AudioEye, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. AudioEye sells web-accessibility software and services, including its SaaS platform and intellectual-property licensing.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $104,423 | $51,320 | $205,461 | $96,972 |
| Gross loss | $(290,079) | $(282,992) | $(651,172) | $(278,493) |
| Operating loss | $(2,860,110) | $(1,895,367) | $(5,885,023) | $(4,058,748) |
| Net loss | $(2,859,953) | $(1,895,828) | $(5,881,759) | $(4,066,192) |
| Net loss attributable to common stockholders | $(3,454,594) | $(1,895,828) | $(6,476,400) | $(4,066,192) |
- Revenue more than doubled year over year in both periods, which management attributed to increased demand. However, implementation costs exceeded revenue, resulting in negative gross margins.
- Q2 operating expenses rose to $2.57 million from $1.61 million, largely due to higher general and administrative costs, including employee-related and stock-based compensation expenses. Six-month operating expenses were $5.23 million versus $3.78 million.
- Cash was $1.15 million at June 30, down from $1.67 million at year-end. Six-month operating cash use was $3.78 million; investing cash use was $30,000 and financing provided $3.28 million.
- Current assets were $1.35 million and current liabilities $608,463, yielding reported working capital of $741,471. Total liabilities were $644,263, including $59,800 of notes payable; there was no material debt burden relative to equity, but cash burn was substantial.
Changes, financing, and unusual items
- Compared with the prior-year periods, revenue increased, but gross loss and operating loss widened. Six-month cost of revenue increased to $856,633 from $375,465.
- The company raised $1.75 million in May through a Series A convertible preferred-stock placement. The shares carry a 5% dividend when declared and an initial conversion price of $0.1754; the beneficial conversion feature resulted in a $594,641 deemed dividend in Q2. The company also collected $1.175 million of prior stock subscriptions and received $325,000 from a January common-stock placement.
- Management said it shifted in 2015 toward cash sales and expense reduction. It reported Q2 cost of revenue was 15% below Q1 and operating expenses excluding stock, option and warrant expense were 23% lower; it also noted one-time costs tied to financial-statement restatement and executive departures.
- Common shares outstanding were 81.64 million at June 30 and 81.69 million at July 31. Outstanding options and warrants, and preferred-stock conversion rights, create potential dilution.
Outlook, risks, and contingencies
- Going concern: The filing says recurring losses and limited cash raise substantial doubt about the company’s ability to continue as a going concern. Management expects to need additional equity or debt financing and cautions that funding may not be available on acceptable terms or at all. No specific financial guidance is provided.
- Controls: Management concluded disclosure controls were not effective at June 30 due to omissions in GAAP disclosures. The filing describes process improvements implemented in early 2015.
- Litigation: Two shareholder class-action lawsuits filed in April 2015 concern previously issued results and guidance that the company said could no longer be relied upon. The company intends to defend the cases, but management could not assess loss probability or estimate a loss range.
- Subsequent event: Effective July 1, Carr Bettis became Executive Chairman under a one-year agreement with $175,000 annual base compensation payable in options, subject to the agreement’s valuation terms.
Important facts for investors to verify
- Cash runway, operating burn, and the company’s ability to secure additional capital.
- Revenue growth, customer demand, implementation costs, and the path to positive gross margins.
- Potential dilution from preferred conversion, warrants, options, and equity-based compensation.
- Developments and potential exposure from the shareholder lawsuits and the prior financial reporting issues.
- The filing’s working-capital discrepancy: its balance-sheet figures and table show $741,471 at June 30 and $2,117,283 at December 31, 2014, while the accompanying MD&A prose states $2,712,981 for December 31.