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ORGANIZATION AND BASIS OF PRESENTATION (Policies) | 3 Months Ended
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Mar. 31, 2020
ORGANIZATION AND BASIS OF PRESENTATION |
Corporate Information and Background | Corporate Information and Background AudioEye, Inc. (“we”, “our” or the “Company”) was incorporated on May 20, 2005 in the state of Delaware. The Company has developed patented, Internet content publication and distribution software that enables conversion of media into accessible formats and allows for real time distribution to end users on any Internet connected device. The Company’s focus is to create more comprehensive access to Internet and other media to all people regardless of their network connection, device, location, or disabilities. The Company is focused on developing innovations in the field of networked and device embedded technology. Our intellectual property is primarily comprised of trade secrets, trademarks, issued, published and pending patent applications, copyrights and technological innovations. We have a patent portfolio comprised of eight issued patents in the United States. We also have two pending patent applications and two international patent applications filed via the Patent Cooperation Treaty (“PCT”) and the European Patent Office. The patents have been extended and cover a period from 2002 through 2026. We have a trademark portfolio comprised of eight United States trademark registrations. Our common stock has been listed on the NASDAQ Capital Market under the symbol “AEYE” since September 4, 2018. Prior to September 4, 2018, our common stock was quoted on the OTCQB and the OTC Bulletin Board beginning on April 15, 2013 under the same symbol. In August 2018, the Company sold 1,000,000 shares (the “Shares”) of its common stock at $6.25 per Share for net proceeds of approximately $5,609,000, after costs and expenses of approximately $641,000 (the “Private Placement”). At the closing of the Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the investors pursuant to which the Company agreed to register the Shares for resale. On September 4, 2018, the Company filed a registration statement on Form S-1 covering the resale of the securities subject to the Registration Rights Agreement, as well as certain other securities of the Company. On July 5, 2019, the Company filed a post-effective amendment to the registration statement on Form S-1 covering the resale of such securities in order to, among other things, incorporate into the filing information included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2019. On August 1, 2018, the Company amended its Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 25 shares of common stock and to reduce the number of authorized shares of common stock from 250,000,000 to 50,000,000. As a result, 186,994,384 shares of the Company’s common stock were exchanged for 7,479,775 shares of the Company’s common stock. These financial statements have been retroactively restated to reflect the reverse stock split. In April 2020, the Company filed a shelf registration statement on Form S-3 with the SEC to register the sale, in future offerings, of up to $7,000,000 in the aggregate of debt securities, common stock, preferred stock, warrants, rights or units consisting of any two or more of such securities. We intend to use the net proceeds of any offering of securities sold by us under the registration statement for general corporate purposes, which may include acquisitions, repayment of debt, capital expenditures and working capital requirements.
Revenue Recognition | Revenue Recognition Revenue is recognized when delivery of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services. We determine revenue recognition through the following five steps:
| · |  | Identify the contract with the customer;
| · |  | Identify the performance obligations in the contract;
| · |  | Determine the transaction price;
| · |  | Allocate the transaction price to the performance obligations in the contract; and
| · |  | Recognize revenue when, or as, the performance obligations are satisfied.
Certain Software as a Service (“SaaS”) invoices are prepared on an annual basis. Any funds received for services not provided yet are held in deferred revenue and are recorded as revenue when the related performance obligations have been satisfied. Subscription revenue is recognized on a ratable basis over the contractual subscription term of the arrangement beginning on the date that our service is made available to the customer. Payments received in advance of services being rendered are recorded as deferred revenue. Any funds received for services not provided yet are held in deferred revenue and are recorded as revenue when the performance obligation has been satisfied. We generate substantially all our revenue from subscription services, which are comprised of subscription fees from customer accounts on the Managed Platform. The following table presents our revenues disaggregated by sales channel:
|  | Three months ended
|  | March 31,
|  | 2020 |  | 2019
|  | (in thousands)
Direct (Enterprise) |  | $ | 2,387 |  | $ | 1,461
Indirect (Vertical partners) |  |  | 1,862 |  |  | 525
Other |  |  | 12 |  |  | —
Total revenues |  | $ | 4,261 |  | $ | 1,986
In accordance with Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers, and all related and subsequent amendments, the Company records accounts receivable for amounts invoiced to customers for which performance obligations have been satisfied, and for amounts invoiced and are in deferred revenue but for which the Company has an unconditional right to consideration as provided under the contractual arrangement. The Company recognizes unbilled receivables for those amounts the Company has the unconditional right to invoice and for which the performance obligations have been satisfied. The Company had one customer (including affiliates of such customer) which generated approximately 18% and 12% of the Company's revenue in each of the three months ended March 31, 2020 and 2019, respectively. The table below compares the deferred revenue balance as of March 31, 2020 versus December 31, 2019:
|  | March 31, |  | December 31,
|  | 2020 |  | 2019
|  | (in thousands)
Deferred revenue |  | $ | 5,284 |  | $ | 5,525
As of March 31, 2020, approximately $5,143,000 was classified as short-term deferred revenue and is expected to be recognized over the next twelve months following March 31, 2020. The remaining approximately $141,000 is long-term deferred revenue to be recognized thereafter.Approximately $2,087,000, or approximately 38%, of deferred revenue from December 31, 2019 has been recognized as revenue through March 31, 2020. At March 31, 2020, the Company had one customer representing 18% of the outstanding accounts receivable. At December 31, 2019, the Company had one customer representing 40% of the outstanding accounts receivable.
Use of Estimates | Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law in the United States. The CARES Act, among other things, includes modifications to net operating loss carryforwards provisions and the net interest expense deduction, and deferment of social security tax payments. We are currently evaluating the provisions of the CARES Act and how certain elections may impact our financial position, results of operations, and disclosures if elected.
Stock Based Compensation | Stock-Based Compensation The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash.
Earnings (Loss) Per Share | Earnings (Loss) Per Share Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could occur if our share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible preferred stock is computed using the if-converted method, which assumes conversion at the beginning of the year. However, when a net loss exists, no potential common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in an anti-dilutive per-share amount. Potentially dilutive securities excluded from the computation of basic and diluted net earnings (loss) per share for the three months ended March 31, 2020 and 2019 are as follows:
|  | 2020 |  | 2019
|  | ( in thousands)
Preferred stock |  | 298 |  | 286
Options to purchase common stock |  | 924 |  | 881
Warrants to purchase common stock |  | 403 |  | 1,743
Restricted stock units |  | 419 |  | 223
Totals |  | 2,044 |  | 3,133
Fair Value Measurements | Fair Value Measurements Fair value is an estimate of the exit price, representing the amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction cost. Fair value measurement under U.S. GAAP provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company. Level 3: Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability. An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities. On August 14, 2019, the Company entered into a Loan Agreement (the "Loan Agreement") with Sero Capital LLC, a shareholder that owns more than 10% of the outstanding shares of common stock of the Company. The Loan Agreement has a one-year term and provides the Company with an unsecured credit facility under which the Company may borrow up to the aggregate principal amount of $2,000,000. No amounts have been drawn under the Loan Agreement as of March 31, 2020. The Company does not at this time expect this loan agreement to be renewed. In consideration of the Loan Agreement, the Company issued to Sero Capital LLC a common stock warrant to acquire up to a total of 146,667 shares of the Company’s common stock at an exercise price of $6.00 per share, which exercise price may be paid in cash or at the election of the holder, in a cashless, or "net," exercise transaction. The warrant expires one year from the date of issuance. The estimated fair value of the Sero Capital LLC warrant was approximately $219,000 at date of issuance and approximately $92,000 at March 31, 2020. The Company valued the warrants as of March 31, 2020 using the Black-Scholes pricing model and the following assumptions: contractual term of six (6) months, a risk-free interest rate of 0.17%, a dividend yield of 0.0%, and volatility of 101.7%. The warrants are classified as a liability instrument since the holder has the option to require the Company to repurchase the warrants when certain events occur that are considered outside of the control of the Company. The unamortized balance was approximately $82,000 on March 31, 2020 and included as debt issuance costs in current assets on the consolidated balance sheet. The Company has no assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019. The following are the Company's liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:
|  |  |  |  | Fair Value
|  | Fair Value |  | Hierarchy
|  | (in thousands)
Liabilities |  |  |  |  |
Warrant liability, March 31, 2020 |  | $ | 92 |  | Level 3
Warrant liability, December 31, 2019 |  | $ | 120 |  | Level 3
Recent Accounting Pronouncements | Recent Accounting Pronouncements In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." This ASU clarifies the accounting treatment for implementation costs for cloud computing arrangements (hosting arrangements) that is a service contract. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact our financial position, results of operations or disclosures. In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, "Fair Value Measurement." This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not impact our financial position, results of operations or disclosures. There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.

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