Item 1. Financial Statements
The financial information set forth below
with respect to the financial statements as of March 31, 2018 and 2017 and for the three month periods ended March 31, 2018 and
2017 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 month period ended
March 31, 2018 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
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,276,997
|
|
|
$
|
1,960,430
|
|
Accounts receivable
|
|
|
137,329
|
|
|
|
105,817
|
|
Marketable securities, held in related party
|
|
|
978
|
|
|
|
750
|
|
Deferred costs, short term
|
|
|
43,932
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
48,483
|
|
|
|
67,406
|
|
Total current assets
|
|
|
1,507,719
|
|
|
|
2,134,403
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
41,570
|
|
|
|
34,994
|
|
|
|
|
|
|
|
|
|
|
Deferred costs, long term
|
|
|
56,574
|
|
|
|
-
|
|
Intangible assets, net
|
|
|
2,116,940
|
|
|
|
2,164,463
|
|
Goodwill
|
|
|
700,528
|
|
|
|
700,528
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,423,331
|
|
|
$
|
5,034,388
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
56,674
|
|
|
$
|
82,628
|
|
Related party payables
|
|
|
14,467
|
|
|
|
23,535
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
2,984,010
|
|
Deferred rent
|
|
|
3,319
|
|
|
|
9,402
|
|
Deferred revenue
|
|
|
1,374,218
|
|
|
|
1,233,754
|
|
Total current liabilities
|
|
|
1,448,678
|
|
|
|
4,333,329
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
9,787
|
|
|
|
5,048
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,458,465
|
|
|
|
4,338,377
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value, 10,000,000 shares authorized, 110,000 shares issued and outstanding as of March 31, 2018 and December 31, 2017
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.00001 par value, 250,000,000 shares authorized, 161,664,077 shares issued and outstanding as of March 31, 2018 and December 31, 2017
|
|
|
1,617
|
|
|
|
1,617
|
|
Additional paid in capital
|
|
|
41,249,086
|
|
|
|
40,120,293
|
|
Accumulated deficit
|
|
|
(38,285,838
|
)
|
|
|
(39,425,900
|
)
|
Total stockholders' equity
|
|
|
2,964,866
|
|
|
|
696,011
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
4,423,331
|
|
|
$
|
5,034,388
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
1,149,342
|
|
|
$
|
434,507
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
587,464
|
|
|
|
341,042
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
561,878
|
|
|
|
93,465
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
610,662
|
|
|
|
279,727
|
|
Research and development
|
|
|
49,667
|
|
|
|
44,702
|
|
General and administrative
|
|
|
936,960
|
|
|
|
737,681
|
|
Amortization and depreciation
|
|
|
127,665
|
|
|
|
145,488
|
|
Total operating expenses
|
|
|
1,724,954
|
|
|
|
1,207,598
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,163,076
|
)
|
|
|
(1,114,133
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative liabilities
|
|
|
-
|
|
|
|
310,773
|
|
Unrealized gain on marketable securities
|
|
|
228
|
|
|
|
-
|
|
Interest income
|
|
|
237
|
|
|
|
164
|
|
Total other income
|
|
|
465
|
|
|
|
310,937
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,162,611
|
)
|
|
|
(803,196
|
)
|
|
|
|
|
|
|
|
|
|
Dividends on Series A Convertible preferred stock
|
|
|
(13,750
|
)
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(1,176,361
|
)
|
|
$
|
(823,196
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic and diluted
|
|
|
161,664,077
|
|
|
|
111,884,024
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
THREE MONTHS ENDED MARCH 31, 2018
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Preferred stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance, December 31, 2017
|
|
|
161,664,077
|
|
|
$
|
1,617
|
|
|
|
110,000
|
|
|
$
|
1
|
|
|
$
|
40,120,293
|
|
|
$
|
(39,425,900
|
)
|
|
$
|
696,011
|
|
Effect of adoption of Accounting Codification Standard 2014-09,
Revenue from Contracts with Customers
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,153
|
|
|
|
80,153
|
|
Reclassify derivative liability to equity upon adoption of Accounting
Codification Standard 2017-11, Earnings Per Share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
761,490
|
|
|
|
2,222,520
|
|
|
|
2,984,010
|
|
Restricted stock units, warrants and options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
367,303
|
|
|
|
-
|
|
|
|
367,303
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,162,611
|
)
|
|
|
(1,162,611
|
)
|
Balance, March 31, 2018
|
|
|
161,664,077
|
|
|
$
|
1,617
|
|
|
|
110,000
|
|
|
$
|
1
|
|
|
$
|
41,249,086
|
|
|
$
|
(38,285,838
|
)
|
|
$
|
2,964,866
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(1,162,611
|
)
|
|
$
|
(803,196
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
127,665
|
|
|
|
145,488
|
|
Option, warrant, RSU and PSU expense
|
|
|
367,303
|
|
|
|
211,464
|
|
Stock issued for services
|
|
|
-
|
|
|
|
17,875
|
|
Unrealized gain on marketable securities
|
|
|
(228
|
)
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
(310,773
|
)
|
Amortization of deferred commission
|
|
|
9,974
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(31,512
|
)
|
|
|
(12,954
|
)
|
Deferred costs
|
|
|
(30,327
|
)
|
|
|
-
|
|
Other current assets
|
|
|
18,923
|
|
|
|
5,871
|
|
Accounts payable and accruals
|
|
|
(25,954
|
)
|
|
|
11,853
|
|
Deferred rent
|
|
|
(1,344
|
)
|
|
|
(385
|
)
|
Deferred revenue
|
|
|
140,464
|
|
|
|
69,959
|
|
Related party payables
|
|
|
(9,068
|
)
|
|
|
51,750
|
|
Net cash (used in) operating activities
|
|
|
(596,715
|
)
|
|
|
(613,048
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(10,893
|
)
|
|
|
(5,736
|
)
|
Software development costs
|
|
|
(75,825
|
)
|
|
|
(50,970
|
)
|
Net cash (used in) investing activities
|
|
|
(86,718
|
)
|
|
|
(56,706
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants for cash
|
|
|
-
|
|
|
|
50,000
|
|
Repayments of notes payable
|
|
|
-
|
|
|
|
(6,000
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash
|
|
|
(683,433
|
)
|
|
|
(625,754
|
)
|
Cash-beginning of period
|
|
|
1,960,430
|
|
|
|
1,409,418
|
|
Cash-end of period
|
|
$
|
1,276,997
|
|
|
$
|
783,664
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Reclassify fair value of liability warrants from equity to liability upon issuance
|
|
$
|
-
|
|
|
$
|
6,062
|
|
Restricted stock units issued in payment of accrued compensation
|
|
$
|
-
|
|
|
$
|
58,333
|
|
Reclassify fair value of warrant liabilities to equity upon adoption of ASU 2017-11
|
|
$
|
2,984,010
|
|
|
$
|
-
|
|
Effect of adoption of Accounting Codification Standard 2014-09, Revenue from Contracts with Customers
|
|
$
|
80,153
|
|
|
$
|
-
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (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 April 2, 2018.
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, 2017 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.
Revenue Recognition
The Company recognizes
revenue when delivery of the promised goods or services is transferred to its customers, in an amount that reflects the consideration
that the Company expects to receive in exchange for those goods or services.
Certain Software as a Service (SaaS) are
prepared and invoiced on an annual basis. Any funds received for services not provided yet are held in deferred revenue, and are
recorded as revenue when earned.
The Company had one major customer including
their affiliates which generated approximately 13% of its revenue in the three months ended March 31, 2018.
At March 31, 2018, the Company had one
customer representing 36% of the outstanding accounts receivable.
Effective January
1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue
recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout
the Industry Topics of the Accounting Standards Codification. The updated guidance states that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect
to revenues and cash flows arising from contracts with customers. The Company adopted the standard using the modified retrospective
approach effective January 1, 2018.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
The most significant impact of the standard
relates to capitalizing costs to acquire contracts, which have historically been expensed as incurred. As of December 31,
2017, the Company’s sales commission plans have included multiple payments, including initial payments in the period a customer
contract is obtained and deferred payments over the life of the contract as future payments are collected from the customers.
Under the standard, only the initial payment is subject to capitalization as the deferred payments require a substantive performance
condition of the employee. These initial commission payments are now capitalized in the period a customer contract is obtained
and payment is received; and will be amortized consistent with the transfer of the goods or services to the customer over the
expected period of benefit. The expected period of benefit is the contract term, except when the commission payment is expected
to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental
sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Such commissions are
amortized over the greater of contract term or technological obsolescence period when the underlying contracted products are technology-based,
such as for the SaaS-based platforms, or the expected customer relationship period when the underlying contracted products are
not technology-based, such as for patient experience survey products. Upon adoption of Topic 606, the Company reclassified $80,153
from equity previously expensed commissions to deferred assets effective January 1, 2018. There were significant changes in contract
liabilities balances during the three months ended March 31, 2018. Deferred Revenue increased to $1,374,218 at March 31, 2018
compared to $1,233,754 at December 31, 2017 due to cash received of $997,467 less revenue recognized of $857,003.
Effects of adoption of ASU 2014-09 are
as follows:
|
|
At January 1, 2018:
|
|
|
|
|
|
|
Prior to adoption of
ASU 2014-09
|
|
|
Subsequent to
adoption of ASU
2014-09
|
|
|
Change
|
|
Accumulated deficit
|
|
$
|
(39,425,900
|
)
|
|
$
|
(39,345,747
|
)
|
|
$
|
(80,153
|
)
|
Deferred commission cost
|
|
$
|
-
|
|
|
$
|
80,153
|
|
|
$
|
80,153
|
|
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation,
debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.
Stock based compensation
The Company measures the cost of services
received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the
fair value of the award is measured on the grant date and for non-employees the fair value of the award is generally re-measured
on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized
over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based
compensation expense is recorded by the Company in the same expense classifications in the consolidated statements of operations,
as if such amounts were paid in cash.
Derivative Instrument Liability
The Company accounts for derivative instruments
in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities,
including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives
on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the
derivative instruments depends on whether the derivatives qualify as hedging relationships and the types of relationships designated
are based on the exposures hedged. At March 31, 2018 and December 31, 2017, the Company did not have any derivative instruments
that were designated as hedges.
In 2017 and prior and in accordance with
ASC 815, certain warrants with anti-dilutive provisions were deemed to be derivatives. The value of the derivative instrument will
fluctuate with the price of the Company’s common stock and is recorded as a current liability on the Company’s Consolidated
Balance Sheet. The change in the value of the liability is recorded as “unrealized gain (loss) on derivative liability”
on the Consolidated Statements of Operations.
Effective January 1, 2018, the Company
adopted Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities
from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification
analysis of certain equity-linked financial instruments (or embedded features) with down round features.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS)
in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as
a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion
options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features
(in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments
in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending
content in the Codification, to a scope exception.
On January 1, 2018, the Company adopted
ASU 2017-11 by electing the modified retrospective method to the outstanding financial instruments with a down round feature by
means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year. Accordingly,
the Company reclassified the fair value of the reset provisions embedded in previously issued warrants from liability to equity
(accumulated deficit) in aggregate of $2,984,010.
Effects of adoption of ASU 2017-11 modified
retrospective are as follows:
|
|
At January 1, 2018:
|
|
|
|
|
|
|
Prior to adoption of
ASU 2014-09
|
|
|
Subsequent to
adoption of ASU
2014-09
|
|
|
Change
|
|
Derivative liabilities
|
|
$
|
2,984,010
|
|
|
$
|
-
|
|
|
$
|
(2,984,010
|
)
|
Additional paid in capital
|
|
|
40,120,293
|
|
|
|
40,881,783
|
|
|
|
761,490
|
|
Accumulated deficit
|
|
$
|
(39,425,900
|
)
|
|
$
|
(37,203,380
|
)
|
|
$
|
2,222,520
|
|
Earnings (Loss) Per Share
Basic earnings (loss) per share are computed
by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. Diluted earnings
(loss) per share and basic earnings (loss) per share are not included in the net loss per share computation until the Company has
Net Income. Diluted loss per share including the dilutive effects of common stock equivalents on an “as if converted”
basis would reduce the loss per share and thereby be antidilutive.
Potentially dilutive securities excluded
from the computation of basic and diluted net earnings (loss) per share are as follows:
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Preferred stock
|
|
|
7,186,314
|
|
|
|
6,872,745
|
|
Options to purchase common stock
|
|
|
26,454,993
|
|
|
|
25,931,207
|
|
Warrants to purchase common stock
|
|
|
44,194,663
|
|
|
|
63,723,041
|
|
Restricted stock units
|
|
|
3,908,471
|
|
|
|
1,654,917
|
|
Totals
|
|
|
81,744,441
|
|
|
|
98,181,910
|
|
Fair Value Measurements
Fair value is an estimate of the exit price,
representing the amount that would be received to upon the sale of 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.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
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.
The following are the Company’s assets
and liabilities, measured at fair value on a recurring basis, as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
|
Hierarchy
|
|
Assets
|
|
|
|
|
|
|
|
|
Marketable securities, March 31, 2018
|
|
$
|
978
|
|
|
|
Level 1
|
|
Marketable securities, December 31, 2017
|
|
$
|
750
|
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative Liability ,March 31, 2018
|
|
$
|
-
|
|
|
|
Level 3
|
|
Derivative Liability , December 31, 2017
|
|
$
|
2,984,010
|
|
|
|
Level 3
|
|
Recent Accounting Pronouncements
There are various updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 2 – MANAGEMENT’S LIQUIDITY
PLANS
As of March 31, 2018, the Company had cash
of $1,276,997 and a working capital of $59,041. In addition, the Company used actual net cash in operations of $596,715 during
the three months ended March 31, 2018. The Company has incurred net losses since inception. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern.
The Company’s primary source of operating
funds has been from revenue generated from sales and cash proceeds from the sale of common stock and the issuance of convertible
and other debt. It is anticipated that the Company has cash sufficient to fund operations through October 2018.
The Company expects that cash used in operations
will decrease significantly over the next several years as the Company executes its business plan. In the event that the Company
is not able to fully achieve its plan, the Company may need to raise additional funds through equity or debt financing. If the
Company is unsuccessful in raising additional financing, it will need to reduce costs and operations in the future. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2018 and December 31,
2017 is summarized as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Computer equipment
|
|
$
|
72,570
|
|
|
$
|
63,517
|
|
Furniture and fixtures
|
|
|
4,968
|
|
|
|
3,128
|
|
Total
|
|
|
77,538
|
|
|
|
66,645
|
|
Less accumulated depreciation
|
|
|
(35,968
|
)
|
|
|
(31,651
|
)
|
Property and equipment, net
|
|
$
|
41,570
|
|
|
$
|
34,994
|
|
Property and equipment are stated at cost
and depreciated using the straight-line method over their estimated useful life of 3 years. When retired or otherwise disposed,
the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any
amount realized from disposition, is reflected in earnings.
The Company spent $10,893 and $5,736 in
purchase of equipment during three months ended March 31, 2018 and 2017, respectively. Depreciation expense was $4,317 and $447
for the three months ended March 31, 2018 and 2017, respectively.
NOTE 4 — INTANGIBLE ASSETS
For the three months ended March 31, 2018
and 2017, the Company invested in Software development costs in the amounts of $75,825 and $50,970 respectively.
Patents, technology and other intangibles
with contractual terms are generally amortized over their estimated useful lives of 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.
Software development costs are amortized over their estimated
useful life of three years.
Prior to any impairment adjustment, intangible assets consisted
of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Patents
|
|
$
|
3,697,709
|
|
|
$
|
3,697,709
|
|
Capitalized software development
|
|
|
1,081,194
|
|
|
|
1,005,369
|
|
Accumulated amortization
|
|
|
(2,661,963
|
)
|
|
|
(2,538,615
|
)
|
Intangible assets, net
|
|
$
|
2,116,940
|
|
|
$
|
2,164,463
|
|
Amortization expense for patents totaled
$87,026 and $91,582 for the three months ended March 31, 2018 and 2017, respectively. Amortization expense for software development
totaled $36,322 and $53,459 for the three months ended March 31, 2018 and 2017, respectively.
Total amortization expense totaled $123,348
and $145,041 for the three months ended March 31, 2018 and 2017, respectively.
NOTE 5 — DEFERRED COSTS
Effective January 1, 2018, the Company
capitalizes initial and renewal sales commission payments in the period a customer contract is obtained and payment is received;
and is amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit. The
expected period of benefit is the contract term, except when the commission payment is expected to provide economic benefit to
the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected
and renewal commissions are not commensurate with initial commissions.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
Such commissions are amortized over the
greater of contract term or technological obsolescence period when the underlying contracted products are technology-based, such
as for the SaaS-based platforms, or the expected customer relationship period when the underlying contracted products are not technology-based,
such as for patient experience survey products.
During the three months ended March 31,
2018, the Company deferred an aggregate $30,327 commissions paid and reclassified from equity $80,153 previously paid and expensed
commissions. Amortization of deferred costs for the three months ended March 31, 2018 was $9,974.
NOTE 6 — RELATED PARTY TRANSACTIONS
Dr. Carr Bettis, Executive Chairman
and Chairman of Board of Directors
As of March 31, 2018 and December 31,
2017, the Company owed Dr. Bettis $5,992 in accrued salary. In addition, AudioEye sub-leases office space in Scottsdale, Arizona
for certain Company employees, including Todd Bankofier, CEO, from Verus Analytics, Inc, a company in which Dr. Bettis has a controlling
interest. The Company had taken on more employees and space, the sub-lease amount increased from $500 per month to $3,502 per month
in 2017 totaling $10,507 and $1,500 for the three months ended March 31, 2018 and 2017, respectively. The amount of $0 was due
as of March 31, 2018 and December 31, 2017. At March 31, 2018 and December 31, 2017, an estimated $8,475 and $14,000 was due and
accrued to Dr. Bettis for unreimbursed travel related expenses, respectively.
Sean Bradley, President, Chief Technology
Officer, and Secretary
As of March 31, 2018 and December 31,
2017 and 2016, the Company owed Sean Bradley $0 and $3,543 in accrued salary, respectively.
NOTE 7 — STOCKHOLDERS’ EQUITY
Preferred stock
As of March 31, 2018 and December 31,
2017, the Company had 110,000 shares of Series A Convertible Preferred Stock, issued at $10 per share, paying a 5% cumulative
annual dividend and convertible for common stock at a price of $0.1754 per share. For the three months ended March 31, 2018, preferred
shareholders earned, but were not paid $13,750 in annual dividends, or equivalent to 78,392 common shares based on a conversion
price of $0.1754 per share. As of March 31, 2018 and December 31, 2017, cumulative and unpaid dividends were $160,668 and $146,918,
or equivalent to 916,009 and 837,617 common shares based on a conversion price of $0.1754 per share, respectively.
Common stock
As of March 31, 2018 and December 31,
2017, the Company had 161,664,077 shares of common stock issued and outstanding.
Options
As of March 31, 2018 and December 31,
2017, the Company has outstanding options to purchase 26,454,993 and 25,095,557 shares of common stock, respectively.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
|
Wtd Avg.
|
|
|
|
|
|
Value
|
|
|
|
Number of
|
|
|
Wtd Avg.
|
|
|
Remaining
|
|
|
|
|
|
of
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Exercisable
|
|
|
Options
|
|
Outstanding at December 31, 2017
|
|
|
25,095,557
|
|
|
$
|
.019
|
|
|
|
2.64
|
|
|
|
22,276,224
|
|
|
$
|
1,356,188
|
|
Granted
|
|
|
1,509,436
|
|
|
|
0.26
|
|
|
|
5.00
|
|
|
|
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(150,000
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
26,454,993
|
|
|
$
|
0.19
|
|
|
|
2.75
|
|
|
|
23,082,687
|
|
|
$
|
2,979,412
|
|
On March 9, 2018, the Company
granted an aggregate of 1,509,436 options to employees as compensation for services rendered. The options are exercisable at
$0.258 per share for five years with (i) 946,936 options vesting 50% at the first day of each month beginning January 1, 2018
through December 1, 2018, 25% vesting at the first day of each month from January 1, 2019 through December 1, 2019 and 25%
vesting at the first day of each month beginning January 1, 2020 through December 1, 2020; (ii) 312,500 options vesting 50%
on January 1, 2018, 50% vesting at each month beginning on January 1, 2019 for 24 months; and (iii) 250,000 options fully
vesting on January 1, 2018. The exercise price was determined using the 10-day average closing price beginning with the
closing price on January 9, 2018. The value on the grant date of the options was $298,914.
Option grants during the three months ended
March 31, 2018 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected
term of 2.50 to 3.50 years, expected volatility of 163.85%, risk free interest rate of 2.45% to 2.65%, and expected dividend yield
of 0%.
For the three months ended March 31, 2018
and 2017, total stock compensation expense related to the options totaled $145,046 and $167,414, respectively.
The outstanding unamortized stock compensation
expense related to options was $265,865 (which will be recognized through December 2020) as of March 31, 2018.
Warrants
Below is a table summarizing the Company’s
outstanding warrants as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
|
Wtd Avg.
|
|
|
Value
|
|
|
|
Number of
|
|
|
Wtd Avg.
|
|
|
Remaining
|
|
|
of
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Warrants
|
|
Outstanding at December 31, 2016
|
|
|
47,997,335
|
|
|
$
|
0.20
|
|
|
|
2.61
|
|
|
$
|
1,656,083
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(3,802,672
|
)
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
44,194,663
|
|
|
$
|
0.19
|
|
|
|
2.57
|
|
|
$
|
4,650,064
|
|
For the three months ended March 31, 2018
and 2017, the Company has incurred warrant-based expense of $1,393 and $44,050, respectively. The outstanding unamortized
stock compensation expense related to warrants was $0.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
Restricted stock units (“RSU”)
The following table summarizes the restricted
stock unit activity for the three months ended March 31, 2018:
Restricted stock units issued as of January 1, 2018
|
|
|
3,908,471
|
|
Granted
|
|
|
958,333
|
|
Total Restricted stock units issued at March 31, 2018
|
|
|
4,866,804
|
|
Vested at March 31, 2018
|
|
|
2,376,804
|
|
Unvested restricted stock units as of March 31, 2018
|
|
|
2,490,000
|
|
On March 27, 2018, the Company granted
958,333 RSUs for services provided. 500,000 of such RSUs began vesting May 1, 2018, and will vest each calendar month at a rate
of 41,666 RSUs per month except the last month ending April 1, 2019 whereby 41,674 RSUs would vest provided that services are not
terminated by the Company or the grantee. 458,333 RSU’s vested immediately. The settlement date for such RSUs is (i) April
1, 2025 or (ii) the date on which the Company undergoes a change of control during the seven-year term of the award. The fair value
of the RSU’s at grant date was $247,250.
For the three months ended March 31, 2018
and 2017, the Company has incurred RSU-based expense of $220,864 and $0, respectively. The outstanding unamortized stock
compensation expense related to RSUs was $179,563 (which will be recognized through April 2019) as of March 31, 2018.
NOTE 8 — COMMITMENTS AND CONTINGENCIES
Litigation
On January 23, 2017, the court granted
preliminary approval of the settlement pursuant to the terms set forth in the Stipulation of Settlement, provisionally certified
a settlement class of shareholders, and directed plaintiffs' counsel to provide notice to that class. The Court held a Settlement
Hearing May 8, 2017 to consider any objections to the Settlement that might be raised by settlement class members, to consider
plaintiffs’ counsel's application for an award of fees and costs, and to determine whether the Order and Final Judgment as
provided under the Stipulation of Settlement should be entered, dismissing the case with prejudice. On May 8, 2017, this Court
granted final approval to the settlement of the securities class action brought by Lead Plaintiffs, individually and on behalf
of all others similarly situated. On February 9, 2018, the Court authorized distribution of the Net Settlement Fund and to approved
the proposed modified plan of allocation.
On May 16, 2016, a shareholder derivative
complaint entitled LiPoChing, Derivatively and on Behalf of AudioEye, Inc., v. Bradley, et al., was filed in the United States
District Court for the District of Arizona. As a derivative complaint, the plaintiff-shareholder purported to act on behalf of
the Company against the Named Individuals. The Company was named as a nominal defendant. The complaint asserted causes of action
including breach of fiduciary duty and others, arising from the Company’s restatement of its financial results for the first
three quarters of 2014. The complaint sought, among other relief, compensatory damages, restitution and attorneys’ fees.
In October 2016, the Company and Named Defendants filed a motion to dismiss. In response, the Plaintiff voluntarily dismissed the
complaint without prejudice. Plaintiff’s counsel subsequently submitted a demand to the Company’s Board of Directors,
to investigate the circumstances surrounding restatement of its financial results for the first three quarters of 2014. The Board
has formed an Independent Director lead special litigation committee to evaluate the demand and make a recommendation to the Board.
No determination has been made at this time.
On July 26, 2016, a shareholder derivative
complaint entitled Denese M. Hebert, derivatively on Behalf of Nominal Defendant AudioEye, Inc., v. Bradley, et al., was filed
in the State of Arizona Superior Court for Pima County. The complaint generally asserted causes of action related to the Company’s
restatement of its financial statements for the first three fiscal quarters of 2014. As a derivative complaint, the plaintiff-shareholder
purported to act on behalf of the Company against the Named Individuals. The Company was named as a nominal defendant. The defendants
filed a motion to dismiss, which the Court granted on May 8, 2017, while also denying Plaintiff’s request for leave to amend
the complaint. As in the above matter, after this matter was dismissed Plaintiff’s counsel subsequently submitted a demand
to the Company’s Board of Directors, to investigate the circumstances surrounding restatement of its financial results for
the first three quarters of 2014.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
While the Company believes that its legal
defense costs may be reimbursed by the Company’s insurance carrier, no reasonable estimate of the outcome of the litigation,
the related legal fees, or the impact on the financial results of the Company can be made as of the date of this statement. This
demand is being evaluated together with the above demand by the Board’s Independent Director lead special litigation committee.
No determination has been made at this time.
We may become involved in various other
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 any such matters, should they arise, is not likely to have a material
adverse effect on our financial position or results of operations.
NOTE 9 — SUBSEQUENT EVENTS
Equity transactions
On April 12, 2018, the Company granted
150,000 options to purchase the Company’s common stock for services at an exercise price of $0.248 per share for five years
with 50,000 options vesting immediately and 25,000 options vesting every 90 days thereafter..
In March 2018, two individuals (the “Holders”) holding
warrants to purchase an aggregate of 3,188,079 shares of the Company’s Common Stock (the “Warrants”) each delivered
a Notice of Cashless Exercise (each, a "Notice") to the Company prior to the March 19, 2018 expiration of the Warrants.
The Notices were technically deficient with respect to the proper exercise procedure required by the Warrants. However, the Company
agreed to waive the deficiency and permit the cashless exercise of the Warrants, which resulted in the issuance of an aggregate
of 146,018 shares of the Company’s Common Stock to the Holders in April 2018.
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, 2017. 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 is a marketplace leader providing
web accessibility solutions for our clients’ customers through our
Ally Platform Products
. Our technology advances
accessibility with patented technology solutions that reduce barriers, expand access for individuals with disabilities, and enhance
the user experience for a broader audience of users
.
When implemented, we believe that our solutions offer businesses the
opportunity to reach more customers, improve brand image, and build additional brand loyalty. In addition, our solutions
help organizations comply with internationally accepted Web Content Accessibility Guidelines (WCAG) as well as US, Canadian, Australian,
and United Kingdom accessibility laws.
We generate revenues through the sale of
subscriptions of our software as a service (SaaS) technology platform, called the AudioEye Ally Platform, to website owners, publishers,
developers, and operators and through the delivery of managed services combined with the implementation of the AudioEye solution.
Our solutions have been adopted by some of the largest and most influential companies in the world. Our customers span disparate
industries and target market verticals, which encompass (but are not limited to) the following categories: human resources, finance,
transportation, media, and education. Government agencies have also integrated our software in their digital platforms.
The AudioEye Solution
AudioEye uses proprietary technology and
development tools to offer web accessibility solutions that offer significant savings in time and money relative to traditional
solutions. Our compliance solutions focus on rapid remediation of the most important accessibility issues, followed by in-depth
analysis identifying and addressing a more comprehensive compliance program. Our technology was built to not only provide users
with a cloud-based assistive toolset that gets embedded and made freely available to users within our client websites, but to also
improve the code in a way that optimizes the user experience for users of existing third-party assistive technologies, such as
screen readers.
Intellectual Property
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. 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 and are actively engaged in the expansion of the AudioEye IP Portfolio.
Our patented technology was a 2013 Edison
Gold Award winner for innovation in the category of “Quality of Life.”
Our intellectual property is primarily
comprised of trade secrets, trademarks, issued and pending patents, copyrights and technological innovation. We have a patent portfolio
comprised of six patents issued in the United States, we have received a notice of allowance from the U.S. Patent and Trademark
Office for a seventh patent, and we have several additional patents that are either pending or are being prepared for filing in
the United States and internationally.
Our current patented invention relates
to a server-side method and apparatus that enables users to audibly navigate websites and hear high-quality streaming audio narration
and descriptions of websites. This patented invention involves creating an audio-enabled web experience by utilizing voice
talent and automated text-to-speech conversion methods to read and describe web content. It involves the creation of audio files
for each section within a website, and then assigning a hierarchy and navigation system in line with the website design.
To implement the system, a script is installed across the pages of the website and, when loaded, it plays an audible
tone upon a user’s visit indicating that the website is enhanced with our proprietary technology. Upon hearing the
tone, a user presses a key on the keyboard to enter the audible website. Audible narration is played through the user’s
computer, reading text and describing non-text information, such as images. The narration includes menus for navigating the
site which have a hierarchy in line that of the original website. Users navigate the website menus and move from webpage to
webpage by making keystrokes or using a mouse.
Our current portfolio has established a
foundation for building unique technology solutions that contribute to the way in which we differentiate ourselves from other competitors
in the B2B Web Accessibility marketplace. We plan to continue to invest in research and development, and expand our portfolio of
proprietary intellectual property.
Our Annual Report filed on Form 10-K for the year ended
December 31, 2017 provides additional information about our business and operations.
Results of Operations
Our consolidated 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 months ended March 31, 2018 with the three months ended March
310, 2017 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 March 31, 2018
and March 31, 2017
Results of Operations
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
1,149,342
|
|
|
$
|
434,507
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
587,464
|
|
|
|
341,042
|
|
Gross profit
|
|
|
561,878
|
|
|
|
93,465
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling & marketing
|
|
|
610,662
|
|
|
|
279,727
|
|
Research & development
|
|
|
49,667
|
|
|
|
44,702
|
|
General and administrative expenses
|
|
|
936,960
|
|
|
|
737,681
|
|
Amortization & depreciation
|
|
|
127,665
|
|
|
|
145,488
|
|
Total operating expenses
|
|
|
1,724,954
|
|
|
|
1,207,598
|
|
Operating loss
|
|
|
(1,163,076
|
)
|
|
|
(1,114,133
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative liabilities
|
|
|
-
|
|
|
|
310,773
|
|
Unrealized gain on marketable securities
|
|
|
228
|
|
|
|
-
|
|
Interest income
|
|
|
237
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,162,611
|
)
|
|
|
(803,196
|
)
|
Deemed dividend on Series A Convertible preferred stock
|
|
|
(13,750
|
)
|
|
|
(20,000
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(1,176,361
|
)
|
|
$
|
(823,196
|
)
|
Net income per common share – basic and diluted
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
Weighted average common shares outstanding – basic and diluted
|
|
|
161,664,077
|
|
|
|
111,884,024
|
|
Revenue
For the three months ended March 31, 2018
and 2017, revenue was $1,149,342 and $434,507, respectively, consisting primarily of revenues from various levels of subscriptions
and technology development. Revenues increased due to a change of marketing focus.
Cost of Sales
For the three months ended March 31, 2018
and 2017, cost of sales was $587,464 and $341,042, respectively, consisting primarily of sub-contracting to outside sources, direct
labor and direct technology costs.
Gross Profit
An increase in our revenues resulted in
a gross profit of $561,878 for the current period, as compared to a gross profit of $93,465 during the three months ended March
31, 2017. Gross profit increased as a result of lower implementation costs as compared to the same period in 2017.
Selling and Marketing Expenses
Selling and marketing expenses were $610,662
and $279,727 for the three months ended March 31, 2018 and 2017, respectively. The increase resulted from the higher sales
activity in 2018 as compared to 2017.
Research and Development Expenses
Research and development expenses were
$49,667 and $44,702 for three months ended March 31, 2018 and 2017, respectively. Research and development expenses decreased from
period to period and reflect continued developments of our product.
General and Administrative Expenses
General and administrative expenses were
$936,960 and $737,681 for the three months ended March 31, 2018 and 2017, respectively. General and administrative expenses increased
$199,279 due primarily to higher service provider costs as compared to 2017. Stock based compensation for the three months ended
March 31, 2018 was $367,303 as compared to $211,464 for the same period last year.
Amortization and Depreciation
Amortization and depreciation expenses
were $127,665 and $145,488 for the three months ended March 31, 2018 and 2017, respectively. The decrease in expense was primarily
related to expiring software development costs in 2017.
Gain on change in Fair Value of Derivative
Liabilities
In October 2015, 2016 and 2017, we issued
warrants with an embedded reset provisions requiring us to fair value the derivatives each reporting period and mark to market
as a non-cash adjustment to our current period operations. This resulted in a gain of $310,733 on change in fair value of derivative
liabilities for the three months ended March 31, 2017. The primary driver of the change in our derivative liability is our stock
price. Generally, as our stock price decreases, the liability decreases resulting in a larger non-cash gain for the period to period
change.
On January 1, 2018, we adopted ASU 2017-11
by electing the retrospective method to the outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the statement of financial position as of the beginning of the fiscal year. Accordingly, we are no longer required
to treat as derivatives our financial instruments with embedded anti-dilutive (reset) provisions.
Interest Income, net
Interest income, net during the three months
ended March 31, 2018 was $237 compared to $164 for the three months ended March 31, 2017.
Contracts in Process/Revenue Recognition
Under current accounting
procedures, the Company only recognizes revenue on new contracts for the actual services delivered in the period under the following
criteria: (i) the contract has been signed and delivered to the Company; (ii) the services have been performed or delivered; and
(iii) the client has been billed for the services delivered. The Company does not record deferred revenues for new contracts until
the first payment for services has been received. The Company only records accounts receivable for the amount of revenue recognized
as service is rendered, even if the client has been billed for the entire contract value. The table below summarizes the amount
of contract value in excess of the revenue recognized of $4,134,641, our deferred revenue of $1,374,218 and amount recognized in
the amount of $1,149,342 in 2018. Contract and deferred revenues are expected to be recognized in future periods. The Company also
receives contracts for service hours but whose total contract value is uncertain. These “fee for service contracts”
are recorded in the table below only if the services have been delivered and the associated revenue has been recognized.
A summary of our contracts
in process is as follows:
|
|
Contracts in Process
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
Revenue
|
|
|
Revenue
Recognized
|
|
|
Deferred
|
|
|
Contract Amount in
Excess of Deferred
|
|
|
|
Contract
|
|
|
Recognized
|
|
|
3 Months Ended
|
|
|
Revenue
|
|
|
Revenue and
|
|
|
|
Amount
|
|
|
prior to 2018
|
|
|
March 31, 2018
|
|
|
March 31, 2018
|
|
|
Recognized Revenue
|
|
Fixed Contracts
|
|
$
|
8,850,037
|
|
|
$
|
2,191,836
|
|
|
$
|
1,149,342
|
|
|
$
|
1,374,218
|
|
|
$
|
4,134,641
|
|
Liquidity and Capital Resources
Working Capital
|
|
At March 31,
|
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current Assets
|
|
$
|
1,507,719
|
|
|
$
|
2,134,403
|
|
Current Liabilities
|
|
|
1,448,678
|
|
|
|
4,333,329
|
|
Working Capital (Deficit)
|
|
$
|
59,041
|
|
|
$
|
(2,198,926
|
)
|
The working capital (deficit) (current
liabilities in excess of current assets) for the periods ended March 31, 2018 and December 31, 2017 was $59,041 and $(2,198,926)
respectively. The increase in working capital was primarily due to increase in our accounts receivable of $31,512,in our deferred
costs of $43,932, elimination of liability treatment of our previously issued anti-dilutive warrants of $2,984,010and a decrease
in accounts payable and accrued expenses of $25,954. In addition, the Company used actual net cash in operations of $596,715 during
the three months ended March 31, 2018. The Company has incurred net losses since inception. It is anticipated that the Company
has cash sufficient to fund operations through October 2018.
The Company expects that cash used in operations
will decrease significantly over the next several years as the Company executes its business plan. In the event that the Company
is not able to fully achieve its plan, the Company may need to raise additional funds through equity or debt financing. If the
Company is unsuccessful in raising additional financing, it will need to reduce costs and operations in the future.
Cash Flows
|
|
For the Three
months ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net Cash (Used in) Operating Activities
|
|
$
|
(596,715
|
)
|
|
$
|
(613,048
|
)
|
Net Cash (Used in) Investing Activities
|
|
|
(86,718
|
)
|
|
|
(56,706
|
)
|
Net Cash Provided by Financing Activities
|
|
|
-
|
|
|
|
44,000
|
|
Decrease in Cash
|
|
$
|
(683,433
|
)
|
|
$
|
(625,754
|
)
|
We had cash in the amount of $1,276,997
and $1,960,430 as of March 31, 2018 and December 31, 2017, respectively.
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, 2017, 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, 2017.