AudioEye, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. The financial statements are unaudited. AudioEye provides web accessibility software and services, including its SaaS Ally platform and intellectual-property licensing.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $108,685 | $187,766 | $314,146 | $284,739 |
| Gross loss | $213,070 | $76,693 | $864,242 | $355,185 |
| Operating loss | $578,624 | $2,457,101 | $6,463,647 | $6,515,848 |
| Net loss | $578,543 | $2,469,517 | $6,460,302 | $6,535,708 |
| Net loss attributable to common stockholders | $578,543 | $2,469,517 | $7,054,943 | $6,535,708 |
| Cash used in operating activities | — | — | $4,804,778 | $3,761,724 |
Q3 revenue fell about 42% year over year; nine-month revenue rose about 10%. Cost of revenue exceeded revenue in both periods, and the gross loss worsened substantially. The nine-month operating loss narrowed slightly as lower selling, marketing, research and administrative expenses largely offset higher delivery costs. The nine-month common-stockholder loss includes a $594,641 deemed preferred-stock dividend. Basic and diluted loss per share was $0.01 for Q3 and $0.09 for the nine-month period, versus $0.04 and $0.12, respectively, in 2014.
Liquidity, debt and capital
- At September 30, cash was $51,910, down from $1,672,901 at year-end 2014. Current assets were $298,011 and current liabilities were $355,544, producing a $57,533 working-capital deficit.
- Total liabilities were $385,344, including $53,800 of Maryland TEDCO notes payable ($24,000 current and $29,800 long term). The filing reports no other material debt at quarter-end.
- Financing activities provided $3,271,943 during the first nine months, including $1,750,000 from a Series A preferred-stock placement and collection of a $1,175,000 subscription receivable. Investing activities used $88,156.
- In May, the company issued 175,000 preferred shares for $1.75 million. They carry a 5% dividend if declared, convert at an initial $0.1754 per common share (subject to adjustment), and may be redeemed for $12.50 per share plus accumulated dividends.
Changes, outlook and significant matters
- Management attributed lower Q3 revenue partly to a shift away from non-cash transactions. For the first nine months, it cited demand for platform implementation. Higher implementation costs drove the larger gross loss.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing the working-capital deficit and $4.8 million of operating cash use. Management said recent capital raises were expected to fund operations into the foreseeable future, but warned additional financing was not assured.
- After quarter-end, the company entered a secured convertible-note and warrant financing. By November 8, $2.5 million of notes had been sold; the agreement permits up to $3.75 million of principal and warrants for up to 37.5 million common shares. Notes carry 10% payable-in-kind interest, mature in three years, and may convert at 60% of the price in a qualifying equity financing. Warrants have a $0.10 exercise price. The financing creates significant potential dilution and grants investors a security interest in company assets.
- As of September 30, 81.8 million common shares were outstanding; the company also had 10.3 million options and 17.3 million warrants outstanding. A further 500,000 options and 250,000 warrants were issued to Executive Chairman Carr Bettis after quarter-end, among other subsequent equity awards.
- The company reported two shareholder class-action lawsuits filed in April 2015 related to previously reported financial results and guidance that could no longer be relied upon. It said it intended to defend the claims, but could not assess the likelihood or estimate a loss range.
- Management concluded disclosure controls and procedures were ineffective as of September 30, 2015, citing disclosure omissions related to GAAP; the filing says these had been substantially corrected by May 18, 2015. Management described improvements to revenue-computation and customer-collectability controls.
- No specific revenue or earnings guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results.
Key investor verification points
- Whether recurring cash revenue grows enough to cover implementation costs and materially negative gross margins.
- Cash burn and liquidity after the October 2015 financing, including financing terms, collateral, and the potential dilution from conversion and warrants.
- Progress addressing the going-concern uncertainty and the effectiveness of remediated financial-reporting controls.
- Developments in the shareholder litigation and any eventual estimate of potential exposure.
- Reconciliation of the filing’s unusual negative Q3 general and administrative expense, which management attributes to forfeiture-related expense reversals, and confirmation of reported comparative cash-flow figures.