses and other current assets on our balance sheets:

	September 30,		December 31,
(in thousands)	2023		2022
Deferred costs — current	$	28	$	49
Deferred costs — noncurrent		5		12
Total deferred costs	$	33	$	61

Amortization expense associated with sales commissions was included in Selling and marketing expenses on the statements of operations and totaled $13,000 and $49,000 for the three- and nine-month periods ended September 30, 2023, respectively, and $26,000 and $91,000 for the three- and nine-month periods ended September 30, 2022, respectively.

Business Combinations

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

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

Employee Stock Purchase Plan

In May 2022, the stockholders of the Company approved the Company’s Employee Stock Purchase Plan (the “ESPP”), which provides for the issuance of up to 500,000 shares of common stock. Eligible employees may elect to have a percentage of eligible compensation withheld to purchase shares of our common stock at the end of each purchase period. The Company expects each purchase period to be the six month periods ending on June 30 or December 31 of each calendar year. The purchase price per share is expected to equal 85% of the fair market value of our common stock on the last trading day of the purchase period. Under the ESPP, a participant may not be granted rights to purchase more than $25,000 worth of common stock for each calendar year and no participant may purchase more than 1,500 shares of our common stock (or such other number as the Compensation Committee may designate) on any one purchase date. As of September 30, 2023, 8,630 shares had been issued under the ESPP and 491,370 shares remained available under the plan.

8

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based Compensation

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

The fair value of options awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor and expected term).

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

We expense the compensation cost associated with time-based options and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based 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, 2023 and 2022:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2023		2022		2023		2022
Options	$	20	$	98	$	136	$	308
RSUs		826		1,145		2,713		3,022
Unrestricted shares of common stock		40		65		180		164
Employee stock purchase plan		—		—		6		—
Total	$	886	$	1,308	$	3,035	$	3,494

As of September 30, 2023, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $26,000 and $5,103,000, respectively, which may be recognized through July 2026, subject to achievement of service, performance, and market conditions.

9

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) Per Share (“EPS”)

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

Potentially dilutive securities outstanding as of September 30, 2023 and 2022, which were excluded from the computation of basic and diluted net loss per share for the periods then ended, are as follows:

	September 30,
(in thousands)	2023	2022
Options	115	169
Restricted stock units	1,840	1,961
Total	1,955	2,130

The following table summarizes the stock option and RSUs activity for the nine months ended September 30, 2023:

	Options	RSUs
Outstanding at December 31, 2022	156,054	1,802,655
Granted	—	606,089
Exercised/Settled	—	(393,804)
Forfeited/Expired	(40,808)	(174,484)
Outstanding at September 30, 2023	115,246	1,840,456
Vested at September 30, 2023	108,664	477,838
Unvested at September 30, 2023	6,582	1,362,618

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective January 1, 2023 and determined that the update applied to accounts receivable. The adoption did not have a material effect on our financial statements and did not significantly impact the Company’s accounting policies or estimation methods related to the allowance for doubtful accounts.

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

10

AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 3 — ACQUISITIONS

Bureau of Internet Accessibility Inc.

On March 9, 2022, we entered into a Stock Purchase Agreement (“Purchase Agreement”) to acquire all the outstanding equity interests of Bureau of Internet Accessibility Inc. (“BOIA”), a Delaware corporation which provides web accessibility services including audits, training, remediation and implementation support. The aggregate consideration for the purchase of BOIA was approximately $7.5 million (at fair value), consisting of $5.1 million cash payment at closing, $0.2 million cash received in the third quarter of 2022 resulting from net working capital adjustments, and an estimated $2.6 million in aggregate contingent consideration to be paid in cash following the one- and two-year anniversary of the closing date. Actual aggregate cash consideration is based on BOIA’s revenues for 2022 and 2023 and may differ from estimated contingent consideration at acquisition. In the first quarter of 2023, we made a $974,000 cash payment towards the contingent consideration liability.

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

(in thousands)	Balance at March 9, 2022
Assets purchased:
Cash	$	398
Accounts receivable		437
Other assets		29
Client relationships (1)		3,600
Internally developed software (1)		700
Trade name (1)		50
Goodwill (2)		3,300
Total assets purchased		8,514
Liabilities assumed:
Accounts payable and accrued liabilities		7
Deferred revenue		1,040
Total liabilities assumed		1,047
Net assets acquired		7,467
Consideration:
Cash paid, net of proceeds from working capital adjustment		4,882
Contingent consideration liability (3)		2,585
Total consideration	$	7,467

(1) Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of 2 to 7 years. In the nine months ended September 30, 2023 and 2022, we recorded $536,000 and $399,000, respectively, in amortization expense associated with these acquired intangible assets.

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

(3) The fair value of the contingent consideration liability was determined using the Monte-Carlo simulation. The key assumptions used in the Monte-Carlo simulation were as follows: non-recurring and recurring revenue metrics for the earn-out periods, non-recurring revenue discount rate of 11.5%, recurring revenue discount rate of 10.5%, expected revenue volatility of 24.65%, risk-free rate of 1.58%, buyer specific discount rate of 9.0%, and discount periods of 1.01 year and 2.22 year.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 3 — ACQUISITIONS (continued)

For the nine months ended September 30, 2023 and 2022, we recorded $200,000 and $182,000, respectively, in change in the fair value of contingent consideration, which is included in General and administrative in the accompanying Statement of Operations. The balance of contingent consideration represents the estimated fair value of the second anniversary payment as of the reporting period and is subject to further change in subsequent periods through settlement based on actual and estimated non-recurring and recurring revenues from the BOIA offering relative to certain thresholds, as well as adjustments for discount periods, discount rates, risk-free rate, volatility, and buyer specific discount rate.

In the nine months ended September 30, 2023 and 2022, the Company incurred zero and $247,000, respectively, of transaction costs related to the acquisition of BOIA, which were included on our Statement of Operations within General and administrative expenses.

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, 2023 and December 31, 2022, the Company’s outstanding finance lease obligations totaled $14,000 and $45,000, 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, net of disposals:

	September 30,		December 31,
(in thousands)	2023		2022
Computer equipment	$	214	$	214
Less: accumulated depreciation		(198)		(172)
Assets acquired under finance leases, net	$	16	$	42

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, New York, New York, and Miami Beach, Florida. The lease for the principal office located in Tucson consists of 627 square feet and ends in October 2024. The lease for the New York office, which consists of approximately 5,000 square feet, commenced in January 2022 and will expire in December 2026. Upon commencement of the New York lease, we recorded a right-of-use asset and corresponding operating lease liability of $876,000 in the first quarter of 2022.

In the second quarter of 2023, we terminated one of the leases for the Miami Beach office, reducing the leased space to approximately 2,000 square feet. The remaining lease will expire in May 2024. In connection with the early termination of this lease, the right-of-use asset and lease liability were reduced by $38,000 and $40,000, respectively.

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

In the first quarter of 2023, we closed our Marietta, Georgia office. As a result of abandoning the office space prior to its lease expiration in August 2024, we wrote off the associated right-of-use asset in full and recognized a $146,000 loss on impairment, which is included in General and administrative in the accompanying Statement of Operations. As of September 30, 2023, the lease liability related to the Marietta, GA office was $107,000.

In addition, the Company entered into membership agreements to occupy shared office space in Lehi, Utah, Portland, Oregon, and Seattle, Washington. Because the membership agreements do not qualify as a lease under ASC 842, we expense the membership fees as they are incurred.

The Company made operating lease payments in the amount of $396,000 and $459,000 during the nine months ended September 30, 2023 and 2022, respectively.

The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2023 (in thousands):

Year ending December 31,	Finance Leases		Operating Leases		Total
2023 (3 months remaining)	$	7	$	121	$	128
2024		7		345		352
2025		—		219		219
2026		—		225		225
Total minimum lease payments		14		910		924
Less: present value discount		—		(73)		(73)
Total lease liabilities		14		837		851
Current portion of lease liabilities		14		374		388
Long term portion of lease liabilities	$	—	$	463	$	463

The following summarizes expenses associated with our finance and operating leases for the nine months ended September 30, 2023 and 2022:

	Nine months ended September 30,
(in thousands)	2023			2022
Finance lease expenses:
Depreciation expense	$	26	$	41
Interest on lease liabilities		1		1
Total Finance lease expense		27		42
Operating lease expense		388		488
Short-term lease and related expenses		204		109
Total lease expenses	$	619	$	639

The following table provides information about the remaining lease terms and discount rates applied as of September 30, 2023 and 2022:

	September 30,
	2023	2022
Weighted average remaining lease term (years)
Operating Leases	2.70	3.26
Finance Leases	0.57	1.37
Weighted average discount rate (%)
Operating Leases	6.00	6.00
Finance Leases	6.00	6.00

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AUDIOEYE, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 5 — COMMITMENTS AND CONTINGENCIES

Membership agreement to occupy shared office space

The Company occupies shared office space in Lehi, UT, and Seattle, WA under membership agreements which end in May 2025 and January 2025, 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, 2023, minimum fees due under these shared office arrangements totaled $375,000.

Litigation

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

NOTE 6 — SUBSEQUENT EVENTS

We have evaluated subsequent events occurring after September 30, 2023, and based on our evaluation we did not identify any events that would have required recognition or disclosure in these financial statements.

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

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

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

Cautionary Note Regarding Forward-Looking Statements

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

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

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

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

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

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

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

● judicial applications of accessibility laws to the internet;

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

● the regulatory environment for our products and services.

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

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

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and addresses a wide range of disabilities including dyslexia, color blindness, epilepsy and more. AudioEye also offers additional solutions to provide for enhanced compliance and accessibility, including periodic manual auditing, manual remediations and legal support services. Our solutions may be purchased through a subscription service on a month-to-month basis or with one or multi-year terms. We also offer PDF remediation services and Website and Native Mobile App 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-one (21) issued patents in the United States and three (3) pending US patent applications. The commercial value of these patents is unknown.

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

Our Annual Report filed on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 9, 2023 provides additional information about our business and operations.

Executive Overview

AudioEye is an industry-leading digital accessibility platform delivering ADA and WCAG compliance at scale. Our solutions advance accessibility with patented technology that reduces barriers, expands access for individuals with disabilities, and enhances the user experience for a broader audience. In the three and nine months ended September 30, 2023, we saw continued revenue growth, increases in customer count, efficiencies in cost of revenue that increased gross margins and decreased total operating expenses.

We have two sales channels to deliver our product, the Partner and Marketplace channel and the Enterprise channel. AudioEye continues to focus on recurring revenue growth in both channels, while still offering our Website and Native Mobile App report services and PDF services. For the nine months ended September 30, 2023, total revenue increased by 6% over the prior year comparable period. As of September 30, 2023, Annual Recurring Revenue (“ARR”) was approximately $30.5 million, which represented an increase of 4% year-over-year. Refer to Other Key Operating Metrics below for details on how we calculate ARR.

As of September 30, 2023, AudioEye had approximately 107,000 customers, a 32% increase from 81,000 customers at September 30, 2022. The increase in customer count is attributed to our Partner and Marketplace channel.

In the nine months ended September 30, 2023, revenue from our Partner and Marketplace grew 14% from prior year comparable period. This channel represented about 61% of ARR at the end of September 2023. In nine months ended September 30, 2023, total Enterprise revenue decreased by 3% from prior year comparable period. The Enterprise channel represented about 39% of ARR at the end of September 2023.

In the three and nine months ended September 30, 2023, we had one customer (including the customer’s affiliates reflecting multiple contracts and a partnership with the Company) which accounted for approximately 17% and 16%, respectively, of our total revenue. In the three and nine months ended September 30, 2022, we had one customer which accounted for approximately 16% and 17%, respectively, of our total revenue.

The Company continued to invest in research and development in the third quarter of 2023. Total research and development cost, as defined under Research and Development Expenses section in the Results of Operations below, was 31% of total revenue in the three months ended September 30, 2023. Total research and development cost increased primarily due to additional investments in engineering and product talent dedicated to further product development and enhancement.

While revenue increased 6% in the nine months ended September 30, 2023, cost of revenue, selling and marketing expense and general and administrative expense decreased from prior year comparable period. This decrease was mainly driven by efficiencies in cost of revenue and selling and marketing implemented during the year, and lower litigation expense.

We provide further commentary on our Results of Operation below.

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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, 2023 with the three and nine months ended September 30, 2022.

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)	2023		2022		$		%
Revenue	$	7,838	$	7,700	$	138	2	%
Cost of revenue		(1,788)		(1,923)		135	(7)	%
Gross profit		6,050		5,777		273	5	%
Operating expenses:
Selling and marketing		2,891		3,351		(460)	(14)	%
Research and development		1,955		1,542		413	27	%
General and administrative		2,594		3,166		(572)	(18)	%
Total operating expenses		7,440		8,059		(619)	(8)	%
Operating loss		(1,390)		(2,282)		892	(39)	%
Interest income (expense), net		35		(1)		36	(3,600)	%
Net loss	$	(1,355)	$	(2,283)	$	928	(41)	%

	Nine months ended September 30,				Change
(in thousands)	2023		2022		$		%
Revenue	$	23,446	$	22,175	$	1,271	6	%
Cost of revenue		(5,277)		(5,474)		197	(4)	%
Gross profit		18,169		16,701		1,468	9	%
Operating expenses:
Selling and marketing		9,387		10,502		(1,115)	(11)	%
Research and development		5,734		4,477		1,257	28	%
General and administrative		8,520		10,227		(1,707)	(17)	%
Total operating expenses		23,641		25,206		(1,565)	(6)	%
Operating loss		(5,472)		(8,505)		3,033	(36)	%
Interest income (expense), net		133		(4)		137	(3,425)	%
Net loss	$	(5,339)	$	(8,509)	$	3,170	(37)	%

Revenue

The following tables present our revenues disaggregated by sales channel:

	Three months ended September 30,				Change
(in thousands)	2023		2022		$		%
Partner and Marketplace	$	4,605	$	4,025	$	580	14	%
Enterprise		3,233		3,675		(442)	(12)	%
Total revenues	$	7,838	$	7,700	$	138	2	%

	Nine months ended September 30,				Change
(in thousands)	2023		2022		$		%
Partner and Marketplace	$	13,365	$	11,749	$	1,616	14	%
Enterprise		10,081		10,426		(345)	(3)	%
Total revenues	$	23,446	$	22,175	$	1,271	6	%

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

Enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites, who generally engage directly with AudioEye sales personnel for custom pricing and solutions. This channel also includes federal, state and local government agencies and revenue attributable to the Bureau of Internet Accessibility Inc. (“BOIA”), which was acquired in March 2022.

For the three and nine months ended September 30, 2023, total revenue increased by 2% and 6%, respectively, over the prior year comparable periods. The increase Partner and Marketplace channel revenue was the result of continued expansion with existing partners and execution of new partnerships agreements in the period. The decrease in Enterprise channel revenue for the three and nine months ended September 30, 2023 was driven primarily by the reduction in revenue from one large customer.

Cost of Revenue and Gross Profit

	Three months ended September 30,				Change
(in thousands)	2023		2022		$		%
Revenue	$	7,838	$	7,700	$	138	2	%
Cost of revenue		(1,788)		(1,923)		135	(7)	%
Gross profit	$	6,050	$	5,777	$	273	5	%

	Nine months ended September 30,				Change
(in thousands)	2023		2022		$		%
Revenue	$	23,446	$	22,175	$	1,271	6	%
Cost of revenue		(5,277)		(5,474)		197	(4)	%
Gross profit	$	18,169	$	16,701	$	1,468	9	%

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, 2023, cost of revenue decreased by 7% and 4%, respectively, over the prior year comparable periods as revenue continued to increase. This decrease was primarily related to efficiencies achieved from infrastructure platform improvements and lower overhead costs from facilities.

For the three and nine months ended September 30, 2023, gross profit increased by 5% and 9%, respectively, over the prior year comparable periods. The increase in gross profit was a result of increased revenue with a corresponding decrease to cost of revenue.

Selling and Marketing Expenses

	Three months ended September 30,				Change
(in thousands)	2023		2022		$		%
Selling and marketing	$	2,891	$	3,351	$	(460)	(14)	%

	Nine months ended September 30,				Change
(in thousands)	2023		2022		$		%
Selling and marketing	$	9,387	$	10,502	$	(1,115)	(11)	%

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, 2023, selling and marketing expenses decreased by 14% and 11%, respectively, over the prior year comparable periods. The decrease in selling and marketing expenses resulted primarily from a reduction in online media and third-party marketing expenses and a reduction to stock compensation expense which was partially offset by higher personnel costs associated with investment in talent.

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Research and Development Expenses

	Three months ended September 30,				Change
(in thousands)	2023		2022		$		%
Research and development expense	$	1,955	$	1,542	$	413	27	%
Plus: Capitalized research and development cost		482		295		187	63	%
Total research and development cost	$	2,437	$	1,837	$	600	33	%

	Nine months ended September 30,				Change
(in thousands)	2023		2022		$		%
Research and development expense	$	5,734	$	4,477	$	1,257	28	%
Plus: Capitalized research and development cost		1,481		860		621	72	%
Total research and development cost	$	7,215	$	5,337	$	1,878	35	%

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

For the three and nine months ended September 30, 2023, research and development expense increased by 27% and 28%, respectively, over the prior year comparable periods. This increase was driven by higher personnel cost associated with increased investment in our platform. For the three and nine months ended September 30, 2023, capitalized research and development cost increased by 63% and 72%, respectively, over the prior year comparable periods. The increase to capitalized research cost was the result of engineering personnel spending more time on product development than in previous comparable periods. For the three and nine months ended September 30, 2023, total research and development cost, which includes both R&D expenses and capitalized R&D costs, increased by 33% and 35%, respectively, over the prior year comparable periods.

General and Administrative Expenses

	Three months ended September 30,				Change
(in thousands)	2023		2022		$		%
General and administrative	$	2,594	$	3,166	$	(572)	(18)	%

	Nine months ended September 30,				Change
(in thousands)	2023		2022		$		%
General and administrative	$	8,520	$	10,227	$	(1,707)	(17)	%

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

For the three and nine months ended September 30, 2023, general and administrative expenses decreased by 18% and 17%, respectively, over the prior year comparable periods. The decrease in general and administrative expenses was due primarily to lower legal expenses towards non-recurring litigation and lower stock compensation expense.

Interest Income (Expense)

	Three months ended September 30,				Change
(in thousands)	2023		2022		$		%
Interest income (expense), net	$	35	$	(1)	$	36	(3,600)	%

	Nine months ended September 30,				Change
(in thousands)	2023		2022		$		%
Interest income (expense), net	$	133	$	(4)	$	137	(3,425)	%

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For the three and nine months ended September 30, 2023, interest income, net consisted primarily of income from investment in money market funds. For the three and nine months ended September 30, 2022, interest expense consisted of interest on our finance lease liabilities.

Other Key Operating Metrics

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

We define ARR as the sum of (i) for our Enterprise channel, the total of the annual recurring fee under each active contract at the date of determination, plus (ii) for our Partner and Marketplace channel, the monthly fee for all active customers at the date of determination, in each case, assuming no changes to the subscription, multiplied by 12. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are cancelable, which may impact future ARR. ARR excludes revenue from our PDF remediation services business, one-time Website and Mobile App report services business and other miscellaneous non-recurring services. As of September 30, 2023, ARR was $30.5 million, which represents an increase of 4% year-over-year, driven by growth in our Partner and Marketplace 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 significant transaction and litigation-related expenses and other costs that are expected to be non-recurring. In order to provide investors with greater insight and allow for a more comprehensive understanding of the information used in our financial and operational decision-making, the Company has supplemented the Financial Statements presented on a GAAP basis in this Quarterly Report on Form 10-Q with the following non-GAAP financial measures: Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share.

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

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

We define: (i) Non-GAAP earnings (loss) as net income (loss), plus (less) interest expense (income), plus depreciation and amortization expense, plus stock-based compensation expense, plus non-cash valuation adjustment to contingent consideration, plus certain litigation expense, plus certain acquisition expense, plus executive team restructuring cost, and plus loss on disposal or impairment of long-lived assets; and (ii) Non-GAAP earnings (loss) per diluted share as net income (loss) per diluted common share, plus (less) interest expense (income), plus depreciation and amortization expense, plus stock-based compensation expense, plus non-cash valuation adjustment to contingent consideration, plus certain litigation expense, plus certain acquisition expense, plus executive team restructuring cost, and plus loss on disposal or impairment of long-lived assets, 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 one of the periods presented in this Quarterly Report on Form 10-Q.

Non-GAAP earnings (loss) and Non-GAAP earnings (loss) per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. All of the items adjusted in the Non-GAAP earnings (loss) to net loss and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, such as stock-based compensation expense and valuation adjustments to assets and liabilities, management believes that investors may find it useful to assess our comparative operating performance because the measures

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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.

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 earnings (loss) to net loss, the most directly comparable GAAP-based measure, as well as Non-GAAP earnings (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)	2023		2022		2023		2022
Non-GAAP Earnings (Loss) Reconciliation
Net loss (GAAP)	$	(1,355)	$	(2,283)	$	(5,339)	$	(8,509)
Non-cash valuation adjustment to contingent consideration		(14)		24		200		182
Interest (income) expense, net		(35)		1		(133)		4
Stock-based compensation expense		886		1,308		3,035		3,494
Acquisition expense (1)		—		7		—		247
Litigation expense (2)		106		449		300		1,810
Executive team restructuring cost (3)		63		—		63		—
Depreciation and amortization		567		598		1,670		1,607
Loss on disposal or impairment of long-lived assets		73		43		220		50
Non-GAAP earnings (loss)	$	291	$	147	$	16	$	(1,115)
Non-GAAP Earnings (Loss) per Diluted Share Reconciliation
Net loss per common share (GAAP) — diluted	$	(0.11)	$	(0.20)	$	(0.46)	$	(0.74)
Non-cash valuation adjustment to contingent consideration		—		—		0.02		0.02
Interest (income) expense, net		—		—		(0.01)		—
Stock-based compensation expense		0.07		0.11		0.26		0.30
Acquisition expense (1)		—		—		—		0.02
Litigation expense (2)		0.01		0.04		0.03		0.16
Executive team restructuring cost (3)		0.01		—		0.01		—
Depreciation and amortization		0.05		0.05		0.14		0.14
Loss on disposal or impairment of long-lived assets		0.01		—		0.02		—
Non-GAAP earnings (loss) per diluted share (4)	$	0.02	$	0.01	$	0.00	$	(0.10)
Diluted weighted average shares (GAAP)		11,822		11,458		11,733		11,464
Includable incremental shares (Non-GAAP) (4)		412		760		376		—
Adjusted diluted shares (Non-GAAP) (5)		12,234		12,218		12,109		11,464

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

(2) Represents legal expenses related primarily to non-recurring litigation pursued by the Company.

(3) Represents severance expense associated with the restructuring in executive roles.

(4) Non-GAAP earnings per adjusted diluted share for our common stock is computed using the treasury stock method.

21

(5) 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, 2023, we had $3,274,000 in cash and working capital of $(2,673,000). The decrease in working capital in the nine months ended September 30, 2023 was primarily due to investments in our internally-developed platform and the increase in current liability associated with the contingent consideration relating to a potential BOIA earn-out, which was classified as a noncurrent liability in 2022. As of September 30, 2023, we had $2.2 million in contingent consideration classified as current liability as it is expected to be paid in the second quarter of 2024.

On February 11, 2021, we entered into an At The Market (“ATM”) 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 million. In 2021, the Company issued 471,970 shares of its common stock under the ATM offering and raised $16,534,000, net of transaction expenses. No shares of common stock were sold under the ATM offering in 2022 or 2023.

We have no debt obligations or off-balance sheet arrangements, and we believe that the Company has sufficient liquidity to continue as a going concern through the next twelve months.

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

(in thousands)	September 30, 2023		December 31, 2022
Current assets	$	8,343	$	12,966
Current liabilities		(11,016)		(11,062)
Working capital	$	(2,673)	$	1,904

Cash Flows

	Nine months ended September 30,
(in thousands)	2023		2022
Net cash used in operating activities	$	(515)	$	(4,492)
Net cash used in investing activities		(1,654)		(5,426)
Net cash used in financing activities		(1,461)		(1,225)
Net decrease in cash	$	(3,630)	$	(11,143)

For the nine months ended September 30, 2023, in relation to the prior year comparable period, cash used in operating activities decreased primarily due lower patent litigation costs and a reduction in sales and marketing costs, driven mainly by lower digital, consulting and third-party costs.

For the nine months ended September 30, 2023, in relation to the prior year comparable period, cash used in investing activities decreased primarily due to the acquisition of BOIA in 2022. In the nine months ended September 30, 2022, we paid $4.5 million in connection with BOIA’s acquisition, net of cash acquired and receipts associated with net working capital adjustments. Cash used for investing activities in 2023 related primarily to cash outlays for software development costs.

For the nine months ended September 30, 2023, in relation to the prior year comparable period, cash used in financing activities increased due to a $974,000 payment towards our contingent consideration in the first quarter of 2023 in connection with the acquisition of BOIA, of which $908,000 and $66,000 are classified as cash used in financing and operating activities, respectively. Cash used for financing activities in 2022 related primarily to cash outlays for common stock repurchase.

22

Critical Accounting Policies and Estimates

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

Our critical accounting estimates, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, relate to stock-based compensation and goodwill, intangible assets and contingent consideration recognized in connection with a business combination. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Controls over Financial Reporting

During the quarter ended September 30, 2023, 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.

23

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”), which could materially affect our business, financial condition and results of operations. The risks described in our 2022 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, 2023:

					Maximum Number
				Total Number of	of Shares (or
				Shares Purchased	Approximate Dollar Value)
				as Part of Publicly	that May Yet Be Purchased
	Total Number of	Average Price		Announced Plans or	under the Plans or
	Shares Purchased	Paid per Share		Programs	Programs (2)
July 1 - July 31:
Employee transactions (1)	2,366	$	5.18	—	$	—
Share repurchase program (2)	—		—	—		2,244,000
August 1 - August 31:
Employee transactions (1)	6,255		4.96	—		—
Share repurchase program (2)	—		—	—		—
September 1 - September 30:
Employee transactions (1)	13,993		4.99	—		—
Share repurchase program (2)	—		—	—		—
Total:
Employee transactions (1)	22,614	$	5.00	—	$	—
Share repurchase program (2)	—	$	—	—	$	—

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

(2) In June 2022, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $3 million of our common stock through June 30, 2024. Shares repurchased under the program were subsequently retired. In August 2023, the share repurchase program was terminated.

24

Item 6. Exhibits

Exhibit  No.	Description
3.1	Restated Certificate of Incorporation of AudioEye, Inc., dated as of August 8, 2022 (1)
3.5	By-Laws of AudioEye, Inc. (as amended as of March 24, 2023) (2)
10.1	Transition and Separation Agreement by and between Dominic Varacalli and AudioEye, Inc. effective as of August 18, 2023 (3)
10.2	Consulting Agreement effective as of September 30, 2023 by and between Dominic Varacalli and AudioEye, Inc. (3)
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.

(1)Incorporated by reference to Form 10-Q, filed with the SEC on August 9, 2022.

(2)Incorporated by reference to Form 8-K, filed with the SEC on March 24, 2023.

(3)Incorporated by reference to Form 8-K, filed with the SEC on August 21, 2023.

25

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 2, 2023	By:	/s/ David Moradi
			David Moradi
			Principal Executive Officer
Date:	November 2, 2023	By:	/s/ Kelly Georgevich
			Kelly Georgevich
			Principal Financial Officer

26

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, 2023 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 2, 2023	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, 2023 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 2, 2023	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, 2023 (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 2, 2023	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, 2023	Oct. 27, 2023
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2023
Document Transition Report	false
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, Postal Zip Code	85711
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
City Area Code	866
Local Phone Number	331-5324
Title of 12(b) Security	Common Stock, par value $0.00001 per share
Trading Symbol	AEYE
Security Exchange Name	NASDAQ
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
Entity Common Stock, Shares Outstanding		11,888,851
Entity Central Index Key	0001362190
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Current assets:
Cash	$ 3,274	$ 6,904
Accounts receivable, net of allowance for doubtful accounts of $484 and $468, respectively	4,409	5,418
Prepaid expenses and other current assets	660	644
Total current assets	8,343	12,966
Property and equipment, net of accumulated depreciation of $272 and $254, respectively	241	161
Right of use assets	691	1,154
Intangible assets, net of accumulated amortization of $7,044 and $5,978, respectively	5,874	6,041
Goodwill	4,001	4,001
Other	104	105
Total assets	19,254	24,428
Current liabilities:
Accounts payable and accrued expenses	2,113	2,452
Operating lease liabilities	374	468
Finance lease liabilities	14	38
Deferred revenue	6,358	7,125
Contingent consideration	2,157	979
Total current liabilities	11,016	11,062
Long term liabilities:
Operating lease liabilities	463	745
Finance lease liabilities		7
Deferred revenue	12	73
Contingent consideration, long term		1,952
Total liabilities	11,491	13,839
Stockholders' equity:
Preferred stock, $0.00001 par value, 10,000 shares authorized
Common stock, $0.00001 par value, 50,000 shares authorized, 11,876 and 11,551 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	1	1
Additional paid-in capital	95,583	93,070
Accumulated deficit	(87,821)	(82,482)
Total stockholders' equity	7,763	10,589
Total liabilities and stockholders' equity	$ 19,254	$ 24,428

XML

BALANCE SHEETS (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
BALANCE SHEETS
Allowance for doubtful accounts	$ 484	$ 468
Property and equipment, accumulated depreciation	272	254
Intangible assets, accumulated amortization	$ 7,044	$ 5,978
Preferred stock, par value (in dollars per share)	$ 0.00001	$ 0.00001
Preferred stock, shares authorized	10,000	10,000
Common stock, par value (in dollars per share)	$ 0.00001	$ 0.00001
Common stock, shares authorized	50,000	50,000
Common stock, shares issued	11,876	11,551
Common stock, shares outstanding	11,876	11,551

XML

STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
STATEMENTS OF OPERATIONS
Revenue	$ 7,838	$ 7,700	$ 23,446	$ 22,175
Cost of revenue	1,788	1,923	5,277	5,474
Gross profit	6,050	5,777	18,169	16,701
Operating expenses:
Selling and marketing	2,891	3,351	9,387	10,502
Research and development	1,955	1,542	5,734	4,477
General and administrative	2,594	3,166	8,520	10,227
Total operating expenses	7,440	8,059	23,641	25,206
Operating loss	(1,390)	(2,282)	(5,472)	(8,505)
Other income (expense):
Interest income (expense), net	35	(1)	133	(4)
Net loss	$ (1,355)	$ (2,283)	$ (5,339)	$ (8,509)
Net loss per common share-basic (in dollars per share)	$ (0.11)	$ (0.20)	$ (0.46)	$ (0.74)
Net loss per common share-diluted (in dollars per share)	$ (0.11)	$ (0.20)	$ (0.46)	$ (0.74)
Weighted average common shares outstanding-basic (in shares)	11,822	11,458	11,733	11,464
Weighted average common shares outstanding-diluted (in shares)	11,822	11,458	11,733	11,464

XML

STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) shares in Thousands, $ in Thousands	Common stock	Additional Paid in Capital	Accumulated Deficit	Total
Balance at Dec. 31, 2021	$ 1	$ 88,889	$ (71,293)	$ 17,597
Balance (in shares) at Dec. 31, 2021	11,435
Common stock issued upon settlement of restricted stock units (in shares)	35
Issuance of common stock for services (in shares)	8
Surrender of stock to cover tax liability on settlement of employee stock-based awards		(25)		(25)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in shares)	(4)
Stock-based compensation		1,145		1,145
Net loss			(3,616)	(3,616)
Balance at Mar. 31, 2022	$ 1	90,009	(74,909)	15,101
Balance (in shares) at Mar. 31, 2022	11,474
Balance at Dec. 31, 2021	$ 1	88,889	(71,293)	17,597
Balance (in shares) at Dec. 31, 2021	11,435
Net loss				(8,509)
Balance at Sep. 30, 2022	$ 1	92,091	(80,558)	11,534
Balance (in shares) at Sep. 30, 2022	11,493
Balance at Mar. 31, 2022	$ 1	90,009	(74,909)	15,101
Balance (in shares) at Mar. 31, 2022	11,474
Common stock issued upon settlement of restricted stock units (in shares)	103
Issuance of common stock for services (in shares)	11
Surrender of stock to cover tax liability on settlement of employee stock-based awards		(133)		(133)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in shares)	(28)
Common stock repurchased for retirement			(410)	(410)
Common stock repurchased for retirement (in shares)	(79)
Stock-based compensation		1,041		1,041
Net loss			(2,610)	(2,610)
Balance at Jun. 30, 2022	$ 1	90,917	(77,929)	12,989
Balance (in shares) at Jun. 30, 2022	11,481
Common stock issued upon settlement of restricted stock units (in shares)	83
Issuance of common stock for services (in shares)	11
Surrender of stock to cover tax liability on settlement of employee stock-based awards		(134)		(134)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in shares)	(22)
Common stock repurchased for retirement			(346)	(346)
Common stock repurchased for retirement (in shares)	(60)
Stock-based compensation		1,308		1,308
Net loss			(2,283)	(2,283)
Balance at Sep. 30, 2022	$ 1	92,091	(80,558)	11,534
Balance (in shares) at Sep. 30, 2022	11,493
Balance at Dec. 31, 2022	$ 1	93,070	(82,482)	10,589
Balance (in shares) at Dec. 31, 2022	11,551
Common stock issued upon settlement of restricted stock units (in shares)	192
Issuance of common stock for services (in shares)	10
Surrender of stock to cover tax liability on settlement of employee stock-based awards		(258)		(258)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in shares)	(56)
Stock-based compensation		1,118		1,118
Net loss			(2,011)	(2,011)
Balance at Mar. 31, 2023	$ 1	93,930	(84,493)	9,438
Balance (in shares) at Mar. 31, 2023	11,697
Balance at Dec. 31, 2022	$ 1	93,070	(82,482)	10,589
Balance (in shares) at Dec. 31, 2022	11,551
Net loss				(5,339)
Balance at Sep. 30, 2023	$ 1	95,583	(87,821)	7,763
Balance (in shares) at Sep. 30, 2023	11,876
Balance at Mar. 31, 2023	$ 1	93,930	(84,493)	9,438
Balance (in shares) at Mar. 31, 2023	11,697
Common stock issued upon settlement of restricted stock units (in shares)	108
Issuance of common stock for services (in shares)	14
Common stock issued pursuant to employee stock purchase plan		36		36
Common stock issued pursuant to employee stock purchase plan (in shares)	9
Surrender of stock to cover tax liability on settlement of employee stock-based awards		(188)		(188)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in shares)	(31)
Stock-based compensation		1,031		1,031
Net loss			(1,973)	(1,973)
Balance at Jun. 30, 2023	$ 1	94,809	(86,466)	8,344
Balance (in shares) at Jun. 30, 2023	11,797
Common stock issued upon settlement of restricted stock units (in shares)	94
Issuance of common stock for services (in shares)	8
Surrender of stock to cover tax liability on settlement of employee stock-based awards		(112)		(112)
Surrender of stock to cover tax liability on settlement of employee stock-based awards (in shares)	(23)
Stock-based compensation		886		886
Net loss			(1,355)	(1,355)
Balance at Sep. 30, 2023	$ 1	$ 95,583	$ (87,821)	$ 7,763
Balance (in shares) at Sep. 30, 2023	11,876

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STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (5,339,000)	$ (8,509,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,670,000	1,607,000
Loss on disposal or impairment of long-lived assets	220,000	50,000
Stock-based compensation expense	3,035,000	3,494,000
Amortization of deferred commissions	49,000	91,000
Amortization of right of use assets	278,000	422,000
Change in fair value of contingent consideration	200,000	182,000
Provision for accounts receivable	49,000	236,000
Changes in operating assets and liabilities:
Accounts receivable	960,000	455,000
Prepaid expenses and other assets	(25,000)	(403,000)
Accounts payable and accruals	(408,000)	(1,050,000)
Operating lease liability	(376,000)	(393,000)
Deferred revenue	(828,000)	(674,000)
Net cash used in operating activities	(515,000)	(4,492,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment	(142,000)	(65,000)
Software development costs	(1,481,000)	(860,000)
Patent costs	(31,000)	(17,000)
Payment for acquisition, net of cash received		(4,484,000)
Net cash used in investing activities	(1,654,000)	(5,426,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan	36,000
Payments related to settlement of employee shared-based awards	(558,000)	(292,000)
Settlement of contingent consideration	(908,000)	(132,000)
Repurchase of common stock		(756,000)
Repayments of finance leases	(31,000)	(45,000)
Net cash used in financing activities	(1,461,000)	(1,225,000)
Net decrease in cash	(3,630,000)	(11,143,000)
Cash-beginning of period	6,904,000	18,966,000
Cash-end of period	$ 3,274,000	7,823,000
Supplemental disclosures of noncash activities:
Right-of-use assets and operating lease obligations recognized during the period		$ 876,000

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BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2023

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, 2022 (the “2022 Form 10-K”), as filed with the SEC on March 9, 2023.

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, 2023

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 2 – Significant Accounting Policies” in the 2022 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the financial statements contained in the 2022 Form 10-K when reviewing interim financial results.

Use of Estimates

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

Revenue Recognition

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

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

We determine revenue recognition through the following five steps:

● Identify the contract with the customer;

● Identify the performance obligations in the contract;

● Determine the transaction price;

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

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

The following table presents our revenues disaggregated by sales channel:

	Nine months ended September 30,
(in thousands)	2023		2022
Partner and Marketplace	$	13,365	$	11,749
Enterprise		10,081		10,426
Total revenues	$	23,446	$	22,175

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

The table below summarizes our deferred revenue as of September 30, 2023 and December 31, 2022:

	September 30,		December 31,
(in thousands)	2023		2022
Deferred revenue — current	$	6,358	$	7,125
Deferred revenue — noncurrent		12		73
Total deferred revenue	$	6,370	$	7,198

In the nine-month period ended September 30, 2023, we recognized $6,771,000, or 94%, in revenue from deferred revenue outstanding as of December 31, 2022.

In the three and nine months ended September 30, 2023, we had one customer (including the customer’s affiliates reflecting multiple contracts and a partnership with the Company) which accounted for approximately 17% and 16%, respectively, of our total revenue. In the three and nine months ended September 30, 2022, we had one customer which accounted for approximately 16% and 17%, respectively, of our total revenue.

One major customer represented 18% and 22% of total accounts receivable as of September 30, 2023 and December 31, 2022, respectively.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Deferred Costs (Contract acquisition costs)

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

The table below summarizes the deferred commission costs as of September 30, 2023 and December 31, 2022, which are included in Prepaid expenses and other current assets on our balance sheets:

	September 30,		December 31,
(in thousands)	2023		2022
Deferred costs — current	$	28	$	49
Deferred costs — noncurrent		5		12
Total deferred costs	$	33	$	61

Amortization expense associated with sales commissions was included in Selling and marketing expenses on the statements of operations and totaled $13,000 and $49,000 for the three- and nine-month periods ended September 30, 2023, respectively, and $26,000 and $91,000 for the three- and nine-month periods ended September 30, 2022, respectively.

Business Combinations

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

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

Employee Stock Purchase Plan

In May 2022, the stockholders of the Company approved the Company’s Employee Stock Purchase Plan (the “ESPP”), which provides for the issuance of up to 500,000 shares of common stock. Eligible employees may elect to have a percentage of eligible compensation withheld to purchase shares of our common stock at the end of each purchase period. The Company expects each purchase period to be the six month periods ending on June 30 or December 31 of each calendar year. The purchase price per share is expected to equal 85% of the fair market value of our common stock on the last trading day of the purchase period. Under the ESPP, a participant may not be granted rights to purchase more than $25,000 worth of common stock for each calendar year and no participant may purchase more than 1,500 shares of our common stock (or such other number as the Compensation Committee may designate) on any one purchase date. As of September 30, 2023, 8,630 shares had been issued under the ESPP and 491,370 shares remained available under the plan.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based Compensation

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

The fair value of options awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor and expected term).

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

We expense the compensation cost associated with time-based options and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based 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, 2023 and 2022:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2023		2022		2023		2022
Options	$	20	$	98	$	136	$	308
RSUs		826		1,145		2,713		3,022
Unrestricted shares of common stock		40		65		180		164
Employee stock purchase plan		—		—		6		—
Total	$	886	$	1,308	$	3,035	$	3,494

As of September 30, 2023, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $26,000 and $5,103,000, respectively, which may be recognized through July 2026, subject to achievement of service, performance, and market conditions.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) Per Share (“EPS”)

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

Potentially dilutive securities outstanding as of September 30, 2023 and 2022, which were excluded from the computation of basic and diluted net loss per share for the periods then ended, are as follows:

	September 30,
(in thousands)	2023	2022
Options	115	169
Restricted stock units	1,840	1,961
Total	1,955	2,130

The following table summarizes the stock option and RSUs activity for the nine months ended September 30, 2023:

	Options	RSUs
Outstanding at December 31, 2022	156,054	1,802,655
Granted	—	606,089
Exercised/Settled	—	(393,804)
Forfeited/Expired	(40,808)	(174,484)
Outstanding at September 30, 2023	115,246	1,840,456
Vested at September 30, 2023	108,664	477,838
Unvested at September 30, 2023	6,582	1,362,618

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective January 1, 2023 and determined that the update applied to accounts receivable. The adoption did not have a material effect on our financial statements and did not significantly impact the Company’s accounting policies or estimation methods related to the allowance for doubtful accounts.

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

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ACQUISITIONS

9 Months Ended

Sep. 30, 2023

ACQUISITIONS

ACQUISITIONS

NOTE 3 — ACQUISITIONS

Bureau of Internet Accessibility Inc.

On March 9, 2022, we entered into a Stock Purchase Agreement (“Purchase Agreement”) to acquire all the outstanding equity interests of Bureau of Internet Accessibility Inc. (“BOIA”), a Delaware corporation which provides web accessibility services including audits, training, remediation and implementation support. The aggregate consideration for the purchase of BOIA was approximately $7.5 million (at fair value), consisting of $5.1 million cash payment at closing, $0.2 million cash received in the third quarter of 2022 resulting from net working capital adjustments, and an estimated $2.6 million in aggregate contingent consideration to be paid in cash following the one- and two-year anniversary of the closing date. Actual aggregate cash consideration is based on BOIA’s revenues for 2022 and 2023 and may differ from estimated contingent consideration at acquisition. In the first quarter of 2023, we made a $974,000 cash payment towards the contingent consideration liability.

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

(in thousands)	Balance at March 9, 2022
Assets purchased:
Cash	$	398
Accounts receivable		437
Other assets		29
Client relationships (1)		3,600
Internally developed software (1)		700
Trade name (1)		50
Goodwill (2)		3,300
Total assets purchased		8,514
Liabilities assumed:
Accounts payable and accrued liabilities		7
Deferred revenue		1,040
Total liabilities assumed		1,047
Net assets acquired		7,467
Consideration:
Cash paid, net of proceeds from working capital adjustment		4,882
Contingent consideration liability (3)		2,585
Total consideration	$	7,467

(1) Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of 2 to 7 years. In the nine months ended September 30, 2023 and 2022, we recorded $536,000 and $399,000, respectively, in amortization expense associated with these acquired intangible assets.

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

(3) The fair value of the contingent consideration liability was determined using the Monte-Carlo simulation. The key assumptions used in the Monte-Carlo simulation were as follows: non-recurring and recurring revenue metrics for the earn-out periods, non-recurring revenue discount rate of 11.5%, recurring revenue discount rate of 10.5%, expected revenue volatility of 24.65%, risk-free rate of 1.58%, buyer specific discount rate of 9.0%, and discount periods of 1.01 year and 2.22 year.

NOTE 3 — ACQUISITIONS (continued)

For the nine months ended September 30, 2023 and 2022, we recorded $200,000 and $182,000, respectively, in change in the fair value of contingent consideration, which is included in General and administrative in the accompanying Statement of Operations. The balance of contingent consideration represents the estimated fair value of the second anniversary payment as of the reporting period and is subject to further change in subsequent periods through settlement based on actual and estimated non-recurring and recurring revenues from the BOIA offering relative to certain thresholds, as well as adjustments for discount periods, discount rates, risk-free rate, volatility, and buyer specific discount rate.

In the nine months ended September 30, 2023 and 2022, the Company incurred zero and $247,000, respectively, of transaction costs related to the acquisition of BOIA, which were included on our Statement of Operations within General and administrative expenses.

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LEASE LIABILITIES AND RIGHT OF USE ASSETS

9 Months Ended

Sep. 30, 2023

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, 2023 and December 31, 2022, the Company’s outstanding finance lease obligations totaled $14,000 and $45,000, 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, net of disposals:

	September 30,		December 31,
(in thousands)	2023		2022
Computer equipment	$	214	$	214
Less: accumulated depreciation		(198)		(172)
Assets acquired under finance leases, net	$	16	$	42

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, New York, New York, and Miami Beach, Florida. The lease for the principal office located in Tucson consists of 627 square feet and ends in October 2024. The lease for the New York office, which consists of approximately 5,000 square feet, commenced in January 2022 and will expire in December 2026. Upon commencement of the New York lease, we recorded a right-of-use asset and corresponding operating lease liability of $876,000 in the first quarter of 2022.

In the second quarter of 2023, we terminated one of the leases for the Miami Beach office, reducing the leased space to approximately 2,000 square feet. The remaining lease will expire in May 2024. In connection with the early termination of this lease, the right-of-use asset and lease liability were reduced by $38,000 and $40,000, respectively.

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

In the first quarter of 2023, we closed our Marietta, Georgia office. As a result of abandoning the office space prior to its lease expiration in August 2024, we wrote off the associated right-of-use asset in full and recognized a $146,000 loss on impairment, which is included in General and administrative in the accompanying Statement of Operations. As of September 30, 2023, the lease liability related to the Marietta, GA office was $107,000.

In addition, the Company entered into membership agreements to occupy shared office space in Lehi, Utah, Portland, Oregon, and Seattle, Washington. Because the membership agreements do not qualify as a lease under ASC 842, we expense the membership fees as they are incurred.

The Company made operating lease payments in the amount of $396,000 and $459,000 during the nine months ended September 30, 2023 and 2022, respectively.

The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2023 (in thousands):

Year ending December 31,	Finance Leases		Operating Leases		Total
2023 (3 months remaining)	$	7	$	121	$	128
2024		7		345		352
2025		—		219		219
2026		—		225		225
Total minimum lease payments		14		910		924
Less: present value discount		—		(73)		(73)
Total lease liabilities		14		837		851
Current portion of lease liabilities		14		374		388
Long term portion of lease liabilities	$	—	$	463	$	463

The following summarizes expenses associated with our finance and operating leases for the nine months ended September 30, 2023 and 2022:

	Nine months ended September 30,
(in thousands)	2023			2022
Finance lease expenses:
Depreciation expense	$	26	$	41
Interest on lease liabilities		1		1
Total Finance lease expense		27		42
Operating lease expense		388		488
Short-term lease and related expenses		204		109
Total lease expenses	$	619	$	639

The following table provides information about the remaining lease terms and discount rates applied as of September 30, 2023 and 2022:

	September 30,
	2023	2022
Weighted average remaining lease term (years)
Operating Leases	2.70	3.26
Finance Leases	0.57	1.37
Weighted average discount rate (%)
Operating Leases	6.00	6.00
Finance Leases	6.00	6.00

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2023

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 5 — COMMITMENTS AND CONTINGENCIES

Membership agreement to occupy shared office space

The Company occupies shared office space in Lehi, UT, and Seattle, WA under membership agreements which end in May 2025 and January 2025, 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, 2023, minimum fees due under these shared office arrangements totaled $375,000.

Litigation

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

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2023

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 6 — SUBSEQUENT EVENTS

We have evaluated subsequent events occurring after September 30, 2023, and based on our evaluation we did not identify any events that would have required recognition or disclosure in these financial statements.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2023

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, allowance for doubtful accounts, and intangible assets. 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, through our direct sales force or through third-party resellers. Our SaaS fees include support and maintenance.

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

We determine revenue recognition through the following five steps:

● Identify the contract with the customer;

● Identify the performance obligations in the contract;

● Determine the transaction price;

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

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

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

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

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

The following table presents our revenues disaggregated by sales channel:

	Nine months ended September 30,
(in thousands)	2023		2022
Partner and Marketplace	$	13,365	$	11,749
Enterprise		10,081		10,426
Total revenues	$	23,446	$	22,175

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

The table below summarizes our deferred revenue as of September 30, 2023 and December 31, 2022:

	September 30,		December 31,
(in thousands)	2023		2022
Deferred revenue — current	$	6,358	$	7,125
Deferred revenue — noncurrent		12		73
Total deferred revenue	$	6,370	$	7,198

In the nine-month period ended September 30, 2023, we recognized $6,771,000, or 94%, in revenue from deferred revenue outstanding as of December 31, 2022.

In the three and nine months ended September 30, 2023, we had one customer (including the customer’s affiliates reflecting multiple contracts and a partnership with the Company) which accounted for approximately 17% and 16%, respectively, of our total revenue. In the three and nine months ended September 30, 2022, we had one customer which accounted for approximately 16% and 17%, respectively, of our total revenue.

One major customer represented 18% and 22% of total accounts receivable as of September 30, 2023 and December 31, 2022, respectively.

Deferred Costs (Contract acquisition costs)

Deferred Costs (Contract acquisition costs)

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

The table below summarizes the deferred commission costs as of September 30, 2023 and December 31, 2022, which are included in Prepaid expenses and other current assets on our balance sheets:

	September 30,		December 31,
(in thousands)	2023		2022
Deferred costs — current	$	28	$	49
Deferred costs — noncurrent		5		12
Total deferred costs	$	33	$	61

Amortization expense associated with sales commissions was included in Selling and marketing expenses on the statements of operations and totaled $13,000 and $49,000 for the three- and nine-month periods ended September 30, 2023, respectively, and $26,000 and $91,000 for the three- and nine-month periods ended September 30, 2022, respectively.

Business Combinations

Business Combinations

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

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

Employee Stock Purchase Plan

Employee Stock Purchase Plan

In May 2022, the stockholders of the Company approved the Company’s Employee Stock Purchase Plan (the “ESPP”), which provides for the issuance of up to 500,000 shares of common stock. Eligible employees may elect to have a percentage of eligible compensation withheld to purchase shares of our common stock at the end of each purchase period. The Company expects each purchase period to be the six month periods ending on June 30 or December 31 of each calendar year. The purchase price per share is expected to equal 85% of the fair market value of our common stock on the last trading day of the purchase period. Under the ESPP, a participant may not be granted rights to purchase more than $25,000 worth of common stock for each calendar year and no participant may purchase more than 1,500 shares of our common stock (or such other number as the Compensation Committee may designate) on any one purchase date. As of September 30, 2023, 8,630 shares had been issued under the ESPP and 491,370 shares remained available under the plan.

Stock-Based Compensation

Stock-Based Compensation

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

The fair value of options awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor and expected term).

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

We expense the compensation cost associated with time-based options and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based 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, 2023 and 2022:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2023		2022		2023		2022
Options	$	20	$	98	$	136	$	308
RSUs		826		1,145		2,713		3,022
Unrestricted shares of common stock		40		65		180		164
Employee stock purchase plan		—		—		6		—
Total	$	886	$	1,308	$	3,035	$	3,494

As of September 30, 2023, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $26,000 and $5,103,000, respectively, which may be recognized through July 2026, subject to achievement of service, performance, and market conditions.

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 and restricted stock units. The dilutive effect of our stock-based awards and warrants is computed using the treasury stock method, which assumes all stock-based awards and warrants are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. However, when a net loss exists, no potential common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in an anti-dilutive per-share amount.

Potentially dilutive securities outstanding as of September 30, 2023 and 2022, which were excluded from the computation of basic and diluted net loss per share for the periods then ended, are as follows:

	September 30,
(in thousands)	2023	2022
Options	115	169
Restricted stock units	1,840	1,961
Total	1,955	2,130

The following table summarizes the stock option and RSUs activity for the nine months ended September 30, 2023:

	Options	RSUs
Outstanding at December 31, 2022	156,054	1,802,655
Granted	—	606,089
Exercised/Settled	—	(393,804)
Forfeited/Expired	(40,808)	(174,484)
Outstanding at September 30, 2023	115,246	1,840,456
Vested at September 30, 2023	108,664	477,838
Unvested at September 30, 2023	6,582	1,362,618

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective January 1, 2023 and determined that the update applied to accounts receivable. The adoption did not have a material effect on our financial statements and did not significantly impact the Company’s accounting policies or estimation methods related to the allowance for doubtful accounts.

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2023

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of disaggregation of revenues

	Nine months ended September 30,
(in thousands)	2023		2022
Partner and Marketplace	$	13,365	$	11,749
Enterprise		10,081		10,426
Total revenues	$	23,446	$	22,175

Summary of deferred revenue

	September 30,		December 31,
(in thousands)	2023		2022
Deferred revenue — current	$	6,358	$	7,125
Deferred revenue — noncurrent		12		73
Total deferred revenue	$	6,370	$	7,198

Summary of deferred commission costs

	September 30,		December 31,
(in thousands)	2023		2022
Deferred costs — current	$	28	$	49
Deferred costs — noncurrent		5		12
Total deferred costs	$	33	$	61

Summary of stock-based compensation expense

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2023		2022		2023		2022
Options	$	20	$	98	$	136	$	308
RSUs		826		1,145		2,713		3,022
Unrestricted shares of common stock		40		65		180		164
Employee stock purchase plan		—		—		6		—
Total	$	886	$	1,308	$	3,035	$	3,494

Summary of antidilutive securities outstanding excluded from computation of basic and diluted net loss per share

	September 30,
(in thousands)	2023	2022
Options	115	169
Restricted stock units	1,840	1,961
Total	1,955	2,130

Summary the stock option and RSUs activity

	Options	RSUs
Outstanding at December 31, 2022	156,054	1,802,655
Granted	—	606,089
Exercised/Settled	—	(393,804)
Forfeited/Expired	(40,808)	(174,484)
Outstanding at September 30, 2023	115,246	1,840,456
Vested at September 30, 2023	108,664	477,838
Unvested at September 30, 2023	6,582	1,362,618

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ACQUISITIONS (Tables)

9 Months Ended

Sep. 30, 2023

ACQUISITIONS

Summary of fair value of tangible and intangible assets acquired and liabilities assumed

(in thousands)	Balance at March 9, 2022
Assets purchased:
Cash	$	398
Accounts receivable		437
Other assets		29
Client relationships (1)		3,600
Internally developed software (1)		700
Trade name (1)		50
Goodwill (2)		3,300
Total assets purchased		8,514
Liabilities assumed:
Accounts payable and accrued liabilities		7
Deferred revenue		1,040
Total liabilities assumed		1,047
Net assets acquired		7,467
Consideration:
Cash paid, net of proceeds from working capital adjustment		4,882
Contingent consideration liability (3)		2,585
Total consideration	$	7,467

(1) Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of 2 to 7 years. In the nine months ended September 30, 2023 and 2022, we recorded $536,000 and $399,000, respectively, in amortization expense associated with these acquired intangible assets.

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

(3) The fair value of the contingent consideration liability was determined using the Monte-Carlo simulation. The key assumptions used in the Monte-Carlo simulation were as follows: non-recurring and recurring revenue metrics for the earn-out periods, non-recurring revenue discount rate of 11.5%, recurring revenue discount rate of 10.5%, expected revenue volatility of 24.65%, risk-free rate of 1.58%, buyer specific discount rate of 9.0%, and discount periods of 1.01 year and 2.22 year.

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LEASE LIABILITIES AND RIGHT OF USE ASSETS (Tables)

9 Months Ended

Sep. 30, 2023

LEASE LIABILITIES AND RIGHT OF USE ASSETS

Summary of finance leases included in property and equipment

	September 30,		December 31,
(in thousands)	2023		2022
Computer equipment	$	214	$	214
Less: accumulated depreciation		(198)		(172)
Assets acquired under finance leases, net	$	16	$	42

Summary of total lease liabilities remaining future minimum lease payments

The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2023 (in thousands):

Year ending December 31,	Finance Leases		Operating Leases		Total
2023 (3 months remaining)	$	7	$	121	$	128
2024		7		345		352
2025		—		219		219
2026		—		225		225
Total minimum lease payments		14		910		924
Less: present value discount		—		(73)		(73)
Total lease liabilities		14		837		851
Current portion of lease liabilities		14		374		388
Long term portion of lease liabilities	$	—	$	463	$	463

Summary of lease expenses

	Nine months ended September 30,
(in thousands)	2023			2022
Finance lease expenses:
Depreciation expense	$	26	$	41
Interest on lease liabilities		1		1
Total Finance lease expense		27		42
Operating lease expense		388		488
Short-term lease and related expenses		204		109
Total lease expenses	$	619	$	639

Summary of lease terms and discount rates

	September 30,
	2023	2022
Weighted average remaining lease term (years)
Operating Leases	2.70	3.26
Finance Leases	0.57	1.37
Weighted average discount rate (%)
Operating Leases	6.00	6.00
Finance Leases	6.00	6.00

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SIGNIFICANT ACCOUNTING POLICIES - Disaggregated by sales (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Partner and Marketplace			$ 13,365	$ 11,749
Enterprise			10,081	10,426
Total revenues	$ 7,838	$ 7,700	$ 23,446	$ 22,175

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SIGNIFICANT ACCOUNTING POLICIES - Deferred revenue (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred revenue - current	$ 6,358	$ 7,125
Deferred revenue - noncurrent	12	73
Total deferred revenue	$ 6,370	$ 7,198

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SIGNIFICANT ACCOUNTING POLICIES - Deferred commission costs (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred costs - current	$ 28	$ 49
Deferred costs - noncurrent	5	12
Total deferred costs	$ 33	$ 61

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SIGNIFICANT ACCOUNTING POLICIES - Stock-based compensation expense (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-based compensation expense	$ 886,000	$ 1,308,000	$ 3,035,000	$ 3,494,000
Options
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-based compensation expense	20,000	98,000	136,000	308,000
Outstanding unamortized share-based compensation expense	26,000		26,000
RSUs
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-based compensation expense	826,000	1,145,000	2,713,000	3,022,000
Outstanding unamortized share-based compensation expense	5,103,000		5,103,000
Unrestricted shares of common stock
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-based compensation expense	$ 40,000	$ 65,000	180,000	$ 164,000
Employee stock purchase plan
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-based compensation expense			$ 6,000

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SIGNIFICANT ACCOUNTING POLICIES - Potentially dilutive securities excluded from computation of earnings per share (Details) - shares shares in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dilutive securities outstanding	1,955	2,130
Options
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dilutive securities outstanding	115	169
Restricted stock units
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dilutive securities outstanding	1,840	1,961

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SIGNIFICANT ACCOUNTING POLICIES - Summary of Stock Option and RSUs Activity (Details)	9 Months Ended
	Sep. 30, 2023 shares
Options
Number of Options
Balance at beginning of the period (in shares)	156,054
Forfeited/Expired	(40,808)
Balance at end of the period (in shares)	115,246
Vested (in shares)	108,664
Unvested (in shares)	6,582
Exercised/Settled	(6,582)
RSUs
Number of Options
Unvested (in shares)	393,804
Balance at beginning of the period (In shares)	1,802,655
Granted	606,089
Exercised/Settled	(393,804)
Forfeited/Expired	(174,484)
Balance at end of the period (In shares)	1,840,456
Vested (in shares)	477,838
Unvested (in shares)	1,362,618

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SIGNIFICANT ACCOUNTING POLICIES - Additional information (Details)	1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	May 31, 2022 USD ($) shares	Sep. 30, 2023 USD ($) customer shares	Sep. 30, 2022 USD ($) customer	Sep. 30, 2023 USD ($) customer shares	Sep. 30, 2022 USD ($) customer	Dec. 31, 2022 customer
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred revenue recognized to revenue | $				$ 6,771,000
Deferred revenue outstanding (as a percent)						94.00%
Amortization of deferred sales commissions | $		$ 13,000	$ 26,000	$ 49,000	$ 91,000
Maximum number of shares issuance of common stock under ESPP	500,000
Maximum percentage of base compensation on payroll deductions	85.00%
Maximum number of shares for each employee under ESPP	1,500
Maximum value of shares for each employee under ESPP | $	$ 25,000
Shares issued under the ESPP				8,630
Shares remained available under the ESPP		491,370		491,370
Maximum
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Service period				3 years
Minimum
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Service period				1 year
Customer concentration risk | Sales revenue, net
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Number of customer | customer		1	1	1	1
Customer concentration risk | Accounts receivable
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Number of customer | customer				1		1
One customer | Customer concentration risk | Sales revenue, net
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration risk percentage		17.00%	16.00%	16.00%	17.00%
One customer | Customer concentration risk | Accounts receivable
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration risk percentage				18.00%		22.00%

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ACQUISITIONS - Bureau of Internet Accessibility Inc (Details) - Bureau of internet accessibility Inc - USD ($)		3 Months Ended	9 Months Ended
	Mar. 09, 2022	Mar. 31, 2023	Sep. 30, 2023	Sep. 30, 2022
ACQUISITIONS
Cash payment towards the contingent consideration liability		$ 974,000
Aggregate consideration	$ 7,467,000
Cash payment	5,100,000
Cash received from net working capital adjustments	200,000
Contingent consideration	$ 2,585,000		$ 200,000	$ 182,000
Term for first aggregate contingent consideration to be paid in cash	1 year
Term for second aggregate contingent consideration to be paid in cash	2 years

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ACQUISITIONS - Bureau of Internet Accessibility Inc - Tangible and intangible assets acquired and liabilities assumed (Details) - USD ($)		9 Months Ended
	Mar. 09, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Assets purchased:
Goodwill		$ 4,001,000		$ 4,001,000
Bureau of internet accessibility Inc
Assets purchased:
Cash	$ 398,000
Accounts receivable	437,000
Other assets	29,000
Goodwill	3,300,000
Total assets purchased	8,514,000
Liabilities assumed:
Accounts payable and accrued liabilities	7,000
Deferred revenue	1,040,000
Total liabilities assumed	1,047,000
Net assets acquired	7,467,000
Consideration:
Cash paid, net of proceeds from working capital adjustment	4,882,000
Contingent consideration liability	2,585,000	$ 200,000	$ 182,000
Total consideration	7,467,000
Bureau of internet accessibility Inc | Customer relationships
Assets purchased:
Intangible assets	3,600,000
Bureau of internet accessibility Inc | Internally developed software
Assets purchased:
Intangible assets	700,000
Bureau of internet accessibility Inc | Trade name
Assets purchased:
Intangible assets	$ 50,000

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ACQUISITIONS - Bureau of Internet Accessibility Inc - Tangible and intangible assets acquired and liabilities assumed (parenthetical) (Details)		9 Months Ended
	Mar. 09, 2022 USD ($) Y	Sep. 30, 2023 USD ($)	Sep. 30, 2022 USD ($)
ACQUISITIONS
Amortization expense		$ 536,000	$ 399,000
Bureau of internet accessibility Inc
ACQUISITIONS
Contingent consideration liability	$ 2,585,000	200,000	182,000
Transaction costs		$ 0	$ 247,000
Bureau of internet accessibility Inc | Discount rate
ACQUISITIONS
Fair value of the contingent consideration liability, Measurement input	0.090
Bureau of internet accessibility Inc | Discount rate | Recurring
ACQUISITIONS
Fair value of the contingent consideration liability, Measurement input	0.105
Bureau of internet accessibility Inc | Discount rate | Non-recurring
ACQUISITIONS
Fair value of the contingent consideration liability, Measurement input	0.115
Bureau of internet accessibility Inc | Volatility rate
ACQUISITIONS
Fair value of the contingent consideration liability, Measurement input	0.2465
Bureau of internet accessibility Inc | Risk-free interest rate
ACQUISITIONS
Fair value of the contingent consideration liability, Measurement input	0.0158
Bureau of internet accessibility Inc | Discount periods | Recurring
ACQUISITIONS
Fair value of the contingent consideration liability, Measurement input | Y	2.22
Bureau of internet accessibility Inc | Discount periods | Non-recurring
ACQUISITIONS
Fair value of the contingent consideration liability, Measurement input | Y	1.01
Maximum | Bureau of internet accessibility Inc
ACQUISITIONS
Useful life	7 years
Minimum | Bureau of internet accessibility Inc
ACQUISITIONS
Useful life	2 years

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Right to use assets under finance leases (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Lessee finance Lease description
Computer equipment	$ 214	$ 214
Less: accumulated depreciation	(198)	(172)
Assets acquired under finance leases, net	$ 16	$ 42

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Future minimum finance leases payments (Details) - USD ($)	Sep. 30, 2023	Dec. 31, 2022
LEASE LIABILITIES AND RIGHT OF USE ASSETS
2023 (6 months remaining)	$ 7,000
2024	7,000
Total minimum lease payments	14,000
Total lease liabilities	14,000	$ 45,000
Current portion of lease liabilities	$ 14,000	38,000
Long term portion of lease liabilities		$ 7,000

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Future minimum operating leases payments (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
LEASE LIABILITIES AND RIGHT OF USE ASSETS
2023 (6 months remaining)	$ 121
2024	345
2025	219
2026	225
Total minimum lease payments	910
Less: present value discount	(73)
Total lease liabilities	837
Current portion of lease liabilities	374	$ 468
Long term portion of lease liabilities	$ 463	$ 745

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Finance Leases and Operating Leases (Details) $ in Thousands	Sep. 30, 2023 USD ($)
LEASE LIABILITIES AND RIGHT OF USE ASSETS
2023 (3 months remaining)	$ 128
2024	352
2025	219
2026	225
Total minimum lease payments	924
Less: present value discount	(73)
Total lease liabilities	851
Current portion of lease liabilities	388
Long term portion of lease liabilities	$ 463

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Lease expenses (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Finance lease expenses:
Depreciation expense	$ 26	$ 41
Interest on lease liabilities	1	1
Total Finance lease expense	27	42
Operating lease expense	388	488
Short-term lease and related expenses	204	109
Total lease expenses	$ 619	$ 639

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Remaining lease terms and discount rates (Details)	Sep. 30, 2023	Sep. 30, 2022
LEASE LIABILITIES AND RIGHT OF USE ASSETS
Weighted average remaining lease term (years) - Operating Leases	2 years 8 months 12 days	3 years 3 months 3 days
Weighted average remaining lease term (years) - Finance Leases	6 months 25 days	1 year 4 months 13 days
Weighted average discount rate (%) - Operating Leases	6.00%	6.00%
Weighted average discount rate (%) - Finance Leases	6.00%	6.00%

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LEASE LIABILITIES AND RIGHT OF USE ASSETS - Additional information (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2023 USD ($) ft²	Mar. 31, 2023 USD ($)	Sep. 30, 2023 USD ($)	Sep. 30, 2022 USD ($)	Oct. 31, 2024 ft²	Dec. 31, 2022 USD ($)	Mar. 31, 2022 USD ($)	Jan. 31, 2022 ft²
LEASE LIABILITIES AND RIGHT OF USE ASSETS
Total finance lease liabilities			$ 14,000			$ 45,000
Effective interest rate of finance leases			6.00%
Operating Lease Liability			$ 837,000
Reduced lease space | ft²	2,000
Decrease in right of use asset	$ 38,000
Operating lease liability	$ 40,000		(376,000)	$ (393,000)
Operating lease payments			396,000	$ 459,000
Marietta Georgia
LEASE LIABILITIES AND RIGHT OF USE ASSETS
Area of land | ft²								5,000
Operating Lease Liability			$ 107,000				$ 876,000
Marietta Georgia | General and Administrative Expense
LEASE LIABILITIES AND RIGHT OF USE ASSETS
Operating Lease, Impairment Loss		$ 146,000
Georgia
LEASE LIABILITIES AND RIGHT OF USE ASSETS
Area of land | ft²					627

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COMMITMENTS AND CONTINGENCIES (Details)	9 Months Ended
	Sep. 30, 2023 USD ($)
COMMITMENTS AND CONTINGENCIES
Shared office arrangement minimum fees due	$ 375,000