AudioEye, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; fiscal year ends December 31. AudioEye sells software and services focused on voice-enabled Internet content, accessibility, and related technology licensing.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue, including related-party revenue | $200,232 | $40,623 | $424,529 | $55,628 |
| Gross profit (loss) | $149,465 | $(22,673) | $328,739 | $(97,403) |
| Gross margin | 74.6% | (55.8%) | 77.4% | (175.1%) |
| Operating loss | $(529,701) | $(177,508) | $(891,820) | $(425,084) |
| Net loss | $(529,900) | $(201,609) | $(925,986) | $(427,221) |
| Net loss per share | $(0.01) | $(0.01) | $(0.02) | $(0.01) |
- Management attributed revenue growth to increased demand for software development, website design, and maintenance services. Cost of revenue fell, which management attributed to lower subcontracting costs and more efficient product implementation.
- General and administrative expense rose to $679,166 in Q2 and $1,220,559 for the half year, versus $154,835 and $327,681, respectively. The filing cites amortization, employee wages, and stock-option and warrant expense.
- At June 30, cash was $193,681, marketable securities were $21,000, and current assets were $262,797. Current liabilities were $321,026, resulting in a $58,229 working-capital deficit, improved from $2,775,216 at December 31, 2012.
- Six-month operating cash use was $379,163; investing cash use was $6,266; financing provided $567,400. Cash increased by $181,971 from year-end.
- Notes and loans payable totaled $109,800 at June 30 ($24,000 current and $85,800 long-term). The balance sheet also reports $10,000 of related-party payables. Total liabilities were $406,826.
- Intangible assets, primarily patents, were $3,247,296 net of amortization; goodwill was $700,528. Stockholders’ equity was $3,809,240. Shares outstanding were 44,354,199 at June 30.
Material changes and unusual items
- Revenue increased substantially from the comparable periods, and gross results improved from losses to profit. However, higher operating expenses left operating and net losses larger.
- The March 2013 merger with AudioEye Acquisition Corporation extinguished former stockholders’ “Rights” to specified proceeds from patent exploitation. The merger also resulted in conversion of debentures and accrued interest into 5,871,752 common shares.
- The company repaid a secured note using $200,000 cash and 1,998,402 shares. It also issued warrants in settlement of related-party and other payables. Six-month stock, option, and warrant expense was $253,358.
- A private placement involved 1,092,000 units, each described as one share and a three-year warrant exercisable at $0.50. The filing reports $426,900 net cash proceeds and $50,000 of payables forgiven; shares were issued August 8, after quarter-end.
Outlook, risks, and contingencies
- Going concern: Management says recurring losses, accumulated deficit of $5,322,833, and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. It plans to seek additional equity or debt financing or borrowings, but gives no assurance funding will be available on acceptable terms or in sufficient amounts.
- No quantified revenue, earnings, or cash-flow guidance is provided. Management describes plans to commercialize its intellectual property through SaaS products, services, licensing, and patent enforcement.
- Under agreements with CMGO, AudioEye owes a five-year royalty of 10% of qualifying cash from patent enforcement/licensing proceeds, and specified commissions on revenue sourced by CMGO. The filing also describes an ongoing agreement with Google limiting certain legal proceedings and waiving recovery for specified prior willful infringement claims during the agreement’s term.
- Routine disputes and allegations are pending; management does not expect their resolution to materially harm financial position or results. No material off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective as of June 30.
- Subsequent to quarter-end, five executives entered employment agreements with annual base salaries ranging from $150,000 to $200,000; three also received performance share unit awards. These commitments and potential equity awards may affect future expenses and dilution.
Important facts for investors to verify
- Confirm the private-placement proceeds: the filing reports 1,092,000 units at $0.50 each, which implies $546,000 before costs, but elsewhere reports gross proceeds of $496,000 and net cash of $426,900, plus $50,000 of payables forgiven.
- Assess the company’s near-term funding needs, cash runway, and ability to obtain financing given its going-concern disclosure and continued operating cash use.
- Review fully diluted share exposure from outstanding options, warrants, converted debt, and post-quarter-end executive awards. The filing reports 3,220,000 options and 3,793,710 warrants outstanding at June 30, apart from the placement warrants.
- Evaluate revenue quality and concentration, including related-party revenue, and the commercial progress of licensing and SaaS initiatives relative to management’s stated strategy.
- Verify filing-status context: the cover-page response to whether required reports had been filed during the preceding 12 months is marked “No.”