AudioEye, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing, signed July 10, 2015, also presents fourth-quarter results. Amounts are in U.S. dollars.
Business context
AudioEye provides cloud-based web accessibility software and services, including its Ally platform, developer tools, user support and audio Reader. It also pursues technology and patent licensing. Revenue is generated primarily from software development, website design and maintenance. The company reported six U.S. patents issued and a notice of allowance for a seventh.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $523,307 | $1,558,160 |
| Gross profit (loss) | $(674,629) | $1,154,072 |
| Operating loss | $(9,694,026) | $(2,806,519) |
| Net loss | $(9,750,813) | $(2,882,626) |
| Net loss per share, basic and diluted | $(0.16) | $(0.07) |
| Cash from (used in) operations | $(5,801,600) | $(1,398,384) |
| Cash and cash equivalents at year-end | $1,672,901 | $1,847,004 |
| Working capital | $2,117,283 | $1,665,751 |
Revenue fell about 66% year over year, while cost of services rose to $1.20 million from $404,088, producing a gross loss. Management attributed lower revenue mainly to reduced demand from its largest customer and higher costs to complete fixed-price contracts. Selling and marketing, research and development, and general and administrative expenses also increased substantially.
Fourth-quarter 2014 revenue was $238,569 and net loss was $3,215,104, compared with revenue of $752,092 and net loss of $1,085,830 in fourth-quarter 2013.
Year-end total assets were $7.07 million and total liabilities were $1.21 million. Notes and loans payable totaled approximately $75,800; current liabilities also included $228,983 in related-party payables. Cash-flow investing outflows were $486,162 and financing inflows were $6,113,659. Financing included equity placements and warrant exercises. A $1.175 million subscription receivable recorded at year-end was collected in 2015; it was not year-end cash.
Changes, outlook and significant risks
- Two customers generated 87% of 2014 revenue (77% and 10%), versus 81% in 2013. This concentration makes results vulnerable to customer demand and retention.
- The company restated its first three 2014 quarterly reports after initially recognizing certain noncash intellectual-property exchanges as revenue. It also identified revenue-recognition and contract-costing errors, including percentage-of-completion timing and revenue for which collection was not reasonably assured. Management said it could not estimate the value of benefits from the exchanges.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2014. Material weaknesses included revenue recognition, noncash transactions, contract accounting, equity reporting and insufficient documented review controls. Management described remediation steps, but their effectiveness was not established in the filing.
- The company was unprofitable, had an accumulated deficit of $17.03 million, and stated that substantial additional capital would be needed. It had no commitment for future external funding. Continued losses and operating cash burn create financing and dilution risks.
- Management gave no clear forward revenue or earnings guidance in the supplied filing text. The company disclosed that previously issued guidance for fourth-quarter and full-year 2014 could no longer be relied upon. Two purported shareholder class actions filed in April 2015 concern the announcement and restatements; the company said it intended to defend them, but could not estimate potential losses.
- After year-end, the company raised $1.75 million in a preferred-stock placement, with conversion and redemption terms that may affect dilution and cash obligations. Senior leadership changes also occurred in 2015, including the CEO and CFO departures and changes in other executive roles.
- Shares moved to the OTC Pink marketplace in April 2015 after late SEC filings; the company said it expected to return to OTCQB after updating filings, but gave no date. Trading liquidity, dilution from outstanding options and warrants, and penny-stock restrictions are additional investor risks.
The independent auditor gave an unqualified opinion on the 2014 and 2013 financial statements. The auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Reconcile the restated quarterly revenue, noncash transactions and percentage-of-completion accounting to the annual financial statements, and confirm subsequent control-remediation results.
- Assess customer concentration, the status and collectability of receivables, and whether the largest customer relationship continued.
- Review cash burn, subsequent financing proceeds, the preferred-stock conversion and redemption terms, and the company’s remaining funding needs.
- Check the status and potential financial impact of the shareholder litigation and any further SEC filing or trading-market developments.
- Review fully diluted share exposure from options, warrants, preferred stock and other equity awards; 77.8 million common shares were outstanding at year-end 2014.