AudioEye, Inc. — Form 10-Q summary
Reporting period: Three and six months ended June 30, 2014; unaudited. AudioEye develops and licenses internet accessibility technology and related services.
Financial performance
| Metric | Q2 2014 | Six months 2014 | Prior comparable period |
|---|---|---|---|
| Total revenue | $3.013 million | $4.046 million | $0.200 million and $0.425 million, respectively |
| Gross profit / margin | $2.679 million / 88.9% | $3.670 million / 90.7% | $0.149 million / 74.6%; $0.329 million / 77.4% |
| Operating income (loss) | $1.002 million | $(0.400) million | $(0.530) million; $(0.892) million |
| Net income (loss) | $1.002 million | $(0.407) million | $(0.530) million; $(0.926) million |
| Operating cash flow | Not presented for quarter | $(1.657) million | $(0.379) million |
Revenue growth was largely noncash: license exchanges generated $2.925 million in Q2 and $3.825 million for the half year. Cash revenue, excluding related-party revenue, was $86,908 in Q2 and $216,669 for the half year, compared with $182,232 and $406,529 in 2013. The exchanges provided licenses and prepaid services rather than cash. Accordingly, reported revenue and profit should not be read as equivalent to cash sales or cash generation.
Q2 operating expenses were $1.677 million, including $1.136 million of general and administrative expense. For the six months, operating expenses were $4.070 million; stock, option, warrant and performance-unit expense totaled $1.227 million. Q2 diluted EPS was $0.02; six-month loss per share was $0.01.
Liquidity, debt and capital
- At June 30, cash was $514,165, down from $1.847 million at December 31, 2013. Working capital was $2.979 million, versus $1.631 million; current assets were $4.292 million and current liabilities $1.312 million.
- Current and long-term notes payable totaled $89,800, principally the interest-free Maryland TEDCO note. Related-party loans were $35,000. Operating and investing cash use totaled $2.078 million in the first half; financing provided $744,689.
- Prepaid assets and security deposits were $2.986 million, substantially reflecting prepaid services received in license exchanges. Intangible assets, net, were $3.899 million.
- Shares outstanding rose to 59.3 million from 53.2 million at year-end. Private placements raised $895,689 net during the first half, before considering the subsequent warrant exercises described below.
Changes, outlook and risks
Compared with 2013, reported revenue and gross profit increased sharply, but the increase chiefly reflects noncash license transactions. Q2 was profitable while the first half remained loss-making, and operating cash use increased. Management attributed higher expenses to staffing, sales and marketing, research and development, stock-based compensation, and greater intellectual-property amortization.
Management stated that additional equity or debt financing would be required to fund operations and that adequate funding on acceptable terms was not assured; without it, the company might be unable to carry out its plan or continue operations. No quantified revenue or earnings guidance was provided. Management cited market opportunity from accessibility needs and website compliance requirements, but these are not assurances of future results.
After quarter-end, in July 2014, AudioEye issued 10,027,002 shares from warrant exercises for $3.633 million in cash proceeds, following an offer allowing certain warrant holders to exercise at a 10% discount. This is a material liquidity event and a significant source of dilution. The company reported routine disputes not expected by management to have a material adverse effect, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30. It also reported remediation of equity-transaction control issues through an additional review layer.
Important facts for investors to verify
- The nature, commercial substance, valuation support and expected realization of the $3.825 million in first-half noncash license-exchange revenue, and the related prepaid services and intangible assets.
- Cash runway and financing needs in light of first-half operating cash use and the July warrant-exercise proceeds; confirm the proceeds were received and assess remaining liquidity needs.
- Potential dilution from outstanding options, warrants and performance share units, including the July issuance of 10.0 million shares.
- Whether cash-based customer demand and collections are growing independently of noncash transactions, and whether the company can convert its reported gross margins into sustainable operating cash flow.