AudioEye, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. AudioEye develops and licenses cloud-based Internet accessibility technology. The company reported substantial growth in revenue, much of it from noncash license exchanges.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $4.837 million | $0.382 million | $8.883 million | $0.806 million |
| Gross profit | $3.752 million | $0.251 million | $7.423 million | $0.580 million |
| Gross margin | 77.6% | 65.7% | 83.6% | 71.9% |
| Operating income (loss) | $1.315 million | $(0.846) million | $0.915 million | $(1.738) million |
| Net income (loss) | $1.302 million | $(0.871) million | $0.895 million | $(1.797) million |
- Noncash revenue: License exchanges generated $4.275 million of Q3 revenue and $8.100 million for the nine months. The nine-month total comprised $2.025 million of license-for-license exchanges and $6.075 million of license-for-services exchanges. Excluding nonmonetary and related-party revenue, reported revenue was $0.561 million in Q3 and $0.778 million year to date.
- Cash flow: Nine-month operating cash flow was negative $3.762 million, versus negative $0.676 million in 2013; investing cash flow was negative $0.557 million. Financing provided $4.623 million, including warrant exercises and stock sales. Cash increased $0.305 million to $2.152 million.
- Balance sheet: Current assets were $8.112 million and current liabilities $0.559 million, yielding working capital of $7.554 million. Current assets included $5.189 million of prepaid assets and security deposits. Total liabilities were $0.617 million, including $0.082 million of notes payable; no related-party loans or payables remained outstanding.
- Share-based compensation and dilution: Nine-month stock, option and warrant expense was $1.539 million. Common shares outstanding increased to 70.553 million from 53.239 million at year-end 2013. Nine-month diluted EPS was $0.01 versus basic EPS of $0.02.
Changes versus the prior comparable period
- Reported total revenue rose sharply year over year, but the increase primarily reflects $8.100 million of noncash revenue recognized in 2014; no comparable nonmonetary revenue was recorded in 2013.
- The company moved from operating and net losses to profits in both Q3 and the first nine months. Management attributed higher gross profit to license exchanges and consistent implementation costs.
- Operating expenses increased: nine-month selling and marketing was $1.301 million, research and development $0.392 million, and general and administrative $4.352 million. Management cited added sales resources, employees, professional and travel costs, and stock-based compensation.
- Working capital increased from $1.631 million at December 31, 2013, mainly due to prepaid assets and capital raised. Cash remained limited relative to operating cash use.
Outlook, risks and unusual items
- No quantitative revenue or earnings guidance was provided. Management stated that additional equity or debt financing would be required to fund operations and implement its business plan, and that sufficient financing on acceptable terms could not be assured; without it, the company might be unable to continue operations.
- The large noncash license exchanges materially affect reported revenue and profit. The company recognized exchanged licenses at $225,000 each and recorded related intangible assets and prepaid services; services are to be expensed as received.
- Financing included a July warrant-exercise offer at a 10% discount, producing $3.502 million net proceeds, and a September private placement yielding $0.350 million gross proceeds. Equity issuance, warrants, options and performance share units create potential dilution.
- Management described pending legal matters as routine and not expected to have a material adverse effect. It reported disclosure controls effective as of September 30, 2014, and remediation of certain equity-transaction control issues through added review. No material risk-factor changes from the 2013 Form 10-K were reported.
- Management cautioned that interim results are not necessarily indicative of future results. Forward-looking statements are subject to risks and uncertainties.
Key facts for investors to verify
- Whether noncash license-exchange revenue meets the stated fair-value, commercial-substance and collectability criteria, and how much related prepaid services will be consumed or converted into future cash costs.
- Underlying cash-generating revenue, customer demand and collections, compared with the headline revenue growth.
- Operating cash burn, available cash, and the timing and terms of any additional financing.
- Future dilution from outstanding options, warrants and performance share units, as well as stock-based compensation expense.
- Recoverability and impairment risk of intangible assets, including the $2.025 million of license-exchange assets and other capitalized technology costs.