AudioEye, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. AudioEye sells web accessibility software subscriptions and related managed services and implementation.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $124,702 | $101,038 |
| Gross loss | $(170,106) | $(361,093) |
| Operating expenses | $818,546 | $2,663,820 |
| Operating loss | $(988,652) | $(3,024,913) |
| Net loss | $(4,510,876) | $(3,021,806) |
| Net loss per share | $(0.06) | $(0.04) |
| Cash used in operating activities | $(564,700) | $(2,418,916) |
- Revenue rose about 23%. Gross loss narrowed as implementation costs declined; gross margin remained negative (approximately -136% versus -357%).
- Operating expenses fell substantially, led by lower general and administrative and selling and marketing costs. Management attributed the reductions primarily to staff cuts, lower benefits and stock-based compensation, and reduced product-development activity.
- Net loss increased because of a $3.41 million non-cash loss from remeasuring derivative warrant liabilities, plus $110,165 of net interest expense. Excluding that derivative loss, reported net loss would still include operating losses and interest expense.
- Cash fell $606,767 during the quarter, to $1,080,490. Investing cash use was $36,067; financing cash use was $6,000.
Balance sheet, debt and liquidity
- At March 31, cash was $1.08 million, total assets $4.63 million, total liabilities $6.40 million, and stockholders’ deficit $1.76 million.
- Current assets were $1.19 million and current liabilities $4.43 million, producing a $3.24 million working-capital deficit. The $3.85 million derivative liability was the principal driver; excluding it, management reported working capital of $612,675.
- Long-term convertible notes and loans, net, were $1.96 million; current notes and loans were $24,000. The 2015 convertible notes carried 10% payable-in-kind interest, were secured by company assets, and were convertible upon a qualifying equity financing.
- Management said it expected to have sufficient funds for at least 12 months and anticipated lower operating cash use over time. It cautioned that failure to execute its plan could require additional financing or reductions in costs and operations.
Material changes and subsequent events
- Revenue increased, while gross losses and operating losses narrowed year over year; nevertheless, losses remained significant and cash declined.
- Derivative liabilities rose from $439,361 at year-end to $3,851,420 at March 31, mainly because the share price increased. This Level 3 fair-value estimate generated a large non-cash quarterly loss.
- After quarter-end, the company agreed to sell up to $2.0 million of common stock and warrants; it had received $1.5 million net proceeds by May 10, 2016.
- On April 18, holders other than Anthion received 12,834,800 common shares, while Anthion received 18,353,311 warrants, in settlement of $2.5 million of convertible notes and $74,658 accrued interest. The amendments also changed conversion and change-of-control terms. These transactions materially affect capitalization and potential dilution.
- At March 31, the company had 81.7 million common shares outstanding; 105.4 million were reported issued and outstanding as of May 13. It also had 21.8 million options and 43.4 million warrants outstanding at quarter-end.
- Three customers and affiliates generated approximately 72% of Q1 revenue. Contract disclosures showed $515,595 of fixed-contract value beyond amounts recognized and deferred revenue; management said this was expected to be recognized in future periods.
Risks, contingencies and controls
- Two shareholder class-action lawsuits filed in 2015 relate to previously reported financial results and guidance. The company disputes the claims, but management said it could not assess the probability or reasonably estimate potential losses.
- Management concluded disclosure controls and procedures were ineffective as of March 31, 2016, citing omissions in GAAP disclosures that it said had been substantially corrected. It also reported engaging an outside financial expert to assist with complex accounting and reporting.
- The filing identifies no material changes to the risk factors in the 2015 Form 10-K. Results for the quarter are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether subsequent financing proceeds and debt settlement provide adequate liquidity, and what further financing may be required.
- The dilution and conversion implications of the post-quarter share and warrant issuances, including the unusually large warrant and option overhang.
- Whether revenue growth and improved cost levels can continue while the company moves toward positive gross margins and operating cash flow.
- The assumptions and sensitivity behind the Level 3 derivative valuation and its potential future effect on reported earnings.
- Customer concentration, expected timing and collectability of contract revenue, and developments in the shareholder litigation and control-remediation efforts.