AUDIOEYE INC - Quarter Report: 2014 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from [ ] to [ ]
Commission file number 333-177463
AudioEye, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
20-2939845 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
5210 East Williams Circle, Fifth |
|
|
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: 866-331-5324
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer o |
|
Accelerated filer o |
|
|
|
|
|
Non-accelerated filer o |
|
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 7, 2014, 70,602,753 shares of the registrant’s common stock were issued and outstanding.
|
|
|
Page |
|
|
|
|
|
| ||
|
|
|
|
|
1 | ||
|
|
|
|
|
|
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (unaudited) |
2 |
|
|
|
|
|
|
3 | |
|
|
|
|
|
|
4 | |
|
|
|
|
|
|
5 | |
|
|
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 | |
|
|
|
|
|
|
|
|
|
20 | ||
|
|
|
|
|
20 | ||
|
|
|
|
|
| ||
|
|
|
|
|
20 | ||
|
|
|
|
|
21 | ||
|
|
|
|
|
21 | ||
|
|
|
|
|
22 | ||
|
|
|
|
|
22 | ||
|
|
|
|
|
22 | ||
|
|
|
|
|
23 | ||
|
|
|
|
|
|
|
PART I — FINANCIAL INFORMATION
The financial information set forth below with respect to the financial statements as of September 30, 2014 and 2013 and for the three and nine month periods ended September 30, 2014 and 2013 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three and nine month periods ended September 30, 2014 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31.
AUDIOEYE, INC.
(UNAUDITED)
|
|
|
September 30, |
|
December 31, |
| ||
|
ASSETS |
|
|
|
|
| ||
|
Current Assets |
|
|
|
|
| ||
|
Cash |
|
$ |
2,151,849 |
|
$ |
1,847,004 |
|
|
Accounts receivable, net |
|
695,744 |
|
569,297 |
| ||
|
Related party receivables |
|
27,500 |
|
82,250 |
| ||
|
Prepaid assets and security deposits |
|
5,189,330 |
|
— |
| ||
|
Marketable securities |
|
48,000 |
|
— |
| ||
|
Total Current Assets |
|
8,112,423 |
|
2,498,551 |
| ||
|
|
|
|
|
|
| ||
|
Property and equipment, net |
|
1,450 |
|
3,847 |
| ||
|
Intangible assets, net |
|
5,195,627 |
|
3,073,945 |
| ||
|
Goodwill |
|
700,528 |
|
700,528 |
| ||
|
Total Assets |
|
14,010,028 |
|
$ |
6,276,871 |
| |
|
|
|
|
|
|
| ||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
Current Liabilities |
|
|
|
|
| ||
|
Accounts payable and accrued expenses |
|
$ |
534,779 |
|
$ |
416,531 |
|
|
Notes and loans payable-current, net of unamortized discounts of $0 and $1,155, respectively |
|
24,000 |
|
172,845 |
| ||
|
Related party payables |
|
— |
|
243,424 |
| ||
|
Related party loans |
|
— |
|
35,000 |
| ||
|
Total Current Liabilities |
|
558,779 |
|
867,800 |
| ||
|
|
|
|
|
|
| ||
|
Long Term Liabilities |
|
|
|
|
| ||
|
Notes and loans payable-long term |
|
57,800 |
|
79,800 |
| ||
|
Total Long Term Liabilities |
|
57,800 |
|
79,800 |
| ||
|
Total Liabilities |
|
616,579 |
|
947,600 |
| ||
|
|
|
|
|
|
| ||
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
Preferred stock, $0.00001 par value, 10,000,000 shares authorized, none issued and outstanding, as of September 30, 2014 and December 31, 2013 |
|
— |
|
— |
| ||
|
Common stock, $0.00001 par value, 250,000,000 shares authorized, 70,552,753 and 53,239,369 issued and outstanding, as of September 30, 2014 and December 31, 2013 respectively |
|
705 |
|
532 |
| ||
|
Treasury stock |
|
(623,000 |
) |
(623,000 |
) | ||
|
Additional paid-in capital |
|
20,400,247 |
|
13,231,212 |
| ||
|
Accumulated deficit |
|
(6,384,503 |
) |
(7,279,473 |
) | ||
|
Total Stockholders’ Equity |
|
13,393,449 |
|
5,329,271 |
| ||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
14,010,028 |
|
$ |
6,276,871 |
|
See Notes to Unaudited Consolidated Financial Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Revenue |
|
$ |
4,836,286 |
|
$ |
344,414 |
|
$ |
8,877,955 |
|
$ |
748,693 |
|
|
Revenue from related party |
|
1,125 |
|
37,125 |
|
5,375 |
|
57,375 |
| ||||
|
Total revenues |
|
4,837,411 |
|
381,539 |
|
8,883,330 |
|
806,068 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Cost of revenues |
|
1,084,988 |
|
130,771 |
|
1,460,453 |
|
226,561 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Gross profit |
|
3,752,423 |
|
250,768 |
|
7,422,877 |
|
579,507 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
|
Selling and marketing |
|
546,265 |
|
117,893 |
|
1,301,365 |
|
167,509 |
| ||||
|
Research and development |
|
153,188 |
|
— |
|
391,958 |
|
— |
| ||||
|
General and administrative expenses |
|
1,548,851 |
|
889,095 |
|
4,352,398 |
|
1,880,726 |
| ||||
|
Amortization and depreciation |
|
189,602 |
|
89,823 |
|
462,326 |
|
269,135 |
| ||||
|
Total operating expenses |
|
2,437,906 |
|
1,096,811 |
|
6,508,047 |
|
2,317,370 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Operating income (loss) |
|
1,314,517 |
|
(846,043 |
) |
914,830 |
|
(1,737,863 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Other income (expense) |
|
|
|
|
|
|
|
|
| ||||
|
Unrealized loss on marketable securities |
|
(12,000 |
) |
(9,000 |
) |
(12,000 |
) |
(18,000 |
) | ||||
|
Interest expense |
|
(416 |
) |
(15,767 |
) |
(7,860 |
) |
(40,933 |
) | ||||
|
Total other income (expense) |
|
(12,416 |
) |
(24,767 |
) |
(19,860 |
) |
(58,933 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net income (loss) |
|
$ |
1,302,101 |
|
$ |
(870,810 |
) |
$ |
894,970 |
|
$ |
(1,796,796 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net income (loss) per common share - basic |
|
$ |
0.02 |
|
$ |
(0.02 |
) |
$ |
0.02 |
|
$ |
(0.04 |
) |
|
Net income (loss) per common share - diluted |
|
$ |
0.02 |
|
$ |
(0.02 |
) |
$ |
0.01 |
|
$ |
(0.04 |
) |
|
Weighted average common shares outstanding - basic |
|
61,062,150 |
|
44,385,177 |
|
55,993,097 |
|
41,668,724 |
| ||||
|
Weighted average common shares outstanding - diluted |
|
70,568,775 |
|
44,385,177 |
|
68,499,722 |
|
41,668,724 |
| ||||
See Notes to Unaudited Consolidated Financial Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Nine Months Ended |
| ||||
|
|
|
September 30, 2014 |
|
September 30, 2013 |
| ||
|
|
|
|
|
|
| ||
|
Cash Flows from Operating Activities: |
|
|
|
|
| ||
|
Net income (loss) |
|
$ |
894,970 |
|
$ |
(1,796,796 |
) |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
| ||
|
Depreciation and amortization |
|
462,326 |
|
269,135 |
| ||
|
Stock, option and warrant expense |
|
1,538,557 |
|
593,019 |
| ||
|
Shares issued for services |
|
778,927 |
|
50,000 |
| ||
|
Unrealized loss on marketable securities |
|
12,000 |
|
18,000 |
| ||
|
Amortization of debt discount |
|
1,155 |
|
— |
| ||
|
Licenses sold in exchange for licenses |
|
(2,025,000 |
) |
— |
| ||
|
Licenses sold in exchange for prepaid services |
|
(6,075,000 |
) |
— |
| ||
|
Changes in operating assets and liabilities: |
|
|
|
|
| ||
|
Accounts receivable |
|
(186,447 |
) |
(104,394 |
) | ||
|
Related party receivable |
|
54,750 |
|
(72,000 |
) | ||
|
Prepaid and other assets |
|
885,670 |
|
— |
| ||
|
Accounts payable and accruals |
|
139,762 |
|
146,857 |
| ||
|
Deferred revenue |
|
— |
|
(54,823 |
) | ||
|
Related party payables |
|
(243,424 |
) |
274,583 |
| ||
|
Net cash used in operating activities |
|
(3,761,754 |
) |
(676,419 |
) | ||
|
|
|
|
|
|
| ||
|
Cash Flows from Investing Activities: |
|
|
|
|
| ||
|
Cash paid for intangible assets |
|
(556,611 |
) |
(9,890 |
) | ||
|
Net cash used in investing activities |
|
(556,611 |
) |
(9,890 |
) | ||
|
|
|
|
|
|
| ||
|
Cash Flows from Financing Activities: |
|
|
|
|
| ||
|
Repayment of note payable |
|
(172,000 |
) |
(218,000 |
) | ||
|
Repayment of related party loans |
|
(35,000 |
) |
— |
| ||
|
Borrowings on debt |
|
— |
|
502,500 |
| ||
|
Issuance of common stock for cash, net of issuance costs |
|
1,305,689 |
|
426,346 |
| ||
|
Proceeds from exercise of options and warrants, net of issuance costs |
|
3,524,521 |
|
37,188 |
| ||
|
Net cash provided by financing activities |
|
4,623,210 |
|
748,034 |
| ||
|
|
|
|
|
|
| ||
|
Net increase in cash |
|
304,845 |
|
61,725 |
| ||
|
Cash - beginning of period |
|
1,847,004 |
|
11,710 |
| ||
|
Cash - end of period |
|
$ |
2,151,849 |
|
$ |
73,435 |
|
|
|
|
|
|
|
| ||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
| ||
|
Interest paid |
|
$ |
7,444 |
|
$ |
24,967 |
|
|
Income taxes paid |
|
— |
|
— |
| ||
|
|
|
|
|
|
| ||
|
NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
| ||
|
Common stock issued for conversion of debt |
|
$ |
— |
|
$ |
1,709,291 |
|
|
Warrants issued for accrued payroll |
|
21,514 |
|
1,073,751 |
| ||
|
Common stock issued for accounts payable |
|
— |
|
50,000 |
| ||
|
Accounts payable converted into debt |
|
— |
|
30,000 |
| ||
|
Debt discount from warrants issued with debt |
|
— |
|
6,930 |
| ||
|
Accounts receivable converted to marketable securities |
|
60,000 |
|
— |
| ||
See Notes to Unaudited Consolidated Financial Statements
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements of AudioEye, Inc. and its wholly-owned subsidiary (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2014.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2013 as reported in the Company’s Annual Report on Form 10-K have been omitted.
Corporate Information and Background
AudioEye, Inc. was formed as a Delaware corporation on May 20, 2005. The Company focuses on working to improve the mobility, usability and accessibility of all Internet-based content through the development, sale, licensing and use of its proprietary accessibility technologies. Audio Internet® is a technology that utilizes patented architecture to deliver a fully accessible audio equivalent of a visual website or mobile website in a compliant format that can be navigated, utilized, interacted with, and transacted from, without the use of a monitor or mouse, by individuals with visual impairments. For individuals with hearing impairments, Audio Internet® provides captioning for websites, and the challenges of reaching those with other impairments are also addressed by the technology platform.
Complete with an ever-growing suite of utilities tailored to the needs of different disabled users, the AudioEye® Audio Internet® Accessibility Platform is a fully scalable cloud-based solution designed and developed to meet the needs and compliance mandates for an ever-growing demographic.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
Revenue Recognition
Revenue is recognized when all applicable recognition criteria have been met, which generally include: (a) persuasive evidence of an existing arrangement; (b) a fixed or determinable price; (c) delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably assured. For software and technology development contracts, where applicable, the Company recognizes revenues on a percentage of completion method based upon several factors including but not limited to: (a) an estimate of total hours and milestones to complete; (b) the total hours completed; (c) the delivery of services rendered; (d) the change in estimates; and (e) the collectability of the contract.
Licensing revenues for intangible assets, including intellectual property such as patents and trademarks, are recognized when all of the following criteria have been met: (a) persuasive evidence of an existing arrangement; (b) a fixed or determinable price; (c) the delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably assured. Licensing revenues are recognized over the term of the
contract or, in the case of a perpetual license, revenues are recognized in the period the criteria have been met. In transactions where the Company engages in a non-cash exchange of a license of the Company for the license of the Company’s customer, the Company follows Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The licenses received from the Company’s customers are sold, licensed or leased in a different line of business from the Company license delivered to the Company’s customers in the exchange. The fair value of the technology or products exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence with the purpose to enhance product offerings for the sale or license to third parties. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The contracts are then evaluted for commercial substance, including that the licenses received by the Company in the exchange are expected, at the time of the exchange, to be deployed and used by the software vendor and the value ascribed to the transaction reasonably reflects such expected use.
In transactions where the Company engages in a non-cash exchange of a license of the Company for the services of the Company’s customer, the Company follows ASC 985-605 and ASC 985-845-10. The fair value of the technology or services exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence. The Company uses fair value guidance of the VSOE under ASC 985-605. The revenue under these transactions is recognized upon delivery of the license and the services received in exchange are recognized as a prepaid asset that is amortized to expense as the services are received. The Company evaluates whether the period over which the services are received requires treatment as extended payment terms under ASC 985-605-25-33 and the Company evaluates the collectibility of the services to be received under ASC 985-605.
For the three and nine months ended September 30, 2014, the Company sold an aggregate of nineteen and thirty-six licenses, respectively, with a fair value of $225,000 per license, in exchange for either a license to their intellectual property or prepaid services. The licenses exchanged were determined to meet the aforementioned criteria. During the three and nine months ended September 30, 2014, nonmonetary revenue of $4,275,000 and $8,100,000, respectively, was recognized. This resulted in an increase to intangible assets and prepaid expenses of $2,025,000 and $6,075,000, respectively.
Total revenues for the three and nine months ended September 30, 2014 and 2013 consisted of the following:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
Revenues |
|
$ |
561,286 |
|
$ |
344,414 |
|
$ |
777,955 |
|
$ |
748,693 |
|
|
Revenue from related party |
|
1,125 |
|
37,125 |
|
5,375 |
|
57,375 |
| ||||
|
Revenues from nonmonetary transactions |
|
4,275,000 |
|
— |
|
8,100,000 |
|
— |
| ||||
|
Total revenues |
|
$ |
4,837,411 |
|
$ |
381,539 |
|
$ |
8,883,330 |
|
$ |
806,068 |
|
The nonmonetary transactions for the three and nine months ended September 30, 2014 and 2013 supported by vendor-specific objective evidence of fair value are listed in the table below:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
Revenues from license exchanges |
|
$ |
1,350,000 |
|
$ |
— |
|
$ |
2,025,000 |
|
$ |
— |
|
|
Revenues from service exchanges |
|
2,925,000 |
|
— |
|
6,075,000 |
|
— |
| ||||
|
Revenues from nonmonetary transactions |
|
$ |
4,275,000 |
|
$ |
— |
|
$ |
8,100,000 |
|
$ |
— |
|
NOTE 2: RELATED PARTY TRANSACTIONS
As of September 30, 2014 and December 31, 2013, related party loans totaled $0 and $35,000, respectively. The Company repaid $35,000 of related party loans during the nine months ended September 30, 2014.
As of September 30, 2014 and December 31, 2013, there were related party payables of $0 and $243,424, respectively, for services performed by related parties. During the nine months ended September 30, 2014, the Company repaid $243,424 to related parties for services, payroll and reimburseable expenses.
As of September 30, 2014 and December 31, 2013, there were outstanding receivables of $27,500 and $82,250, respectively, for services performed for related parties.
For the three and nine months ended September 30, 2014 and 2013, there were revenues earned of $1,125 and $37,125 and $5,375 and $57,375, respectively, for services performed for related parties.
NOTE 3: NOTES PAYABLE
As of September 30, 2014 and December 31, 2013, the Company had the short term and long term notes payable as shown in the table below.
|
Notes and loans payable |
|
September 30, |
|
December 31, |
| ||
|
|
|
|
|
|
| ||
|
Short Term |
|
|
|
|
| ||
|
Maryland TEDCO Note |
|
$ |
24,000 |
|
$ |
24,000 |
|
|
Note Payable (net of $0 and $1,155 discount, respectively) |
|
— |
|
148,845 |
| ||
|
Total |
|
$ |
24,000 |
|
$ |
172,845 |
|
|
Long Term |
|
|
|
|
| ||
|
Maryland TEDCO Note |
|
$ |
57,800 |
|
$ |
79,800 |
|
|
Total |
|
$ |
57,800 |
|
$ |
79,800 |
|
The Company previously had an outstanding loan from a third party in the amount of $74,900, which was originally issued during 2006 as part of an investment agreement. The loan was unsecured and bore interest at 25% per year for four years. The Company had accrued interest of $74,900, which was included in accounts payable and accrued expenses on the balance sheet. The note was in default until October 24, 2011, at which time the Company entered into a Termination and Release Agreement (“Release”) with the noteholder. The terms of the Release, among other things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the noteholder in the combined amount of principal and accrued interest owed to date, for a total principal amount of $149,800 (the “Maryland TEDCO Note”). The Maryland TEDCO Note is interest free, and is payable in monthly installments of $2,000 beginning November 1, 2011. During the nine months ending September 30, 2014, the Company made cash payments of $22,000 on this note. As of September 30, 2014 and December 31, 2013, the principal amount owed was $81,800 and $103,800, respectively, of which $24,000 and $24,000, respectively, has been recorded as the current portion of the note, and $57,800 and $79,800, respectively, as the long-term portion of the note.
On August 3, 2013, the Company borrowed $150,000 from a third party with a coupon rate of 10%, due on September 10, 2013 with a warrant to purchase 20,000 common shares that vested immediately with a strike price of $0.50. The warrant was valued at $6,930 on August 3, 2013 using a closing price that day of $0.47, a strike price of $0.50, term of 5 years, volatility of 100%, dividends of 0%, and a discount rate of 1.36%. The value of the warrant of $6,930 was reflected as a discount to the note for a net amount of $143,070. For the year ended December 31, 2013, interest was accrued in the amount of $2,384 and $5,755 was recognzied as amortization
expense. During the nine months ending September 30, 2014, the note principal of $150,000 and interest of $3,658 was paid in full and $1,155 was recognized as amortization expenses.
NOTE 4: STOCKHOLDERS’ EQUITY
As of September 30, 2014 and December 31, 2013, the Company had 70,552,753 and 53,239,369 shares of common stock issued and outstanding, respectively.
On January 30, 2014, the Company sold an aggregate of 666,667 units to two accredited investors for gross proceeds of $200,000 in the second closing of a private placement (the “Second Private Placement”). Placement fees of $18,463 were paid and the Company received net proceeds of $181,537. The units in the Second Private Placement consisted of 666,667 shares of the Company’s common stock and warrants to purchase an additional 666,667 shares of the Company’s common stock. The warrants in the Second Private Placement have a term of five years and an exercise price of $0.40 per share.
On February 3, 2014, the Company issued 44,307 shares of common stock valued at $13,292 and a five-year warrant to purchase 44,307 shares of common stock with a strike price of $0.40 for services. The Company used the Black-Scholes option pricing model to estimate the fair value of the warrants with a volatility of 100% and a risk free rate of 1.44% resulting in a fair value of $8,186, which was completely expensed in the current period. The warrant was issued to compensate for consulting services provided by a third-party. The shares were valued at the market price of the respective date of issuance.
On March 27, 2014, the Company filed a Certificate of Amendment to the Certificate of Incorporation increasing the authorized number of shares of Company common stock to 250,000,000 from 100,000,000.
On March 28, 2014, the Company issued 49,496 shares of common stock pursuant to the cashless exercise of 100,000 options.
From January 1, 2014 through March 31, 2014, the Company also issued 100,000 shares of common stock for services valued at $28,500 with no future period amortization and 1,300,000 shares of common stock pursuant to exercise of warrants for total proceeds of $13,000. The shares were valued at the market price of the respective date of issuance.
On June 30, 2014, the Company sold an aggregate of 2,766,667 units to three accredited investors for gross proceeds of $830,000 in the third closing of a private placement (the “Third Private Placement”). Placement fees of $55,848 were paid and the Company received net proceeds of $774,152. The units in the Third Private Placement consisted of 2,766,667 shares of the Company’s common stock and warrants to purchase an additional 2,766,667 shares of the Company’s common stock. The warrants have a term of five years and an exercise price of $0.40 per share.
From April 1, 2014 through June 30, 2014, the Company also issued 1,071,916 shares of common stock for services for an expense of $354,835 with no future period amortization. Additionally, the Company issued 17,870 shares of common stock pursuant to the cashless exercise of 50,000 warrants.
In July 2014, the Company offered holders of a series of its warrants, including the warrants issued in the Second Private Placement and the Third Private Placement, the opportunity to exercise their warrants for a 10% discount to the stated exercise price in exchange for their agreement to exercise their warrants in full and for cash on or before July 31, 2014. Under the warrant exercise offer, in July 2014 the Company issued 10,027,002 shares of common stock pursuant to exercise of warrants for gross proceeds of $3,632,801 and net proceeds of $3,501,521 after investment banking fees of $131,280.
On July 17, 2014, the Company issued 34,459 shares of common stock pursuant to the cashless exercise of 75,000 common stock warrants.
From July 1, 2014 through September 30, 2014, the Company also issued 515,000 shares of common stock for services valued at $382,300 with no future period amortization.
In September 2014, the Company issued 20,000 shares of common stock pursuant to the exercise of 20,000 warrants at a strike price of $0.50 for proceeds of $10,000.
On September 30, 2014, the Company sold an aggregate of 700,000 units to two accredited investors for gross proceeds of $350,000 in the closing of a private placement (the “Summer Private Placement”). The units in the Summer Private Placement consisted of 700,000 shares of the Company’s common stock and warrants to purchase ¼ of a share for every common share purchased or an additional 175,000 shares of the Company’s common stock. The warrants have a term of five years and an exercise price of $0.60 per share.
NOTE 5: OPTIONS
As of September 30, 2014 and December 31, 2013, the Company has 11,306,850 and 4,485,250 options to purchase shares of common stock issued and outstanding, respectively, as follows:
|
|
|
Number of |
|
Wtd Avg. |
|
Wtd Avg. |
|
Intrinsic |
| ||
|
Outstanding at December 31, 2013 |
|
4,485,250 |
|
$ |
0.38 |
|
3.96 |
|
$ |
105,410 |
|
|
|
|
|
|
|
|
|
|
|
| ||
|
Granted |
|
7,096,600 |
|
0.51 |
|
|
|
|
| ||
|
Less Forfeited |
|
100,000 |
|
0.79 |
|
|
|
|
| ||
|
Less Exercised |
|
175,000 |
|
0.31 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
| ||
|
Outstanding at September 30, 2014 |
|
11,306,850 |
|
$ |
0.46 |
|
4.00 |
|
$ |
709,393 |
|
The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation during the nine months ended September 30, 2014 include expected terms of 2.50 to 3.33 years, expected volatility of 100%, risk free interest rate of 0.83% to 1.76%, and expected dividend yield of 0%.
On January 27, 2014, the Company awarded 1,500,000 options, one third of which vested immediately, one third vest upon the Company reporting a minimum of $10 million in annualized revenues by the second anniversary of the grant date and one third vest upon the Company reporting a minimum of $20 million in annualized reveunes by the third anniversary of the grant date, with an exercise price of $0.40 per share and an expiration date of January 27, 2019. The fair value on the grant date of the options was $303,562 and it is being recognized over the vesting period of the options.
On February 17, 2014, the Company awarded 55,000 options, which vest over three years, with an exercise price of $0.305 per share and an expiration date of February 17, 2019. The fair value on the grant date of the options was $10,556 and it is being recognized over the vesting period of the options.
On March 3, 2014, the Company awarded 250,000 options, of which 20% vested immediately and 20% vest every 90 days thereafter, with an exercise price of $0.40 per share and an expiration date of March 3, 2019. The fair value on the grant date of the options was $36,935 and it is being recognized over the vesting period of the options.
On March 24, 2014, the Company awarded 2,522,100 options, which vest over three years,with the exception of 200,000 options issued to one individual that vested immediately upon grant. The options have an exercise price of $0.45 per share and an expiration date of March 24, 2019. The fair value on the grant date of the options was $724,948 and it is being recognized over the vesting period of the options.
On June 2, 2014 and June 9, 2014, the Company awarded 175,000 options, which vest over three years. The options have an exercise price of $0.33 per share and an expiration date of June 2, 2019 and June 9, 2019. The fair value on the grant date of the options was $35,834 and it is being recognized over the vesting period of the options.
On June 11, 2014 and June 30, 2014, the Company awarded 400,000 options, which vest over three years. The options have an exercise price of $0.33 and $0.34 per share and an expiration date of June 11, 2019 and June 30, 2019. The fair value on the grant date of the options was $68,830 and it is being recognized over the vesting period of the options.
On July 1, 2014, the Company awarded 262,500 options, which vest over three years. The options have an exercise price of $0.35 per share and an expiration date of July 1, 2019. The fair value on the grant date of the options was $54,788 and it is being recognized over the vesting period of the options.
On July 21, 2014, the Company awarded 22,000 options, which vest over three years. The options have an exercise price of $0.91 per share and an expiration date of July 21, 2019. The fair value on the grant date of the options was $12,882 and it is being recognized over the vesting period of the options.
On July 22, 2014, the Company awarded 250,000 options, of which 20% vested immediately and 20% vest every 90 days thereafter, with an exercise price of $0.65 per share and an expiration date of July 22, 2019. The fair value on the grant date of the options was $97,876 and it is being recognized over the vesting period of the options.
On July 23, 2014, the Company awarded 125,000 options, which vest over three years. The options have an exercise price of $1.07 per share and an expiration date of July 23, 2019. The fair value on the grant date of the options was $80,905 and it is being recognized over the vesting period of the options.
On July 28, 2014, the Company awarded 75,000 options, which vest over three years. The options have an exercise price of $0.92 per share and an expiration date of July 28, 2019. The fair value on the grant date of the options was $42,981 and it is being recognized over the vesting period of the options.
On August 18, 2014, the Company awarded 60,000 options, which vest over three years. The options have an exercise price of $0.65 per share and an expiration date of August 18, 2019. The fair value on the grant date of the options was $25,067 and it is being recognized over the vesting period of the options.
On September 2, 2014, the Company awarded 130,000 options, which vest over three years. The options have an exercise price of $0.70 per share and an expiration date of September 2, 2019. The fair value on the grant date of the options was $58,548 and it is being recognized over the vesting period of the options.
On September 5, 2014, the Company awarded 1,220,000 options, which vest over three years. The options have an exercise price of between and $0.65 and $0.70 per share and an expiration date of September 5, 2019. The fair value on the grant date of the options was $593,826 and it is being recognized over the vesting period of the options.
On September 8, 2014, the Company awarded 25,000 options, which vest over three years. The options have an exercise price of $0.775 per share and an expiration date of September 5, 2019. The fair value on the grant date of the options was $11,750 and it is being recognized over the vesting period of the options.
On September 12, 2014, the Company awarded 25,000 options, which vest over three years. The options have an exercise price of $0.78 per share and an expiration date of September 12, 2019. The fair value on the grant date of the options was $11,945 and it is being recognized over the vesting period of the options.
For the nine months ended September 30, 2014 and 2013, stock compensation expense related to options totaled totaled $1,000,526 and $458,765, respectively.
NOTE 6: WARRANTS
Below is a table summarizing the Company’s outstanding warrants as of September 30, 2014 and December 31, 2013:
|
|
|
Number of |
|
Wtd Avg. |
|
Wtd Avg. |
|
Intrinsic |
| ||
|
Outstanding at December 31, 2013 |
|
18,770,591 |
|
$ |
0.35 |
|
4.64 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
| ||
|
Granted |
|
6,317,011 |
|
0.46 |
|
|
|
|
| ||
|
Less Exercised |
|
11,397,002 |
|
0.36 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
| ||
|
Outstanding at September 30, 2014 |
|
13,690,600 |
|
$ |
0.40 |
|
3.68 |
|
$ |
984,178 |
|
The warrants were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation during the nine months ended September 30, 2014 include expected terms of 1.50 to 2.50 years, expected volatility of 100%, risk free interest rate of 0.29% to 1.76%, and expected dividend yield of 0%.
On January 27, 2014, the Company issued five-year fully-vested warrants to purchase 250,000 shares of common stock with an exercise price of $0.40 per share. The fair value on the grant date of the warrants was $44,370 and was expensed during the nine months ended September 30, 2014.
On January 30, 2014, the Company sold an aggregate of 666,667 units to two accredited investors for gross proceeds of $200,000 in the Second Private Placement. The units in the Second Private Placement consisted of 666,667 shares of common stock and warrants to purchase an additional 666,667 shares of common stock, as well as 53,334 placement agent warrants. The warrants in the Second Private Placement have a term of five years, an exercise price of $0.40 per share and a fair value determined to be $122,287.
On February 3, 2014, the Company issued 44,307 shares of common stock and five-year fully-vested warrants to purchase 44,307 shares of common stock with an exercise price of $0.40 per share for payment for services. The fair value on the grant date of the warrants was $8,186 and was expensed during the nine months ended September 30, 2014.
On March 24, 2014, the Company issued warrants to purchase 1,000,000 shares of common stock. The warrants vest as follows: one warrant share for every $10 of gross sales by the Company during the 12-month period immediately following the date of grant to customers introduced by an affiliate of the warrant holder. The warrants have an exercise price of $0.40 per share and an expiration date of March 24, 2019. The fair value on the grant date of the warrants was $321,746 and it is being expensed over the expected vesting period of the warrants.
On June 30, 2014, the Company sold an aggregate of 2,766,667 units to three accredited investors for gross proceeds of $830,000 in the Third Private Placement. The units in the Third Private Placement consisted of 2,766,667 shares of common stock and warrants to purchase an additional 2,766,667 shares of common stock, as
well as 168,000 placement agent warrants. The warrants in the Third Private Placement have a term of five years, an exercise price of $0.40 per share and a fair value determined to be $503,884.
On June 30, 2014, the Company issued three-year fully-vested warrants to purchase 100,000 shares of common stock with an exercise price of $0.35 per share for payment for services. The fair value on the grant date of the warrants was $13,202 and was expensed during the nine months ended September 30, 2014.
In July 2014, the Company offered holders of a series of its warrants, including the warrants issued in the Second Private Placement and the Third Private Placement, the opportunity to exercise their warrants for a 10% discount to the stated exercise price in exchange for their agreement to exercise their warrants in full and for cash on or before July 31, 2014. Under the warrant exercise offer, in July 2014 the Company warrants for 10,027,002 shares of common stock were exercised pursuant to this offer.
On July 17, 2014, the Company issued five-year warrants to purchase 25,000 shares of common stock that vest over twelve months and have an exercise price of $0.85 per share for payment for services. The fair value on the grant date of the warrants was $12,426 and it is being expensed over the vesting period of the warrants.
On August 25, 2014, the Company issued warrants to purchase 500,000 shares of common stock. The warrants vest as follows: one warrant share for every $10 of gross sales by the Company during the 12-month period immediately following the date of grant to customers introduced by the warrant holder. The warrants have an exercise price of $0.60 per share and an expiration date of August 25, 2017. The fair value on the grant date of the warrants was $198,374 and and it is being expensed over the expected vesting period of the warrants.
On August 27, 2014, the Company issued three-year fully-vested warrants to purchase 15,000 shares of common stock with an exercise price of $0.65 per share for payment for services. The fair value on the grant date of the warrants was $5,531 and it is being expensed over the vesting period of the warrants.
On August 29, 2014, the Company issued three-year fully-vested warrants to purchase 53,036 shares of common stock with an exercise price of $0.70 per share for the settlement of accrued payroll of $21,514. The fair value on the grant date of the warrants was $21,514.
On September 5, 2014, the Company issued five-year warrants to purchase 500,000 shares of common stock that vest over three years and have an exercise price of $0.79 per share for payment for services. The fair value on the grant date of the warrants was $253,999 and it is being expensed over the vesting period of the warrants.
On September 30, 2014, the Company sold an aggregate of 700,000 units to two accredited investors for gross proceeds of $350,000 in the Summer Private Placement. The units in the Summer Private Placement consisted of 700,000 shares of common stock and warrants to purchase ¼ of a share for every share purchased or an additional 175,000 shares of common stock. The warrants in the Summer Private Placement have a term of five years, an exercise price of $0.60 per share and a fair value determined to be $47,260.
For the nine months ended September 30, 2014 and 2013, the Company has incurred warrant-based expense of $189,172 and $59,254, respectively.
NOTE 7: PERFORMANCE SHARE UNITS
On January 27, 2014, the Company entered into a Performance Share Unit Agreement under the AudioEye, Inc. 2013 Incentive Compensation Plan with Paul Arena, the Company’s Executive Chairman. Mr. Arena was granted an award of up to an aggregate of 3,000,000 Performance Share Units (“PSUs”). Each PSU represents the right to receive one share of the Company’s common stock. The number of PSUs for a performance period will be determined by the level of achievement of performance goals in accordance with the terms and provisions of the Performance Share Unit Agreement.
On September 5, 2014, the Company entered into Performance Share Unit Agreements under the AudioEye, Inc. 2015 Incentive Compensation Plan with two employees. Each was granted an award of up to an aggregate of 200,000 PSUs. Each PSU represents the right to receive one share of the Company’s common stock. The number of PSUs for a performance period will be determined by the level of achievement of performance goals in accordance with the terms and provisions of the Performance Share Unit Agreement.
On September 30, 2014, the Company entered into a Performance Share Unit Agreement under the AudioEye, Inc. 2015 Incentive Compensation Plan with one employee. The employee was granted an award of up to an aggregate of 100,000 PSUs. Each PSU represents the right to receive one share of the Company’s common stock. The number of PSUs for a performance period will be determined by the level of achievement of performance goals in accordance with the terms and provisions of the Performance Share Unit Agreement.
Below is a table summarizing the Company’s outstanding performance share units as of September 30, 2014 and December 31, 2013:
|
|
|
Number of |
|
Wtd Avg. |
|
Wtd Avg. |
| |
|
Outstanding at December 31, 2013 |
|
1,000,000 |
|
$ |
0.45 |
|
1.75 |
|
|
|
|
|
|
|
|
|
| |
|
Granted |
|
3,500,000 |
|
0.39 |
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Outstanding at September 30, 2014 |
|
4,500,000 |
|
$ |
0.40 |
|
2.14 |
|
For the nine months ended September 30, 2014 and 2013, the Company has incurred performance share unit-based expense of $348,859 and $75,000, respectively.
For the nine months ended September 30, 2014 and 2013, aggregate stock compensation expense related to the options, warrants and performance stock units totaled $1,538,557 and $593,019, respectively. As of September 30, 2014, the aggregate stock compensation expense related to the options, warrants and performance stock units to be amortized through March 2017 is $2,310,338.
NOTE 8: INTANGIBLE ASSETS
As of September 30, 2014, patents, technology and other intangibles with contractual terms were generally amortized over their estimated useful lives of five or ten years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
Prior to any impairment adjustment, intangible assets consisted of the following:
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
|
| ||
|
Patents |
|
$ |
3,602,454 |
|
$ |
3,563,343 |
|
|
Software Development Costs |
|
517,500 |
|
— |
| ||
|
Licensing |
|
2,025,000 |
|
— |
| ||
|
Accumulated Amortization |
|
(949,327 |
) |
(489,398 |
) | ||
|
Intangible Assets, Net |
|
$ |
5,195,627 |
|
$ |
3,073,945 |
|
Software development costs and licensing intangible assets both have an estimated useful life of 3 years. Software development costs are incurred during the building of the Company’s Internet platform. Licensing costs are those costs incurred to use processes and technologies not developed by the Company. Both software development and licensing costs are subject to annual impairment testing. During the nine months ended September 30, 2014, $556,611 was capitalized as software development cost and patent acquisition costs. During the nine months ended September 30, 2014, a total of $2,025,000 of licenses were purchased by exchanging the Company’s own licenses and were accounted for as a non-cash transaction in accordance with ASC 985-845. See Note 1 for more details.
Amortization expense totaled $459,929 and $266,738 for the nine months ended September 30, 2014 and 2013, respectively.
NOTE 9: INVESTMENTS
In March 2013, the Company was granted an aggregate of 300,000 common shares in Beta Music Group, Inc. (OTCBB: BEMG) for consulting services. Beta Music Group, Inc. has not yet established an active trading market for shares of common stock as of September 30, 2014. The Company has received the 300,000 common shares and assigned a value of $0 to those shares until a liquid trading market is established.
On June 27, 2014, the Company and Ecologic Transportation, Inc. agreed to convert $60,000 of accounts receivable owed to the Company into 600,000 shares of Ecologic Transportation, Inc. common stock at a rate of $0.10 per share. The Ecologic Transportation, Inc. common stock has a value of $0.08 per share as of September 30, 2014, with an aggregate value of $48,000 as of such date resulting in an unrealized loss on marketable securities of $12,000 for the nine months ended September 30, 2014. The shares of Ecologic Transportation, Inc. common stock are expected to be issued to the Company in the fourth quarter of 2014.
NOTE 10: SUBSEQUENT EVENTS
On October 3, 2014, the Company awarded 300,000 options, which vest twenty percent upon grant and twenty percent every ninety days thereafter. The options have an exercise price of $0.60 per share and an expiration date of October 3, 2017.
On October 10, 2014 the Company issued 50,000 shares of common stock for services.
On October 16, 2014, the Company awarded 37,500 options, which vest over three years. The options have an exercise price of $0.65 per share and an expiration date of October 16, 2019.
On October 20, 2014, the Company awarded 115,000 options, which vest over three years. The options have an exercise price of $0.61 per share and an expiration date of October 20, 2019.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this quarterly report, the terms “we,” “us,” “our” and similar references refer to AudioEye, Inc. and our wholly-owned subsidiary, unless otherwise indicated.
Cautionary Note Regarding Forward-Looking Statements
Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”, “positioned”, “strategy”, “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in “Part I, Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended December 31, 2013. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.
Overview
AudioEye, Inc. was formed as a Delaware corporation on May 20, 2005. We focus on working to improve the mobility, usability and accessibility of all Internet-based content through the development, sale, licensing and use of our proprietary accessibility technologies. Our Audio Internet® is a technology that utilizes patented architecture to deliver a fully accessible audio equivalent of a visual website or mobile website in a compliant format that can be navigated, utilized, interacted with, and transacted from, without the use of a monitor or mouse, by individuals with visual impairments. For individuals with hearing impairments, Audio Internet® provides captioning for websites, and the challenges of reaching those with other impairments are also addressed by the technology platform.
Complete with an ever-growing suite of utilities tailored to the needs of different disabled users, the AudioEye® Audio Internet® Accessibility Platform is a fully scalable cloud-based solution designed and developed to meet the needs and compliance mandates for an ever-growing demographic.
We have developed patented Internet content publication and distribution software that enables conversion of any media into accessible formats and allows for real time distribution to end users on any Internet-connected device. We have a patent portfolio comprised of six patents in the United States, as well as several pending U.S. patents. Our portfolio includes a number of patents that describe unique systems and methods for navigating devices and Internet content, as well as publication and automated solutions that connect to any content management system, and can deliver a mobile, usable, and accessible user experience to any consumer device.
This patented technology is the foundation of our mission to become a leader in Internet accessibility, mobile audio Internet navigation, and multi-format publishing technology as well as Internet content publication and distribution software. Our management believes that there is significant market opportunity for our services as most websites are developed with the assumption that users can see the site, with the result that visually-impaired users have difficulty using such websites. Accordingly, providing accessibility services for these websites has become a significant market opportunity, as there are approximately 33 million computer users who have some form of visual impairment.
In October 2010, Congress passed and the President signed into law the Twenty-First Century Communication and Video Accessibility Act of 2010, which mandates that all government websites (city, state and federal) be compliant and provide accessibility to persons with disabilities. As a result, our management believes that providing accessibility services for these government websites has become a significant market opportunity in view of the potential demand for our patented solution.
Our Annual Report on Form 10-K for the year ended December 31, 2013 provides additional information about our business and operations.
Results of Operations
The discussion of the results of our operations compares the three and nine months ended September 30, 2014 with the three and nine months ended September 30, 2013 and are not necessarily indicative of the results which may be expected for any subsequent period. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in similar positions. We may not be successful in addressing these risks and difficulties.
Comparative for the Three Months ended September 30, 2014 and September 30, 2013
Revenue
For the three months ended September 30, 2014 and 2013, revenue was $4,836,286 and $344,414, respectively, consisting primarily of revenues from various levels of licensing, website design and maintenance. Revenues increased due to increased demand for our services and nonmonetary sales of our licenses. Additionally, for the three months ended September 30, 2014 and 2013, revenue from related parties was $1,125 and $37,125, respectively, consisting primarily of revenue from various levels of website design and maintenance.
Cost of Sales
For the three months ended September 30, 2014 and 2013, cost of sales was $1,084,988 and $130,771, respectively, consisting primarily of sub-contracting to outside sources, direct labor and direct technology costs.
Gross Profit
The increase in revenue resulted in a gross profit of $3,752,423 during the three months ended September 30, 2014 as compared to a gross profit of $250,768 for the three months ended September 30, 2013. Gross profit increased as a result of increasing license exchanges combined with consistent and efficient implementation costs of our products.
Selling and Marketing Expenses
Selling and marketing expenses were $546,265 and $117,893 for the three months ended September 30, 2014 and 2013, respectively. The increase results from the establishment of dedicated resources to actively sell and market our products and services.
Research and Development Expenses
Research and development expenses were $153,188 and $-0- for three months ended September 30, 2014 and 2013, respectively. Research and development expenses increased as a result of the establishment of a dedicated research and development group during 2013.
General and Administrative Expenses
General and administrative expenses were $1,548,851 and $889,095 for the three months ended September 30, 2014 and 2013, respectively. General and administrative expenses increased as a result of an increase in the number of employees and the associated benefits costs as well as increased stock, option and warrant expense.
Amortization and Depreciation
Amortization and depreciation expenses were $189,602 and $89,823 for the three months ended September 30, 2014 and 2013, respectively. The increase in expense was primarily related to an increase in intellectual property amortization.
Other Expenses
Other expenses were charges of $12,416 and $24,767 for the three months ended September 30, 2014 and 2013, respectively. The resulting change to expense was due to a minor increase in unrealized losses from marketable equity securities and a substantial decrease in interest expense.
Comparative for the Nine Months ended September 30, 2014 and September 30, 2013
Revenue
For the nine months ended September 30, 2014 and 2013, revenue was $8,877,955 and $748,693, respectively, consisting primarily of revenues from various levels of licensing, website design and maintenance. Revenues increased due to increased demand for our services and nonmonetary sales of our licenses. Additionally, for the nine months ended September 30, 2014 and 2013, revenue from related parties was $5,375 and $57,375, respectively, consisting primarily of revenue from various levels of website design and maintenance.
Cost of Sales
For the nine months ended September 30, 2014 and 2013, cost of sales was $1,460,453 and $226,561, respectively, consisting primarily of sub-contracting to outside sources, direct labor and direct technology costs.
Gross Profit
The increase in revenue resulted in a gross profit of $7,422,877 during the nine months ended September 30, 2014 as compared to a gross profit of $579,507 for the nine months ended September 30, 2013. Gross profit increased as a result of increasing license exchanges combined with consistent and efficient implementation costs of our products.
Selling and Marketing Expenses
Selling and marketing expenses were $1,301,365 and $167,509 for the nine months ended September 30, 2014 and 2013, respectively. The increase results from the establishment of dedicated resources to actively sell and market our products and services.
Research and Development Expenses
Research and development expenses were $391,958 and $-0- for nine months ended September 30, 2014 and 2013, respectively. Research and development expenses increased as a result of the establishment of a dedicated research and development group during 2013.
General and Administrative Expenses
General and administrative expenses were $4,352,398 and $1,880,726 for the nine months ended September 30, 2014 and 2013, respectively. General and administrative expenses increased as a result an increase in the number of employees and the associated benefits costs as well as increases in travel, professional service, occupancy and stock, option and warrant expense.
Amortization and Depreciation
Amortization and depreciation expenses were $462,326 and $269,135 for the nine months ended September 30, 2014 and 2013, respectively. The increase in expense was primarily related to increased intellectual property amortization.
Other Expenses
Other expenses were charges of $19,860 and $58,933 for the nine months ended September 30, 2014 and 2013, respectively. The resulting change to expense was due to decreases in unrealized losses from marketable equity securities and a substantial decrease in interest expense.
Liquidity and Capital Resources
Working Capital
|
|
|
At September 30, |
|
At December 31, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
Current Assets |
|
$ |
8,112,423 |
|
$ |
2,498,551 |
|
|
Current Liabilities |
|
558,779 |
|
867,800 |
| ||
|
Working Capital |
|
$ |
7,553,644 |
|
$ |
1,630,751 |
|
The working capital surplus for the periods ended September 30, 2014 and December 31, 2013 was $7,553,644 and $1,630,751, respectively. The increase in surplus was primarily due to an increase in prepaid assets and capital raised.
Cash Flows
|
|
|
For the nine months ended |
| ||||
|
|
|
|
|
|
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
|
| ||
|
Net Cash Used in Operating Activities |
|
$ |
(3,761,754 |
) |
$ |
(679,419 |
) |
|
Net Cash Used in Investing Activities |
|
(556,611 |
) |
(9,890 |
) | ||
|
Net Cash Provided by Financing Activities |
|
4,623,210 |
|
748,034 |
| ||
|
Net Increase in Cash |
|
$ |
304,845 |
|
$ |
61,725 |
|
We had cash in the amounts of $2,151,849 and $1,847,004 as of September 30, 2014 and December 31, 2013, respectively.
In view of our working capital position, continuing operating losses and limited cash, we will be required to raise additional capital through the sale of equity or debt securities or borrowings from financial institutions or third parties or a combination of the foregoing to continue to fund operations. We cannot assure you that we will be able to obtain sufficient funds on acceptable terms or at all. Without such funds, we will be unable to implement our business plan or continue operations.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States. Preparing financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by our management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements.
Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, relate to capitalized legal patent costs, income taxes, business combinations, goodwill, intangible assets, share-based payments, revenue recognition, and research and other accounting descriptions. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 except as set forth below.
Revenue is recognized when all applicable recognition criteria have been met, which generally include: (a) persuasive evidence of an existing arrangement; (b) a fixed or determinable price; (c) delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably assured. For software and technology development contracts where applicable, we recognize revenues on a percentage of completion method based upon several factors including but not limited to: (a) an estimate of total hours and milestones to complete; (b) the total hours completed; (c) the delivery of services rendered; (d) the change in estimates; and (e) the collectability of the contract.
Licensing revenues for intangible assets, including intellectual property such as patents and trademarks, are recognized when all of the following criteria have been met: (a) persuasive evidence of an existing arrangement; (b) a fixed or determinable price; (c) the delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably assured. Licensing revenues are recognized over the term of the contract or, in the case of a perpetual license, revenues are recognized in the period the criteria have been met. In transactions where we engage in a non-cash exchange of a license of ours for the license of our customer, we follow Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The licenses received from our customers are sold, licensed or leased in a different line of business from our license delivered to our customers in the exchange. The fair value of the technology or products exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence with the purpose to enhance product offerings for the sale or license to third parties. We use fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The contracts are then evaluted for commercial substance, including that the licenses received by us in the exchange are expected, at the time of the exchange, to be deployed and used by the software vendor and the value ascribed to the transaction reasonably reflects such expected use.
In transactions where we engage in a non-cash exchange of a license of ours for the services of our customer, we follow ASC 985-605 and ASC 985-845-10. The fair value of the technology or services exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence. We
use fair value guidance of the VSOE under ASC 985-605. The revenue under these transactions is recognized upon delivery of the license and the services received in exchange are recognized as a prepaid asset that is amortized to expense as the services are received. We evaluate whether the period over which the services are received requires treatment as extended payment terms under ASC 985-605-25-33 and we evaluate the collectibility of the services to be received under ASC 985-605.
For the three and nine months ended September 30, 2014, we sold an aggregate of nineteen and thirty-six licenses, respectively, with a fair value of $225,000 per license, in exchange for either a license to our customers’ intellectual property or prepaid services. The licenses exchanged were determined to meet the aforementioned criteria. During the three and nine months ended September 30, 2014, nonmmonetary revenue of $4,275,000 and $8,100,00, respectively, was recognized. This resulted in an increase to intangible assets and prepaid expenses of $2,025,000 and $6,075,000, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure. Our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2014 in accordance with generally accepted accounting principles. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC on March 31, 2014 for a complete discussion relating to the foregoing evaluation of our controls and procedures.
Changes in Internal Control over Financial Reporting
There have been improvements in our internal controls over financial reporting that occurred after the year ended December 31, 2013. In the first, second and third quarters of 2014, we remediated inconsistencies and omissions related to certain equity transactions by identifying potential issues in a timely manner and properly classifying those transactions by adding an additional layer of review to equity transactions.
We are currently involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, our management believes that the resolution of all such pending or threatened litigation is not likely to have a material adverse effect on our financial position or results of operations.
There have been no material changes from the risk factors disclosed in Item 1.A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sales of Unregistered Securities
In July 2014, we offered holders of a series of our warrants, including the warrants issued in the Second Private Placement and the Third Private Placement, the opportunity to exercise their warrants for a 10% discount to the stated exercise price in exchange for their agreement to exercise their warrants in full and for cash on or before July 31, 2014. Under the warrant exercise offer, in July 2014 we issued 10,027,002 shares of common stock pursuant to exercise of warrants for gross proceeds of $3,632,801 and net proceeds of $3,501,521 after investment banking fees of $131,280.
From July 1, 2014 through September 30, 2014, we also issued 515,000 shares of common stock for services valued at $382,300 with no future period amortization.
In September 2014, we issued 20,000 shares of common stock pursuant to the exercise of 20,000 warrants at a strike price of $0.50 for proceeds of $10,000.
On July 17, 2014, we issued five-year warrants to purchase 25,000 shares of common stock that vest over twelve months and have an exercise price of $0.85 per share for payment for services.
On August 25, 2014, we issued warrants to purchase 500,000 shares of common stock. The warrants vest as follows: one warrant share for every $10 of gross sales by us during the 12-month period immediately following the date of grant to customers introduced by the warrant holder. The warrants have an exercise price of $0.60 per share and an expiration date of August 25, 2017.
On August 27, 2014, we issued three-year fully-vested warrants to purchase 15,000 shares of common stock with an exercise price of $0.65 per share for payment for services.
On August 29, 2014, we issued three-year fully-vested warrants to purchase 53,036 shares of common stock with an exercise price of $0.70 per share for payment for services.
On September 5, 2014, we issued five-year warrants to purchase 500,000 shares of common stock that vest over three years and have an exercise price of $0.79 per share for payment for services.
On September 30, 2014, we sold an aggregate of 700,000 units to two accredited investors for gross proceeds of $350,000 in the closing of a private placement (the “Summer Private Placement”), which are being used for general working capital purposes. The units in the Summer Private Placement consisted of 700,000 shares of our common stock and warrants to purchase ¼ of a share for every share purchased or an additional 175,000 shares of our common stock. The warrants in the Summer Private Placement have a term of five years and an exercise price of $0.60 per share.
The offer and sale of the securities set forth above were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder. The Company determined that the investors were accredited based on representations made by the investors to the Company
Use of Proceeds from Public Offering of Common Stock
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
|
Exhibit |
|
Description |
|
4.1* |
|
Form of Warrant (Summer Private Placement) |
|
|
|
|
|
10.1* |
|
AudioEye, Inc. 2015 Incentive Compensation Plan |
|
|
|
|
|
31.1* |
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
31.2* |
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.1* |
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 7th day of November 2014.
|
|
AUDIOEYE, INC. | |
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Nathaniel Bradley |
|
|
|
Nathaniel Bradley |
|
|
|
Chief Executive Officer and President |
|
|
|
|
|
|
By: |
/s/ Edward O’Donnell |
|
|
|
Edward O’Donnell |
|
|
|
Chief Financial Officer |