AudioEye, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited; the company cautions that quarterly results are not necessarily indicative of full-year results. AudioEye develops patented internet content accessibility, publication, and distribution software.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 or comparison |
|---|---|---|
| Revenue | $224,297 | $14,255, plus $750 related-party revenue |
| Cost of revenue | $45,023 | $89,735 |
| Gross profit (loss) | $179,274; approximately 80% margin | $(74,730); negative gross margin |
| General and administrative expenses | $541,393 | $172,846 |
| Operating loss | $(362,119) | $(247,576) |
| Net loss | $(396,086); $(0.01) per share | $(225,612); $(0.01) per share |
| Cash used in operations | $(64,790) | $(199,352) |
| Cash and cash equivalents | $93,420 at March 31 | $11,710 at December 31, 2012 |
| Working capital | Deficit of $381,100 | Deficit of $2,775,215 at December 31, 2012 |
Revenue rose substantially, which management attributed to increased demand for services. Cost of revenue fell due to lower subcontracting costs and more efficient product implementation. Gross profit turned positive, but higher G&A—attributed to amortization, new employees, and stock, option, and warrant expense—contributed to a larger net loss. Interest expense increased to $24,967 from $3,536; a $9,000 unrealized investment loss also affected Q1 2013, versus a $25,500 unrealized gain in Q1 2012.
Total liabilities were $626,445 at March 31, 2013, down from $2,957,106 at year-end, primarily reflecting debt and related-party liability conversions or repayments. Current liabilities were $524,645; current assets were $143,545. Notes and loans payable included $24,000 current and $91,800 long-term, plus a $10,000 related-party loan. Intangible assets were $3,361,264 and goodwill was $700,528. The company had 43,062,199 shares outstanding at March 31, versus 35,192,045 at December 31.
Material transactions and changes
- AudioEye completed its merger with AudioEye Acquisition Corporation (AEAC) effective March 25, 2013. AEAC’s former debenture holders converted $1,400,200 principal and $67,732 accrued interest into 5,871,752 AudioEye shares; AEAC’s former shareholders received 24,004,143 shares held by AEAC. The merger extinguished certain former-stockholder rights and was accounted for as a common-control combination with historical statements adjusted retroactively.
- In February, the company repaid a $425,000 secured note to CMGO Investors LLC with $200,000 cash and 1,998,402 shares valued at $241,339. The cash-flow statement reports $206,000 in note repayments during the quarter.
- Related-party payables of $829,418 were eliminated in connection with warrants issued to related parties. The warrants cover up to 3,652,672 shares at $0.25 per share, vest over three years, and expire in 2018.
- For five years, a CMGO royalty agreement requires payment of 10% of qualifying net patent-enforcement and licensing receipts. A services agreement provides CMGO commissions on certain revenue it procures.
Outlook, risks, and controls
The filing provides no numerical revenue or earnings guidance. Management says the company needs additional capital through equity, debt, or borrowing to fund its business plan and warns that sufficient financing may not be available on acceptable terms. The going-concern note states that recurring losses, accumulated deficit of $906,708, and working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern; the financial statements include no adjustments for a possible failure to continue.
Management identifies potential opportunity in website accessibility, including government websites, but the filing does not quantify expected demand or future results. The company reported no legal proceedings and no material off-balance-sheet arrangements. Disclosure controls were deemed ineffective as of March 31, 2013 because of a material weakness involving insufficient levels of supervision and review. The cover page also marks “No” for having filed all required Exchange Act reports during the preceding 12 months and for required Interactive Data File submission and posting.
Important facts for investors to verify
- Whether AudioEye obtained adequate financing after quarter-end and how its liquidity and going-concern status changed.
- The effect of merger-related and other share issuances, warrant exercises, and options on ownership and future dilution.
- The sustainability and composition of the sharp revenue increase, gross-margin improvement, and elevated G&A costs.
- The status and economic value of the patent portfolio, including any licensing or enforcement receipts and associated CMGO payments.
- Whether the reporting-filing and interactive-data deficiencies indicated on the cover page were resolved, and whether the material weakness in disclosure controls was remediated.