AudioEye, Inc. — FY 2015 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2015, not a standalone fourth quarter. AudioEye sells web-accessibility SaaS subscriptions and related managed services through its Ally platform. The company reported a shift toward a SaaS-focused model; both major customer relationships were reported as terminated by December 31, 2015.
Key financial metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $338,863 | $523,307 |
| Gross loss | $(885,789) | $(674,629) |
| Operating loss | $(7,313,968) | $(9,694,026) |
| Net loss | $(7,209,145) | $(9,750,813) |
| Net loss per common share | $(0.10) | $(0.16) |
| Net cash used in operating activities | $(5,474,454) | $(5,801,600) |
| Cash at year-end | $1,687,257 | $1,672,901 |
| Working capital | $913,741 | $2,117,283 |
Revenue fell approximately 35%. Gross loss widened despite lower revenue, while operating and net losses improved as selling, research and administrative costs declined. Cash used in operations remained substantial. The 2015 net loss attributable to common stockholders was $7,862,519, including a $594,641 deemed preferred-stock dividend and $58,733 preferred dividend.
At year-end, total assets were $5.35 million and total liabilities were $2.81 million. Long-term convertible notes and loans were reported at $1.92 million net of discount, alongside $24,000 of current notes payable. The company also had $439,361 of derivative liabilities. The auditor cited recurring losses and operating cash outflows as raising substantial doubt about the company’s ability to continue as a going concern.
Material changes and financing
- Revenue declined from $523,307 to $338,863, primarily due to reduced demand from the largest customer and the business-model transition. The two major customers accounted for a substantial share of revenue; the filing gives conflicting 2015 concentration figures of 58% and 67.5%.
- Operating expenses declined overall, but cost of services remained above revenue, producing a negative gross margin in both years.
- In 2015, the company raised $1.75 million through Series A convertible preferred stock and borrowed $2.5 million under secured convertible notes. The notes accrue 10% annual payable-in-kind interest, mature in three years, and are secured by all company assets. A qualifying cash equity financing of at least $2 million triggers conversion at 60% of that financing’s price. Related warrants cover up to 25 million shares at $0.10 per share.
- Common shares outstanding rose to 81.7 million from 77.8 million. At year-end, 14.76 million options and 42.28 million warrants were outstanding; the preferred stock was convertible into approximately 9.98 million common shares.
Outlook, risks, and unusual items
The filing provides no quantified revenue, earnings, or cash-flow guidance. Management describes ongoing cost reductions and a focus on generating cash revenue, but says additional capital may be needed and there is no assurance it can be raised. The company reported 22 full-time employees at year-end.
- Going concern and liquidity: The auditor expressed substantial doubt about continued operations. Year-end cash was $1.69 million versus $5.47 million of operating cash use during 2015.
- Customer and execution risk: Customer concentration is high, both major customers reportedly ended their contracts, and the SaaS model has not yet demonstrated a diversified, durable subscriber base.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective. Identified weaknesses included equity-transaction reporting inconsistencies and omissions, and insufficiently formalized documented controls. Earlier 2014 quarterly results were restated.
- Litigation: Two shareholder class actions relate to the announcement that 2014 quarterly results and guidance could no longer be relied upon. Management said it could not assess the probability or estimate a range of potential losses; $100,000 had been paid toward the D&O policy deductible.
- Dilution and stock risk: The secured notes, warrants, convertible preferred stock, options, and potential future fundraising create significant dilution risk. Shares traded on OTC markets; the reported fourth-quarter 2015 range was $0.03–$0.06.
- Unusual accounting items: A $187,932 unrealized gain on derivative liabilities reduced reported net loss. Share-based compensation and service-share expense were also significant. The filing’s MD&A expense breakdown does not match its audited statement of operations, although reported total operating expenses agree.
Investor verification priorities
- Reconcile the conflicting 2015 major-customer concentration disclosures and confirm the post-termination recurring revenue base.
- Assess cash runway, subsequent financing, and the ability to meet obligations under secured notes, including potential conversion and warrant dilution.
- Verify the status and potential exposure of the shareholder litigation and whether internal-control weaknesses have been remediated.
- Reconcile expense line items in MD&A with the audited statements and confirm the reported cash-flow and liquidity position.
- Review the full financial statements and subsequent events for developments after December 31, 2015; the filing does not provide quantified operating guidance.