AUDIOEYE INC (Form: 10-Q, Received: 11/13/2020 08:37:25)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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 November 6, 2020, 10,020,128 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 September 30, 2020 and December 31, 2019 (unaudited)	2

	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)	3

	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4

	Consolidated Statements of Cash Flows for the nine months ended September 30, 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	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II	OTHER INFORMATION	27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 6.	Exhibits	28

SIGNATURES		29

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The financial information set forth below with respect to the financial statements as of September 30, 2020 and December 31, 2019 and for the three-month and nine-month periods ended September 30, 2020 and 2019 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three-month and nine-month periods ended September 30, 2020 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31. Certain prior period amounts have been reclassified to conform to current period classification. The Company presents its unaudited financial statements, notes, 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)

	September 30,			December 31,
(in thousands, except per share data)	2020			2019
ASSETS
Current assets:
Cash	$	10,295		$	1,972
Accounts receivable, net of allowance for doubtful accounts of $79 and $63, respectively		3,457			2,958
Unbilled receivables		34			160
Deferred costs, short term		179			183
Debt issuance costs, net		-			137
Prepaid expenses and other current assets		219			198
Total current assets		14,184			5,608

Property and equipment, net of accumulated depreciation of $179 and $124, respectively		121			156
Right of use assets		671			827
Deferred costs, long term		102			145
Intangible assets, net of accumulated amortization of $4,294 and $3,710, respectively		1,931			1,715
Goodwill		701			701
Total assets	$	17,710		$	9,152

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,588		$	973
Finance lease liabilities		57			52
Operating lease liabilities		223			209
Warrant liability		-			120
Deferred revenue		5,587			5,372
Total current liabilities		7,455			6,726

Long term liabilities:
Finance lease liabilities		23			52
Operating lease liabilities		486			655
Deferred revenue		110			153
Term loan		1,302			-
Total liabilities		9,376			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, 100 and 105 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		1			1
Common stock, $0.00001 par value, 50,000 shares authorized, 9,921 and 8,877 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		1			1
Additional paid-in capital		62,409			51,490
Accumulated deficit		(54,077	)		(49,926	)
Total stockholders' equity		8,334			1,566

Total liabilities and stockholders' equity	$	17,710		$	9,152

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
(in thousands, except per share data)	2020			2019			2020			2019
Revenue	$	5,341		$	2,776		$	14,885		$	7,198

Cost of revenue		1,551			1,147			4,478			3,193

Gross profit		3,790			1,629			10,407			4,005

Operating expenses:
Selling and marketing		2,028			1,598			5,551			4,257
Research and development		203			149			801			442
General and administrative		3,197			2,040			8,185			5,624
Total operating expenses		5,428			3,787			14,537			10,323

Operating loss		(1,638	)		(2,158	)		(4,130	)		(6,318	)

Other income (expense):
Change in fair value of warrant liability		593			-			120			-
Interest expense		(35	)		(37	)		(141	)		(39	)
Total other income (expense)		558			(37	)		(21	)		(39	)

Net loss		(1,080	)		(2,195	)		(4,151	)		(6,357	)

Dividends on Series A Convertible Preferred Stock		(13	)		(13	)		(39	)		(39	)

Net loss available to common stockholders	$	(1,093	)	$	(2,208	)	$	(4,190	)	$	(6,396	)

Net loss per common share-basic and diluted	$	(0.12	)	$	(0.27	)	$	(0.46	)	$	(0.81	)

Weighted average common shares outstanding-basic and diluted		9,385			8,279			9,067			7,848

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(unaudited)

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

									Additional
	Common stock				Preferred stock				Paid-in		Accumulated
(in thousands)	Shares		Amount		Shares		Amount		Capital		Deficit			Total
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
Share-based compensation		-		-		-		-		449		-			449
Net loss		-		-		-		-		-		(2,141	)		(2,141	)
Balance, March 31, 2019		7,623	$	1		105	$	1	$	48,508	$	(44,285	)	$	4,225
Common stock issued upon exercise of warrants and options		33		-		-		-		99		-			99
Share-based compensation		-		-		-		-		275		-			275
Net loss		-		-		-		-		-		(2,020	)		(2,020	)
Balance, June 30, 2019		7,656	$	1		105	$	1	$	48,882	$	(46,305	)	$	2,579
Common stock issued upon exercise of warrants and options		1,221		-		-		-		2,115		-			2,115
Warrants issued in connection with line of credit		-		-		-		-		219		-			219
Share-based compensation		-		-		-		-		273		-			273
Net loss		-		-		-		-		-		(2,195	)		(2,195	)
Balance, September 30, 2019		8,877	$	1		105	$	1	$	51,489	$	(48,500	)	$	2,991

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended September 30,
(in thousands)	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,151	)	$	(6,357	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		639			534
Share-based compensation expense		2,004			997
Amortization of deferred commissions		162			175
Amortization of debt issuance costs		137			37
Amortization of right of use assets		156			164
Change in fair value of warrant liability		(120	)		-
Provision for accounts receivable		109			-
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables		(482	)		(1,190	)
Prepaid expenses and other assets		(136	)		(393	)
Accounts payable and accruals		615			576
Operating lease liability		(155	)		(138	)
Related party payables		-			(10	)
Deferred revenue		172			1,283
Net cash used in operating activities		(1,050	)		(4,322	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		-			(46	)
Software development costs		(659	)		(137	)
Patent costs		(141	)		-
Net cash used in investing activities		(800	)		(183	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering, net of transaction costs		7,824			-
Proceeds from term loan		1,302			-
Proceeds from exercise of options and warrants		1,091			2,256
Repayments of finance leases		(44	)		(29	)
Net cash provided by financing activities		10,173			2,227

Net increase (decrease) in cash		8,323			(2,278	)
Cash-beginning of period		1,972			5,742
Cash-end of period	$	10,295		$	3,464

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

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

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 3 – Significant Accounting Policies” in the 2019 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the consolidated financial statements contained in the 2019 Form 10-K when reviewing interim financial results.

Use of Estimates

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

Revenue Recognition

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

We determine revenue recognition through the following five steps:

Identify the contract with the customer;

Identify the performance obligations in the contract;

	·	Determine the transaction price;

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

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

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

The following table presents our revenues disaggregated by sales channel:

	Nine months ended September 30,
(in thousands)	2020		2019
Direct (Enterprise)	$	8,104	$	5,135
Indirect (Vertical partners)		6,698		2,063
Other		83		-
Total revenues	$	14,885	$	7,198

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

The table below summarizes our deferred revenue as of September 30, 2020 and December 31, 2019:

(in thousands)	September 30, 2020		December 31, 2019
Deferred revenue - current	$	5,587	$	5,372
Deferred revenue - noncurrent		110		153
Total deferred revenue	$	5,697	$	5,525

In the nine-month period ended September 30, 2020 we recognized $4,724,000, or 85%, in revenue from deferred revenue outstanding as of December 31, 2019.

In the three months ended September 30, 2020, two customers (including affiliates of such customers) accounted for 15% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2020 one customer accounted for 16% of our total revenue. In the three and nine months ended September 30, 2019, one customer accounted for 9% and 10% of our total revenue, respectively.

Two customers represented 14% and 11%, respectively, of total accounts receivable as of September 30, 2020. At December 31, 2019, one customer represented 40% of the outstanding accounts receivable.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Deferred Costs (Contract acquisition costs)

The Company capitalizes initial and renewal sales commission payments in the period a customer contract is obtained and customer payment is received, and amortizes deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term. As a practical expedient, we expense sales commissions as incurred when the amortization period of related deferred commission costs would have been less than one year.

The table below summarizes the deferred commission costs as of September 30, 2020 and December 31, 2019:

(in thousands)	September 30, 2020		December 31, 2019
Deferred costs - current	$	179	$	183
Deferred costs - noncurrent		102		145
Total deferred costs	$	281	$	328

Amortization expense associated with sales commissions was included in selling and marketing expenses on the consolidated statements of operations and totaled $51,000 and $162,000 for the three- and nine-month periods ended September 30, 2020, respectively, and $67,000 and $175,000 for the three- and nine-month periods ended September 30, 2019, respectively. There were no impairment losses for these capitalized costs for the three and nine months ended September 30, 2020 and 2019.

Share-Based Compensation

The Company periodically issues options, warrants and restricted stock units (“RSUs”) as compensation for services received. The fair value of the award is measured on the grant date. The fair value amount is then recognized as expense over the requisite vesting period during which services are required to be provided in exchange for the award.

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

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

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

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the three- and nine-month periods ended September 30, 2020, we awarded 89,900 and 181,092 options, respectively, and 305,145 and 659,821 RSUs, respectively, to employees, officers, and consultants of the Company, which included a grant to our Interim Chief Executive Officer of 260,000 RSUs with performance-based and market-based conditions in the third quarter of 2020.

The performance condition for 105,000 of the RSUs in the CEO award is based on the achievement of Monthly Recurring Revenue (“MRR”) targets. The Company did not record any stock-based compensation expense related to these performance-based RSUs in the three months ended September 30, 2020 as the achievement of performance targets during the requisite period was not deemed probable. The Company will continue to evaluate the probability of achieving the performance conditions in future periods and record the appropriate expense if necessary. The market condition for the remaining 155,000 RSUs in the award is based on the Company’s stock price targets. The Company used a Monte Carlo simulation to determine the grant-date fair value for the market-based RSUs. The weighted-average assumptions used in the Monte-Carlo simulation were as follows: 5-year historical volatility of 136.52%, 5-year risk-free rate of 0.26%, and a performance period of 5 years. The Company recorded $464,000 in stock-based compensation expense related to these market-based RSUs in the three months ended September 30, 2020.

In the three- and nine-month periods ended September 30, 2020, no warrants were issued and no stock-based compensation expense related to warrants was incurred. As of September 30, 2020, there was no remaining unamortized stock-based compensation expense related to warrants.

The following table summarizes the stock-based compensation expense recorded for the three and nine months ended September 30, 2020 and 2019:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2020		2019		2020		2019
Stock Options	$	79	$	71	$	200	$	237
RSUs		1,010		202		1,804		760
Total	$	1,089	$	273	$	2,004	$	997

As of September 30, 2020, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $1,352,000 and $6,058,000, respectively, which may be recognized through June 2025, subject to achievement of service, performance, and market conditions.

Earnings (Loss) Per Share (“EPS”)

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

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Potentially dilutive securities excluded from the computation of basic and diluted net loss per share for the nine months ended September 30, 2020 and 2019 were as follows:

(in thousands)	2020		2019
Preferred stock		290		293
Options		683		904
Warrants		85		537
Restricted stock units		846		381
Total		1,904		2,115

The following table summarizes the stock option activity for the nine months ended September 30, 2020:

						Weighted				Intrinsic
				Weighted		Average				Value
	Number of			Average		Remaining				of
	Options			Exercise Price		Term		Exercisable		Options
Outstanding at December 31, 2019		965,043		$	3.70		3.01		759,631	$	1,666,266
Granted		181,092			10.60		5.00
Exercised		(315,630	)		2.12
Forfeited/Expired		(147,091	)		8.02
Outstanding at September 30, 2020		683,414		$	5.33		2.48		444,329	$	6,323,007

The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2020:

Restricted stock units outstanding as of December 31, 2019	428,919
Granted	659,821
Settled	(88,799	)
Forfeited/Canceled	(154,080	)
Total restricted stock units outstanding at September 30, 2020	845,861
Vested at September 30, 2020	268,174
Unvested restricted stock units as of September 30, 2020	577,687

The following table summarizes the warrant activity for the nine months ended September 30, 2020:

						Weighted		Intrinsic
				Weighted		Average		Value
	Number of			Average		Remaining		of
	Warrants			Exercise Price		Term		Warrants
Outstanding at December 31, 2019		424,708		$	5.31		0.82	$	189,450
Granted		-			-
Exercised		(317,467	)		4.76
Forfeited/Expired		(22,188	)		9.59
Outstanding at September 30, 2020		85,053		$	6.25		1.19	$	708,917

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Value Measurements

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

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

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

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

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

The Company had no assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019.

The table below provides information on our liabilities that are measured at fair value on a recurring basis:

			Fair Value
(in thousands)	Fair Value		Hierarchy
Liabilities
Warrant liability (1), September 30, 2020	$	-	Level 3
Warrant liability (1), December 31, 2019	$	120	Level 3

(1)

The fair value of the warrant liability was determined using the Black-Scholes pricing model (refer to Note 5 – Debt for additional information on our warrant liability). Fair value adjustments are included within change in fair value of warrant liability in the consolidated statements of operations. In the third quarter of 2020, the warrant liability was extinguished upon full exercise of these warrants, which were issued in connection with our credit facility (see Note 5 – Debt), and we recognized a gain of $593,000 and $120,000 for the three and nine months ended September 30, 2020, respectively, related to the extinguishment of the liability.

Recent Accounting Pronouncements

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

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

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 3 — CAPITAL RAISE AND LIQUIDITY

In the third quarter of 2020, we completed a public offering of common stock, whereby we issued 473,239 shares of our common stock at $17.75 per share, and raised a total of $7,824,000, net of underwriting discounts and commissions and other costs associated with the offering.

As of September 30, 2020, cash and working capital totaled $10,295,000 and $6,729,000, respectively. For the nine months ended September 30, 2020, cash used in operating activities totaled $1,050,000.

We have incurred net losses since inception. Our independent registered public accounting firm expressed in its report on our financial statements for the years ended December 31, 2019 and 2018 that there was substantial doubt about our ability to continue as a going concern. Following the capital raise during the third quarter of 2020, which contributed to the improvement in our cash and working capital positions as of September 30, 2020, we believe that the substantial doubt about our ability to continue as a going concern has been alleviated and that we have sufficient liquidity to continue as a going concern through the next twelve months.

NOTE 4 — LEASE LIABILITIES AND RIGHT OF USE ASSETS

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

Finance Leases

The Company has finance leases to purchase computer equipment. The amortization expense of the leased equipment is included in depreciation expense. As of September 30, 2020 and December 31, 2019, the Company’s outstanding finance lease obligations totaled $80,000 and $104,000, respectively. The effective interest rate of the finance leases is estimated at 6.0% based on the implicit rate in the lease agreements.

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

(in thousands)	September 30, 2020			December 31, 2019
Computer equipment	$	177		$	157
Less: accumulated depreciation		(101	)		(60	)
Assets acquired under finance leases, net	$	76		$	97

Operating Leases

Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since our lease arrangements do not provide an implicit rate, we use our estimated incremental borrowing rate for the expected remaining lease term at commencement date for new leases, or as of January 1, 2019 for existing leases, in determining the present value of future lease payments. Operating lease expense is recognized on a straight-line basis over the lease term.

The Company has operating leases for office space in Tucson, Arizona and Marietta, Georgia. The company also leases office space in Scottsdale, Arizona from a company controlled by our Executive Chairman, which continues on a month-to-month basis, therefore was not measured under Topic 842.

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

The Company made operating lease payments in the amount of $191,000 during the nine months ended September 30, 2020.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

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

The following summarizes the total lease liabilities and remaining future minimum lease payments at September 30, 2020 (in thousands):

Year ending December 31,	Finance Leases			Operating Leases			Total
2020 (3 months remaining)	$	16		$	64		$	80
2021		52			262			314
2022		17			257			274
2023		1			118			119
2024		-			81			81
Total minimum lease payments		86			782			868
Less: present value discount		(6	)		(73	)		(79	)
Total lease liabilities		80			709			789
Current portion of lease liabilities		57			223			280
Long term portion of lease liabilities	$	23		$	486		$	509

The following summarizes expenses associated with our finance and operating leases for the nine months ended September 30, 2020 (in thousands):

Finance lease expenses:
Depreciation expense	$	41
Interest on lease liabilities		5
Total Finance lease expense		46
Operating lease expense		192
Short-term lease and related expenses		103
Total lease expenses	$	341

The following table provides information about the remaining lease terms and discount rates applied as of September 30, 2020:

Weighted average remaining lease term (years)
Operating Leases			3.18
Finance Leases			1.59
Weighted average discount rate (%)
Operating Leases			6.00
Finance Leases			6.00

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 5 — DEBT

Related party credit facility

On August 14, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) with Sero Capital LLC (“Sero Capital”), a stockholder who owns more than 10% of the outstanding shares of common stock of the Company. The beneficial owner of Sero Capital is David Moradi, who became a director of the Company on November 8, 2019 and was appointed the Company’s Interim Chief Executive Officer and Chief Strategy Officer on August 13, 2020. The Loan Agreement provided 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 would bear interest at a per annum rate of 10% (subject to increase in the event of a default). The term of the Loan Agreement extended through August 14, 2020 and provided for certain customary covenants, representations and events of default. No amounts had been drawn under the credit facility through its expiration on August 14, 2020.

In consideration of the Loan Agreement, the Company issued to Sero Capital common stock warrants to acquire up to a total of 146,667 shares of the Company’s common stock at an exercise price of $6.00 per share, which were classified as a liability instrument since the holder had the option to require the Company to repurchase the warrants when certain events occurred that were considered outside of the control of the Company. In the third quarter of 2020, the Company received $880,000 in cash in connection with Sero Capital’s full exercise of these warrants. The estimated fair value of the warrants held by Sero Capital was $219,000 at the date of issuance and included in debt issuance costs on the consolidated balance sheet. Debt issuance cost was amortized as interest expense on a straight-line basis over the term of the associated credit facility. As of September 30, 2020, the unamortized balance of debt issuance costs was zero.

Term loan

On April 15, 2020, the Company entered into a loan agreement in the amount of $1,302,000 with Liberty Capital Bank (“Lender”) pursuant to the Paycheck Protection Program (“PPP Loan”) of the CARES Act, which is administered by the Small Business Administration (“SBA”). Pursuant to the terms of the PPP Loan, interest payments are deferred until the date on which the SBA either remits to the Lender the amount of the PPP Loan that will be forgiven by the SBA or notifies the Lender that the PPP Loan or a portion thereof will not be forgiven. The loan has a maturity of two years and an interest rate of 1.0% per annum. The PPP Loan is not collateralized and is not personally guaranteed. No fees were charged in connection with the loan. All or a portion of the PPP Loan may be forgiven upon application by the Company in accordance with the SBA requirements. As of September 30, 2020, the outstanding principal balance of the PPP Loan totaled $1,302,000 and accrued interest totaled $6,000.

NOTE 6 — SERIES A CONVERTIBLE PREFERRED STOCK

As of September 30, 2020 and December 31, 2019, the Company had 100,000 and 105,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) outstanding, respectively, which Preferred Stock was issued at $10 per share, accrues 5% in a cumulative annual dividend, and is convertible into the Company’s common stock at a price of $4.385 per share. For the nine months ended September 30, 2020, preferred stockholders collectively earned, but were not paid, approximately $38,000 in quarterly dividends, which is equivalent to 8,709 shares of common stock based on a conversion price of $4.385 per share. As of September 30, 2020 and December 31, 2019, cumulative and unpaid dividends were approximately $271,000 and approximately $245,000, respectively, which is equivalent to 61,823 and 55,927 shares of common stock, respectively, based on a conversion price of $4.385 per share.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

On any matter presented to the stockholders of the Company for vote, 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 and amendments to the Certificate of Incorporation in a manner that adversely affects any rights of the holders of Preferred Stock.

In addition, the holders of Preferred Stock have a liquidation preference for purposes of which the Preferred Stock would be valued at $10 per share plus accrued cumulative annual dividends. At September 30, 2020 and December 31, 2019, the liquidation preference was valued at $1,271,000 and $1,295,000, respectively. In the event of any liquidity event, holders of Preferred Stock shall be entitled to be paid their liquidation preference out of the assets of the Company legally available before any sums shall be paid to holders of common stock.

NOTE 7 — RELATED PARTY TRANSACTIONS

As discussed in Note 5 – Debt, we entered into a Loan Agreement with Sero Capital, a stockholder who owns more than 10% of the outstanding shares of common stock of the Company. The beneficial owner of Sero Capital is David Moradi, who became a director of the Company on November 8, 2019 and was appointed the Company’s Interim Chief Executive Officer and Chief Strategy Officer on August 13, 2020. The Loan Agreement extended through August 14, 2020 and provided the Company with an unsecured credit facility under which we could borrow up to the aggregate principal amount of $2,000,000. No amounts had been drawn under the credit facility though its expiration on August 14, 2020.

In consideration for the Loan Agreement, we issued to Sero Capital common stock warrants to acquire up to a total of 146,667 shares of the Company’s common stock at an exercise price of $6.00 per share. The warrants were fully exercised in August 2020 and the warrant liability was extinguished. See Note- 5 – Debt for additional detail on our warrant liability.

As discussed in Note 4 – Lease Liabilities and Right of Use Assets, we lease office space from a company controlled by our Executive Chairman. For the three- and nine- month periods ended September 30, 2020, rent payments for this office space totaled $17,000 and $52,000, respectively.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Membership agreement to occupy shared office space

In the second quarter of 2020, the Company entered into a membership agreement to occupy shared office space in Portland, Oregon. Our new shared office arrangement commenced upon taking possession of the space and ends in August 2021. Fees due under the membership agreement are based on the number of contracted seats and the use of optional office services. As of September 30, 2020, minimum fees due under this shared office arrangement totaled $41,000.

The Company also amended its original membership agreement to occupy shared office space in New York, NY through July 2021. As of September 30, 2020, minimum fees due under this shared office arrangement totaled $81,000.

Litigation

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

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

NOTE 9 — SUBSEQUENT EVENTS

We have evaluated subsequent events occurring after September 30, 2020 and based on our evaluation we did not identify any events that would have required recognition or disclosure in these consolidated financial statements.

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 and in our other filings with the Securities and Exchange Commission, which aim to inform interested parties of the risks and 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.

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 ADP, Tommy Hilfiger, AMI, Samsung, Darden, Landry's and more. Government agencies, both at the federal level and state and local levels, have also integrated our software in their digital platforms, including the Federal Communications Commission and the Social Security Administration.

AudioEye primarily generates revenue through the sale of subscriptions for our software-as-a-service (“SaaS”) accessibility solution plans. All plans are backed by the power of AudioEye’s machine-learning/AI-driven technology that finds and fixes the most common accessibility errors. 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 plans ideal for customers in any industry and platform;

	·	Certain platforms, such as Duda, natively integrate our 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 AudioEye 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

The COVID-19 pandemic has negatively impacted the global and local economies and workforce participation. While we observed some impact of COVID-19 on our financial results for the nine months ended September 30, 2020, we are uncertain of the significance of its impact on our future results as our customers continue to evaluate the impact of COVID-19 on their businesses, including their demand for our products and services, their profitability and their liquidity. We continue to evaluate ways to ensure that we are better prepared 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, some of our customers have requested shorter term contracts, asked us to accept delayed payments or to forgive payments, and have sought price reductions. In addition, there has been some impact to our renewals as a few customers have shut down or have filed for bankruptcy. These factors have adversely affected, and may continue to adversely affect, our revenue and collections and may become more material in the future if economic conditions worsen.

We expect some of our COVID-19 related programs to continue for some time, which could further impact our financial and operating performance. We anticipate our revenues and collections to be affected in the near term as we expect our account receivables to continue to age. We will continue to monitor our business, evaluate the value of our assets and assess them for any impairment.

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 and beyond our control. It is not clear how and to what extent any potential alterations or modifications to our business operations may affect our customers, teammates, and prospects, or our financial results for the remainder of 2020 and beyond.

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 and platform were built to not only provide users with a cloud-based assistive toolset that gets embedded in and is made available to users within our customers’ websites, but to also improve the code in a way that optimizes the 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 ten issued patents in the United States. We also have nine pending US patent applications and one international patent application filed via the Patent Cooperation Treaty (“PCT”) and one patent application pending in the European Patent Office.

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

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 unaudited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP” or “GAAP”). The discussion of the results of our operations compares the three and nine months ended September 30, 2020 with the three and nine months ended September 30, 2019. Our results of operations in these interim periods are not necessarily indicative of the results which may be expected for any subsequent period.

In 2020, the Company amended the categorization of certain expenses to conform to 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 our current period presentation.

Revenue

The following tables present our revenues disaggregated by sales channel:

	Three months ended September 30,
(in thousands)	2020		2019		Change		% Change
Direct (Enterprise)	$	2,792	$	1,847	$	945		51	%
Indirect (Vertical partners)		2,498		929		1,569		169	%
Other		51		-		51		100	%
Total revenues	$	5,341	$	2,776	$	2,565		92	%

	Nine months ended September 30,
(in thousands)	2020		2019		Change		% Change
Direct (Enterprise)	$	8,104	$	5,135	$	2,969		58	%
Indirect (Vertical partners)		6,698		2,063		4,635		225	%
Other		83		-		83		100	%
Total revenues	$	14,885	$	7,198	$	7,687		107	%

A vertical partner is a CMS provider or a company which provides a web-hosting platform for private and public entities and resells our managed service as an accessibility offering to its customers. CMS providers who are focused on a specific industry vertical are referred to as vertical partners. CMS providers who are not focused on a specific vertical are referred to as platform partners.

For the three and nine months ended September 30, 2020, revenue increased by 92% and 107%, respectively, over the prior year comparable periods. We experienced revenue growth in all of our sales channels. The increase in enterprise revenue was due to the execution of the Company’s business plan and the benefit from increased contribution by our PDF remediation services business. The increase in vertical partners revenue was a result of our continued focus on highly transactional industry verticals to achieve higher penetration within our channel partnerships. Revenue from other sales channels includes customers acquired through our marketplace, as well as agencies and platform partners.

Cost of Sales and Gross Profit

	Three months ended September 30,
(in thousands)	2020		2019		Change		% Change
Revenue	$	5,341	$	2,776	$	2,565		92	%
Cost of sales		1,551		1,147		404		35	%
Gross profit	$	3,790	$	1,629	$	2,161		133	%

	Nine months ended September 30,
(in thousands)	2020		2019		Change		% Change
Revenue	$	14,885	$	7,198	$	7,687		107	%
Cost of sales		4,478		3,193		1,285		40	%
Gross profit	$	10,407	$	4,005	$	6,402		160	%

Cost of sales consists primarily of compensation and related benefits costs for our technology operations and customer experience teams, fees paid to our managed hosting and other third-party service providers, amortization of capitalized software development costs and acquired technology, and allocated overhead costs.

For the three and nine months ended September 30, 2020, cost of sales increased by 35% and 40%, respectively, over the prior year comparable periods. The increase in cost of sales was primarily due to additions to our employee and contractor headcount to support the increase in revenue and delivery of our services.

For the three and nine months ended September 30, 2020, gross profit increased by 133% and 160%, respectively, over the prior year comparable periods. The increase in gross profit was a result of increased revenue and continued improvement in efficiencies as we scale, offset in part by higher costs for investments to support the revenue growth.

Selling and Marketing Expenses

	Three months ended September 30,
(in thousands)	2020		2019		Change		% Change
Selling and marketing	$	2,028	$	1,598	$	430		27	%

	Nine months ended September 30,
(in thousands)	2020		2019		Change		% Change
Selling and marketing	$	5,551	$	4,257	$	1,294		30	%

For the three and nine months ended September 30, 2020, selling and marketing expenses increased by 27% and 30%, respectively, over the prior year comparable periods. The increase in sales and marketing expenses resulted primarily from an increase in personnel and commission costs, as well as higher digital marketing, lead generation and media spend as we continued to expand our business.

Research and Development Expenses

	Three months ended September 30,
(in thousands)	2020		2019		Change		% Change
Research and development	$	203	$	149	$	54		36	%

	Nine months ended September 30,
(in thousands)	2020		2019		Change		% Change
Research and development	$	801	$	442	$	359		81	%

For the three and nine months ended September 30, 2020, research and development expenses increased by 36% and 81%, respectively, over the prior year comparable periods. The increase in research and development expenses was primarily as a result of increased investments in new product development, as well as in outsourced hosting and cloud computing costs for the research and development of new technologies.

General and Administrative Expenses

	Three months ended September 30,
(in thousands)	2020		2019		Change		% Change
General and administrative	$	3,197	$	2,040	$	1,157		57	%

	Nine months ended September 30,
(in thousands)	2020		2019		Change		% Change
General and administrative	$	8,185	$	5,624	$	2,561		46	%

For the three and nine months ended September 30, 2020, general and administrative expenses increased by 57% and 46%, respectively, over the prior year comparable periods. The increase in general and administrative expenses was due primarily to higher compensation cost, including stock-based compensation expense, which was mostly a result of increased headcount to support the Company’s growth. In addition, in the third quarter of 2020, we incurred $360,000 in severance expense associated with our strategic decision to move our technology center from Atlanta, Georgia, to Portland, Oregon.

Change in fair value of warrant liability

	Three months ended September 30,
(in thousands)	2020		2019		Change		% Change
Change in fair value of warrant liability	$	593	$	-	$	593		100	%

	Nine months ended September 30,
(in thousands)	2020		2019		Change		% Change
Change in fair value of warrant liability	$	120	$	-	$	120		100	%

Change in fair value of warrant liability consists of fair value adjustments associated with warrants to purchase 146,667 shares of the Company’s common stock, which were issued in consideration for the credit facility extended by Sero Capital in the third quarter of 2019. In the third quarter of 2020, the warrants were fully exercised and the related liability was extinguished, which led to a $593,000 and $120,000 gain being recognized for the three and nine months ended September 30, 2020, respectively.

Interest Expense

	Three months ended September 30,
(in thousands)	2020		2019		Change			% Change
Interest expense	$	35	$	37	$	(2	)		(5	)%

	Nine months ended September 30,
(in thousands)	2020		2019		Change		% Change
Interest expense	$	141	$	39	$	102		262	%

Interest expense consists primarily of amortization of debt issuance costs from our line of credit, and interest on our PPP Loan and finance lease liabilities. The increase in interest expense for the nine months ended September 30, 2020 was attributable to the amortization of deferred issuance costs associated with our line of credit, which was not drawn upon through its one-year term which expired in August 2020.

Key Operating Metrics

We consider monthly recurring revenue (“MRR”) as a key operating metric and a key indicator of our overall business. We also use MRR as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and (ii) as a performance metric for certain executive share-based compensation awards.

We define MRR as the sum of (i) for our enterprise and agency sales channels, the total of the average monthly fee amount under each active paid contract at the date of determination, plus (ii) for our vertical partners, marketplace and platform sales channels, the recognized monthly fee amount for all paying customers at the date of determination, in each case, assuming no changes to the subscription and without taking into account any usage above the subscription or recurring revenue base, if any, that may be applicable to such subscription. This determination includes both annual and monthly contracts for recurring products. Some of our contracts are cancelable, which may impact future MRR. MRR excludes revenue from our PDF remediation services business. As of September 30, 2020, MRR was $1.7 million, which represents an increase of 67% year-over-year.

Use of Non-GAAP Financial Measures

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

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

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

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

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

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

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

	Three months ended September 30,						Nine months ended September 30,
(in thousands, except per share data)	2020			2019			2020			2019
Non-GAAP Earnings (Loss) Reconciliation
Net loss (GAAP)	$	(1,080	)	$	(2,195	)	$	(4,151	)	$	(6,357	)
Non-cash valuation adjustments to liabilities		(593	)		-			(120	)		-
Interest expense		35			37			141			39
Share-based compensation expense		1,089			273			2,004			997
Severance (1)		360			-			360			-
Non-GAAP earnings (loss)	$	(189	)	$	(1,885	)	$	(1,766	)	$	(5,321	)

Non-GAAP Earnings (Loss) per Diluted Share Reconciliation
Net loss per common share (GAAP) — diluted	$	(0.12	)	$	(0.27	)	$	(0.46	)	$	(0.81	)
Non-cash valuation adjustments to liabilities		(0.06	)		-			(0.01	)		-
Interest expense		-			-			0.02			-
Share-based compensation expense		0.12			0.04			0.22			0.13
Severance (1)		0.04			-			0.04			-
Non-GAAP earnings (loss) per diluted share (2)	$	(0.02	)	$	(0.23	)	$	(0.19	)	$	(0.68	)
Diluted weighted average shares (3)		9,385			8,279			9,067			7,848

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

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

(3)

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

Liquidity and Capital Resources

Working Capital

As of September 30, 2020, we had $10,295,000 in cash and working capital of $6,729,000. The increase in working capital in the nine months ended September 30, 2020 was primarily a result of a public offering whereby the Company raised net proceeds of $7,824,000 by issuing 473,239 shares of its common stock, as well as $880,000 received from a cash exercise of warrants by Sero Capital. We intend to use the net proceeds from this offering for working capital and general corporate purposes.

As a result of this capital raise, which contributed to the improvement in our cash and working capital positions as of September 30, 2020, we believe that the Company has sufficient liquidity to continue as a going concern through the next twelve months.

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

(in thousands)	September 30, 2020			December 31, 2019
Current assets	$	14,184		$	5,608
Current liabilities		(7,455	)		(6,726	)
Working capital (deficit)	$	6,729		$	(1,118	)

Cash Flows

	Nine months ended September 30,
(in thousands)	2020			2019
Net cash used in operating activities	$	(1,050	)	$	(4,322	)
Net cash used in investing activities		(800	)		(183	)
Net cash provided by financing activities		10,173			2,227
Net increase (decrease) in cash	$	8,323		$	(2,278	)

For the nine months ended September 30, 2020, in relation to the prior year comparable period, cash used in operating activities decreased primarily due to an increase in our paying customer base leading to our revenue growth. The effect of higher collections from this expanded customer base was partially offset by the increased personnel and sales and marketing costs, primarily driven by the increase in headcount to support the Company’s growth. In addition the Company paid $298,000 in severance, as well as $66,000 in accrued vacation, associated with the reallocation of our technology center to Portland, Oregon, as part of our strategic plan to build scalable technology to improve efficiency.

For the nine months ended September 30, 2020, in relation to the prior year comparable period, cash used in investing activities increased primarily due to investment in new technologies and enhancements to our legacy solutions, as well in patents to protect our intellectual property.

For the nine months ended September 30, 2020, in relation to the prior year comparable period, cash provided by financing activities increased primarily due to net proceeds of $7,824,000 that we received from a public offering in the third quarter of 2020, whereby we issued 473,239 shares of our common stock. We intend to use the $7,824,000 net proceeds from this offering for working capital and general corporate purposes, including the implementation of our business plan and growth of current operations. In addition, in the second quarter of 2020, we obtained a $1,302,000 PPP loan. The increase in cash from financing activities due to the capital raise and PPP loan was partially offset by a $1,165,000 reduction in proceeds from the exercise of options and warrants.

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, impairment of long-lived assets, income taxes, fair value measurements, stock based compensation, and research and development expense. 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

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

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective, for the same reasons as previously disclosed under Part II, 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

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

As part of our efforts to improve our finance and accounting function and to remediate the material weaknesses that existed in our internal control over financial reporting and our disclosure controls and procedures as of December 31, 2019, as previously reported in Part II, Item 9A., “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, we developed a remediation plan (the “Remediation Plan”) pursuant to which we have implemented, or plan to implement, a number of measures. The Remediation Plan, among other things, includes the following:

Staffing: We hired a new Controller and intend to add another member to our accounting team to allow for proper segregation of duties and multiple level of reviews.

Policies and procedures: We are currently documenting and implementing formal policies and procedures to further enhance the controls over financial reporting.

Systems: We have implemented a cloud-based accounting software and are currently optimizing its usage, as well as implementing a few software solutions to enhance our processes and documentation in critical areas such as revenue recognition and stock-based compensation.

The Remediation Plan, however, may not be sufficient to remedy the material weaknesses. Further, the material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management is able to conclude, through testing, that these controls are operating effectively.

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

You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), which could materially affect our business, financial condition and results of operations. The risks described in our 2019 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations. The risk factors set forth below update, and should be read together with, the risk factors described in our 2019 Form 10-K. In addition, the COVID-19 pandemic could exacerbate or trigger other risks discussed in our 2019 Form 10-K, any of which could materially affect our business, financial condition and results of operations.

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 the continued responsive measures taken globally 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 continuous 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, some of our customers have requested shorter term contracts, asked us to accept delayed payments or to forgive payments, and have sought price reductions. In addition, there has been some impact to our renewals as a few customers have shut down or have filed for bankruptcy. These factors have adversely affected, and may continue to adversely affect, our revenue and collections and may become more material in the future if economic conditions worsen. 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 as conditions evolve, including if new waves of infection emerge in various parts of the globe or there is continued uncertainty regarding widespread availability of a vaccine. 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 impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain, cannot be predicted and are beyond our control, 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. In any event, even after the COVID-19 outbreak subsides, we may experience materially adverse effects to our business as a result of its global social and economic impact, including any economic recession or depression that has occurred or may occur in the future, as well as additional risks and uncertainties not presently known to us or that we currently deem immaterial which may also affect our business, financial condition or results of operations.

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

As discussed in this report, including in Note 5 in the notes to the unaudited financial statements included herein, on April 15, 2020, we entered into a note agreement in the amount of $1,302,000 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. All or a portion of the Loan may be forgiven upon application by the Company in accordance with the Small Business Administration Requirements. In October 2020, we submitted our application to obtain forgiveness of the PPP Loan in full. No assurance can be provided, however, that we will obtain forgiveness of all or a portion of the PPP Loan. If we are unable to 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 6. Exhibits

Exhibit No.		Description
3.1		Certificate of Incorporation of AudioEye, Inc., dated as of May 20, 2005 (1)

3.2		Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of February 12, 2010 (1)

3.3		Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of August 16, 2012 (2)

3.4		Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of March 26, 2014 (3)

3.5		Certificate of Amendment of the Certificate of Incorporation of AudioEye, Inc., dated as of August 1, 2018 (4)

3.6		Certificate of Designations - Series A Convertible Preferred Stock (5)

3.7		Amended and Restated ByLaws as of August 13, 2020 (6)

10.1*		Executive Employment Agreement, effective August 13, 2020, between the Company and Dominic Varacalli

10.2		Employment Agreement, dated August 20, 2020, between the Company and David Moradi (7)

10.3		Notice of Award of Performance Shares and Performance Share Award Agreement, dated August 20, between the Company and David Moradi (7)

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

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

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

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

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

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

(7)	Incorporated by reference to Form 8-K/A, filed with the SEC on August 24, 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:	November 13, 2020	By:	/s/ David Moradi
			Dr. David Moradi
			Principal Executive Officer

Date:	November 13, 2020	By:	/s/ Sachin Barot
			Sachin Barot
			Principal Financial Officer

Exhibit 10.1

EXECUTIVE EMPLOYMENT AGREEMENT

This EXECUTIVE EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of August 13, 2020 (the “Effective Date”), by and between AudioEye, Inc., a Delaware corporation with an address at 5210 E. Williams Circle, Tucson, AZ 85711 (the “Company”), and Dominic Varacalli, a natural person (“Executive”).

W I T N E S E T H:

WHEREAS, prior to the Effective Date, Executive was employed by the Company as its Chief Technology Officer pursuant to a May 20, 2020 Offer Letter (the “Offer Letter”);

WHEREAS, as a condition of Executive’s employment with the Company, Executive and the Company entered into a June 1, 2020 Confidentiality, Proprietary Rights and Non-Solicitation Agreement (the “Confidentiality Agreement”) and Executive agreed to be bound by the Company’s policies and practices, including its Amended and Restated Insider Trading Policy, Code of Business Conduct and Ethics, Document Retention Policy, and other policies contained in the Company’s Handbook (collectively, the “Policies”); and

WHEREAS, the Company wishes to promote Executive to the position of President (the “Position”) and Executive wishes to accept such Position and the associated additional compensation and benefits.

NOW, THEREFORE, in consideration of the foregoing recitals and the respective covenants and agreements of the parties contained in this document, the Company and Executive, intending to be legally bound, hereby agree as follows:

1. Employment and Duties. Effective on the Effective Date, the Company shall promote Executive to the Position. In the Position, Executive shall report to the Chief Executive Officer (“CEO”). The duties and responsibilities of Executive in the Position shall include the duties and responsibilities typical of a President and such other duties and responsibilities as the CEO may from time to time reasonably assign to Executive.

Executive shall devote all of his business time, attention, and energies to the business of the Company, provided that nothing in this Section 1 shall prohibit Executive from (a) serving as a director or trustee of any charitable or educational organization or (b) engaging in additional activities in connection with personal investments and community affairs, as long as these additional activities do not materially interfere, individually or collectively, with the performance of the duties and responsibilities of Executive, and these activities are not inconsistent with Executive’s duties under this Agreement and do not violate the terms of Section 14.

2. Term. Executive’s employment pursuant to this Agreement shall commence on the Effective Date and shall continue until earlier terminated pursuant to Section 6 or Section 12 (the “Term”). The parties agree that Executive shall at all times be an at-will employee, and he or the Company may terminate his employment at any time for any lawful reason, subject to the payment obligations described herein. For the avoidance of doubt, the restrictions in Sections 13 and 14 of this Agreement that apply after employment ends, and the provisions of Sections 9 and 17, shall survive the expiration of the Term.

3. Place of Employment. Executive shall continue to work in the Company’s offices in the Portland, Oregon area; provided, however, that Executive shall make himself available as requested for regular business travel, including travel to the Company’s other corporate offices, or such other location where the Company may decide to establish operations.

4. Base Salary. For all services to be rendered by Executive pursuant to this Agreement, the Company agrees to pay Executive a base salary (the “Base Salary”) during the Term at an annual rate of $210,000 per year unless the parties mutually agree to modify the Base Salary. The Base Salary shall be paid in periodic installments in accordance with the Company’s regular payroll practices.

5. Bonus. During the Term, Executive shall be eligible to receive an annual cash performance bonus, with a target value of $20,000 (a “Performance Bonus”), such Performance Bonus to be paid if the Company and Executive meet or exceed certain performance targets set by the Company and Executive. The Performance Bonus shall be evaluated based on the Company and Executive’s performance throughout the entire calendar year with which the Performance Bonus corresponds (“Performance Bonus Year”); provided, however, that Executive shall be eligible for a prorated Performance Bonus for calendar year 2020 based on the date that Executive commenced employment with the Company. If Executive is employed by the Company as of January 1 of the year immediately following the Performance Bonus Year and if the Company, in its sole discretion, determines that the Performance Bonus has been earned, Executive shall be paid within thirty (30) days after the Company’s year-end financial statements for the Performance Bonus Year are approved by the Audit Committee for inclusion in the Company’s Annual Report on Form 10-K for the year ended December 31 of the Performance Bonus Year, but, in any event, any payment shall be made no later than March 15 of the year that is two (2) years immediately following the Performance Bonus Year.

6. Termination. Upon any termination of Executive’s employment, whether caused by Executive or the Company, the Company shall pay or provide all of the following to Executive: (i) reimbursement of any and all reasonable business expenses paid or incurred by Executive through the termination date in connection with and related to the performance of Executive’s duties and responsibilities for the Company; (ii) payment, based on the Base Salary, for any accrued but unused vacation through the termination date in accordance with Company policy, as in effect as of the date of termination; and (iii) any earned but unpaid Base Salary accrued through Executive’s last date of employment with the Company (all of these payments are collectively the “Accrued Obligations”).

7. Equity Award. Executive currently holds time-based restricted share units (“RSUs”) covering 20,000 shares of the Company’s common stock pursuant to the AudioEye, Inc. 2019 Equity Incentive Plan (the “Plan”). The Company will award Executive additional RSUs covering 45,000 of the Company’s common stock under the Plan, with 15,000 of such RSUs to vest annually in equal installments over a three (3)-year period from the date the RSUs are awarded and 30,000 of such RSUs to vest upon achievement of performance targets established in an award agreement, in each case subject to Executive’s continued employment with the Company on the applicable vesting date; provided, however, that (a) if a change in control occurs (as determined under the terms of the Plan), any such remaining unvested RSUs shall be subject to the terms of the Plan relating to such change in control and (b) in the event the parties, after Executive’s good faith efforts, cannot agree, due to the Company’s failure to engage in good faith discussions, to targets applicable to the performance-based RSUs for one or more years during the first three years after the award, one-third of such performance-based RSUs (10,000) shall vest on the applicable anniversary(ies) of the award during the first three years (e.g., if the parties cannot agree on performance targets applicable to the year that runs from the first anniversary of the grant to the second anniversary of the grant due to the Company’s failure to engage in good faith discussions, performance-based RSUs covering 10,000 shares shall automatically vest on the second anniversary). RSUs approved by the Compensation Committee will be awarded to Executive subject to Executive’s execution of an award agreement acceptable to the Company. The RSUs granted to Executive may be adjusted in the event of a stock split, stock dividend, recapitalization or other similar event.

8. Deductions and Withholdings. The Company shall deduct and withhold, from all payments made pursuant to this Agreement, including but not limited to the Base Salary, all applicable taxes, including income tax, FICA and FUTA, and other deductions and withholdings required by law.

9. Clawback Rights. All amounts paid to Executive by the Company during the Term and any time thereafter (other than Executive’s Base Salary, the Performance Bonuses, accrued but unused vacation, reimbursement of expenses pursuant to Section 10, and the Accrued Obligations) and any and all stock-based compensation (such as options, stock, stock unit, and other equity awards) granted during the Term and any time thereafter (collectively, the “Clawback Benefits”) shall be subject to the Company’s “Clawback Rights” as follows: during the period that Executive is employed by the Company and upon the termination or expiration of Executive’s employment and for a period of three (3) years thereafter, if any of the following events occur, Executive agrees to repay or surrender to the Company the Clawback Benefits if a restatement (a “Restatement”) of any financial results from which any Clawback Benefits to Executive shall have been determined (such restatement resulting from material non-compliance of the Company with any financial reporting requirement under the federal securities laws and shall not include a restatement of financial results resulting from subsequent changes in accounting pronouncements or requirements which were not in effect on the date the financial statements were originally prepared), then Executive agrees to immediately repay or surrender upon demand by the Company any Clawback Benefits which were determined by reference to any Company financial results which were later restated, but only to the extent the Clawback Benefits amounts paid exceed the Clawback Benefits amounts that would have been paid, based on the restatement of the Company’s financial information. All Clawback Benefits amounts resulting from such Restatements shall be retroactively adjusted by the Compensation Committee (or the Board of Directors (the “Board”), if there is no Compensation Committee) to take into account the restated results and if any excess portion of the Clawback Benefits resulting from such restated results is not so repaid or surrendered by Executive within ninety (90) days of the revised calculation being provided to Executive by the Company following a publicly announced restatement, the Company shall have the right to take any and all action to effectuate such adjustment. For the avoidance of doubt, nothing in this Section 9 shall infringe on Executive’s entitlement to the Base Salary.

The Clawback Rights shall terminate following a Change of Control, subject to applicable law, rules and regulations. The amount of Clawback Benefits to be repaid or surrendered to the Company shall be determined by the Compensation Committee (or the Board, if there is no Compensation Committee) in accordance with applicable law, rules and regulations. All determinations by the Compensation Committee (or the Board, if there is no Compensation Committee) with respect to the Clawback Rights shall be final and binding on the Company and Executive. The parties acknowledge it is their intention that the foregoing Clawback Rights as relates to Restatements conform in all respects to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”) and requires recovery of all “incentive-based” compensation, pursuant to the provisions of the Dodd Frank Act and any and all rules and regulations promulgated thereunder from time to time in effect. Accordingly, the terms and provisions of this Agreement shall be deemed automatically amended from time to time to assure compliance with the Dodd Frank Act and such rules and regulation as hereafter may be adopted and in effect.

10. Expenses. Executive shall be entitled to prompt reimbursement by the Company for all reasonable ordinary and necessary travel, entertainment, and other expenses incurred by Executive while employed (in accordance with the policies and procedures established by the Company for its senior executive officers) in the performance of his duties and responsibilities under this Agreement; provided, that Executive shall properly account for such expenses in accordance with Company policies and procedures.

11. Other Benefits; Vacation. During the Term, Executive shall be eligible to participate in incentive, stock purchase, savings, retirement (401(k)), and welfare benefit plans, including, without limitation, health, medical, dental, vision, life (including accidental death and dismemberment) and disability insurance plans to the extent provided by the Company generally to its employees (collectively, “Benefit Plans”), in substantially the same manner and at substantially the same levels as the Company makes such opportunities available to the Company’s managerial or salaried executive employees, subject to the terms and conditions, including eligibility provisions, of any such Benefit Plans, which may be amended or terminated from time to time. During the Term, Executive shall be entitled to accrue, on a pro rata basis, twenty (20) paid vacation days per year, which if not taken, will accrue and be carried forward into the next year. No carry forward of vacation past the second year will be granted without the approval of the Compensation Committee. Vacation shall be taken at such times as are mutually convenient to Executive and the Company and no more than twenty (20) consecutive days shall be taken at any one time without the advance written approval of the CEO.

12. Termination of Employment.

(a) Upon Executive’s termination of employment, for any reason, and whether caused by Executive or the Company, the Company shall have no further obligations to Executive or, if applicable, his estate, except to pay or provide the Accrued Obligations, any rights Executive has related to the RSUs as provided in the Plan and the award agreement, and any rights and benefits required by applicable law.

(b) Any termination of Executive’s employment by the Company or by Executive (other than termination by reason of Executive’s death) shall be communicated by written Notice of Termination to the other party of this Agreement. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice which shall indicate the date of termination, provided, however, that failure to provide timely notification shall not affect the employment status of Executive.

(c) Upon a termination of Executive’s employment with the Company for any reason, Executive agrees not to disparage the Company or its Board members, officers or other senior management employees, or say or do anything that will adversely impact the Company’s business practices or the reputation of the Company or its Board members, officers or management employees. Notwithstanding the foregoing, this Section 12(c) does not apply to Executive in (i) filing any pleading, or providing truthful oral or written testimony, in any administrative, arbitration or judicial proceeding, (ii) providing information pursuant to subpoena, court order, or similar legal process, (iii) reporting violations of any law or regulation, or otherwise providing truthful information, to any government or regulatory agencies, or in any document required to be filed with the SEC, or (iv) otherwise engaging in whistleblower activity protected by the Securities Exchange Act of 1934, the Dodd Frank Act, or any rules or regulations issued thereunder, including, without limitation, SEC Rule 21F-17.

13. Confidential Information. Executive confirms that he has already had, and shall continue to have, access to Company trade secrets and other competitively sensitive confidential business or professional information. Executive reaffirms his obligations and commitments as set forth in the Confidentiality Agreement, and agrees that he remains so bound. Upon termination of Executive’s employment with the Company, Executive shall deliver forthwith to the Company any and all originals and copies, including those in electronic or digital formats, of Confidential Information (as defined in the Confidentiality Agreement); provided, however, that Executive shall be entitled to retain (a) papers and other materials of a personal nature, including, but not limited to, photographs, correspondence, personal diaries, calendars and rolodexes, personal files and phone books, (b) information showing his compensation or relating to reimbursement of expenses, and (c) information that he reasonably believes may be needed for tax purposes.

14. Non-Competition and Non-Solicitation.

(a) Executive agrees and acknowledges that the restrictions set forth herein are reasonable and necessary to protect the Company’s legitimate business interests and do not impose undue hardship or burdens on Executive. Executive also acknowledges that the technology, software, and related products and services developed or provided by the Company and its affiliates relating to ADA-related and other digital accessibility compliance requirements and enhancements are or are intended to be sold, provided, licensed and/or distributed to customers and clients primarily in and throughout the United States (the “Territory”) and that Executive’s responsibilities extend throughout the Territory (to the extent the Company comes to operate, either directly or through the engagement of a distributor or joint or co-venturer, or sell a significant amount of its products and services to customers located, in areas other than the United States during the Term, the definition of Territory shall be automatically expanded to cover such other areas in which the Company did business at the time Executive’s employment with the Company terminates). For purposes of this Agreement, the “Business” of the Company means: (i) the development, marketing and sale and licensing of technology, software, and related products and services relating to ADA and other digital accessibility federal, state and local compliance requirements, and (ii) any other business in which the Company is engaged, or actively planning to engage, during the last year of Executive’s employment with the Company. Executive further acknowledges and agrees that the Territory, scope of prohibited competition with the Business, and time duration set forth in the non-competition restrictions set forth below are reasonable and necessary to maintain the value of the Confidential Information, and to protect the goodwill and other legitimate business interests, of the Company, its affiliates and/or its clients or customers. The provisions of this Section 14 shall survive the termination of Executive’s employment hereunder.

(b) Executive hereby agrees and covenants that he shall not during the Restricted Period and within the Territory, without the prior written consent of the Company, directly or indirectly:

(1) perform services the same or substantially similar to those he provides to the Company pursuant to this Agreement, or any other executive-level functions, for any person (including Executive himself) or entity in competition with the Company in the Business;

(2) Recruit, solicit or hire; attempt to recruit, solicit or hire; or assist another person or entity to recruit, solicit or hire any current or former employee, or independent contractor of the Company who was employed by or contracted with the Company any time during the final year of Executive’s employment with the Company, to leave the employment (or independent contractor relationship) thereof, whether or not any such employee or independent contractor is party to an employment agreement; or

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

With respect to the activities described in Sections 14(b)(1), (2), and (3) above, the restrictions of this Section 14(b) shall apply during the Term and until one (1) year after the termination of Executive’s employment with the Company (including upon expiration of the Agreement) (the “Restricted Period”). In the event that any provision of this Section 14 is determined by a court of competent jurisdiction to be unenforceable, such provision shall not render the entire Section 14 unenforceable but, to the extent possible, the court may appropriately modify this Section 14 to render such provision enforceable.

15. Inventions. All systems, inventions, discoveries, apparatus, techniques, methods, know-how, formulae or improvements made, developed or conceived by Executive during Executive’s employment by the Company that (a) are directly relevant to the Company’s business as then constituted, (b) are developed as a part of the tasks and assignments that are the duties and responsibilities of Executive, and (c) were created using substantially the Company’s resources, such as time, materials and space, shall be and continue to remain the Company’s exclusive property, without any added compensation or any reimbursement for expenses to Executive, and upon the conception of any and every such invention, process, discovery or improvement and without waiting to perfect or complete it, Executive promises and agrees that Executive will immediately disclose it to the Company and to no one else and thenceforth will treat it as the property and secret of the Company. Executive will also execute any instruments requested from time to time by the Company to vest in it complete title and ownership to such invention, discovery or improvement and will, at the request of the Company, do such acts and execute such instruments as the Company may require, but at the Company’s expense to obtain patents, trademarks or copyrights in the United States and foreign countries, for such invention, discovery or improvement and for the purpose of vesting title thereto in the Company, all without any reimbursement for expenses (except as provided in Section 10 or otherwise) and without any additional compensation of any kind to Executive.

16. Section 409A.

The provisions of this Agreement are intended to comply with or meet an exemption from Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and any final regulations and guidance promulgated thereunder (“Section 409A”) and shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A.

To the extent that Executive will be reimbursed for costs and expenses or in-kind benefits, except as otherwise permitted by Section 409A, (a) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, (b) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxable year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year; provided that the foregoing clause (b) shall not be violated with regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period the arrangement is in effect and (c) such payments shall be made on or before the last day of the taxable year following the taxable year in which the expense was incurred.

A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment unless such termination constitutes a “Separation from Service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement references to a “termination,” “termination of employment” or like terms shall mean Separation from Service.

Each installment payable hereunder shall constitute a separate payment for purposes of Treasury Regulation Section 1.409A-2(b), including Treasury Regulation Section 1.409A-2(b)(2)(iii). Each payment that is made within the terms of the “short-term deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4) is intended to meet the “short-term deferral” rule. Each other payment is intended to be a payment upon an involuntary termination from service and payable pursuant to Treasury Regulation Section 1.409A-1(b)(9)(iii), et. seq., to the maximum extent permitted by that regulation, with any amount that is not exempt from Code Section 409A being subject to Code Section 409A.

Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A, any payment otherwise due to Executive on or within the six (6) month period following Executive’s termination will accrue during such six (6) month period and will become payable in one lump sum cash payment on the date six (6) months and one (1) day following the date of Executive’s termination of employment, to the extent required to avoid any adverse tax consequences under Section 409A. Any remaining payment(s) will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following termination but prior to the six (6) month anniversary of Executive’s termination date, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other amounts will be payable in accordance with the payment schedule applicable to each payment or benefit, to the extent and in a manner consistent with Section 409A.

17. Miscellaneous.

(a) Executive acknowledges that the services to be rendered by him under the provisions of this Agreement are of a special, unique and extraordinary character and that it would be difficult or impossible to replace such services. Furthermore, the parties acknowledge that monetary damages alone would not be an adequate remedy for any breach by Executive of Section 13 or Section 14 of this Agreement. Accordingly, Executive agrees that any breach by Executive of Section 13 or Section 14 of this Agreement shall entitle the Company, in addition to all other legal remedies available to it, to apply to any court of competent jurisdiction to seek to enjoin such breach. The parties understand and intend that each restriction agreed to by Executive hereinabove shall be construed as separable and divisible from every other restriction, that the unenforceability of any restriction shall not limit the enforceability, in whole or in part, of any other restriction, and that one or more or all of such restrictions may be enforced in whole or in part as the circumstances warrant. In the event that any restriction in this Agreement is more restrictive than permitted by law in the jurisdiction in which the Company seeks enforcement thereof, such restriction shall be limited to the extent permitted by law. The remedy of injunctive relief herein set forth shall be in addition to, and not in lieu of, any other rights or remedies that the Company may have at law or in equity. Executive agrees that the restrictions contained herein are in addition to, and do not replace, the restrictions contained in the Confidentiality Agreement, and this Agreement and the Confidentiality Agreement shall be read together so as to give the broadest possible protections to the Company. In the event of any inconsistency between this Agreement and the Confidentiality Agreement, the broader restriction shall apply.

(b) Neither Executive nor the Company may assign or delegate any of their rights or duties under this Agreement without the express written consent of the other; provided, however, that the Company may assign this Agreement to any affiliate or in connection with any merger or sale of equity or assets, and the Company shall have the right to delegate its obligation of payment of all sums due to Executive hereunder, provided that such delegation shall not relieve the Company of any of its obligations hereunder.

(c) During the Term, the Company (i) shall indemnify and hold harmless Executive and his heirs and representatives as, and to the extent, provided in the Company’s bylaws and (ii) shall cover Executive under the Company’s directors’ and officers’ liability insurance on the same basis as it covers other senior executive officers and directors of the Company.

(d) This Agreement, and the Confidentiality Agreement, constitute and embody the full and complete understanding and agreement of the parties with respect to Executive’s employment by the Company (it being understood that the Plan and RSU award agreement shall apply to RSUs that may be awarded pursuant to Section 7), supersede all prior understandings and agreements, whether oral or written, between Executive and the Company (including the Offer Letter, except as incorporated herein), and shall not be amended, modified or changed except by an instrument in writing executed by the party to be charged. The invalidity or partial invalidity of one or more provisions of this Agreement shall not invalidate any other provision of this Agreement. No waiver by either party of any provision or condition to be performed shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. For clarity, the parties confirm that nothing herein shall supersede or terminate the Confidentiality Agreement or Executive’s prior commitments with regard to any of the Policies.

(e) This Agreement shall inure to the benefit of, be binding upon and enforceable against, the parties hereto and their respective successors, heirs, beneficiaries and permitted assigns.

(f) The headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.

(g) All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when personally delivered, sent by registered or certified mail, return receipt requested, postage prepaid, or by reputable national overnight delivery service (e.g., Federal Express) for overnight delivery to the Company at its principal executive office or to Executive at his address of record in the Company’s records, or to such other address as either party may hereafter give the other party notice of in accordance with the provisions hereof. Notices shall be deemed given on the sooner of the date actually received or the third business day after deposited in the mail or one business day after deposited with an overnight delivery service for overnight delivery.

(h) This Agreement shall be governed by and construed in accordance with the internal laws of the State of Arizona without reference to principles of conflicts of laws, and each of the parties hereto irrevocably consents to the non-exclusive jurisdiction and venue of the federal and state courts located in, or whose jurisdiction includes, the Counties of Pima or Maricopa, Arizona.

(i) This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one of the same instrument. The parties hereto have executed this Agreement as of the date set forth above.

(j) Executive represents and warrants to the Company that he has the full power and authority to enter into this Agreement and to fully perform his obligations hereunder and that the execution and delivery of this Agreement and the performance of all of his obligations under this Agreement will not conflict with any agreement to which Executive is a party. The parties agree that Executive’s breach of this Section 17(j) shall constitute a material breach of this Agreement.

(k) The Company represents and warrants to Executive that it has the full power and authority to enter into this Agreement and to perform its obligations hereunder and that the execution and delivery of this Agreement and the performance of its obligations hereunder will not conflict with any agreement to which the Company is a party.

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

IN WITNESS WHEREOF, Executive and the Company have caused this Executive Employment Agreement to be executed as of the date first above written.

THE COMPANY		EXECUTIVE


/s/ David Moradi		/s/ Dominic Varacalli
By: David Moradi		Dominic Varacalli

Exhibit 31.1

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

I, David Moradi, Principal Executive Officer of AudioEye, Inc. (the “Registrant”), certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 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 us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 13, 2020	By:	/s/ David Moradi
		Name:	David Moradi
		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 September 30, 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: November 13, 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 September 30, 2020 (the “Quarterly Report”) with the Securities and Exchange Commission, we, David Moradi 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: November 13, 2020	By:	/s/ David Moradi
		Name:	David Moradi
		Title:	Principal Executive Officer

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