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, 2015
| 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
![http:||www.sec.gov|Archives|edgar|data|1362190|000110465914038693|g97971bai001.jpg](http://www.sec.gov/Archives/edgar/data/1362190/000114420415065489/image_001.jpg)
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, Suite 750, Tucson,
Arizona |
85711 |
(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 13, 2015, 81,800,488 shares of the registrant’s
common stock were issued and outstanding.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
The financial information set forth below
with respect to the financial statements as of September 30, 2015 and 2014 and for the three and nine month periods ended September
30, 2015 and 2014 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, 2015 are not necessarily indicative of results to be expected for any subsequent period. Our
fiscal year end is December 31.
AUDIOEYE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| |
September 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash | |
$ | 51,910 | | |
$ | 1,672,901 | |
Accounts receivable, net | |
| 49,014 | | |
| 261,676 | |
Related party receivables | |
| 54,250 | | |
| 10,000 | |
Marketable securities held in related party | |
| 13,800 | | |
| 13,800 | |
Non-marketable securities held in related party | |
| 50,000 | | |
| 50,000 | |
Subscription receivable | |
| — | | |
| 1,175,000 | |
Prepaid expenses and other current assets | |
| 79,037 | | |
| 90,688 | |
Total Current Assets | |
| 298,011 | | |
| 3,274,065 | |
| |
| | | |
| | |
Property and equipment, net | |
| — | | |
| 651 | |
Intangible assets, net | |
| 2,789,832 | | |
| 3,097,293 | |
Goodwill | |
| 700,528 | | |
| 700,528 | |
TOTAL ASSETS | |
$ | 3,788,371 | | |
$ | 7,072,537 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 262,148 | | |
$ | 779,891 | |
Billings in excess of costs | |
| 66,896 | | |
| 123,908 | |
Notes and loans payable-current | |
| 24,000 | | |
| 24,000 | |
Related party payables | |
| 2,500 | | |
| 228,983 | |
Total Current Liabilities | |
| 355,544 | | |
| 1,156,782 | |
| |
| | | |
| | |
Long Term Liabilities | |
| | | |
| | |
Notes and loans payable-long term | |
| 29,800 | | |
| 51,800 | |
Total Long Term Liabilities | |
| 29,800 | | |
| 51,800 | |
Total Liabilities | |
| 385,344 | | |
| 1,208,582 | |
| |
| | | |
| | |
Stockholders' Equity | |
| | | |
| | |
Preferred stock, $0.00001 par value, 10,000,000 shares authorized, 175,000 and -0- issued and outstanding, as of September 30, 2015 and December 31, 2014, respectively | |
| 2 | | |
| — | |
Common stock, $0.00001 par value, 250,000,000 shares authorized, 81,800,488, and 77,817,861 issued and outstanding, as of September 30, 2015 and December 31, 2014, respectively | |
| 818 | | |
| 778 | |
Treasury stock | |
| (623,000 | ) | |
| (623,000 | ) |
Additional paid in capital | |
| 27,515,795 | | |
| 23,516,463 | |
Accumulated deficit | |
| (23,490,588 | ) | |
| (17,030,286 | ) |
Total Stockholders’ Equity | |
| 3,403,027 | | |
| 5,863,955 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 3,788,371 | | |
$ | 7,072,537 | |
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, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 108,685 | | |
$ | 186,641 | | |
$ | 314,146 | | |
$ | 279,364 | |
Revenue from related party | |
| — | | |
| 1,125 | | |
| — | | |
| 5,375 | |
Total revenues | |
| 108,685 | | |
| 187,766 | | |
| 314,146 | | |
| 284,739 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 321,755 | | |
| 264,459 | | |
| 1,178,388 | | |
| 639,924 | |
| |
| | | |
| | | |
| | | |
| | |
Gross loss | |
| (213,070 | ) | |
| (76,693 | ) | |
| (864,242 | ) | |
| (355,185 | ) |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Selling and marketing | |
| 171,594 | | |
| 546,265 | | |
| 747,990 | | |
| 1,068,353 | |
Research and development | |
| 92,857 | | |
| 153,188 | | |
| 293,877 | | |
| 391,958 | |
General and administrative expenses | |
| (27,278 | ) | |
| 1,548,851 | | |
| 4,161,269 | | |
| 4,352,398 | |
Amortization and depreciation | |
| 128,381 | | |
| 132,104 | | |
| 396,269 | | |
| 347,954 | |
Total operating expenses | |
| 365,554 | | |
| 2,380,408 | | |
| 5,599,405 | | |
| 6,160,663 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (578,624 | ) | |
| (2,457,101 | ) | |
| (6,463,647 | ) | |
| (6,515,848 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Unrealized loss on marketable securities | |
| — | | |
| (12,000 | ) | |
| — | | |
| (12,000 | ) |
Interest income (expense) net | |
| 81 | | |
| (416 | ) | |
| 3,345 | | |
| (7,860 | ) |
Total other income (expense) | |
| 81 | | |
| (12,416 | ) | |
| 3,345 | | |
| (19,860 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (578,543 | ) | |
$ | (2,469,517 | ) | |
$ | (6,460,302 | ) | |
$ | (6,535,708 | ) |
Deemed dividend on Series A Convertible preferred stock | |
| - | | |
| - | | |
| (594,641 | ) | |
| - | |
Net loss attributable to common stockholders | |
| (578,543 | ) | |
| (2,469,517 | ) | |
| (7,054,943 | ) | |
| (6,535,708 | ) |
Net loss per common share – basic and diluted | |
| (0.01 | ) | |
| (0.04 | ) | |
| (0.09 | ) | |
| (0.12 | ) |
Weighted average common shares outstanding – basic and diluted | |
| 81,800,488 | | |
| 61,062,150 | | |
| 80,007,507 | | |
| 55,993,097 | |
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
For the Nine Months Ended | |
| |
September 30, 2015 | | |
September 30, 2014 | |
Cash Flows from Operating Activities: | |
| | | |
| | |
Net loss | |
$ | (6,460,302 | ) | |
$ | (6,535,708 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 396,268 | | |
| 347,954 | |
Stock, option and warrant expense | |
| 1,200,459 | | |
| 1,538,557 | |
Common stock issued for services | |
| 679,972 | | |
| 778,927 | |
Unrealized loss on marketable securities | |
| 0 | | |
| 12,000 | |
Amortization of debt discount | |
| 0 | | |
| 1,155 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 212,662 | | |
| 169,179 | |
Related party receivable | |
| (44,250 | ) | |
| 54,750 | |
Prepaid expenses and other current assets | |
| 11,651 | | |
| (167,873 | ) |
Accounts payable and accruals | |
| (517,743 | ) | |
| 79,792 | |
Billings in excess of costs | |
| (57,012 | ) | |
| 202,967 | |
Related party payables | |
| (226,483 | ) | |
| (243,424 | ) |
Net cash used in operating activities | |
$ | (4,804,778 | ) | |
$ | (3,761,724 | ) |
| |
| | | |
| | |
Cash Flows from Investing Activities: | |
| | | |
| | |
Cash paid for intangible assets | |
| (88,156 | ) | |
| (556,611 | ) |
Net cash used in by investing activities | |
$ | (88,156 | ) | |
$ | (556,611 | ) |
| |
| | | |
| | |
Cash Flows from Financing Activities: | |
| | | |
| | |
Repayment of note payable | |
| (22,000 | ) | |
| (172,000 | ) |
Repayment of related party loans | |
| 0 | | |
| (35,000 | ) |
Issuance of common stock for cash | |
| 325,000 | | |
| 1,305,689 | |
Collection of stock subscription receivable | |
| 1,175,000 | | |
| — | |
Issuance of preferred stock for cash | |
| 1,750,000 | | |
| — | |
Proceeds from exercise of options and warrants, net of issuance costs | |
| 43,943 | | |
| 3,524,521 | |
Net cash provided by financing activities | |
$ | 3,271,943 | | |
$ | 4,623,210 | |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (1,620,991 | ) | |
| 304,875 | |
Cash - beginning of period | |
| 1,672,901 | | |
| 1,847,004 | |
Cash - end of period | |
$ | 51,910 | | |
$ | 2,151,879 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |
| | | |
| | |
Interest paid | |
$ | 307 | | |
$ | 7,444 | |
Income taxes paid | |
| — | | |
| — | |
| |
| | | |
| | |
NONCASH INVESTING AND FINANCING ACTIVITIES | |
| | | |
| | |
Warrants issued for accrued payroll | |
| — | | |
| 21,514 | |
Accounts receivable converted to marketable securities | |
| — | | |
| 60,000 | |
Deemed Dividend beneficial conversion feature on convertible preferred stock | |
| 594,641 | | |
| — | |
See Notes to Unaudited Consolidated Financial Statements
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015 (Unaudited)
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited 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 July 10, 2015.
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, 2014 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 providing its customers with the most complete and inclusive web accessibility solution
available. The Company’s suite of technologies allows its customers to provide their site visitors with an enhanced web
experience. When implemented, the Company believes its solutions offer businesses the opportunity to reach more customers, improve
brand image, and build additional brand loyalty. In addition, the Company’s solutions provide organizations with the ability
to comply with internationally accepted web content accessibility guidelines (WCAG) as well as United States, Canadian and United
Kingdom accessibility laws.
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 applicable 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, the Company follows ASC 845 and any potential revenue is recorded as other income.
NOTE 2: GOING CONCERN
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplates
the continuation of the Company as a going concern. As of September 30, 2015, the Company had a working capital deficit of $57,533.
In addition, the Company used net cash in operations of $4,804,778 during the nine months ended September 30, 2015.
Even with a greater focus on cash revenue generation and the
ongoing cost reductions, the conditions described in the first paragraph, above, raise substantial doubt about the Company’s
ability to continue as a going concern. While the Company has been successful in raising capital in the past, there is no assurance
that it will be successful at raising additional capital in the future. Additionally, if the Company’s plans are not achieved
and/or if significant unanticipated events occur, the Company may have to further modify its business plan.
NOTE 3: RELATED PARTY TRANSACTIONS
For
the three and nine months ended September 30, 2015 and 2014, there were revenues earned of $-0- and $1,125 and $-0-
and $5,375, respectively, for services performed for related parties.
The Company holds 60,000 shares in Peartrack Security Systems,
formerly Ecologic Transportation, as of September 30, 2015 resulting from the conversion of a $60,000 accounts receivable balance
in 2014. In 2014, the Company invested $50,000 in Cannonball Red in return for 97,500 shares held as of September 30, 2015. Both
companies were affiliated with related parties who resigned from the Company during the quarter.
In summary, as of September 30, 2015 and December 31, 2014
the total balances of related party payables were $2,500 and $228,983, respectively.
As of September 30, 2015 and December 31, 2014, there were
outstanding receivables of $54,250 and $10,000, respectively, for amounts owing or services performed with related parties.
NOTE 4: NOTES PAYABLE
As of
September 30, 2015 and December 31, 2014, the Company had current and long term notes payable of $24,000 and $24,000 and
$29,800 and $51,800, respectively as shown in the table below.
Notes and loans payable | |
September 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
Short Term | |
| | | |
| | |
Maryland TEDCO Note | |
$ | 24,000 | | |
$ | 24,000 | |
Total | |
$ | 24,000 | | |
$ | 24,000 | |
Long Term | |
| | | |
| | |
Maryland TEDCO Note | |
$ | 29,800 | | |
$ | 51,800 | |
Total | |
$ | 29,800 | | |
$ | 51,800 | |
As of December 31, 2012, the Company had an
outstanding loan to 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 consolidated 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. As of September 30, 2015 and December 31, 2014 the principal amount owing was $53,800
and $75,800, respectively, of which $24,000 and $24,000, respectively, has been recorded as the current portion of the note,
and $29,800 and $51,800, respectively, as the long-term portion of the note, respectively.
NOTE 5: STOCKHOLDERS’ EQUITY
As of September 30, 2015 and December 31, 2014, the Company
had 81,800,488 and 77,817,861 shares of common stock issued and outstanding, respectively.
On December 31, 2014, the Company sold an aggregate of 6,687,500
units to ten accredited investors for gross proceeds of $2,675,000 in the closing of a private placement. Of this amount, $1,175,000
was recorded as a Subscription Receivable as of December 21, 2014. Such subscription receivable was collected in 2015.
On January 15, 2015, the Company sold an additional 812,500
units under a private placement that had its initial close in December 2014 (the “December 2014 Private Placement”)
to one institutional investor for gross proceeds of $325,000 with no commission payable. Each unit in the December 2014 Private
Placement consisted of one share of the Company’s common stock and warrants to purchase ¼ of a share for every common
share purchased. The warrants have a term of five years and an exercise price of $0.60 per share.
On March 5, 2015, Paul Arena resigned as Chairman of the
Board of Directors and Executive Chairman and was designated by AIM Group, Inc. as a consultant to the Company for the term
of one year. On March 5, 2015, the Company and Mr. Arena, pursuant to a Separation and Release Agreement, agreed to
the issuance of 500,000 restricted common shares in lieu of the January 27, 2014 issuance of 3,000,000 Performance Share
Units. The agreement calls for the immediate release of 250,000 common shares, or 50%, and up to 250,000 common shares, or 50%,
be held in escrow until April 1, 2016 or until the Company’s 2015 audited financials are final. The 250,000 shares
earned during the three months ended March 31, 2015 were valued and expensed at $117,500. The remaining 250,000 shares are not
expected to be earned.
Commencing on May 1, 2015, the Company sold an aggregate
of 175,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) to 12 accredited investors at a
purchase price of $10.00 per share (the “Purchase Price”) for proceeds of $1,750,000 in a private placement. Each
share of the Preferred Stock may be converted into shares of common stock of the Company by dividing the Purchase Price plus
any accumulated dividends with respect to such share by an initial conversion price of $0.1754 (subject to adjustment for
stock splits, stock dividends and similar actions). The Company may redeem the Preferred Stock at any time for an amount
equal to $12.50 plus accumulated dividends. The Preferred Stock will bear a dividend of 5% of the purchase price when, as and
if declared by the Board of Directors of the Company. The Company evaluated the convertible preferred stock under FASB ASC
470-20-30 and determined it contained a beneficial conversion feature. The intrinsic value of the beneficial conversion
feature was determined to be $594,641. The beneficial conversion feature was fully amortized and recorded as a deemed
dividend.
From January 1, 2015 through September 30, 2015, the Company
also issued 109,855 shares of common stock pursuant to exercise of warrants for total proceeds of $43,943. The Company also issued
2,810,272 additional shares of common stock for services provided for a total expense of $679,972 (in addition to the 250,000
common shares issued to Mr. Arena described above).
NOTE 6: OPTIONS
As of
September 30, 2015 and December 31, 2014, the Company has outstanding options to purchase 10,305,834 and 11,434,350
shares of common stock, respectively.
| |
| | |
| | |
| | |
| | |
Intrinsic | |
| |
| | |
| | |
Wtd Avg. | | |
| | |
Value | |
| |
Number of | | |
Wtd Avg. | | |
Remaining | | |
| | |
of Exercisable | |
| |
Options | | |
Exercise Price | | |
Term | | |
Exercisable | | |
Options | |
Outstanding at December 31, 2014 | |
| 11,434,350 | | |
$ | 0.47 | | |
| 3.79 | | |
| 5,635,250 | | |
$ | 460,941 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Granted | |
| 3,018,550 | | |
| 0.38 | | |
| 4.81 | | |
| | | |
| — | |
Forfeited | |
| 4,147,066 | | |
| 0.45 | | |
| --- | | |
| | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Outstanding at September 30, 2015 | |
| 10,305,834 | | |
$ | 0.45 | | |
| 3.21 | | |
| 5,902,396 | | |
$ | --- | |
The option grants during the nine months ended September 30,
2015 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of
2.71 to 3.26 years, expected volatility of 100%, risk free interest rate of 01.05% to 1.75%, and expected dividend yield of 0%.
For
the three and nine months ended September 30, 2015 and 2014, total stock compensation expense related to the options totaled $(119,224)
and $655,476 and $376,173 and $1,000,526, respectively. For the three and nine months ended September 30, 2015 and 2014, aggregate
stock compensation expense related to the options, warrants and performance stock units totaled $(299,811) and $1,200,459 and
$311,149 and $1,538,557, respectively. The negative expense in the three months ended September 30, 2015 is the result of forfeitures
of unvested options related to terminated employees exceeding the amortization of option expense for current employees, in addition
to negative expense associated with executive PSUs. The total stock compensation expense related to the options, warrants and
performance stock units to be amortized through September 30, 2019 is $568,414 as of September 30, 2015.
NOTE 7: WARRANTS
Below is a table summarizing the Company’s outstanding
warrants as of September 30, 2015 and December 31, 2014:
| |
| | |
| | |
| | |
| | |
Intrinsic | |
| |
| | |
| | |
Wtd Avg. | | |
| | |
Value | |
| |
Number of | | |
Wtd Avg. | | |
Remaining | | |
| | |
of Exercisable | |
| |
Warrants | | |
Exercise Price | | |
Term | | |
Exercisable | | |
Warrants | |
Outstanding at December 31, 2014 | |
| 16,527,989 | | |
$ | 0.44 | | |
| 3.69 | | |
| 12,604,407 | | |
$ | 309,821 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Exercised | |
| 109,855 | | |
| 0.40 | | |
| — | | |
| | | |
| — | |
Granted | |
| 3,454,688 | | |
| 0.21 | | |
| --- | | |
| | | |
| | |
Forfeited | |
| 2,554,545 | | |
| 0.44 | | |
| --- | | |
| | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Outstanding at September 30, 2015 | |
| 17,318,277 | | |
| 0.40 | | |
| 3.39 | | |
| 15,839,588 | | |
$ | --- | |
The warrant grants during the nine months ended September 30,
2015 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of
3 to 5 years, expected volatility of 100%, risk free interest rate of 0.84% to 1.61%, and expected dividend yield of 0%.
For
the three and nine months ended September 30, 2015 and 2014, the Company has incurred warrant-based expense of $20,962
and $491,148 and $(198,332) and $189,172, respectively. For the three and nine months ended September 30, 2015 and 2014,
aggregate stock compensation expense related to the options, warrants and performance stock units totaled $(299,811) and $1,200,459
and $311,149 and $1,538,557, respectively. The negative expense in the three months ended September 30, 2015 is the result of
forfeitures of unvested options related to terminated employees exceeding the amortization of option expense for current employees,
in addition to negative expense associated with executive PSUs. The total stock compensation expense related to the options, warrants
and performance stock units to be amortized through September 30, 2019 is $568,414 as of September 30, 2015.
NOTE 8: PERFORMANCE SHARE UNITS
On April 1, 2013, the Company entered into a Performance Share
Unit Agreement under the AudioEye, Inc. 2013 Incentive Compensation Plan with Nathaniel Bradley, the Company’s CEO; Mr.
Sean Bradley, the Company’s Chief Technology Officer; and Mr. James Crawford, the Company’s Chief Operating Officer.
Mr. Nathaniel Bradley was granted an award of up to an aggregate of 400,000 Performance Share Units (“PSU’s”);
Mr. Sean Bradley was granted an award of up to an aggregate of 300,000 PSU’s; and Mr. Crawford was granted an award of up
to an aggregate of 300,000 PSU’s.
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. There were three Performance Periods
with the opportunity to earn a full award of PSU’s based on achievement of Performance Goals on a cumulative basis. There
were no awards made in 2014.
On March 5, 2015, Paul Arena resigned as Chairman of the
Board of Directors and Executive Chairman and was designated by AIM Group, Inc. as a consultant to the Company for the term
of one year. On March 5, 2015, the Company and Mr. Arena, pursuant to a Separation and Release Agreement, agreed to
the issuance of 500,000 restricted common shares in lieu of the January 27, 2014 issuance of 3,000,000 PSUs.
Below is a table summarizing the Company’s outstanding
performance share units as of September 30, 2015 and December 31, 2014:
| |
Number of | | |
Wtd Avg. | | |
Remaining | |
| |
PSUs | | |
Grant Price | | |
Term | |
Outstanding at December 31, 2014 | |
| 4,500,000 | | |
$ | 0.40 | | |
| 2.00 | |
| |
| | | |
| | | |
| | |
Forfeited | |
| 3,000,000 | | |
| 0.33 | | |
| --- | |
| |
| | | |
| | | |
| | |
Outstanding at September 30, 2015 | |
| 1,500,000 | | |
$ | 0.54 | | |
| 1.00 | |
For
the three and nine months ended September 30, 2015 and 2014, the Company has incurred performance share unit-based expense of
$(201,549) and $53,853 and $133,308 and $348,859, respectively. For the three and nine months ended September 30, 2015 and
2014, aggregate stock compensation expense related to the options, warrants and performance stock units totaled $(299,811)
and $1,200,459 and $311,149 and $1,538,557, respectively. The negative expense in the three months ended September 30, 2015 is
a result of management assessment that none of the performance units conditions granted to executives will be met, and therefore
none will be earned resulting in a reversal of expense previously recorded. The remaining PSUs were granted to two management team
members. The total stock compensation expense related to the options, warrants and performance stock units to be amortized through
September 30, 2019 is $568,414 as of September 30, 2015.
NOTE 9: INTANGIBLE ASSETS
As of September 30, 2015, 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, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Patents | |
$ | 3,699,536 | | |
$ | 3,611,380 | |
Software Development Costs | |
| 388,125 | | |
| 388,125 | |
| |
| | | |
| | |
Accumulated Amortization | |
| (1,297,829 | ) | |
| (902,212 | ) |
Intangible Assets, Net | |
$ | 2,789,832 | | |
$ | 3,097,293 | |
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. Software development costs are subject to annual impairment testing.
Amortization
expense totaled $395,617 and $345,557 for the nine months ended September 30, 2015 and 2014, respectively.
NOTE 10: FAIR VALUE MEASUREMENTS
The following are the Company’s assets and liabilities,
measured at fair value on a recurring basis, as of September 30, 2015 and December 31, 2014:
| |
Fair Value | | |
Fair Value Hierarchy |
Marketable securities, September 30, 2015 | |
$ | 13,800 | | |
Level 1 |
Marketable securities, December 31, 2014 | |
$ | 13,800 | | |
Level 1 |
Fair value is an estimate of the exit price,
representing the amount that would be received to, sell an asset or paid to transfer a liability in an orderly transaction between
market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction cost.
Fair value measurement under generally accepted accounting principles provides for use of a fair value hierarchy that prioritizes
inputs to valuation techniques used to measure fair value into three levels:
Level
1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level
2: Inputs other than quoted market prices that are observable, either directly
or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the
asset or liability and are developed based on market data obtained from sources independent of the Company.
Level
3: Unobservable inputs reflect the assumptions that the Company develops based
on available information about what market participants would use in valuing the asset or liability.
An asset or liability’s level within
the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability
of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of
assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.
NOTE 11: COMMITMENTS
On July 1, 2015, the Company entered into an Executive Employment
Agreement with Carr Bettis pursuant to which Dr. Bettis was employed as the Company’s Executive Chairman/Chairman of the
Board. The term of the Executive Employment Agreement is one year commencing July 1, 2015, terminable at will by either the Company
or Dr. Bettis and subject to extension upon mutual agreement. He is to receive a base annual salary of $175,000 during the employment
period, paid at the end of every calendar quarter in the form of options and warrants to purchase shares of the Company’s
common stock. The total number of options per year are limited to 500,000 and any additional amounts due Dr. Bettis will be in
the form of warrants. The number of options/warrants will be determined are to be issued for each quarterly period will be determined
by means of a Black Scholes valuation whereby the number of options issued would have a value at the time of issuance equal to
the dollar value of Dr. Bettis’ base salary for each calendar quarter. He is entitled to receive bonuses at the sole discretion
of the Company’s board of directors or the compensation committee. Dr. Bettis is also entitled to equity awards under the
Company’s incentive compensation plans. The overall commitment of $175,000 by the Company for Dr. Bettis’s salary
remains the same, but the Agreement has been modified as discussed below in Note 12: Subsequent Events.
NOTE 12: SUBSEQUENT EVENTS
Grant
of Options to Board of Directors Chairing Committees. On October 24, 2015, Tony Coehlo, Ernest (Sandy) Purcell and Alex
Zyngier, were each awarded 750,000 options for their service as independent members of the board of directors and board committee
chairmen. The term of the options is 5 years, 50% of the options vested on grant date, and 12.5% vest each 30 days thereafter.
The exercise price is 0.044.
Grant
of Options and Warrants to Executive Chairman, Employees, Advisor and New Member of Board of Directors; on October 26,
the Executive Chairman, Dr. Carr Bettis was awarded 500,000 options and 250,000 warrants in lieu of cash compensation pursuant
to his amended employment agreement. Dr, Bettis’s options and warrants have a
3 year term, 100% vested on grant date at an exercise price of 0.041. On November 4, 2015, three non-executive employees were awarded
a total of 235,330 options,. These employee options have a 3 year term, 100% vested on the grant date at an exercise price will
be determined by taking the 10 day average closing price from November 5, 2015 through November 18, 2015. On November 4, 2015 advisory
board member Joyce Bender was awarded 100,000 options. The term of the option is 5 years, 50% of the options vested on grant date,
and 12.5% vest each 30 days thereafter. The exercise price will be determined by taking the 10 day average closing price from November
5, 2015 through November 18 2015. On November 10, 2015, Christine Griffin an independent member of the board of directors of the
Company was awarded 500,000 options, The term of the options is 5 years, 50% of the options vested on grant date, and 12.5% vest
each 30 days thereafter. The exercise price will be determined by taking the 10 day average closing price from November 11, 2015
through November 24, 2015.
Appointment
of Executive Officer. Effective November 4, 2015, Todd Bankofier, age 55, was appointed by the Board of Directors to
the position of Chief Executive Officer of the Company. As a principal in Fairmont Capital Group (FCG) since 2008, Mr. Bankofier
was responsible for day-to-day oversight of multiple asset holdings, including strategic planning, revenue generation, technology
evolution, operational effectiveness and public relations for all FCG entities.
Change
to Executive Officers Compensatory Agreement. On October 26, by resolution, the Board, with the consent
of President and CTO Mr. Sean Bradley, agreed that it was in the best interests of the Company and its stockholders to award beginning
October 1, 2015, $25,000 per year of Mr. Bradley’s base salary in the form of quarterly option awards, with a Black Scholes
value of $6,250 per quarter. On November 4, 2015, the Board amended the employment agreement of Executive Chairman Dr. Carr Bettis,
whose agreement currently requires his $175,000 salary to be paid entirely in the form of options and warrants. Dr. Bettis has
voluntarily agreed to limit the number of options and warrants he receives to 750,000 per quarter, and to defer any additional
owed compensation for up to a year, when he will be paid his deferred compensation either in the form of equity or cash, at the
discretion of the Compensation Committee.
Note
and Warrant Purchase Agreement. On October 9, 2015 (the “Initial Closing Date”), the Company entered
into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with certain investors (the
“Investors”) for the issuance and sale of convertible promissory notes in an aggregate principal amount of up to
$3,750,000 (the “Notes”) and warrants (the “Warrants”) to purchase up to an aggregate of 37,500,000
shares of common stock of the Company (the “Common Stock”) (the “Transaction”). Notes representing up
to $2,500,000 in aggregate principal, and Warrants exercisable for up to 25,000,000 shares of Common Stock in the aggregate,
may be issued and sold at one or more closings during the 30-day period immediately following the Initial Closing Date. The
maximum of $2,500,000 in aggregate principal has been sold as of November 8, 2015. In addition, upon the election of any
Investor within the three-year period immediately following the Initial Closing Date, any Investor may purchase an additional
Note in the principal amount equal to 50% of the principal amount of the Notes purchased by such Investor at previous
closings (the “Option Principal Amount”) and an additional Warrant with an aggregate exercise price equal to such
Investor’s Option Principal Amount. The Notes mature three years from the date of issuance (the “Maturity
Date”) and, until the Notes are repaid or converted into shares of the Company’s equity securities (“Equity
Securities”), accrue payable-in-kind interest at the rate of 10% per annum.
If the Company sells Equity Securities
in a single transaction or series of related transactions for cash of at least $2,000,000 (excluding the conversion of the Notes
and excluding the shares of Common Stock to be issued upon exercise of the Warrants) on or before the Maturity Date (the “Equity
Financing”), all of the unpaid principal on the Notes plus accrued interest shall be automatically converted at the closing
of the Equity Financing into a number of shares of the same class or series of Equity Securities as are issued and sold by the
Company in such Equity Financing (or a class or series of Equity Securities identical in all respects to and ranking pari-passu
with the class or series of Equity Securities issued and sold in such Equity Financing) as is determined by dividing (i) the principal
and accrued and unpaid interest amount of the Notes by (ii) 60% of the price per share at which such Equity Securities are issued
and sold in such Equity Financing. The Notes, if not converted, shall be due and payable in full on the Maturity Date. The Notes
contain customary events of default provisions. In connection with the issuance of the Notes, on October 9, 2015, the Company entered
into a Security Agreement with the Investors (the “Security Agreement”) pursuant to which the Company granted a security
interest in all of its assets to the Investors as collateral for the Company’s obligations under the Notes. The Warrants
are exercisable at $0.10 per share and expire 60 months following the date of issuance. The Warrants are subject to anti-dilution
protection, subject to certain customary exceptions.
Under the Purchase Agreement, the Company
has agreed to use its reasonable best efforts to prepare and file with the SEC registration statement within 90 days of the Initial
Closing Date, covering the resale by the Investors of any Common Stock previously issued to the Investors, and any Common Stock
into which the Notes and any convertible promissory notes previously issued to the Investors are convertible and any Common Stock
for which the Warrants or any warrants previously issued to the Investors are exercisable.
The foregoing description of the Transaction and summary of the terms of the Purchase Agreement, Security Agreement, Notes, Warrants
and related transactions does not purport to be complete and are subject to, and qualified in their entirety by, reference to the
8-K filed on October 16, 2015 together with the complete text of the (i) Purchase Agreement filed as Exhibit 10.1; (ii) Security
Agreement filed as Exhibit 10.2; (iii) form of Note issued in the Transaction filed as Exhibit 4.1; and (iv) form of Warrant issued
in the Transaction filed as Exhibit 4.2, each of which is incorporated herein by reference.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations or MD&A, should be read in conjunction with our consolidated
financial statements and related notes in Part I, Item 1 of this report.
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, 2014. 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. The Company focuses on providing its customers with the most complete and inclusive web accessibility
solution available. The Company’s suite of technologies allows its customers to provide their site visitors with an enhanced
web experience. When implemented, the Company believes its solutions offer businesses the opportunity to reach more customers,
improve brand image, and build additional brand loyalty. In addition, the Company’s solutions provide organizations with
the ability to comply with internationally accepted web content accessibility guidelines (WCAG) as well as United States, Canadian
and United Kingdom accessibility laws.
The Company generates revenues through
the sale of our software as a service (SaaS) technology platform, called the AudioEye Ally Platform, to website owners, publishers,
developers, and operators and through the licensing of our intellectual property. When adopting the Company’s technology,
clients implement the Ally+ Toolbar into their website. The Ally+ Toolbar helps an organization put a face on the issue of web
accessibility. It provides site visitors with access to a dedicated web accessibility Help Desk, WCAG-compliant and enhanced
accessibility for individuals utilizing their own assistive technologies, as well as the optional Reader in the cloud.
Whether a user has a vision impairment,
hearing impairment, color blindness, is learning to read, or simply wants to hear the website read to them, the Company’s
Reader is a fully scalable, cloud-based technology that utilizes patented architecture to deliver a fully accessible audio-enabled
user experience that can be navigated, utilized, interacted with, and transacted from, without the use of a monitor or mouse.
Using the Reader, site visitors can customize their user experience by listening to the website, using their keyboard to navigate,
enlarging text, changing background and foreground colors, clicking to listen, among several other customizations.
For organizations that do not want a managed
SaaS solution and prefer to achieve WCAG 2.0 Level AA compliance on their own, the Company’s cloud-based Developer Portal
provides them with a comprehensive single-source solution for tracking and maintaining a compliance audit of their web environments.
The self-service solution allows client developers to detect compliance issues and fix those issues through the implementation
of the AudioEye JavaScript library in the client’s front-end web environment. The system is also able to automatically fix
specific compliance issues, vastly reducing the number of outstanding issues that require manual remediation, inherently reducing
cost and time to market. The same Software-as-a-Service (SaaS) Developer Portal is utilized by the Company’s developers
when servicing the Company’s clients through its Ally+ managed service offering.
The Company provides its customers with
detailed remediation (compliance fix) statistics and analytics that demonstrate Reader usage. Organizations are thereby provided
insight into the different ways in which site visitors are engaging with their website from a web accessibility perspective.
Our technology development was initiated
at the University of Arizona Science & Technology Park in Tucson, Arizona. In 2006, we received technology development
venture funding from the Maryland Technology Development Corporation (TEDCO), which contributed to the development of our platform
strategy. TEDCO was created by the Maryland State Legislature in 1998 to facilitate the transfer and commercialization of technology
from Maryland’s research universities and federal labs into the marketplace and to assist in the creation and growth of
technology-based businesses in all regions of the State of Maryland, where we formerly had a technology development and administration
office. Beginning in 2009, we engaged in a multi-year technology development program with the Eller College of Management’s
Department of Management Information Systems at the University of Arizona. In connection with our proprietary technology, our
company has been issued a number of U.S. patents in two distinct patent families. Today, an experienced team of in-house engineers,
designers, and developers in our Atlanta, GA, and Tucson, AZ, offices develop the Company’s technology & software.
Our patented technology was a 2013 Edison
Gold Award winner for innovation in the category of “Quality of Life.”
Our Annual Report filed on Form 10-K
for the year ended December 31, 2014 provides additional information about our business and operations.
Results of Operations
Our
consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States
Generally Accepted Accounting Principles (“GAAP”). The discussion of the results of our operations compares
the three and nine months ended September 30, 2015 with the three and nine months ended September 30, 2014 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,
2015 and September 30, 2014
Results of Operations
| |
Three Months Ended | |
| |
September 30, | |
| |
2015 | | |
2014 | |
Revenue | |
| 108,685 | | |
$ | 186,641 | |
Revenue from related party | |
| — | | |
| 1,125 | |
Total revenues | |
| 108,685 | | |
| 187,766 | |
| |
| | | |
| | |
Cost of sales | |
| 321,755 | | |
| 264,459 | |
Gross loss | |
| (213,070 | ) | |
| (76,693 | ) |
Operating expenses: | |
| | | |
| | |
Selling & marketing | |
| 171,594 | | |
| 546,265 | |
Research & development | |
| 92,857 | | |
| 153,188 | |
General and administrative expenses | |
| (27,278 | ) | |
| 1,548,851 | |
Amortization & depreciation | |
| 128,381 | | |
| 132,104 | |
Operating loss | |
| 365,554 | | |
| (2,457,101 | ) |
| |
| | | |
| | |
Unrealized loss on marketable securities | |
| 0 | | |
| (12,000 | ) |
Interest income/(expense) | |
| 81 | | |
| (416 | ) |
| |
| | | |
| | |
Net (loss) | |
$ | (578,543 | ) | |
$ | (2,469,517 | ) |
Deemed dividend on Series A Convertible preferred stock | |
| - | | |
| - | |
Net loss attributable to common stockholders | |
| (578,543 | ) | |
| (2,469,517 | ) |
Net loss per common share – basic and diluted | |
| (0.01 | ) | |
| (0.04 | ) |
Weighted average common shares outstanding – basic and diluted | |
| 81,800,488 | | |
| 61,062,150 | |
Revenue
For the three months ended September 30,
2015 and 2014, revenue was $108,685 and $187,766, respectively, consisting primarily of revenues from various levels of licensing,
website design and maintenance. Revenues decreased due to a change of marketing focus to eliminate non-cash transactions. Additionally,
for the three months ended September 30, 2015 and 2014, revenue from related party was $-0- and $1,125, respectively, consisting
primarily of revenue from various levels of website design and maintenance.
Cost of Sales
For
the three months ended September 30, 2015 and 2014, cost of sales was $321,755 and $264,459, respectively, consisting primarily
of sub-contracting to outside sources, direct labor and direct technology costs.
Gross Loss
An increase in our implementation costs
resulted in a gross loss of $213,071 and $76,693 during the three months ended September 30, 2015 and 2014, respectively. Gross
loss increased as a result of increased costs of sales together with the decrease in revenues.
Selling and Marketing Expenses
Selling and marketing expenses were $171,594
and $546,265 for the three months ended September 30, 2015 and 2014, respectively. The decrease resulted from the reduction
primarily in staffing levels.
Research and Development Expenses
Research and development expenses
were $92,857 and $153,188 for three months ended September 30, 2015 and 2014, respectively. Research and development expenses
declined from period to period and reflect the material completion of our product.
General and Administrative Expenses
General and administrative expenses were
$(27,278) and $1,548,851 for the three months ended September 30, 2015 and 2014, respectively. General and administrative expenses
decreased as a result of employee staff reductions and the associated benefits costs as well as increased stock option and warrant
expense recapture due to the forfeiture of unvested awards.
Amortization and Depreciation
Amortization and depreciation expenses
were $128,381 and $132,104 for the three months ended September 30, 2015 and 2014, respectively. The decrease in expense was primarily
related to a decrease in intellectual property amortization.
Other Income/Expenses
Other
income and expenses were income of $81 and charges of $12,416 for the three months ended September 30, 2015 and 2014, respectively.
The resulting change was due to a decrease in interest expense and no further unrealized loss on marketable securities.
Comparative for the Nine Months ended September 30, 2015
and September 30, 2014
Results of Operations
| |
Nine Months Ended | |
| |
September 30, | |
| |
2015 | | |
2014 | |
Revenue | |
$ | 314,146 | | |
$ | 279,364 | |
Revenue from related party | |
| — | | |
| 5,375 | |
Total revenues | |
| 314,146 | | |
| 284,739 | |
Cost of sales | |
| 1,178,388 | | |
| 639,924 | |
Gross profit (loss) | |
| (864,242 | ) | |
| (355,185 | ) |
Operating expenses: | |
| | | |
| | |
Selling & marketing | |
| 747,990 | | |
| 1,068,353 | |
Research & development | |
| 293,877 | | |
| 391,958 | |
General and administrative expenses | |
| 4,161,269 | | |
| 4,352,398 | |
Amortization & depreciation | |
| 396,269 | | |
| 347,954 | |
Total Operating Expenses | |
| 5,599,405 | | |
| 6,160,663 | |
| |
| | | |
| | |
Operating (loss) | |
| (6,463,647 | ) | |
| (6,515,848 | ) |
| |
| | | |
| | |
Unrealized loss on marketable securities | |
| — | | |
| (12,000 | ) |
Interest income/(expense) | |
| 3,345 | | |
| (7,860 | ) |
| |
| | | |
| | |
Net (loss) | |
$ | (6,460,302 | ) | |
$ | (6,535,708 | ) |
Deemed dividend on Series A Convertible preferred stock | |
| (594,641 | ) | |
| - | |
Net loss attributable to common stockholders | |
| (7,054,943 | ) | |
| (6,535,708 | ) |
Net loss per common share – basic and diluted | |
| (0.09 | ) | |
| (0.12 | ) |
Weighted average common shares outstanding – basic and diluted | |
| 80,007,507 | | |
| 55,993,097 | |
Revenue
For the nine months ended September 30,
2015 and 2014, revenue was $314,146 and $284,739, respectively, consisting primarily of revenues from various levels of licensing,
website design and maintenance. Revenues increased slightly due to demand for our platform implementation. Additionally, for the
nine months ended September 30, 2015 and 2014, revenue from related party was $-0- and $5,375, respectively, consisting primarily
of revenue from various levels of website design and maintenance.
Cost of Sales
For
the nine months ended September 30, 2015 and 2014, cost of sales was $1,178,388 and $639,924, respectively, consisting
primarily of sub-contracting to outside sources, direct labor and direct technology costs.
Gross Loss
The
increase in our implementation costs resulted in a gross loss of $864,242 during the nine months ended September 30, 2015
as compared to a gross loss of $355,185 for the nine months ended September 30, 2014.
Selling and Marketing Expenses
Selling and marketing expenses were $747,990
and $1,068,353 for the nine months ended September 30, 2015 and 2014, respectively. The decrease resulted from the establishment
of dedicated resources to actively sell and market our products (away from third-party contractors) together with the reduction
in staffing costs.
Research and Development Expenses
Research and development expenses were
$293,877 and $391,958 for nine months ended September 30, 2015 and 2014, respectively. Research and development expenses were
down from the prior year period and reflect the establishment of a dedicated internal research group.
General and Administrative Expenses
General and administrative expenses were
$4,161,269 and $4,352,398 for the nine months ended September 30, 2015 and 2014, respectively. General and administrative expenses
decrease as a result of staff reductions and the associated benefits costs as well as recapture of expense related to forfeitures
of unvested stock options and warrants.
Amortization and Depreciation
Amortization and depreciation expenses
were $396,269 and $347,954 for the nine months ended September 30, 2015 and 2014, respectively. The increase in expense was primarily
related to an increase in intellectual property amortization.
Other Income/Expenses
Other income and expenses were income of
$3,345 and charges of $19,860 for the nine months ended September 30, 2015 and 2014, respectively. The resulting change
was due to a decrease in interest expense and the elimination of any further unrealized loss on marketable securities.
Liquidity and Capital Resources
Working Capital
| |
At September 30, | | |
At December 31, | |
| |
2015 | | |
2014 | |
Current Assets | |
$ | 298,011 | | |
$ | 3,274,065 | |
Current Liabilities | |
| 355,544 | | |
| 1,156,782 | |
Working Capital | |
$ | (57,533 | ) | |
$ | 2,117,283 | |
The working capital (deficit)/surplus for
the periods ended September 30, 2015 and December 31, 2014 was $(57,533) and $2,117,283 respectively. The decrease in working
capital was primarily due to a decrease in other assets associated with the settlement of a stock subscription receivable and
a decrease in accounts payables and accrued expenses.
The accompanying financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”), which contemplates the continuation of the Company as a going concern. As of September 30, 2015, the Company had
a working capital deficit of $57,533. In addition, the Company used net cash in operations of $4,804,778 during the nine months
ended September 30, 2015.
Even with a greater focus
on cash revenue generation and the ongoing cost reductions, the conditions described in the first paragraph, above, raise substantial
doubt about the Company’s ability to continue as a going concern. While the Company has been successful in raising capital
in the past, there is no assurance that it will be successful at raising additional capital in the future. Additionally, if the
Company’s plans are not achieved and/or if significant unanticipated events occur, the Company may have to further modify
its business plan.
Cash Flows
| |
For the nine months ended | |
| |
September 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Net Cash (Used in) Operating Activities | |
$ | (4,804,778 | ) | |
$ | (3,761,754 | ) |
Net Cash (Used in) Investing Activities | |
| (88,156 | ) | |
| (556,611 | ) |
Net Cash Provided by Financing Activities | |
| 3,271,943 | | |
| 4,623,210 | |
Increase (Decrease) in Cash | |
$ | (1,620,991 | ) | |
$ | 304,845 | |
We had cash in the amount of $51,910 and $1,672,901
as of September 30, 2015 and December 31, 2014, respectively.
On January 15, 2015, we sold an additional
812,500 units under a private placement that had its initial close in December 2014 (the “December 2014 Private
Placement”) to one institutional investor for gross proceeds of $325,000 with no commission payable. Each unit in the December 2014
Private Placement consisted of one share of the Company’s common stock and warrants to purchase ¼ of a share for
every common share purchased. The warrants have a term of five years and an exercise price of $0.60 per share.
On October 9, 2015 (the
“Initial Closing Date”), we entered into a Note and Warrant Purchase Agreement with certain investors for the
issuance and sale of convertible promissory notes in an aggregate principal amount of up to $3,750,000 and warrants to
purchase up to an aggregate of 37,500,000 shares of common stock of the Company as more fully described in the Subsequent
Events discussion above (the “October 2015 Private Placement”). $2,500,000 in aggregate principal has
been sold as of November 8, 2015. In view of the recent capital raises, management believes that it has sufficient liquidity
to implement the business plan and continue operations into the foreseeable future.
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, 2014, relate to capitalized legal patent costs,
income taxes, 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, 2014 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.
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 not effective as of September 30, 2015 due to omissions of disclosures in accordance with generally accepted accounting principles
that have been substantially corrected as of May 18, 2015. Please refer to our Annual Report on Form 10-K for the year
ended December 31, 2014 as filed with the SEC on July 10, 2015 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,
2014. In the first quarter of 2015, we implemented the processes to effectively and accurately compute the revenues associated
with non-cash transactions and the revenues earned under the percentage of completion methodology. Additionally, we implemented
processes to mitigate the issue of sales to customers where collections were not reasonably assured.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
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
In April 2015, two purported shareholder
class action lawsuits were filed against us and our former officers Nathaniel Bradley and Edward O’Donnell in the U.S. District
Court for the District of Arizona. The plaintiffs allege various causes of action against the defendants arising from our announcement
that our previously issued financial results for the first three quarters of 2014 and the guidance for the fourth quarter of 2014
and the full year of 2014 could no longer be relied upon. The complaints seek, among other relief, compensatory damages and plaintiff’s
counsel’s fees and experts’ fees. The Court has not yet appointed a lead plaintiff or lead counsel, and we have not
yet responded to the complaints. We believe that the lawsuits have no merit and intend to mount a vigorous defense. Given the
current stage of the proceedings in this case, our management currently cannot assess the probability of losses, or reasonably
estimate the range of losses, related to these matters.
Item 1A. Risk Factors
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,
2014.
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds
Sales of Unregistered Securities
On January 15, 2015, we sold an additional
812,500 units under a private placement that had its initial close in December 2014 (the “December 2014 Private
Placement”) to one institutional investor for gross proceeds of $325,000 with no commission payable. Each unit in the December 2014
Private Placement consisted of one share of our common stock and warrants to purchase ¼ of a share for every common share
purchased. The warrants have a term of five years and an exercise price of $0.60 per share.
On May 1, 2015, we sold an aggregate
of 175,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) to 12 accredited investors
at a purchase price of $10.00 per share (the “Purchase Price”) for proceeds of $1,750,000 in a private placement.
Each share of the Preferred Stock may be converted into shares of our common stock by dividing the Purchase Price plus any accumulated
dividends with respect to such share by an initial conversion price of $0.1754 (subject to adjustment for stock splits, stock
dividends and similar actions). We may redeem the Preferred Stock at any time for a per share amount equal to $12.50 plus accumulated
dividends. The Preferred Stock will bear a dividend of 5% of the purchase price when, as and if declared by our board of directors.
On October 9, 2015 (the “Initial
Closing Date”), we entered into a Note and Warrant Purchase Agreement with certain investors for the issuance and sale of
convertible promissory notes in an aggregate principal amount of up to $3,750,000 and warrants to purchase up to an aggregate
of 37,500,000 shares of common stock of the Company as more fully described in the Subsequent Events discussion
above. $2,500,000 in aggregate principal has been sold as of November 8, 2015.
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 Rule 506 of Regulation D promulgated thereunder. We determined
that the investors were accredited based on representations made by the investors to us.
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.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
No. |
|
Description |
31.1* |
|
Certification of the Principal Executive
Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1* |
|
Certification of the Principal Executive
Officer and Principal 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 |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed
herewith.
SIGNATURES
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 16 day of November, 2015.
|
AUDIOEYE, INC. |
|
|
|
|
|
|
|
By: |
/s/ Carr Bettis |
|
|
Carr Bettis |
|
|
Executive Chairman |
|
|
|
|
|
|
|
By: |
/s/ Sean Bradley |
|
|
Sean Bradley |
|
|
President |
Exhibit 31.1
CERTIFICATION UNDER SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Carr Bettis, Principal Executive Officer
of AudioEye, Inc. (the “Registrant”), certify that:
1. I have reviewed this Quarterly Report
on Form 10-Q for the period ended September 30, 2015 of AudioEye, Inc. (the “Quarterly Report”);
2. Based on my knowledge, this Quarterly
Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this Quarterly Report;
3. Based on my knowledge, the financial
statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information
relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly
during the period in which this Quarterly Report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the
Registrant’s disclosure controls and procedures and presented in this Annual Report my conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation;
and
(d) Disclosed in this report any change
in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal
quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying
officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Registrant’s
auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the Registrant’s internal control over financial
reporting.
Date: November 16, 2015 |
By: |
/s/ Carr Bettis |
|
|
Name: |
Carr Bettis |
|
|
Title: |
Principal Executive Officer and Principal Financial Officer |
Exhibit 32.1
CERTIFICATION UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing by AudioEye, Inc.
(the “Registrant”) of its Quarterly Report on Form 10-Q for the period ended September 30, 2015 (the
“Quarterly Report”) with the Securities and Exchange Commission, I, Carr Bettis, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The
Quarterly Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(ii) The
information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of
operations of the Registrant.
A signed original of this written statement
required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities
and Exchange Commission or its staff upon request.
Date: November 16, 2015 |
By: |
/s/ Carr Bettis |
|
|
Name: |
Carr Bettis |
|
|
Title: |
Principal Executive Officer and Principal Financial Officer |
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