AudioEye, Inc. — FY2012 Form 10-K
Reporting period: Year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. Financial statements are consolidated and prepared under U.S. GAAP.
Business context
AudioEye develops patented software and services for audio navigation and accessible delivery of Internet content across devices. Its offerings include Audio Internet, mobile and advertising products, and technology licensing. The company reported five issued U.S. patents and several pending applications. Revenue remained primarily from website design and maintenance services; licensing and government sales were strategic opportunities rather than established major revenue sources.
Financial highlights
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue, excluding related-party revenue | $279,062 | $125,521 |
| Related-party revenue | $3,000 | $12,500 |
| Gross profit (loss) | $16,732 | ($503,103) |
| Operating loss | ($806,496) | ($1,461,352) |
| Net loss | ($893,039) | ($1,744,402) |
| Loss per share, basic and diluted | ($0.03) | ($0.06) |
| Net cash used in operating activities | ($250,951) | ($957,282) |
| Cash at year-end | $11,147 | $27,426 |
Including related-party revenue, total revenue rose about 104% year over year. Cost of sales fell to $265,330 from $641,124, taking gross profit from a loss to a small positive result; gross margin was approximately 6% of total revenue. General and administrative expenses were $823,228, modestly above $810,341 in 2011. Interest expense declined to $98,543 from $280,050. No patent impairment was recorded in 2012, compared with $147,908 in 2011.
At December 31, 2012, current assets were $246,928 and current liabilities were $1,719,520, producing a working-capital deficit of $1,472,592. Total assets were $253,971 and total liabilities were $1,827,320; stockholders’ deficit was $1,573,349. Current liabilities included $449,000 of notes and loans payable and $829,418 of related-party payables. Cash was limited; current assets included a $173,400 advance to an affiliate and $30,000 of marketable securities. Investing cash outflow was $2,928 and financing cash inflow was $237,600.
Changes, financing and unusual items
- Revenue increased and cost of sales decreased, substantially improving gross results and reducing the net loss. Operating cash use also narrowed year over year.
- In December 2012, the CEO converted $1,296,715 of related-party debt into 5,186,860 common shares at $0.25 per share; $84,581 of accrued interest was forgiven. This reduced related-party loan balances but diluted shareholders.
- The company reported a $425,000 secured note issued in connection with the 2012 separation from CMG. It was repaid in February 2013 through $200,000 cash and $241,339 of principal settled with 1,998,402 shares, plus reported interest payments.
- After year-end, AudioEye merged with AudioEye Acquisition Corporation (AEAC). AEAC debentures totaling $1,400,200 principal plus accrued interest were converted, with holders receiving 5,871,752 AudioEye shares; the merger also extinguished certain former-stockholder rights to future proceeds from patent exploitation.
- For five years after the separation, CMG is entitled to 10% of specified net cash proceeds from patent enforcement and licensing. A separate services agreement provides commissions on qualifying business procured by CMG.
Outlook, risks and contingencies
Management planned to commercialize its intellectual property through licensing, SaaS products, services, partners and potential direct government sales. It reported pursuing a GSA contract and developing a higher-education initiative expected to commence in 2013. No quantified revenue, earnings or cash-flow guidance is provided.
The independent auditor included a going-concern paragraph, citing recurring losses and a working-capital deficiency that raise substantial doubt about the company’s ability to continue. Management said continued operations depend on profitable operations and additional capital, potentially through equity or debt financing; funding was not assured. The filing reports an accumulated deficit of $4,091,030 in the audited balance sheet and notes.
- Two customers generated 81% of FY2012 revenue, approximately 59% and 22%, creating significant concentration risk.
- Patent licensing and enforcement prospects are uncertain; litigation could require substantial expense. The company reported no active or pending litigation at filing, but anticipated possible future enforcement actions.
- Disclosure controls and internal control over financial reporting were assessed as ineffective due to a material weakness: insufficient multiple levels of supervision and review.
- Competition from larger, better-funded browser, mobile-device and technology companies, long sales cycles, market adoption, and dependence on additional financing were identified as material risks.
Most important facts for investors to verify
- Reconcile liquidity and related-party balances, especially the $173,400 affiliate advance, $829,418 related-party payable, and limited $11,147 cash balance.
- Confirm the terms, timing and fully diluted share impact of the 2013 note repayment, AEAC merger conversions, and other subsequent share issuances.
- Assess customer concentration and whether recurring revenue or licensing agreements have developed beyond website services.
- Track financing needs, cash runway, and progress toward addressing the auditor’s going-concern warning.
- Review remediation of the disclosed material weakness and the strength of financial reporting controls.
- Note that the filing contains inconsistent loss and working-capital figures in certain narrative risk disclosures; the audited statements report net loss of $893,039 and working-capital deficit of $1,472,592 for FY2012.