AudioEye, Inc. — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014; unaudited. AudioEye develops and licenses internet accessibility technology. Comparisons are with Q1 2013 unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $1.033 million | $224,297; up approximately 361% |
| Gross profit / margin | $991,733 / approximately 96% | $179,274 / approximately 80% |
| Operating loss | $1.402 million | $362,119 |
| Net loss | $1.409 million; $0.03 per share | $396,086; $0.01 per share |
| Operating cash flow | $(1.275) million | $(64,790) |
| Cash at period end | $492,718 | $93,420 at March 31, 2013 |
| Working capital | $499,603 | $1.631 million at December 31, 2013 |
| Total liabilities | $1.491 million | $947,600 at December 31, 2013 |
Revenue was primarily from licensing, website design, and maintenance. Management attributed growth to increased demand. Selling and marketing, research and development, and general and administrative expenses rose substantially as the company added dedicated sales and research resources, employees, and related compensation costs. G&A was $1.668 million versus $444,050; it included increased stock, option, and warrant expense. Financing provided $34,537, including net proceeds from a private placement, while investing used $113,476. Cash fell by $1.354 million during the quarter.
Material changes and notable items
- Revenue growth was accompanied by a larger net loss as operating expenses rose to $2.394 million from $541,393.
- Q1 revenue included $675,000 recognized from three non-cash license exchanges; the company also recorded corresponding intangible assets. It reported one cash license sale for $225,000.
- Intangible assets, net, increased to $3.831 million from $3.074 million, including capitalized software development costs and acquired licenses.
- Cash declined from $1.847 million at December 31, 2013. Accounts receivable increased to $1.295 million from $569,297, and accounts payable and accrued expenses rose to $1.275 million from $416,531.
- The company repaid a $150,000 note and accrued interest during the quarter. Notes payable were $93,800 at March 31, including $24,000 current and $69,800 long-term; related-party loans were $35,000.
- Common shares outstanding increased to 55.400 million from 53.239 million at year-end. The company also reported 8.712 million options, 19.485 million warrants, and 4.000 million performance share units outstanding at quarter-end.
Outlook, risks, and controls
No specific revenue or earnings guidance was provided. Management stated that, given working capital, continuing operating losses, and limited cash, additional equity or debt financing or borrowing would be required to fund operations. The company cautioned that financing might not be available on acceptable terms or at all and that, without sufficient funds, it might be unable to implement its business plan or continue operations.
Management said disclosure controls and procedures were not effective as of March 31, 2014 because of omissions in GAAP disclosures, which it stated had been corrected by May 14. The filing describes improvements to review of equity transactions. Routine disputes and allegations were reported; management did not expect their resolution to materially adversely affect financial position or results. The filing reported no material changes to the risk factors disclosed in the 2013 Form 10-K.
Investor verification priorities
- Assess whether revenue growth is recurring and supported by cash collections, given the increase in receivables and the $675,000 of non-cash license-exchange revenue.
- Evaluate cash runway, operating cash burn, and the availability and terms of additional financing.
- Review the collectability of receivables, the rise in accrued payables, and the nature and terms of related-party balances and transactions.
- Assess potential dilution from outstanding options, warrants, and performance share units, including performance- or sales-based awards.
- Review the corrected disclosure omissions and the status and effectiveness of the company’s remedial controls.