AudioEye, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; quarterly figures include the three months ended December 31, 2013. Unless stated otherwise, amounts are U.S. dollars.
Business context
AudioEye develops and commercializes patented software and services for audio navigation, Internet accessibility, and digital content delivery. Revenue in 2013 primarily came from software development, website design, and maintenance—not solely recurring SaaS or patent licensing. The company also pursues licensing, reseller, government, and other vertical-market opportunities. It reported six U.S. patents issued, a notice of allowance for a seventh, and additional pending applications.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $1.558 million | $282,062 |
| Gross profit | $1.154 million | $16,732 |
| Gross margin | 74.1% | 5.9% |
| Operating loss | $2.807 million | $1.037 million |
| Net loss | $2.883 million | $1.166 million |
| Net loss per share, basic and diluted | $0.07 | $0.04 |
| Cash used in operating activities | $1.398 million | $303,218 |
Revenue increased about 452% year over year. Management attributed the increase to greater demand; lower subcontracting and direct labor costs also drove the improvement in gross profit. Operating expenses rose to $3.961 million from $1.054 million, notably including $3.243 million in general and administrative costs, $301,280 in selling and marketing, and $359,414 in amortization and depreciation.
Fourth-quarter 2013 revenue was $752,092, versus $3,225 in fourth-quarter 2012. Fourth-quarter net loss was $1.086 million, compared with $423,925 a year earlier.
At year-end, cash was $1.847 million, current assets $2.499 million, current liabilities $832,800, and working capital $1.666 million. Total liabilities were $947,600, including $252,645 in current and long-term notes and loans payable and $243,424 in related-party payables. Financing activities provided $3.245 million; investing activities used $11,542. Cash increased by $1.835 million during the year.
The company remained loss-making, with an accumulated deficit of $7.279 million. It reported no off-balance-sheet arrangements material to stockholders and no dividend payments.
Changes, financing, and unusual items
- Revenue rose sharply from a small prior-year base, while operating and net losses widened due to substantially higher operating expenses.
- Two customers accounted for most sales. The filing gives 81% concentration in one disclosure and 80% in another; its customer breakdown identifies approximately 70% and 10% for 2013. The comparable 2012 disclosure also varies, so the exact concentration should be checked.
- Equity financing and debt conversions materially changed the capital structure. Cash-flow reporting shows $3.232 million of net cash from common-stock issuance; the company also raised funds through private placements and converted certain debt and accrued compensation into shares or warrants.
- In December 2013, AudioEye repurchased 2,184,583 shares from CMGO for $573,022 and forgave a $50,000 affiliate payable. The shares were transferred in January 2014 and retired to treasury.
- The CMGO royalty agreement was terminated in November 2013. The merger with AudioEye Acquisition Corporation was completed in March 2013, and the related former stockholder rights were extinguished.
- Subsequent events included a January 2014 private placement, new executive compensation arrangements, approval and filing of an amendment increasing authorized common shares to 250 million, and authorization for a possible reverse split of up to 1-for-10 in connection with a potential national-market listing.
Outlook, risks, and controls
The filing provides no formal financial guidance. Management described plans to expand direct and partner-led sales, commercialize its intellectual property through licensing, and pursue government and higher-education markets. It expected substantial additional capital needs and disclosed no committed future external funding.
Key risks include continued losses and cash burn, dependence on additional financing, concentrated customers, reliance on key personnel, competition from larger technology companies, uncertain adoption and long sales cycles, and the cost and uncertain outcomes of patent enforcement. The company disclosed no active or pending patent litigation at the time, but anticipated potential enforcement actions that could require significant legal spending. Its patents, licensing opportunities, and market demand may also be challenged or fail to generate expected revenue.
Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2013 because of a material weakness involving inconsistencies and omissions in accounting for certain equity transactions. It reported remediation in the first quarter of 2014 through added review procedures. The independent auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Customer concentration: reconcile the filing’s 80% versus 81% statements and the stated 70%/10% split.
- Revenue quality and sustainability: distinguish project-based development and maintenance revenue from recurring SaaS, licensing, and royalties.
- Cash runway and financing needs: assess the $1.398 million operating cash outflow, year-end cash, and absence of committed funding.
- Share dilution: review private-placement shares, outstanding warrants and options, debt conversions, registered resale shares, and the enlarged authorized-share capacity.
- Control remediation: confirm that equity-transaction reporting weaknesses were fully addressed and that subsequent filings reflect reliable controls.
- Patent monetization: verify actual licensing income, enforcement costs, patent scope and validity, and the status of proposed market partnerships.