AUDIOEYE INC (Form: 10-Q, Received: 05/15/2020 13:59:25)

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 March 31, 2020

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 x 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 x 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	x	Smaller reporting company	x
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 x

As of May 14, 2020, 8,895,269 shares of the registrant’s common stock were issued and outstanding.

		Page

PART I	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited)	2

	Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)	3

	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019 (unaudited)	4

	Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

PART II	OTHER INFORMATION	29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

SIGNATURES		31

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The financial information set forth below with respect to the financial statements as of March 31, 2020 and December 31, 2019 and for the three-month periods ended March 31, 2020 and 2019 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31. Certain prior period amounts have been reclassified to conform to current period classification. The Company presents its unaudited financial statements, footnotes, and other financial information rounded to the nearest thousand United States Dollars (“U.S. Dollar”), except for per share data.

AUDIOEYE, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 31,			December 31,
	2020			2019
	(in thousands, except per share data)
ASSETS
Current assets:
Cash	$	1,785		$	1,972
Accounts receivable, net		2,505			2,958
Unbilled receivables		483			160
Deferred costs, short term		181			183
Debt issuance costs, net		82			137
Prepaid expenses and other current assets		234			198
Total current assets		5,270			5,608

Property and equipment, net		138			156
Right of use assets		776			827

Deferred costs, long term		137			145
Intangible assets, net		1,655			1,715
Goodwill		701			701
Total assets	$	8,677		$	9,152

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,235		$	973
Finance lease liabilities		53			52
Operating lease liabilities		214			209
Warrant liability		92			120
Deferred revenue		5,143			5,372
Total current liabilities		7,737			6,726

Long term liabilities:
Finance lease liabilities		41			52
Operating lease liabilities		600			655
Deferred revenue		141			153

Total liabilities		8,519			7,586

Stockholders' equity:
Preferred stock, $0.00001 par value, 10,000 shares authorized
Series A Convertible Preferred Stock, $0.00001 par value, 200 shares designated, 105 shares issued and outstanding as of March 31, 2020 and December 31, 2019		1			1
Common stock, $0.00001 par value, 50,000 shares authorized, 8,877 shares issued and outstanding as of March 31, 2020 and December 31, 2019		1			1
Additional paid-in capital		51,746			51,490
Accumulated deficit		(51,590	)		(49,926	)
Total stockholders' equity		158			1,566

Total liabilities and stockholders' equity	$	8,677		$	9,152

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended March 31,
	2020			2019
	(in thousands, except per share data)
Revenues	$	4,261		$	1,986

Cost of revenue		1,320			922

Gross profit		2,941			1,064

Operating expenses:
Selling and marketing		1,818			1,313
Research and development		333			142
General and administrative		2,486			1,749
Total operating expenses		4,637			3,204

Operating loss		(1,696	)		(2,140	)

Other income (expense):
Change in fair value of warrant liability		28			-
Interest income (expense), net		4			(1	)
Total other (loss) income		32			(1	)

Net loss		(1,664	)		(2,141	)

Dividends on Series A Convertible Preferred Stock		(13	)		(13	)

Net loss available to common stockholders	$	(1,677	)	$	(2,154	)

Net loss per common share-basic and diluted	$	(0.19	)	$	(0.28	)

Weighted average common shares outstanding-basic and diluted		8,877			7,611

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(unaudited)

									Additional
	Common stock				Preferred stock				Paid-in		Accumulated
	Shares		Amount		Shares		Amount		Capital		Deficit			Total
	(in thousands)
Balance, December 31, 2018		7,580	$	1		105	$	1	$	48,017	$	(42,144	)	$	5,875
Common stock issued in exchange for exercise of options and warrants		43		-		-		-		42		-			42
Restricted stock units, warrants and options issued for services		-		-		-		-		449		-			449
Net loss		-		-		-		-		-		(2,141	)		(2,141	)
Balance, March 31, 2019		7,623	$	1		105	$	1	$	48,508	$	(44,285	)	$	4,225

Balance, December 31, 2019		8,877	$	1		105	$	1	$	51,490	$	(49,926	)	$	1,566
Restricted stock units, warrants and options issued for services		-		-		-		-		256		-			256
Net loss		-		-		-		-		-		(1,664	)		(1,664	)
Balance, March 31, 2020		8,877	$	1		105	$	1	$	51,746	$	(51,590	)	$	158

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months ended March 31,
	2020			2019
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,664	)	$	(2,141	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		201			173
Option, warrant, restricted stock unit and performance stock unit expense		256			449
Amortization of deferred commissions		56			51
Amortization of debt issuance costs		55			-
Noncash operating lease expense		51			43
Change in fair value of warrant liability		(28	)		-
Changes in operating assets and liabilities:
Accounts receivable		453			(138	)
Unbilled receivables		(323	)		22
Deferred costs		(46	)		(65	)
Prepaid expenses and other current assets		(36	)		(79	)
Accounts payable and accruals		1,262			247
Operating lease liabilities		(50	)		(43	)
Deferred revenue		(241	)		(144	)
Net cash used in operating activities		(54	)		(1,625	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs		(124	)		(60	)
Net cash used in investing activities		(124	)		(60	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants		-			42
Repayments of finance leases		(9	)		(9	)
Net cash provided by (used in) financing activities		(9	)		33

Net decrease in cash		(187	)		(1,652	)
Cash-beginning of period		1,972			5,742
Cash-end of period	$	1,785		$	4,090

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	1		$	1
Income taxes paid		-			-
Non-cash investing and financing activities:
Right of use assets and operating lease obligations recognized upon adoption of ASU 2016-02		-			568
Equipment acquired through finance leases		-			20

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of AudioEye, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on March 30, 2020.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2019 as reported in the Company’s Annual Report on Form 10-K have been omitted. Certain prior period amounts have been reclassified to conform to current period classification. Reclassifications had no material effect on prior year net loss, earnings per share, or shareholders’ equity.

Corporate Information and Background

AudioEye, Inc. (“we”, “our” or the “Company”) was incorporated on May 20, 2005 in the state of Delaware. The Company has developed patented, Internet content publication and distribution software that enables conversion of media into accessible formats and allows for real time distribution to end users on any Internet connected device. The Company’s focus is to create more comprehensive access to Internet and other media to all people regardless of their network connection, device, location, or disabilities.

The Company is focused on developing innovations in the field of networked and device embedded technology. Our intellectual property is primarily comprised of trade secrets, trademarks, issued, published and pending patent applications, copyrights and technological innovations. We have a patent portfolio comprised of eight issued patents in the United States. We also have two pending patent applications and two international patent applications filed via the Patent Cooperation Treaty (“PCT”) and the European Patent Office. The patents have been extended and cover a period from 2002 through 2026. We have a trademark portfolio comprised of eight United States trademark registrations.

Our common stock has been listed on the NASDAQ Capital Market under the symbol “AEYE” since September 4, 2018. Prior to September 4, 2018, our common stock was quoted on the OTCQB and the OTC Bulletin Board beginning on April 15, 2013 under the same symbol.

In August 2018, the Company sold 1,000,000 shares (the “Shares”) of its common stock at $6.25 per Share for net proceeds of approximately $5,609,000, after costs and expenses of approximately $641,000 (the “Private Placement”). At the closing of the Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the investors pursuant to which the Company agreed to register the Shares for resale. On September 4, 2018, the Company filed a registration statement on Form S-1 covering the resale of the securities subject to the Registration Rights Agreement, as well as certain other securities of the Company. On July 5, 2019, the Company filed a post-effective amendment to the registration statement on Form S-1 covering the resale of such securities in order to, among other things, incorporate into the filing information included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2019.

On August 1, 2018, the Company amended its Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 25 shares of common stock and to reduce the number of authorized shares of common stock from 250,000,000 to 50,000,000. As a result, 186,994,384 shares of the Company’s common stock were exchanged for 7,479,775 shares of the Company's common stock. These financial statements have been retroactively restated to reflect the reverse stock split.

In April 2020, the Company filed a shelf registration statement on Form S-3 with the SEC to register the sale, in future offerings, of up to $7,000,000 in the aggregate of debt securities, common stock, preferred stock, warrants, rights or units consisting of any two or more of such securities. We intend to use the net proceeds of any offering of securities sold by us under the registration statement for general corporate purposes, which may include acquisitions, repayment of debt, capital expenditures and working capital requirements.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION (continued)

Revenue Recognition

Revenue is recognized when delivery of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to be entitled to 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.

Certain Software as a Service (“SaaS”) invoices are prepared on an annual 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. 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. Payments received in advance of services being rendered are recorded as deferred revenue. Any funds received for services not provided yet are held in deferred revenue and are recorded as revenue when the performance obligation has been satisfied. We generate substantially all our revenue from subscription services, which are comprised of subscription fees from customer accounts on the Managed Platform.

The following table presents our revenues disaggregated by sales channel:

	Three months ended March 31,
	2020		2019
	(in thousands)
Direct (Enterprise)	$	2,387	$	1,461
Indirect (Vertical partners)		1,862		525
Other		12		-
Total revenues	$	4,261	$	1,986

In accordance with Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and all related and subsequent amendments, the Company records accounts receivable for amounts invoiced to customers for which performance obligations have been satisfied, and for amounts invoiced and are in deferred revenue but for which the Company has an unconditional right to consideration as provided under the contractual arrangement. The Company recognizes unbilled receivables for those amounts the Company has the unconditional right to invoice and for which the performance obligations have been satisfied.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION (continued)

The Company had one customer (including affiliates of such customer) which generated approximately 18% and 12% of the Company’s revenue in each of the three months ended March 31, 2020 and 2019, respectively.

The table below compares the deferred revenue balance as of March 31, 2020 versus December 31, 2019:

	March 31,		December 31,
	2020		2019
	(in thousands)
Deferred revenue	$	5,284	$	5,525

As of March 31, 2020, approximately $5,143,000 was classified as short-term deferred revenue and is expected to be recognized over the next twelve months following March 31, 2020. The remaining approximately $141,000 is long-term deferred revenue to be recognized thereafter. Approximately $2,087,000, or approximately 38%, of deferred revenue from December 31, 2019 has been recognized as revenue through March 31, 2020.

At March 31, 2020, the Company had one customer representing 18% of the outstanding accounts receivable. At December 31, 2019, the Company had one customer representing 40% of the outstanding accounts receivable.

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 and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in the United States. The CARES Act, among other things, includes modifications to net operating loss carryforwards provisions and the net interest expense deduction, and deferment of social security tax payments. We are currently evaluating the provisions of the CARES Act and how certain elections may impact our financial position, results of operations, and disclosures if elected.

Stock-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION (continued)

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could occur if our share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible preferred stock is computed using the if-converted method, which assumes conversion at the beginning of the year. However, when a net loss exists, no potential common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in an anti-dilutive per-share amount.

Potentially dilutive securities excluded from the computation of basic and diluted net earnings (loss) per share for the three months ended March 31, 2020 and 2019 are as follows:

	2020		2019
	(in thousands)
Preferred stock		298		286
Options to purchase common stock		924		881
Warrants to purchase common stock		403		1,743
Restricted stock units		419		223
Totals		2,044		3,133

Fair Value Measurements

Fair value is an estimate of the exit price, representing the amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction cost. Fair value measurement under U.S. GAAP provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3: Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.

On August 14, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC, a shareholder that owns more than 10% of the outstanding shares of common stock of the Company. The Loan Agreement has a one-year term and provides the Company with an unsecured credit facility under which the Company may borrow up to the aggregate principal amount of $2,000,000. No amounts have been drawn under the Loan Agreement as of March 31, 2020. The Company does not at this time expect this loan agreement to be renewed.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION (continued)

In consideration of the Loan Agreement, the Company issued to Sero Capital LLC a common stock warrant to acquire up to a total of 146,667 shares of the Company’s common stock at an exercise price of $6.00 per share, which exercise price may be paid in cash or at the election of the holder, in a cashless, or “net,” exercise transaction. The warrant expires one year from the date of issuance.

The estimated fair value of the Sero Capital LLC warrant was approximately $219,000 at date of issuance and approximately $92,000 at March 31, 2020. The Company valued the warrants as of March 31, 2020 using the Black-Scholes pricing model and the following assumptions: contractual term of six (6) months, a risk-free interest rate of 0.17%, a dividend yield of 0.0%, and volatility of 101.7%. The warrants are classified as a liability instrument since the holder has the option to require the Company to repurchase the warrants when certain events occur that are considered outside of the control of the Company. The unamortized balance was approximately $82,000 on March 31, 2020 and included as debt issuance costs in current assets on the consolidated balance sheet.

The Company has no assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

The following are the Company’s liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:

			Fair Value
	Fair Value		Hierarchy
	(in thousands)
Liabilities
Warrant liability, March 31, 2020	$	92		Level 3
Warrant liability, December 31, 2019	$	120		Level 3

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU clarifies the accounting treatment for implementation costs for cloud computing arrangements (hosting arrangements) that is a service contract. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact our financial position, results of operations or disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not impact our financial position, results of operations or disclosures.

There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 2 — GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

As of March 31, 2020, the Company had cash and cash equivalents of approximately $1,785,000 and a working capital deficit of approximately $2,467,000. In addition, the Company used actual net cash in operations of approximately $54,000 during the quarter ended March 31, 2020. The Company has incurred net losses since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

On August 14, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC, a stockholder who owns more than 10% of the outstanding shares of common stock of the Company. The beneficial owner of Sero Capital LLC is David Moradi, who became a director of the Company on November 8, 2019. The Loan Agreement provides the Company with an unsecured credit facility under which the Company may borrow up to the aggregate principal amount of $2,000,000. Any advances under the Loan Agreement will bear interest at a per annum rate of 10.0% (subject to increase in the event of a default), which is payable monthly and may, at the Company’s option, be paid either in cash or by the issuance of shares of the Company’s common stock. The term of the Loan Agreement extends through August 14, 2020, subject to earlier termination as provided in the Loan Agreement. The Company’s obligations under the Loan Agreement are subject to acceleration upon the occurrence of an event of default (as defined in the Loan Agreement). The Company may prepay its obligations under the Loan Agreement without penalty, but subject to certain limitations regarding the number, timing and dollar amounts of prepayments. The Loan Agreement provides for certain customary covenants, representations, and events of default provisions. No amounts have been drawn under the Loan Agreement as of March 31, 2020. In consideration of the Loan Agreement, the Company issued to Sero Capital LLC a common stock warrant to acquire up to a total of 146,667 shares of the Company’s common stock at an exercise price of $6.00 per share, which exercise price may be paid in cash or, at the election of the holder, in a cashless, or “net,” exercise transaction. The warrant expires one year from the date of issuance.

On April 15, 2020, the Company entered into a note agreement in the amount of $1.3 million with Liberty Capital Bank (“Loan”) pursuant to the Paycheck Protection Program (“PPP”) of the CARES Act, which is being administered by the Small Business Administration (“SBA”). The Loan has been funded. All or a portion of the Loan may be forgiven upon application by the Company in accordance with the SBA requirements. Under the PPP, loan forgiveness is available for the sum of payroll costs, rent payments, mortgage interest and utilities during the eight-week period beginning on the date of loan approval. For purposes of the PPP, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25.0% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25.0%. Loan payments are deferred for six months. The loan has a maturity of two years and an interest rate of 1.0%. The loan is not collateralized and is not personally guaranteed. No fees were charged in connection with the loan. The Company intends to use all proceeds from the Loan to retain employees, maintain payroll and make lease, mortgage interest and utility payments.

In April 2020, the Company filed a registration statement on Form S-3 with SEC to register the sale, in future offerings, of up to $7,000,000 in the aggregate of debt securities, common stock, preferred stock, warrants, rights or units consisting of any two or more of such securities. We intend to use the net proceeds of any offering of securities sold by us under the registration statement or otherwise for general corporate purposes, which may include acquisitions, repayment of debt, capital expenditures and working capital requirements.

The Company expects that cash used in operations will continue to be negative in the near future. The Company may need to raise additional funds through debt or equity financing, including those debt and equity agreements and offerings noted previously. If the Company is unsuccessful in raising additional financing, it will need to reduce costs and operations in the future. Additionally, the Company is currently evaluating the reduction of salaries or deferral of bonuses for certain individuals.

Accordingly, the accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2020 and December 31, 2019 is summarized as follows:

	March 31, 2020			December 31, 2019
	(in thousands)
Computer equipment	$	64		$	64
Equipment under finance lease		157			157
Furniture and fixtures		59			59
Total		280			280
Less accumulated depreciation		(142	)		(124	)
Property and equipment, net	$	138		$	156

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful life of three (3) years. When property or equipment is retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference, less any amount realized from disposition, is reflected in earnings.

Included in net property and equipment are assets under finance leases of approximately $157,000, less accumulated depreciation of approximately $73,000 as of March 31, 2020 and approximately $157,000 less accumulated depreciation of approximately $60,000 as of December 31, 2019.

The Company spent $0 in the purchase of equipment during the three months ended March 31, 2020 and 2019. The Company also leased $0 in equipment during the three months ended March 31, 2020. Depreciation expense was approximately $18,000 and $13,000 for the three months ended March 31, 2020 and 2019, respectively.

NOTE 4 — INTANGIBLE ASSETS

For the three months ended March 31, 2020 and 2019, the Company invested in Software development costs in the amounts of approximately $124,000 and $60,000 respectively. Patents, technology and other intangibles with contractual terms are generally amortized over their estimated useful lives of ten years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

Software development costs are amortized over their estimated useful life of three years.

Intangible assets consisted of the following:

	March 31, 2020			December 31, 2019
	(in thousands)
Patents	$	3,698		$	3,698
Capitalized software development		1,841			1,717
Domain name		10			10
Accumulated amortization		(3,894	)		(3,710	)
Intangible assets, net	$	1,655		$	1,715

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 4 — INTANGIBLE ASSETS (continued)

Amortization expense for patents totaled approximately $93,000 and $94,000 for the three months ended March 31, 2020 and 2019, respectively. Amortization expense for software development totaled approximately $91,000 and $66,000 for the three months ended March 31, 2020 and 2019, respectively.

Total amortization expense totaled approximately $184,000 and $160,000 for the three months ended March 31, 2020 and 2019, respectively.

NOTE 5 — DEFERRED COSTS

The Company capitalizes initial and renewal sales commission payments in the period a customer contract is obtained, and payment is received; and the commissions are amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit, which we have deemed to be the contract term.

Such commissions are amortized over the contract term when the underlying contracted products are technology-based. The table below summarizes the activity within the deferred commission costs account, during the three months ended March 31, 2020:

	December 31, 2019		Commission Costs Deferred			Commission Amortized			March 31, 2020
	(in thousands)
Deferred costs, short term	$	183	$	54		$	(56	)	$	181
Deferred costs, long term		145		(8	)		-			137
Deferred commission costs	$	328	$	46		$	(56	)	$	318

During the three months ended March 31, 2020, the Company deferred an aggregate of approximately $46,000 for commissions paid of which approximately $27,000 was classified as long-term and approximately $19,000 was classified as short-term. During the three months ended March 31, 2020, the Company reclassified approximately $35,000 of previously deferred commissions cost from long-term to short-term classification. Amortization of deferred costs for the three months ended March 31, 2020 was approximately $56,000.

During the three months ended March 31, 2019, the Company deferred an aggregate of approximately $65,000 for commissions paid. Amortization of deferred costs for the three months ended March 31, 2019 was approximately $51,000.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 6 — LEASE LIABILITIES AND RIGHT OF USE ASSETS

Finance Leases

	March 31,			December 31,
	2020			2019
	(in thousands)
Finance equipment lease dated April 5, 2018	$	7		$	8
Finance equipment lease dated May 8, 2018		8			9
Finance equipment lease dated June 27, 2018		12			13
Finance equipment lease dated September 18, 2018		9			10
Finance equipment lease dated September 28, 2018		10			11
Finance equipment lease dated February 20, 2019		13			14
Finance equipment lease dated June 4, 2019		16			18
Finance equipment lease dated September 30, 2019		19			21
Total finance lease liabilities		94			104
Less current portion		(53	)		(52	)
Long term portion	$	41		$	52

The Company did not enter any finance leases during the quarter ended March 31, 2020.

During the year ended December 31, 2019, the Company entered into three finance leases for computer equipment for three-year terms. The Company recognized these arrangements as finance leases based on the determination that the leases exceeded 75% of the economic life of the underlying assets. The Company initially recorded the equipment and finance leases liability at the estimated present value of the aggregate amount of the minimum lease payments of approximately $61,000.

The leases include base monthly payments in aggregate of approximately $5,000, due on the contract monthly anniversary of each calendar month. At the expiration of the lease, the Company is required to return all leased equipment to the lessor with right of repurchase at fair value. The Company has made payments in the amount of approximately $14,000 during the quarter ended March 31, 2020. The effective interest rate of the finance leases is estimated at 6.0% based on the implicit rate in the lease agreements.

The following summarizes the right to use assets under finance leases included in property and equipment:

	March 31,			December 31,
	2020			2019
	(in thousands)
Classes of property
Computer equipment	$	157		$	157
Less: accumulated depreciation		(73	)		(60	)
	$	84		$	97

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 6 — LEASE LIABILITIES AND RIGHT OF USE ASSETS (continued)

The following summarizes the total remaining future minimum finance lease payments at March 31, 2020 (in thousands):

Period ending December 31,
2020	$	46
2021		43
2022		10
Total minimum lease payments		99
Amount representing interest		(5	)
Present value of minimum lease payments		94
Current portion of finance lease obligations		53
Finance lease obligations, less current portion	$	41

Operating Leases

The Company’s principal offices are located at 5210 E. Williams Circle, Suite 750, Tucson, Arizona 85711, consisting of approximately 5,151 square feet as of December 31, 2019. The Company’s principal office originally consisted of approximately 2,362 square feet. On December 21, 2017, effective February 1, 2018, the Company amended its existing lease to expand its principal office to approximately 4,248 square feet and to extend the expiration date to September 30, 2021. Beginning February 1, 2018, the basic rent increased to $9,598 per month. On October 2, 2018, effective December 1, 2018, the Company further amended its existing lease to expand its principal office to approximately 5,151 square feet. In accordance with the amended lease, rent increased to $11,810 on January 1, 2019, escalating over time to $12,977 at the end of the lease, which was further extended to October 31, 2022.

On December 29, 2017, effective February 1, 2018, the Company amended its existing lease to expand its Atlanta office from approximately 2,739 square feet to approximately 3,831 square feet. Beginning February 1, 2018, the basic rent increased by $1,500 through the remainder of the lease term. In February 2019, the Company entered into a lease for new offices in Marietta, Georgia located at 450 Franklin Gateway, Marietta, Georgia consisting of approximately 9,662 square feet. The new lease commenced on June 1, 2019, with move-in on June 15, 2019.

Beginning in 2017, the Company leased office space in New York for $300 per month, which was increased to $850 per month in October 2018 through May 31, 2019. Beginning in June 2019, the Company moved to larger office space in New York, leased for $4,482 per month, for a term of 12 months ending May 31, 2020. Beginning November 1, 2015, we subleased an office in Scottsdale, Arizona from a company controlled by our Executive Chairman for $3,578 per month, which continues on a month to month basis as of March 31, 2020. These New York and Scottsdale properties were considered short-term leases and therefore were not measured under Topic 842.

The Company has made operating lease payments in the amount of approximately $63,000 during the three months ended March 31, 2020. Rent expense charged to operations, which differs from rent paid due to rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments on a straight-line basis over the term of the lease. Operating lease liabilities at March 31, 2020 and December 31, 2019 consist of:

	March 31,			December 31,
	2020			2019
	(in thousands)
Tucson Arizona office lease	$	371		$	402
Marietta Georgia office lease		443			462
Total operating lease liabilities		814			864
Less current portion		(214	)		(209	)
Long term portion	$	600		$	655

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 6 — LEASE LIABILITIES AND RIGHT OF USE ASSETS (continued)

As of January 1, 2019, the Company adopted the provisions of ASC Topic 842 using the modified retrospective method. In adopting ASC Topic 842, Leases (Topic 842), the Company elected the ‘package of practical expedients’, which permitted it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of twelve (12) months or less. Effective January 1, 2019, the Company initially recognized operating lease liabilities of approximately $568,000 based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The discount rate utilized in such present value calculation was 6% based on an estimate of the Company’s incremental borrowing rate. At such time, the Company also recognized corresponding right-of-use (“ROU”) assets of approximately $557,000 and eliminated the prior period deferred rent of approximately $11,000.

During the fiscal year ended December 31, 2019, the Company entered into an operating lease for new office space in Marietta, Georgia, for a five-year term. The Company measured and recorded a right of use asset and corresponding operating lease liability of approximately $484,000 at the lease commencement date in June 2019.

The following summarizes the total remaining future minimum operating lease payments at March 31, 2020 (in thousands):

Period ending December 31,
2020	$	192
2021		262
2022		257
2023		118
2024		81
Total minimum lease payments		910
Less: present value discount		(96	)
Present value of minimum lease payments		814
Current portion of operating lease obligations		214
Operating lease obligations, less current portion	$	600

The following summarizes lease expenses for the three months ended March 31, 2020 (in thousands):

Finance lease expenses:
Depreciation and amortization expense	$	14
Interest on lease liabilities		1
Finance lease expense		15
Operating lease expense		64
Short-term lease expense		31
Total lease expenses	$	110

The following table provides information about the remaining lease terms and discount rates applied as of March 31, 2019:

Weighted average remaining lease term (years)
Operating Leases			3.64
Finance Leases			1.79
Weighted average discount rate (%)
Operating Leases			6.00
Finance Leases			6.00

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 7 — CREDIT FACILITY-RELATED PARTY

On August 14, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC, a stockholder who owns more than 10% of the outstanding shares of common stock of the Company. The beneficial owner of Sero Capital LLC is David Moradi, who became a director of the Company on November 8, 2019. The Loan Agreement provides the Company with an unsecured credit facility under which the Company may borrow up to the aggregate principal amount of $2,000,000. Any advances under the Loan Agreement will bear interest at a per annum rate of 10% (subject to increase in the event of a default), which is payable monthly and may, at the Company’s option, be paid either in cash or by the issuance of shares of the Company’s common stock. The term of the Loan Agreement extends through August 14, 2020, subject to earlier termination as provided in the Loan Agreement. The Company’s obligations under the Loan Agreement are subject to acceleration upon the occurrence of an event of default (as defined in the Loan Agreement). The Company may prepay its obligations under the Loan Agreement without penalty, but subject to certain limitations regarding the number, timing and dollar amounts of prepayments. The Loan Agreement provides for certain customary covenants, representations and events of default. No amounts have been drawn under the Loan Agreement as of March 31, 2020.

In consideration of the Loan Agreement, the Company issued to Sero Capital LLC a common stock warrant to acquire up to a total of 146,667 shares of the Company’s common stock at an exercise price of $6.00 per share, which exercise price may be paid in cash or, at the election of the holder, in a cashless, or “net,” exercise transaction. The warrant expires one year from the date of issuance.

NOTE 8 — STOCKHOLDERS’ EQUITY

Preferred stock

As of March 31, 2020 and December 31, 2019, the Company had 105,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) outstanding, which was issued at $10 per share, paying a 5% cumulative annual dividend, and convertible into the Company’s common stock at a price of $4.385 per share. For the three months ended March 31, 2020, preferred stockholders collectively earned, but were not paid, approximately $13,000 in quarterly dividends, which is equivalent to 2,985 shares of common stock based on a conversion price of $4.385 per share. As of March 31, 2020 and December 31, 2019, cumulative and unpaid dividends were approximately $258,000 and approximately $245,000, respectively, which is equivalent to 58,912 and 55,927 shares of common stock, respectively, based on a conversion price of $4.385 per share.

On any matter presented to the stockholders of the Company, holders of Preferred Stock are entitled to cast the number of votes equal to the number of shares of common stock into which their shares of Preferred Stock are convertible as of the record date to vote on such matter. As long as any shares of Preferred Stock are outstanding, the Company has certain restrictions on share repurchases or amendments to the Certificate of Incorporation in a manner that adversely affects any rights of the Preferred Stockholders.

In addition, the preferred stockholders have a liquidation preference for purposes of which the Preferred Stock would be valued at $10 per share plus accrued cumulative annual dividends. At March 31, 2020 and December 31, 2019, the liquidation preference was valued at approximately $1,308,000 and approximately $1,295,000, respectively. In the event of any liquidity event, holders of each share of Preferred Stock shall be entitled to be paid out of the assets of the Company legally available before any sums shall be paid to holders of common stock.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 8 — STOCKHOLDERS’ EQUITY (continued)

Common stock

As of March 31, 2020 and December 31, 2019, the Company had 8,876,553 shares of common stock issued and outstanding. During the three months ended March 31, 2020, the Company did not issue any shares of its common stock of the Company upon the exercise of options or warrants.

Options

As of March 31, 2020 and December 31, 2019, the Company had outstanding options to purchase 923,653 and 965,043 shares of common stock, respectively.

						Weighted				Intrinsic
				Weighted		Average				Value
	Number of			Average		Remaining				of
	Options			Exercise Price		Term		Exercisable		Options
Outstanding at December 31, 2019		965,043		$	3.70		3.01		759,631	$	1,666,266
Granted		-			-		-		-		-
Exercised		-			-
Forfeited/Expired		(41,390	)		10.99
Outstanding at March 31, 2020		923,653		$	3.38		2.89		742,345	$	1,498,979

During the three months ended March 31, 2020, there were no stock options granted or exercised.

Option grants historically were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of, expected volatility, risk free interest rate, and expected dividend yield.

For the three months ended March 31, 2020 and 2019, total stock-based compensation expense related to the options totaled approximately $85,000 and $72,000, respectively. The outstanding unamortized stock-based compensation expense related to options was approximately $700,000 (which will be recognized through December 2022) as of March 31, 2020.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 8 — STOCKHOLDERS’ EQUITY (continued)

Warrants

Below is a table summarizing the Company’s outstanding warrants as of March 31, 2020 and December 31, 2019:

						Weighted		Intrinsic
				Weighted		Average		Value
	Number of			Average		Remaining		of
	Warrants			Exercise Price		Term		Warrants
Outstanding at December 31, 2019		424,708		$	5.31		0.82	$	189,450
Granted		-			-		-		-
Exercised		-			-
Forfeited/Expired		(22,188	)		9.59
Outstanding at March 31, 2020		402,520		$	5.07		0.61	$	130,400

For the three months ended March 31, 2020 and 2019, the Company incurred warrant-based compensation expense of $0. There was no outstanding unamortized stock-based compensation expense related to warrants as of March 31, 2020.

Restricted stock units (“RSUs”)

The following table summarizes the restricted stock unit activity for the three months ended March 31, 2020:

Restricted stock units issued as of December 31, 2019	428,919
Granted	15,000
Forfeited/Canceled	(25,000	)
Total Restricted stock units issued at March 31, 2020	418,919
Vested at March 31, 2020	253,794
Unvested restricted stock units as of March 31, 2020	165,125

For the three months ended March 31, 2020 and 2019, the Company incurred RSU-based compensation expense of approximately $170,000 and $377,000, respectively. The outstanding unamortized stock-based compensation expense related to RSUs was approximately $591,000 (which will be recognized through December 2022) as of March 31, 2020.

In January 2020, the Company granted awards of 10,000 RSUs and 5,000 RSUs to a consultant to the Company. The vesting of each award is subject to (i) a performance condition based on the extent to which established performance milestones are achieved within a specified timeframe as determined and certified by the Compensation Committee of the Board of Directors and (ii) continuing service with the Company through the one—year anniversary of the grant date. The settlement date for such RSUs, to the extent they vest, is the earlier of (a) promptly after the vesting date or (b) in any event no later than March 15 of the calendar year following the calendar year in which such vesting occurs. The fair value of the RSUs at the date of grant was approximately $80,000.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Litigation

We may become involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, 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.

NOTE 10 — SUBSEQUENT EVENTS

Note Payable

As discussed in Note 2 in these footnotes to the unaudited financial statements, on April 15, 2020, the Company entered into a note agreement in the amount of $1.3 million with Liberty Capital Bank (“Loan”) pursuant to the Paycheck Protection Program (“PPP”) of the CARES Act, which is being administered by the Small Business Administration (“SBA”). The Loan has been funded.

All or a portion of the Loan may be forgiven upon application by the Company in accordance with the SBA requirements. Under the PPP, loan forgiveness is available for the sum of payroll costs, rent payments, mortgage interest and utilities during the eight-week period beginning on the date of loan approval. For purposes of the PPP, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25.0% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25.0%. Loan payments are deferred for six months. The loan has a maturity of two years and an interest rate of 1.0%. The loan is not collateralized and is not personally guaranteed. No fees were charged in connection with the loan.

The application for these funds required the Company, in good faith, to certify that the current economic uncertainty made the loan request necessary to support the ongoing operation of the Company. The Company made this certification after analyzing and taking into account, among other things, such current economic uncertainty and the Company’s financial situation, business operations and potential ability to access other sources of liquidity sufficient to support ongoing operations in a manner not significantly detrimental to the Company’s business.

Conversion of Preferred Shares

In April 2020, one of our preferred shareholders elected to convert 5,000 of the shareholder’s shares of Preferred Stock into the Company’s common stock. The conversion, including approximately $12,000 of cumulative dividends, resulted in the issuance of 14,239 shares of the Company’s common stock.

Exercise of Options from former employee

In April 2020, a former employee exercised 35,325 options resulting in the Company issuing an aggregate of 4,477 shares of common stock upon the cashless, or net, exercise of those outstanding options.

In May 2020, a former employee exercised 10,000 options resulting in the Company issuing an aggregate of 8,746 shares of common stock upon the cashless, or net, exercise of those outstanding options.

Certification of Certain Performance RSUs

In April 2020, the Compensation Committee of the Company certified the extent to which a consultant to the Company had achieved certain performance-based vesting conditions with respect to three performance RSU awards held by the consultants. Such certification effectuated the forfeiture of 3,215 of the performance RSUs granted in August 2019 and 3,000 of the performance RSUs granted in January 2020.

Amendment of Equity Awards of Director

In May 2020, the Compensation Committee of the Board of Directors amended the vesting of previously granted RSUs and the expiration date of previously granted stock options held by a Director on the Board Directors who was resigning and would not be standing for re-election at the Company’s 2020 Annual Meeting of Stockholders. This amendment effectively resulted in the immediate and full vesting of 11,280 RSUs and the amendment of a total of 110,000 stock options such that they will expire on their original expiration dates rather than three months following termination of service.

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

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

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

Cautionary Note Regarding Forward-Looking Statements

Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”, “positioned”, “strategy”, “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in “Part I, Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended December 31, 2019 and elsewhere in this Report, especially under the headings "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer any assurance of future results, levels of activity, performance or achievements or other future events. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements are made only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we do not intend, and we do not undertake any obligation, to revise or update any of the forward-looking statements to match actual results. Readers are urged to carefully review and consider the various disclosures made in this report, which aim to inform interested parties of the risks factors that may affect our business, financial condition, results of operations and prospects.

Background

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

In August 2018, the Company completed a private placement of $6.25 million (before expenses) growth equity financing with institutional investors to accelerate expansion efforts for the company's indirect partnership business. Further, we listed the Company's common stock on the NASDAQ Capital Market in September 2018.

Overview

AudioEye is an industry-leading software solution provider delivering website accessibility compliance at all price points to businesses of all sizes. Our solutions advance accessibility with patented technology that reduces barriers, expands access for individuals with disabilities, and enhances the user experience for a broader audience. We believe that, when implemented, our solution offers businesses and organizations the opportunity to reach more customers, improve brand image, build additional brand loyalty, and, most importantly, provide an accessible and usable web experience to the expansive and ever-growing global population of individuals with disabilities. AudioEye provides an always-on testing, remediation, and monitoring solution that continually improves conformance with the Web Content Accessibility Guidelines (WCAG), helping businesses and organizations comply with WCAG standards as well as applicable U.S., Canadian, Australian, and United Kingdom accessibility laws.

AudioEye stands out among its competitors because it delivers machine-learning/artificial intelligence (“AI”)-driven accessibility without fundamental changes to the website architecture. Our technology publishes more than one billion remediations daily, and our solution is trusted by some of the largest and most influential companies in the world, including Uber, ADP, Tommy Hilfiger, AMI and more. Government agencies, both at the federal level and state and local levels, have also integrated our software in their digital platforms.

AudioEye primarily generates revenue through the sale of subscriptions for our software-as-a-service (“SaaS”) accessibility solution plans. Plans range in scale from “do-it-yourself” to “do-it-for-me.” All are backed by the power of AudioEye’s machine-learning/AI-driven technology that finds and fixes the most common accessibility errors. Do-it-yourself plans, AudioEye Starter and Pro, also equip site owners with the remediation tools needed to fix remaining issues, ensuring accessibility standards are met. Do-it-for-me, AudioEye Managed/Enterprise, is for those who want AudioEye to continuously ensure legal compliance and accessibility for users of all abilities. Managed and Enterprise also come with the AudioEye Trusted Certification, our attestation of a site owner’s commitment to digital inclusion as defined by WCAG success criteria, which mitigates a customer’s risk of a costly digital accessibility-related legal action. AudioEye also provides Mobile App and PDF remediation services.

AudioEye customers may purchase tiered plans directly through the AudioEye marketplace, in a platform partner marketplace, through a vertical Content Management System (“CMS”) authorized reseller, or by working directly with the AudioEye sales team:

	·	The AudioEye marketplace offers Starter, Pro and Managed plans ideal for customers in any industry and is most effective for sites built on supported CMS platforms;

	·	Certain platforms, such as Duda, natively integrate AudioEye Pro and Managed plans into their marketplace, enabling web creators to immediately build legally compliant, fully accessible websites;

	·	Vertical CMS authorized resellers provide a website-hosting platform for their end-user customers, selling either AudioEye Pro or Managed accessibility solutions; and

	·	Organizations with non-platform custom websites seeking a fully managed solution, engage directly with AudioEye sales personnel for custom pricing and solutions.

Recent Developments – Impact of COVID 19 to our Business

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. In an effort to protect the health and safety of our teammates, we took proactive action to adopt social distancing policies at all our locations, including working from home, and suspending teammate travel. Governments around the world have also enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities.

The COVID-19 pandemic has negatively impacted the global and local economies and workforce participation, and initially created significant volatility and disruption of financial markets. While we observed a limited impact of COVID-19 on our first quarter financial results, we are uncertain of the significance of its impact on our future results as clients evaluate the impact of COVID-19 on their businesses, their profitability and liquidity. We continue to evaluate ways to shore up our liquidity for uncertain economic conditions ahead.

We are not immune to the effects of a global pandemic or a related macroeconomic slowdown. The same goes for our customers, many of whom are small businesses that have been disproportionately impacted by the current economic environment. In response, we have been proactive in providing options for pricing terms and other concessions on a temporary basis to help our customers withstand the financial impacts they may be experiencing. As a result of the pandemic, our customers have requested shorter term contracts, are unable to commit to or declined to enter into regular term renewal agreements, asked us to accept delayed payments or to forgive payments, and have sought price reductions. These factors have adversely affected and may continue to adversely affect our revenue and collections.

Nobody knows how long the current business environment will persist. However, it is our expectation that some of our COVID-19 related programs will need to continue for some time. In that case, it would be reasonable to expect more meaningful negative impacts to our financial and operating performance. More generally, based on what we know right now, we anticipate at least a near-term impact on our revenue, and collections as we expect our Account Receivables aging will continue to worsen. This in-turn may put further pressure on our liquidity in the short- to medium- term. We will continue to monitor the impact on our business and evaluate the value of our assets and assess them for any impairment resulting from the effects of the pandemic driven uncertainty in accordance with our policy.

The ultimate extent of the impact of the COVID-19 pandemic on our business operations, financial performance and results of operation, including our ability to execute our business strategies and initiatives in the expected time frame, is currently unknown and will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic, its severity, the actions to contain the virus or treat its impact, such as related restrictions on travel and transportation, and how quickly and to what extent normal economic and operating conditions can resume.

We will continue to actively monitor the situation and anticipate further actions altering our business operations that we determine will be in the best interests of our teammates, clients, partners, suppliers, and shareholders, or as required by federal, state, or local authorities. It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our clients, teammates, and prospects, or on our financial results for the remainder of 2020.

Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. See “Risk Factors” in Part II, Item 1A of this report for additional risks we face due to the COVID-19 pandemic.

The AudioEye Solution

AudioEye uses proprietary technology and development tools to offer web accessibility solutions that offer significant savings in time and money relative to traditional solutions. Our compliance solutions focus on rapid remediation of the most important accessibility issues, followed by in-depth analysis identifying and addressing a more comprehensive compliance program. Our technology was built to not only provide users with a cloud-based assistive toolset that gets embedded in and is made freely available to users within our customers’ websites, but to also improve the code in a way that optimizes the user experience for users of existing third-party assistive technologies, such as screen readers.

Intellectual Property

Our intellectual property is primarily comprised of trade secrets, trademarks, issued, published and pending patent applications, copyrights and technological innovation. We have a patent portfolio comprised of eight issued patents in the United States. We also have two pending patent applications and two international patent applications filed via the Patent Cooperation Treaty (“PCT”) and the European Patent Office. The patents have been extended and cover a period from 2002 through 2026.

We have a trademark portfolio comprised of eight United States trademark registrations.

Our current patented inventions relate to:

A server-side method and apparatus that enables users to audibly navigate websites and hear high-quality streaming audio narration and descriptions of websites. This patented invention involves creating an audio-enabled web experience by utilizing voice talent and automated text-to-speech conversion methods to read and describe web content.

Systems for automatic remediation of non-compliant webpages and user interfaces using pre-stored remediation scripts as well as form-based quickfix remediation codes. More specifically, this patent covers various features related to crawling webpages and user interfaces to perform compliance assessments using pre-stored remediation scripts corresponding to different compliance issues and manipulating the document object model (DOM). This patent also covers various features related to using pre-stored accelerated remediation code blocks, including those derived from machine learning, corresponding to different compliance issues to modify the DOM.

Methods for providing alternative descriptions to elements on a webpage that were previously untagged and without the appropriate tags. More specifically, this patent covers various features related to detecting an untagged element having an associated hyperlink and using pre-existing remediation scripts to assign an alt text description to the untagged element. In addition, this patent also covers various features related to detecting an untagged image and assigning an alt text description based on image recognition analysis.

Our current portfolio has established a foundation for building unique technology solutions that contribute to the way in which we differentiate ourselves from other competitors in the B2B Web Accessibility marketplace. 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, 2019 as filed with the SEC on March 30, 2020 provides additional information about our business and operations.

Results of Operations

Our consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). The discussion of the results of our operations compares the three months ended March 31, 2020 with the three months ended March 31, 2019. Our results of operations in these interim periods are not necessarily indicative of the results which may be expected for any subsequent period. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in similar positions. We may not be successful in addressing these risks and difficulties.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation. While we observed an insignificant impact on our first quarter financial results, the ultimate extent of the impact of the COVID-19 pandemic on our future business operations, financial performance and results of operation, including our ability to execute our business strategies and initiatives in the expected time frame, is currently unknown and will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted.

Comparative for the Three Months ended March 31, 2020 and March 31, 2019

Results of Operations

	Three Months Ended
	March 31,
	2020			2019
	(in thousands, except per share data)
Revenue	$	4,261		$	1,986

Cost of sales		1,320			922
Gross profit		2,941			1,064
Operating expenses:
Selling & marketing		1,818			1,313
Research & development		333			142
General and administrative expenses		2,486			1,749
Total operating expenses		4,637			3,204
Operating loss		(1,696	)		(2,140	)

Change in fair value of warrant liability		28			-
Interest income (expense)		4			(1	)

Net loss		(1,664	)		(2,141	)
Deemed dividend on Series A Convertible preferred stock		(13	)		(13	)
Net loss attributable to common stockholders	$	(1,677	)	$	(2,154	)
Net income per common share – basic and diluted	$	(0.19	)	$	(0.28	)
Weighted average common shares outstanding – basic and diluted		8,877			7,611

Revenue

For the three months ended March 31, 2020 and 2019, revenue was approximately $4,261,000 and $1,986,000, respectively, consisting primarily of revenues from core product sales, and maintenance services. Revenues increased due to the execution of the Company’s business plan which includes the hiring of additional sales team members, securing new negotiated channel partnerships thus increasing the volume of reselling of the AudioEye products and services, and a continued focus on highly transactional industry verticals.

The following table presents our revenues disaggregated by sales channel:

	Three months ended March 31,
	2020		2019
	(in thousands)
Direct (Enterprise)	$	2,387	$	1,461
Indirect (Vertical partners)		1,862		525
Other		12		-
Total revenues	$	4,261	$	1,986

Cost of Revenue

For the three months ended March 31, 2020 and 2019, cost of revenue was approximately $1,320,000 and $922,000, respectively, and consisted primarily of employee-related costs, including payroll, benefits and stock-based compensation expense for our technology operations and customer experience teams, fees paid to our managed hosting providers and other third-party service providers, amortization of capitalized software development costs and acquired technology, and allocated overhead costs. The increase in cost of revenue was due to significant increase in direct labor headcount and related payroll and use of sub-contracting to support the increase in revenues.

During the three months ended March 31, 2020, the Company amended the categorization of certain expenses to conform with changes incurred in its operations, including internal department structure changes, employee movements, intellectual property and technology related expenses, and facility expenses. For the purposes of comparability, the company reclassified prior period results to conform with current period presentation. The reclassification resulted a net increase of approximately $20,000 to previously reported cost of revenue for the comparable prior year period.

Gross Profit

An increase in our revenues and increase in cost of revenue resulted in a gross profit of approximately $2,941,000 for the current period, as compared to a gross profit of approximately $1,064,000 during the three months ended March 31, 2019. Gross profit increased as a result of increased sales volume, an increasing revenue renewal amount and recognition of deferred revenue as contractual obligations are fulfilled, offset in part by an increase in sub-contracting and direct labor costs.

Selling and Marketing Expenses

Selling and marketing expenses were approximately $1,818,000 and $1,313,000 for the three months ended March 31, 2020 and 2019, respectively. The increase resulted primarily from staff additions and related compensation costs, including increases in salary and commission expenses, as we continue expand our business.

The reclassification resulted a net increase of approximately $442,000 to previously reported selling and marketing expenses for the comparable prior year period.

Research and Development Expenses

Research and development expenses were approximately $333,000 and $142,000 for the three months ended March 31, 2020 and 2019, respectively. The increase was primarily as a result of an increase in outsourced hosting and cloud computing related costs for the research and development of new technologies.

The reclassification resulted in a net decrease of approximately $74,000 to previously reported research and development expenses for the comparable prior year period.

General and Administrative Expenses

General and administrative expenses were approximately $2,486,000 and $1,749,000 for the three months ended March 31, 2020 and 2019, respectively. General and administrative expenses increased approximately $737,000 due primarily to higher salaries and service provider costs in the 2020 period as compared to the 2019 period. Salaries, wages and benefits expenses increased to approximately $1,101,000 in the current year period compared to approximately $863,000 in the first quarter of 2019. Legal, consulting and other professional fees increased significantly over such fees for the prior year period and were approximately $860,000 in the first quarter of 2020 compared to approximately $540,000 in the prior year comparable period. Much of the increase over prior period was primarily due to legal expenses incurred relating to: sales contract enhancements, corporate governance, shelf registration statement, and other employee and executive compensation matters.

The reclassification resulted a net decrease of approximately $388,000 to general and administrative expenses.

Interest Income (Expense), net

Interest income, net, during the three months ended March 31, 2020 was approximately $4,000 compared to Interest expense, net, of approximately $1,000 for the three months ended March 31, 2019. Interest income or expense, net is principally related to our finance lease liabilities, partially offset by interest income earned on our cash balances

Contracts in Process/Revenue Recognition

Under current accounting procedures, revenue is recognized when delivery of the promised goods or services is transferred to customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services. Certain Software as a Service (“SaaS”) invoices are prepared on an annual basis. Any funds received for services not provided yet are held in deferred revenue and are recorded as revenue when earned. 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. Non-subscription revenue (e.g. PDF remediation) is recognized upon delivery. The Company records accounts receivable for the amount of revenue recognized as service is rendered and for invoiced amount for non-cancellable contracts. The table below summarizes the amount of contract value in excess of the revenue recognized and deferred revenue. Contract and deferred revenues are expected to be recognized in future periods.

A summary of our contracts in process is as follows (in thousands):

Contracts in Process

March 31, 2020

Contract Amount

Revenue

Revenue
Recognized

in Excess of
Deferred Revenue

Contract

Recognized

Three Months Ended

Deferred Revenue

and

Amount

prior to 2020

March 31, 2020

Recognized Revenue

Fixed Contracts

42,488

15,708

4,261

5,285

17,234

Revenues for the first quarter of 2020 were a record of approximately $4,261,000, representing an increase of 115% from approximately $1,986,000 in the prior year comparable period and an increase of 19% from approximately $3,567,000 in the fourth quarter of 2019. The revenues for the first quarter of 2020 represent the 17^th consecutive quarter of topline growth for the Company. In addition, contracts in excess of revenues and deferred revenues continue to grow.

Contract bookings (as defined below) for the first quarter of 2020 were approximately $3,928,000. This represents an increase of approximately 14% from approximately $3,434,000 in the prior year comparable period.

About Key Operating Metrics

To supplement our financial information presented in accordance with U.S. GAAP, we consider certain operating measures that are not prepared in accordance with U.S GAAP, including monthly recurring revenue and contract bookings. AudioEye reviews a number of operating metrics such as these to evaluate its business, measure performance, identify trends, formulate business plans, and make strategic decisions. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business and to facilitate comparisons of our performance to that of other similar companies.

AudioEye's Contract Bookings is the contracted amount of money the customer commits to spend with the Company over an agreed amount of time, generally ranging from twelve (12) to sixty (60) months. These contracts may be cancellable; however, this poses limited risk as our customers do not generally cancel mid-term.

AudioEye's Monthly Recurring Revenue is estimated to be the annualized run-rate spend an active customer divided by twelve on non-one time, or non-project, type products by . This metric assumes that those active contracts at that time are for a twelve (12) month term.

Vertical Partner is a CMS provider or a company which provides a web-hosting platform for private and public entities and resells the AudioEye Managed service as a new accessibility service offering to its customers. CMS providers who are focused on a specific industry vertical are referred to as Vertical Partners by AudioEye. CMS providers who are vertical agnostic are referred to as Platform Partners by AudioEye.

Liquidity and Capital Resources

Working Capital

As of March 31, 2020, the Company had cash of approximately $1,785,000 and working capital deficit of approximately $2,467,000. While the Company has been successful in raising capital in the past, there is no assurance that it will be successful at raising additional capital in the future. Extreme volatility of the capital markets during the COVID-19 pandemic could have an adverse impact on the Company’s ability to access the capital markets. 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.

	March 31,			December 31,
	2020			2019
	(in thousands)
Current assets	$	5,270		$	5,608
Current liabilities		7,737			6,726
Working capital (deficit)	$	(2,467	)	$	(1,118	)

Cash Flows

	For the Three Months Ended
	March 31,
	2020			2019
	(in thousands)
Net cash used in operating activities	$	(54	)	$	(1,625	)
Net cash used in investing activities		(124	)		(60	)
Net cash provided by financing activities		(9	)		33
Net (decrease) increase in cash	$	(187	)	$	(1,652	)

We had cash in the amount of approximately $1,785,000 and approximately $1,972,000 as of March 31, 2020 and December 31, 2019, respectively. Cash used in operating activities resulted from increased headcount, personnel, sales and marketing costs, an increase in unbilled receivables of approximately $323,000, a decrease in deferred revenue of approximately $241,000, a decrease in operating lease liabilities of approximately $50,000 and deferred costs of approximately $46,000, an increase in prepaid expenses and other current assets of approximately $36,000, partially offset by a decrease in accounts receivable of approximately $453,000, and an increase in accounts payable and accrued expenses of approximately $1,262,000. In addition, the Company used actual net cash in operations of approximately $54,000 during the three months ended March 31, 2020 compared to approximately $1,625,000 during the three months ended March 31, 2019.

We may raise additional capital through the sale of equity or debt securities or borrowings from financial institutions or third parties or a combination of the foregoing. Capital raised will be used to implement our business plan, grow current operations, make acquisitions and/or start new vertical businesses among some of the anticipated uses of such capital.

The Company is currently considering the potential reduction of salaries or deferral of bonuses for certain individuals as a means to address any cash flow issues.

Critical Accounting Policies

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

Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, relate to revenue recognition, cost of revenue, capitalized software development costs, allowance for doubtful accounts, property and equipment, goodwill, intangible assets, long-lived assets, impairment of long-lived assets, income taxes, cash and cash equivalents, investments in equity securities, earnings per share, derivative instrument liability, financial instruments, fair value measurements, stock based compensation, and research and development. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of March 31, 2020 were not effective, for the same reasons as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Currently, there are no pending material legal proceedings to which the Company is a party to or to which any of its property is subject.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes in our risk factors from those set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2019:

The extent to which the COVID-19 pandemic and measures put in place in response to the pandemic will further impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.

The worldwide COVID-19 pandemic and the measures put in place to address it have materially and negatively impacted the global economy and have significantly increased worldwide economic uncertainty.

The outbreak has resulted in the implementation by authorities of numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders, and business shutdowns. These measures have negatively impacted, and may continue to negatively impact, business spending by our customers, and they have also adversely impacted and may further adversely impact our workforce and operations and the operations of our customers and business partners. These measures may remain in place for a significant but unpredictable period of time, and they are likely to continue to adversely affect our business, results of operations and financial condition.

As a result of the pandemic, our customers have requested shorter term contracts, declined to enter into renewal agreements, asked us to accept delayed payments or to forgive payments, and have sought price reductions. These factors have adversely affected and may continue to adversely affect our revenue and collections. The spread of COVID-19 has caused us to modify our business practices (including with respect to employee travel, employee work locations and physical participation in meetings with customers and prospective customers. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. These changes in business practices may negatively impact our business, results of operations and financial condition.

The extent to which the COVID-19 pandemic adversely impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the measures put in place to contain the virus or treat its impact, and when, how quickly and to what extent the global economy will improve and more normal economic and business conditions can resume. Even after the COVID-19 outbreak has subsided, we may experience materially adverse impacts to our business as a result of its global economic impact, including any economic recession or depression that has occurred or may occur in the future.

We may not receive forgiveness of all or a portion of our recently received PPP Loan.

As discussed in this report, including in Notes 2 and 10 in the footnotes to the unaudited financial statements included herein, on April 15, 2020, we entered into a note agreement in the amount of $1.3 million with Liberty Capital Bank (the “PPP Loan”) pursuant to the Paycheck Protection Program of the CARES Act, which is being administered by the Small Business Administration. The Loan has been funded. All or a portion of the Loan may be forgiven upon application by the Company in accordance with the Small Business Administration Requirements. No assurance can be provided, however, that we will elect to pursue forgiveness of all or a portion of the PPP Loan or that we will be eligible for and obtain forgiveness of all or a portion of the PPP Loan. If we elect not to pursue or are unable to qualify for or obtain forgiveness of all or a portion of the PPP Loan, our liquidity could be reduced, and our business, financial condition and results of operations may be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
3.1*		Certificate of Validation dated March 27, 2020, together with Certificate of Designations Series A Preferred Stock, effective May 1, 2015, all as filed in the Office of the Delaware Secretary of State on March 27, 2020 (1)

10.1		Severance Agreement and General Release of Claims dated January 17, 2020 between the Company and Todd Bankofier (2)

10.2		Executive Employment Agreement entered into as of February 25, 2020 between the Company and Heath Thompson (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

*	Filed herewith.

(1)

This Exhibit supersedes Exhibit No. 3.6 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020 (the “2019 Form 10-K”).

(2)

Incorporated by reference to Exhibit 10.47 to the 2019 Form 10-K.

(3)

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on March 2, 2020.

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:	May 15, 2020	By:	/s/ Heath Thompson
			Heath Thompson
			Principal Executive Officer

Date:	May 15, 2020	By:	/s/ Sachin Barot
			Sachin Barot
			Principal Financial Officer

Exhibit 3.1

CERTIFICATE OF VALIDATION

AUDIOEYE, INC.

Pursuant to Section 204 of the

General Corporation Law of the State of Delaware

AudioEye, Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), certifies as follows:

1. The defective corporate act that is the subject of this Certificate of Validation is the issuance of 175,000 shares of the Corporation’s Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”), on May 1, 2015 (the “Preferred Stock Issuance”).

2. The nature of the failures of authorization in respect of the Preferred Stock Issuance was: (i) the failure of the Board to have duly approved the Certificate of Designations in the manner required by Section 151 of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and (ii) the failure of the Certificate of Designations to have authorized a sufficient number of shares of Series A Preferred Stock and to have been filed and become effective prior to the issuance of the stock.

3. The defective corporate act that is the subject of this Certificate of Validation was duly ratified in accordance with Section 204 of General Corporation Law pursuant to resolutions of the Board of Directors of the Corporation adopted on March 27, 2020.

4. The Certificate of Designations of Series A Convertible Preferred Stock was previously filed under Section 103 of the General Corporation Law on May 4, 2015 and a Certificate of Correction to the Certificate of Designations Series A Convertible Preferred Stock of the Corporation was filed on March 27, 2020, rendering such Certificate of Designations null and void. A certificate containing all of the information required to be included under Section 151 of the General Corporation Law to give effect to the Preferred Stock Issuance is attached hereto as Exhibit A. Such certificate shall be deemed to have become effective as of 12:01 a.m. on May 1, 2015.

[Signature Page Follows]

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Validation to be executed by its duly authorized officer as of this 27th day of March, 2020.

AUDIOEYE, INC.


By:	/s/ Carr Bettis
	Name:	Carr Bettis
	Title:	Executive Chairman of the Board

EXHIBIT A

CERTIFICATE OF DESIGNATIONS

SERIES A CONVERTIBLE PREFERRED STOCK

OF AUDIOEYE, INC.

(pursuant to Section 151 of the Delaware General Corporation Law)

AudioEye, Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies that the Board of Directors of the Corporation (the “Board of Directors” or the “Board”) pursuant to authority of the Board of Directors under Section 151 of the Delaware General Corporation Law (“DGCL”), and in accordance with the provisions of its Certificate of Incorporation and Bylaws, adopted a resolution on April 24, 2015, which authorizes a series of the Corporation’s Preferred Stock, par value $0.00001 per share designated Series A Convertible Preferred Stock (the “Preferred Stock”):

RESOLVED, that a series of Preferred Stock in the Corporation, having the rights, preferences, privileges and restrictions, and the number of shares constituting such series and the designation of such series, set forth below be, and it hereby is, authorized by the Board of Directors of the Corporation pursuant to authority given by the Corporation’s Certificate of Incorporation.

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the number of shares constituting, and the rights, preferences, privileges and restrictions relating to, a new series of Preferred Stock designated Series A Convertible Preferred Stock as follows:

Section 1. Definitions. For the purposes hereof, the following terms shall have the following meanings:

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 of the Securities Act.

“Alternate Consideration” shall have the meaning set forth in Section 7(d).

“Board of Directors” means the board of directors of the Corporation.

“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

“Certificate of Designations” means this Certificate of Designations of the Series A Convertible Preferred Stock

“Closing” means the closing of the purchase and sale of the Securities pursuant to of the Purchase Agreement.

“Commission” means the United States Securities and Exchange Commission.

“Common Stock” means the Corporation’s common stock, par value $0.00001 per share, and stock of any other class of securities into which such securities may hereafter be reclassified or changed.

“Conversion Date” shall have the meaning set forth in Section 6(a).

“Conversion Price” shall have the meaning set forth in Section 6(b).

“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of the shares of Preferred Stock in accordance with the terms hereof.

“Corporation” means AudioEye, Inc., a Delaware corporation.

“Dividend Payment Date” shall have the meaning set forth in Section 2.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Fundamental Transaction” shall have the meaning set forth in Section 7(d).

“GAAP” means United States generally accepted accounting principles.

“Holder” shall mean a holder of the Preferred Stock, and “Holders” shall mean multiple or all, as the context requires, holders of the Preferred Stock.

“Junior Securities” means the Common Stock and all other Common Stock Equivalents of the Corporation other than those securities which are explicitly senior or pari passu to the Preferred Stock in dividend rights or liquidation preference.

“Liquidity Event” means (i) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (ii) any sale of all or substantially all of the Company’s assets, or (iii) any other transaction that results in the Company’s stockholders immediately prior to such transaction holding less than 50% of the voting power of the surviving entity.

“Liquidity Preference” shall have the meaning set forth in Section 5.

“Notice of Conversion” shall have the meaning set forth in Section 6(a).

“Original Issue Date” means the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

“Preferred Stock” shall have the meaning set forth in Section 2.

“Purchase Agreement” means the Securities Purchase Agreement among the Corporation and the original Holders, as amended, modified or supplemented from time to time in accordance with its terms for the purchase and sale of the Preferred Stock.

“Redemption Price” shall have the meaning set forth in Section 8(a).

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“Securities” means the Preferred Stock and the Underlying Shares subject to the Purchase Agreement.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Share Delivery Date” shall have the meaning set forth in Section 6(c).

“Stated Value” shall have the meaning set forth in Section 2.

“Subsidiary” means any subsidiary of the Corporation.

“Successor Entity” shall have the meaning set forth in Section 7(d).

“Trading Day” means a day on which the principal Trading Market is open for business.

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE MKT LLC, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTC Markets, or the OTC Bulletin Board (or any successors to any of the foregoing).

“Transaction Documents” means this Certificate of Designations, the Purchase Agreement, all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated pursuant to the Purchase Agreement.

“Transfer Agent” means Corporate Stock Transfer, Inc., the current transfer agent of the Corporation, and any successor transfer agent of the Corporation.

“Underlying Shares” means the shares of Common Stock issued and issuable upon conversion of the Preferred Stock.

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Preferred Stock then outstanding and reasonably acceptable to the Corporation, the fees and expenses of which shall be paid by the Corporation.

Section 2. Designation, Amount and Par Value. The series of Preferred Stock shall be designated as its Series A Convertible Preferred Stock (the “Preferred Stock”) and the number of shares so designated shall be 200,000 (which shall not be subject to increase without the written consent of Holders representing at least 67% of the Preferred Stock based on Liquidity Preference). Each share of Preferred Stock shall have a par value of $0.00001 per share and a stated value equal to $10.00 (the “Stated Value”). Preferred Stock represents equity interests in the Corporation and shall not give rise to a claim for payment of a principal amount at a particular date.

Section 3. Dividends.

The Holders shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation out of funds legally available therefore, cumulative dividends at the annual rate of 5% of the Stated Value per share of the Preferred Stock. To the extent declared, such dividends shall be payable in cash quarterly, on the last day of each quarter, beginning June 30, 2015 (each of such dates being a “Dividend Payment Date”). Such dividends shall accrue on each such share commencing on the date of issue, and shall accrue from day to day, whether or not earned or declared.

(a) So long as any shares of Preferred Stock remain outstanding, neither the Corporation nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any material amount of Junior Securities.

Section 4. Voting Rights. On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Certificate of Designations, holders of the Preferred Stock shall vote together with the holders of Common Stock, as a single class. Notwithstanding the foregoing, as long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of at least 75% in Stated Value of Preferred Stock then outstanding, except as may be necessary to increase the authorized shares of Common Stock in order to account for any increase in the number of shares issuable upon conversion of the Preferred Stock, (a) purchase or redeem any capital stock other than stock repurchased from former employees or consultants in connection with the cessation of their employment services, at the lower of fair market value or cost, or (b) amend, alter or repeal any provision of its certificate of incorporation or other charter documents in a manner that adversely affects any rights of the Holders.

Section 5. Liquidation Rights. In the event of any Liquidity Event, holders of each share of Preferred Stock shall be entitled to be paid out of the assets or surplus funds of the Corporation legally available for distribution to holders of the Corporation’s capital stock of all classes (whether such assets are capital, surplus, or earnings) and subject to the liquidating preference of the holders of any other series of Preferred Shares which may be on parity or senior in right of preference to the Preferred Stock and before any sums shall be paid or any assets or surplus funds distributed among the holders of Common Stock, an amount equal to the Stated Value plus accrued dividends as to such share (the “Liquidity Preference”). If the assets of the Corporation shall be insufficient to permit the payment in full to holders of the Preferred of the preferential amount set forth in this Section 5, then the entire assets of the Corporation available for such distribution shall be distributed ratably among the holders of the Preferred in accordance with the aggregate liquidation preference of the shares of Preferred Stock held by each of them.

Section 6. Conversion.

(a) Conversion at Option of Holder. Each share of Preferred Stock shall be convertible, at any time and from time to time from and after the Original Issue Date at the option of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value plus any accrued dividends with respect to such share by the Conversion Price. Holders shall effect conversions by providing the Corporation with the form of conversion notice attached hereto as Annex A (a “Notice of Conversion”). Each Notice of Conversion shall specify the number of shares of Preferred Stock to be converted, the number of shares of Preferred Stock owned prior to the conversion at issue, the number of shares of Preferred Stock owned subsequent to the conversion at issue and the date on which such conversion is to be effected, which date may not be prior to the date the applicable Holder delivers by facsimile such Notice of Conversion to the Corporation (such date, the “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion to the Corporation is deemed delivered hereunder. The calculations and entries set forth in the Notice of Conversion shall control in the absence of manifest or mathematical error. To effect conversions of shares of Preferred Stock, a Holder shall not be required to surrender the certificate(s) representing the shares of Preferred Stock to the Corporation unless (i) the full or remaining number of shares of Preferred Stock represented by such certificate are being converted or (ii) such Holder has provided the Corporation with prior written notice (which notice may be included in a Notice of Conversion) requesting reissuance of a certificate representing the remaining shares of Preferred Stock upon physical surrender of any certificate representing the shares of Preferred Stock being converted. Each Holder and the Corporation shall maintain records showing the number of shares of Preferred Stock so converted by such Holder and the dates of such conversions or shall use such other method, reasonably satisfactory to such Holder and the Corporation, so as not to require physical surrender of the certificate representing the shares of Preferred Stock upon each such conversion. In the event of any dispute or discrepancy, such records of the Corporation establishing the number of shares of Preferred Stock to which the record holder is entitled shall be controlling and determinative in the absence of manifest error. Shares of Preferred Stock converted into Common Stock in accordance with the terms hereof shall be canceled and shall not be reissued.

(b) Conversion Price. The per share conversion price for the Preferred Stock shall equal the greater of (a) $0.15 or (b) the average of 90% of the closing prices of the Company’s Common Stock for the five Trading Days immediately preceding the initial Closing plus any accrued dividends with respect to such share, subject to adjustment herein (the “Conversion Price”).

(i) Delivery of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion Date (the “Share Delivery Date”), the Corporation shall deliver, or cause to be delivered, to the converting Holder a certificate or certificates representing the number of Conversion Shares being acquired upon the conversion of the Preferred Stock. If requested by the Holder, the Corporation shall use its best efforts to deliver any certificate or certificates required to be delivered by the Corporation under this Section 6 electronically through the Depository Trust Company or another established clearing corporation performing similar functions.

(ii) Reservation of Shares Issuable Upon Conversion. The Corporation covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of the Preferred Stock as herein provided, not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the respective Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 7) upon the conversion of the then outstanding shares of Preferred Stock. The Corporation covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.

(iii) Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Preferred Stock. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Corporation shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.

(iv) Transfer Taxes. The issuance of certificates for shares of the Common Stock on conversion of this Preferred Stock shall be made without charge to any Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holders of such shares of Preferred Stock and the Corporation shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid.

Section 7. Certain Adjustments.

(a) Stock Dividends and Stock Splits. If the Corporation, at any time while this Preferred Stock is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any other Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Corporation upon conversion of this Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Corporation, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Corporation) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification.

(b) Subsequent Rights Offerings. If the Corporation, at any time while the Preferred Stock is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not proportionately to the Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share that is lower than the VWAP on the record date for such issuance, and do not offer the same rights to the Holders, then the Holder will be entitled to acquire, upon conversion of the Preferred Stock, such rights, options or warrants which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of such Holder’s Preferred Stock (without regard to any limitations on the conversion of such Preferred Stock) immediately before the date on which a record is taken for the issuance of such rights, options or warrants, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the issuance of such rights, options or warrants.

(c) Pro Rata Distributions. If the Corporation, at any time while the Preferred Stock is outstanding, distributes to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security, then in each such case the Conversion Price shall be adjusted by multiplying such Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness or rights or warrants so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors of the Corporation in good faith. In either case the adjustments shall be described in a statement delivered to the Holders describing the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

(d) Fundamental Transaction. If, at any time while this Preferred Stock is outstanding, (i) the Corporation, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Corporation with or into another Person, (ii) the Corporation, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Corporation, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Corporation, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination and excluding shares acquired upon conversion of any currently outstanding convertible securities in accordance with the terms thereof as in effect on the date hereof) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this Preferred Stock, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Preferred Stock is convertible immediately prior to such Fundamental Transaction. For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Corporation shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Preferred Stock following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Corporation or surviving entity in such Fundamental Transaction shall file a new Certificate of Designations with the same terms and conditions and issue to the Holders new preferred stock consistent with the foregoing provisions and evidencing the Holders’ right to convert such preferred stock into Alternate Consideration. The Corporation shall cause any successor entity in a Fundamental Transaction in which the Corporation is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Corporation under this Certificate of Designations and the other Transaction Documents (as defined in the Purchase Agreement) in accordance with the provisions of this Section 7(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the holder of this Preferred Stock, deliver to the Holder in exchange for this Preferred Stock a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Preferred Stock which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Preferred Stock (without regard to any limitations on the conversion of this Preferred Stock) prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of this Preferred Stock immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of Designation and the other Transaction Documents referring to the “Corporation” shall refer instead to the Successor Entity), and may exercise every right and power of the Corporation and shall assume all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Corporation herein.

(e) Calculations. All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 7, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Corporation) issued and outstanding.

(f) Notice to the Holders.

(i) Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 7, the Corporation shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(ii) Notice to Allow Conversion by Holder. If (A) the Corporation shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Corporation shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Corporation shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation is a party, any sale or transfer of all or substantially all of the assets of the Corporation, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, then, in each case, the Corporation shall cause to be filed at each office or agency maintained for the purpose of conversion of this Preferred Stock, and shall cause to be delivered to each Holder at its last address as it shall appear upon the stock books of the Corporation, at least ten (10) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Corporation or any of the Subsidiaries, the Corporation shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to convert the Preferred Stock (or any part hereof) during the 10-day period commencing on the date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

Section 8. Redemption.

(a) Optimal Company Redemption. Subject to the terms hereof, at any time the Corporation shall be entitled to redeem any or all of the outstanding shares of Preferred Stock (the “Optional Company Redemption”) at a per share price equal to 125% of the Stated Value plus accumulated dividends (such amount, the “Redemption Price”), payable in cash; provided that the Corporation shall have funds legally available for such payment.

(b) Notice of Optional Company Redemption. Notice of any Optional Company Redemption of shares of Preferred Stock, specifying the time and place of redemption and the Redemption Price (a “Redemption Notice”), shall be sent by courier or first class overnight mail, pre-paid, to each holder of Preferred Stock to be redeemed, at the address for such holder shown on the Company’s records, not more than sixty (60) nor less than ten (10) days prior to the Redemption Date. If, in any case, less than all of the shares of Preferred Stock then owned by such holder are to be redeemed, the Redemption Notice shall also specify the number of shares which are to be redeemed; provided, however, that no failure to give such Redemption Notice nor any defect therein shall affect the validity of the procedure for the redemption of any shares of Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to give said Redemption Notice or except as to the holder whose Redemption Notice was defective. Each such Redemption Notice shall state:

(i) the Redemption Date;

(ii) the Redemption Price;

(iii) the number of shares of Preferred Stock to be redeemed and, if fewer than all the shares of Preferred Stock held by a holder are to be redeemed, the number of shares thereof to be redeemed from such holder;

(iv) the manner and place or places at which payment for the shares of Preferred Stock to be redeemed will be made, upon presentation and surrender to the Corporation of the certificates evidencing the shares being redeemed; and

(v) that the rights of holders to convert shares of Preferred Stock being redeemed shall terminate at the close of business on the Redemption Date unless the Corporation defaults in the payment of the Redemption Price.

Upon mailing any such Redemption Notice, the Corporation shall become obligated to redeem at the Redemption Price on the Redemption Date all shares of Preferred Stock therein specified; provided, however, any redemption contemplated by any Redemption Notice may be conditioned upon the occurrence of one or more transactions or other events and the Redemption Date in such Redemption Notice may be the date on which such transaction is consummated or such other event occurs.

Section 9. Miscellaneous.

(a) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service, addressed to the Corporation at 5210 E. Williams Circle, Suite 500, Tucson, Arizona 85711, facsimile number (520) 844-2989, or such other facsimile number or address as the Corporation may specify for such purposes by notice to the Holders delivered in accordance with this Section 10. Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of such Holder appearing on the books of the Corporation, or if no such facsimile number or address appears on the books of the Corporation, at the principal place of business of such Holder, as set forth in the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth in this Section prior to 5:30 p.m. (Arizona time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (Arizona time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.

(b) Absolute Obligation. Except as expressly provided herein, no provision of this Certificate of Designations shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay dividends, as applicable, on the shares of Preferred Stock at the time, place, and rate, and in the coin or currency, herein prescribed.

(c) Lost or Mutilated Preferred Stock Certificate. If a Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of the ownership hereof reasonably satisfactory to the Corporation.

(d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designations shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflict of laws thereof. If any party shall commence an action or proceeding to enforce any provisions of this Certificate of Designation, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

(e) Waiver. Any waiver by the Corporation or a Holder of a breach of any provision of this Certificate of Designation shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Certificate of Designations or a waiver by any other Holders. The failure of the Corporation or a Holder to insist upon strict adherence to any term of this Certificate of Designations on one or more occasions shall not be considered a waiver or deprive that party (or any other Holder) of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designation on any other occasion. Any waiver by the Corporation or a Holder must be in writing.

(f) Severability. If any provision of this Certificate of Designations is invalid, illegal or unenforceable, the balance of this Certificate of Designations shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.

(g) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

(h) Headings. The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designations and shall not be deemed to limit or affect any of the provisions hereof.

(i) Status of Converted Preferred Stock. If any shares of Preferred Stock shall be converted or reacquired by the Corporation, such shares shall resume the status of authorized but unissued shares of preferred stock and shall no longer be designated as Series A Convertible Preferred Stock.

Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Heath Thompson, 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 March 31, 2020 of AudioEye, Inc. (the “Quarterly Report”);

2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me 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: May 15, 2020	By:	/s/ Heath Thompson
		Name:	Heath Thompson
		Title:	Principal Executive Officer

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Sachin Barot, 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 March 31, 2020 of AudioEye, Inc. (the “Quarterly Report”);

(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: May 15, 2020	By:	/s/ Sachin Barot
		Name:	Sachin Barot
		Title:	Principal Financial Officer

Exhibit 32.1

CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the filing by AudioEye, Inc. (the “Registrant”) of its Quarterly Report on Form 10-Q for the period ended March 31, 2020 (the “Quarterly Report”) with the Securities and Exchange Commission, we, Heath Thompson and Sachin Barot, 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: May 15, 2020	By:	/s/ Heath Thompson
		Name:	Heath Thompson
		Title:	Principal Executive Officer

By:	/s/ Sachin Barot
	Name:	Sachin Barot
	Title:	Principal Financial Officer