NOTE 2 – MANAGEMENT’S LIQUIDITY
PLANS
As of June 30, 2018, the Company had cash of
$679,590 and a working capital deficit of $750,341. In addition, the Company used actual net cash in operations of $1,094,896
during the six months ended June 30, 2018.
On August 6, 2018, the Company sold 992,000
shares of its common stock at $6.25 per share for net proceeds of $5,547,635, after costs and expenses of $652,365 In addition,
the Company has received common stock subscriptions for 48,000 shares of its common stock at a sales price of $6.25 per share for
net proceeds of $288,000, after costs and expenses of $12,000. It is anticipated that the Company has cash sufficient to fund operations
for the next twelve months (See Note 10).
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 (Unaudited)
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2018 and December 31, 2017
is summarized as follows:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Computer equipment
|
|
$
|
72,570
|
|
|
$
|
63,517
|
|
Equipment under capital lease
|
|
|
60,668
|
|
|
|
-
|
|
Furniture and fixtures
|
|
|
4,968
|
|
|
|
3,128
|
|
Total
|
|
|
138,206
|
|
|
|
66,645
|
|
Less accumulated depreciation
|
|
|
(43,400
|
)
|
|
|
(31,651
|
)
|
Property and equipment, net
|
|
$
|
94,806
|
|
|
$
|
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.
Included
in net property are assets under capital leases of $60,668, less accumulated depreciation of $3,115 as of June 30, 2018 and $0,
less accumulated depreciation of $0 as of December 31, 2017, respectively.
The Company spent $10,893 in purchases and
leased $60,668 of equipment during the six months ended June 30, 2018 and $16,255 in purchases of equipment during the six months
ended June 30, 2017. Depreciation expense was $7,432 and $11,749 for the three and six months ended June 30, 2018; and $814 and
$1,261 for the three and six months ended June 30, 2017.
NOTE 4 — INTANGIBLE ASSETS
For the six months ended June 30, 2018 and
2017, the Company invested in software development costs in the amounts of $173,597 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:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Patents
|
|
$
|
3,697,709
|
|
|
$
|
3,697,709
|
|
Capitalized software development
|
|
|
1,178,966
|
|
|
|
1,005,369
|
|
Accumulated amortization
|
|
|
(2,791,943
|
)
|
|
|
(2,538,615
|
)
|
Intangible assets, net
|
|
$
|
2,084,732
|
|
|
$
|
2,164,463
|
|
Amortization expense for patents totaled $93,658
and $180,684 for the three and six months ended June 30, 2018, respectively; and $93,648 and $185,230 for the three and six months
ended June 30, 2017, respectively. Amortization expense for software development totaled $36,322 and $72,644 for the three and
six months ended June 30, 2018, respectively; and $53,459 and $106,918 for the three and six months ended June 30, 2017, respectively.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 (Unaudited)
Total amortization expense totaled $253,328
and $292,148 for the six months ended June 30, 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.
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 six months ended June 30, 2018,
the Company deferred an aggregate $66,324 commissions paid and reclassified from equity $80,153 previously paid and expensed commissions.
Amortization of deferred costs for the three and six months ended June 30, 2018 was $15,517 and $25,491.
NOTE 6 — CAPITAL LEASES
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Capital equipment lease dated April 5, 2018
|
|
$
|
15,625
|
|
|
$
|
-
|
|
Capital equipment lease dated May 8, 2018
|
|
|
17,850
|
|
|
|
-
|
|
Capital equipment lease dated June 27, 2018
|
|
|
25,739
|
|
|
|
-
|
|
Total capital leases payable
|
|
|
59,214
|
|
|
|
-
|
|
Less current portion
|
|
|
(19,110
|
)
|
|
|
-
|
|
Long term portion
|
|
$
|
40,104
|
|
|
$
|
-
|
|
During the six months ended June 30, 2018,
the Company entered into three capital leases for computer equipment for a three year term. The Company recognized these
arrangements as a capital leases based on the determination the leases exceeded 75% of the economic life of the underlying assets.
The Company initially recorded the equipment and the capitalized lease liability at the estimated present value of the minimum
lease payments of $60,668.
The leases include base monthly payments in
aggregate of $1,839, due on the contract monthly anniversary of each calendar month. At the expiration of the lease, the
Company is required to return all leased equipment to the lessor with right of repurchase at fair value.
The Company determined that the capital leases
exceeded 75% of the estimated economic life of the equipment and therefore classified as a capitalized leases. The effective interest
rate of the capitalized lease is estimated at 6.00% based on the Company estimated incremental borrowing rate.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 (Unaudited)
The following summarizes the assets under capital
leases:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Classes of property
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
|
60,668
|
|
|
|
-
|
|
Less: accumulated depreciation
|
|
|
(3,115
|
)
|
|
|
-
|
|
|
|
$
|
57,553
|
|
|
$
|
-
|
|
The following summarizes total future minimum
lease payments at June 30, 2018:
Period ending December 31,
|
|
|
|
Six months ended December 31, 2018
|
|
$
|
11,108
|
|
2019
|
|
|
22,066
|
|
2020
|
|
|
22,066
|
|
2021
|
|
|
9,474
|
|
Total minimum lease payments
|
|
|
64,714
|
|
Amount representing interest
|
|
|
5,500
|
|
Present value of minimum lease payments
|
|
|
59,214
|
|
Current portion of capital lease obligations
|
|
|
19,110
|
|
Capital lease obligation, less current portion
|
|
$
|
40,104
|
|
NOTE 7 — RELATED PARTY TRANSACTIONS
Dr. Carr Bettis, Executive Chairman and
Chairman of Board of Directors
As of June 30, 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. As the Company has taken on more employees and space, the sub-lease amount increased from $500 per month to $3,502 per
month in 2017 totaling $10,506 and $21,013 for the three and six months ended June 30, 2018; and $3,252 and $4,752 for the three
and six months ended June 30, 2017, respectively. The amount of $0 was due as of June 30, 2018 and December 31, 2017. At June 30,
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 June 30, 2018 and December 31, 2017,
the Company owed Sean Bradley $0 and $3,543 in accrued salary, respectively.
NOTE 8 — STOCKHOLDERS’ EQUITY
On August 1, 2018, the Company amended its
Articles of Incorporation to implement a reverse stock split in the ratio of 1 share for every 25 shares of common stock and to
reduce the number of authorized common stock from 250,000,000 to 50,000,000. No fractional shares were issued from such aggregation
of common stock, upon the reverse split; any fractional share was rounded up and converted to the nearest whole share of common
stock. As a result, 186,994,384 of the Company’s common stock were exchanged for 7,479,775 of the Company's common stock
resulting in the transfer of $1,795 from common stock to additional paid in capital. These amendments were approved and filed of
record by the Delaware Secretary of State on August 1, 2018, effective on August 1, 2018. FINRA declared the Company’s
1-for-25 reverse stock split market effective as of August 8, 2018. These financial statements have been retroactively restated
to reflect the reverse stock split.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 (Unaudited)
Preferred stock
As of June 30, 2018 and December 31, 2017,
the Company had 105,000 and 110,000 shares of Series A Convertible Preferred Stock, respectively, issued at $10 per share, paying
a 5% cumulative annual dividend and convertible for common stock at a price of $4.385 per share, as adjusted for the Company’s
reverse stock split. For the six months ended June 30, 2018, preferred shareholders earned, but were not paid $27,274 in annual
dividends, or equivalent to 6,220 common shares based on a conversion price of $4.385 per share. As of June 30, 2018 and December
31, 2017, cumulative and unpaid dividends were $166,274 and $146,918, or equivalent to 37,919 and 33,505 common shares based on
a conversion price of $4.385 per share, respectively.
Common stock
As of June 30, 2018 and December 31, 2017
on a post-split basis, the Company had 6,487,779 and 6,466,564 shares of common stock issued and outstanding, respectively.
In April 2018, the Company issued 5,842 shares
of its common stock upon the cashless exercise of outstanding warrants to purchase 127,525 shares of common stock.
In June 2018, the Company issued 2,169 shares
of its common stock upon the cashless exercise of outstanding options to purchase 8,667 shares of common stock.
In June 2018, the Company issued 13,204 shares
of its common stock upon conversion of 5000 shares of Series A Convertible Preferred Stock and accrued dividends.
Options
As of June 30, 2018 and December 31, 2017,
the Company has outstanding options to purchase 1,062,609 and 1,003,836 shares of common stock, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
|
Wtd Avg.
|
|
|
|
|
|
Value
|
|
|
|
Number of
|
|
|
Wtd Avg.
|
|
|
Remaining
|
|
|
|
|
|
of
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Exercisable
|
|
|
Options
|
|
Outstanding at December 31, 2017
|
|
|
1,003,836
|
|
|
$
|
4.69
|
|
|
|
2.64
|
|
|
|
891,087
|
|
|
$
|
1,356,188
|
|
Granted
|
|
|
73,440
|
|
|
|
6.32
|
|
|
|
5.00
|
|
|
|
|
|
|
|
-
|
|
Exercised
|
|
|
(8,667
|
)
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(6,000
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
1,062,609
|
|
|
$
|
4.78
|
|
|
|
2.53
|
|
|
|
943,407
|
|
|
$
|
3,232,212
|
|
On March 9, 2018, the Company granted an aggregate
of 60,390 options to employees as compensation for services rendered. The options are exercisable at $6.45 per share for five years
with (i) 37,890 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) 12,500 options vesting 50% on January 1, 2018, 50% vesting at each month beginning
on January 1, 2019 for 24 months; and (iii) 10,000 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.
On April 12, 2018, the Company granted 6,000
options to purchase the Company’s common stock for services rendered at an exercise price of $6.20 per share for five years
with 2,000 options vesting immediately and 1,000 options vesting every 90 days thereafter. The exercise price was determined using
the 10-day average closing price beginning with the closing price on March 12, 2018. The value on the grant date of the options
was $29,694.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 (Unaudited)
On May 31, 2018, the Company granted an aggregate
of 7,050 options to employees as compensation for services rendered. The options are exercisable at $5.30 per share for five years
with 50% of options vesting upon one year employee anniversary and 50% vesting at a rate of 1/24 per month thereafter. The exercise
price was determined using the 10-day average closing price beginning with the closing price on May 16, 2018. The value on the
grant date of the options was $33,130.
Option grants during the six months ended June
30, 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 160.87% to 163.85%, risk free interest rate of 2.45% to 2.65%, and expected dividend
yield of 0%.
For the three and six months ended June 30,
2018 and 2017, total stock compensation expense related to the options totaled $78,152 and $223,198 and $257,619 and $425,033,
respectively.
The outstanding unamortized stock compensation
expense related to options was $248,727 (which will be recognized through December 2020) as of June 30, 2018.
Warrants
Below is a table summarizing the Company’s
outstanding warrants as of June 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
|
Wtd Avg.
|
|
|
Value
|
|
|
|
Number of
|
|
|
Wtd Avg.
|
|
|
Remaining
|
|
|
of
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Warrants
|
|
Outstanding at December 31, 2017
|
|
|
1,919,906
|
|
|
$
|
4.98
|
|
|
|
2.61
|
|
|
$
|
1,656,083
|
|
Granted
|
|
|
127,525
|
|
|
$
|
6.25
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(127,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(153,784
|
)
|
|
|
6.66
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
1,766,122
|
|
|
$
|
4.84
|
|
|
|
2.32
|
|
|
$
|
5,128,906
|
|
On April 17, 2018, the Company granted 127,525
warrants for services rendered. The warrants are exercisable at $6.25 per share through May 16, 2018. The fair value of the warrants
of $109,207 was charged to current operations.
Warrants issued during the six months ended
June 30, 2018 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected
term of 0.08 years, expected volatility of 162.35%, risk free interest rate of 1.68%, and expected dividend yield of 0%.
For the three and six months ended June 30,
2018 and 2017, the Company has incurred warrant-based expense of $109,207 and $110,600 and $14,733 and $58,783, respectively. There
was no outstanding unamortized stock compensation expense related to warrants as of June 30, 2018.
There was no outstanding unamortized stock
compensation expense related to warrants as of June 30, 2018.
Restricted stock units (“RSU”)
The following table summarizes the restricted
stock unit activity for the six months ended June 30, 2018:
Restricted stock units issued as of January 1, 2018
|
|
|
156,340
|
|
Granted
|
|
|
38,334
|
|
Total Restricted stock units issued at June 30, 2018
|
|
|
194,674
|
|
Vested at June 30, 2018
|
|
|
151,408
|
|
Unvested restricted stock units as of June 30, 2018
|
|
|
43,266
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 (Unaudited)
On March 27, 2018, the Company granted 38,334
RSUs, on a post-split basis, for services provided. 20,000 of such RSUs began vesting May 1, 2018, and will vest each calendar
month at a rate of 1,667 RSUs per month, whereby the RSUs would vest provided that services are not terminated by the Company or
the grantee. 18,333 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 and six months ended June 30,
2018 and 2017, the Company has incurred RSU-based expense of $83,363 and $304,227 and $87,500 and $87,500, respectively. The
outstanding unamortized stock compensation expense related to RSUs was $96,200 (which will be recognized through April 2019) as
of June 30, 2018.
NOTE 9 — 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 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. On June 22, 2018, the
matter was resolved to the parties’ satisfaction. The resolution of the matter will not have a material adverse effect on
our financial position or results of operations.
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. On June 22, 2018, the matter was resolved to the parties’ satisfaction. The resolution
of the matter will not have a material adverse effect on our financial position or results of operations.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018 (Unaudited)
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 10 — SUBSEQUENT EVENTS
On August 6, 2018, the Company sold 992,000 shares of its common
stock at $6.25 per share for net proceeds of $5,547,635, after costs and expenses of $652,365 In addition, the Company has received
common stock subscriptions for 48,000 shares of its common stock at a sales price of $6.25 per share for net proceeds of $288,000,
after costs and expenses of $12,000. It is anticipated that the Company has cash sufficient to fund operations for the next twelve
months.
At the closing of
the private placement, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”)
with the investors pursuant to which the Company agreed to register the shares for resale. Under the terms of the Registration
Rights Agreement, the Company will be obligated to file a registration statement covering the resale or other disposition of the
registrable securities by the Investors no later than 30 days after the initial closing and to use its reasonable best efforts
to cause the registration statement to become effective no later than 90 days after the initial closing. In the event that the
Company fails to file and obtain and maintain effectiveness of the registration statement, the Company is subject to certain penalties,
including making certain registration delay payments to the investors.
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 and six months ended June 30, 2018 with the three and six months
ended June 30, 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 June 30, 2018 and June
30, 2017
Results of Operations
|
|
Three Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
1,234,897
|
|
|
$
|
684,224
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
622,645
|
|
|
|
440,033
|
|
Gross profit
|
|
|
612,252
|
|
|
|
244,191
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling & marketing
|
|
|
576,894
|
|
|
|
337,156
|
|
Research & development
|
|
|
49,362
|
|
|
|
49,267
|
|
General and administrative expenses
|
|
|
944,428
|
|
|
|
615,528
|
|
Amortization & depreciation
|
|
|
137,412
|
|
|
|
147,921
|
|
Total operating expenses
|
|
|
1,708,096
|
|
|
|
1,149,872
|
|
Operating loss
|
|
|
(1,095,844
|
)
|
|
|
(905,681
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative liabilities
|
|
|
-
|
|
|
|
(1,264,962
|
)
|
Unrealized gain on marketable securities
|
|
|
1,422
|
|
|
|
-
|
|
Interest expense
|
|
|
(105
|
)
|
|
|
(48,284
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,094,527
|
)
|
|
|
(2,218,927
|
)
|
Deemed dividend on Series A Convertible preferred stock
|
|
|
(13,524
|
)
|
|
|
(20,000
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(1,108,051
|
)
|
|
$
|
(2,238,927
|
)
|
Net income per common share – basic and diluted
|
|
|
(0.17
|
)
|
|
|
(0.50
|
)
|
Weighted average common shares outstanding – basic and diluted
|
|
|
6,471,831
|
|
|
|
4,494,859
|
|
Revenue
For the three months ended June 30, 2018 and
2017, revenue was $1,234,897 and $684,224, 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 June 30, 2018 and
2017, cost of sales was $622,645 and $440,033, 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 $612,252 for the current period, as compared to a gross profit of $244,191 during the three months ended June 30, 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 $576,894
and $337,156 for the three months ended June 30, 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 $49,362
and $49,267 for three months ended June 30, 2018 and 2017, respectively. Research and development expenses increased from period
to period and reflect continued developments of our product.
General and Administrative Expenses
General and administrative expenses were $944,428
and $615,528 for the three months ended June 30, 2018 and 2017, respectively. General and administrative expenses increased $328,900
due primarily to higher service provider costs as compared to 2017. Stock based compensation for the three months ended June 30,
2018 was $270,722 as compared to $279,478 for the same period last year.
Amortization and Depreciation
Amortization and depreciation expenses were
$137,412 and $147,921 for the three months ended June 30, 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 provision 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 loss of $1,264,962 on change in fair value of derivative liabilities
for the three months ended June 30, 2017. The primary driver of the change in our derivative liability is our stock price. Generally,
as our stock price increases, the liability increases resulting in a larger non-cash loss 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 Expense, net
Interest expense, net during the three months
ended June 30, 2018 was $105 compared to $48,284 for the three months ended June 30, 2017. In 2018, we incurred interest expenses
relating to our capital leases for equipment as compared to non-cash interest expense and debt discounts relating to our convertible
note payable of $39,644 and $7,326 in 2017, respectively.
Comparative for the Six Months ended June 30, 2018 and June
30, 2017
Results of Operations
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
2,384,239
|
|
|
$
|
1,118,731
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,210,109
|
|
|
|
781,075
|
|
Gross profit
|
|
|
1,174,130
|
|
|
|
337,656
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling & marketing
|
|
|
1,187,556
|
|
|
|
616,883
|
|
Research & development
|
|
|
99,029
|
|
|
|
93,969
|
|
General and administrative expenses
|
|
|
1,881,388
|
|
|
|
1,353,209
|
|
Amortization & depreciation
|
|
|
265,077
|
|
|
|
293,409
|
|
Total operating expenses
|
|
|
3,433,050
|
|
|
|
2,357,470
|
|
Operating loss
|
|
|
(2,258,920
|
)
|
|
|
(2,019,814
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative liabilities
|
|
|
-
|
|
|
|
(954,189
|
)
|
Unrealized gain on marketable securities
|
|
|
1,650
|
|
|
|
-
|
|
Interest income (expense), net
|
|
|
132
|
|
|
|
(48,120
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,257,138
|
)
|
|
|
(3,022,123
|
)
|
Deemed dividend on Series A Convertible preferred stock
|
|
|
(27,274
|
)
|
|
|
(40,000
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(2,284,412
|
)
|
|
$
|
(3,062,123
|
)
|
Net income per common share – basic and diluted
|
|
|
(0.35
|
)
|
|
|
(0.68
|
)
|
Weighted average common shares outstanding – basic and diluted
|
|
|
6,469,212
|
|
|
|
4,485,164
|
|
Revenue
For the six months ended June 30, 2018 and
2017, revenue was $2,384,239 and $1,118,731, 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 six months ended June 30, 2018 and
2017, cost of sales was $1,210,109 and $781,075, 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 $1,174,130 for the current period, as compared to a gross profit of $337,656 during the six months ended June 30, 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 $1,187,556
and $616,883 for the six months ended June 30, 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 $99,029
and $93,969 for six months ended June 30, 2018 and 2017, respectively. Research and development expenses increased from period
to period and reflect continued developments of our product.
General and Administrative Expenses
General and administrative expenses were $1,881,388
and $1,353,209 for the six months ended June 30, 2018 and 2017, respectively. General and administrative expenses increased $528,179
due primarily to higher service provider costs as compared to 2017. Stock based compensation for the six months ended June 30,
2018 was $638,025 as compared to $596,317 for the same period last year.
Amortization and Depreciation
Amortization and depreciation expenses were
$265,077 and $293,409 for the six months ended June 30, 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 provision 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 loss of $954,189 on change in fair value of derivative liabilities
for the six months ended June 30, 2017. The primary driver of the change in our derivative liability is our stock price. Generally,
as our stock price increases, the liability increases resulting in a larger non-cash loss 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 six months
ended June 30, 2018 was $132 compared to $(48,120) interest expense for the six months ended June 30, 2017. In 2017, we incurred
non-cash interest expense and debt discount amortization related to our convertible note payable of $39,644 and $6,326, respectively.
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 $5,447,838, our deferred revenue of $1,697,266 and amount recognized in the amount of $2,384,239
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
|
|
|
|
June 30, 2018
|
|
|
|
|
|
|
Revenue
|
|
|
Revenue
Recognized
|
|
|
Deferred
|
|
|
Contract Amount in
Excess of Deferred
|
|
|
|
Contract
|
|
|
Recognized
|
|
|
6 Months Ended
|
|
|
Revenue
|
|
|
Revenue and
|
|
|
|
Amount
|
|
|
prior to 2018
|
|
|
June 30, 2018
|
|
|
June 30, 2018
|
|
|
Recognized Revenue
|
|
Fixed Contracts
|
|
$
|
11,721,179
|
|
|
$
|
2,191,836
|
|
|
$
|
2,384,239
|
|
|
$
|
1,697,266
|
|
|
$
|
5,447,838
|
|
Liquidity and Capital Resources
Working Capital
|
|
At June 30,
|
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current Assets
|
|
$
|
1,069,518
|
|
|
$
|
2,134,403
|
|
Current Liabilities
|
|
|
1,819,859
|
|
|
|
4,333,329
|
|
Working Capital (Deficit)
|
|
$
|
(750,341
|
)
|
|
$
|
(2,198,926
|
)
|
The working capital (deficit) (current liabilities
in excess of current assets) for the periods ended June30, 2018 and December 31, 2017 was $(750,341) and $(2,198,926) respectively.
The increase in working capital was primarily due to increase in our accounts receivable of $151,916, in our deferred costs of
$61,221, elimination of liability treatment of our previously issued anti-dilutive warrants of $2,984,010 and a decrease in accounts
payable and accrued expenses of $6,940, net with increases in our deferred revenue of $463,512 and short term portion of our capital
leases of $19,110. In addition, the Company used actual net cash in operations of $1,094,896 during the six months ended June 30,
2018.
On August 6, 2018, the Company sold 992,000
shares of its common stock at $6.25 per share for net proceeds of $5,547,635, after costs and expenses of $652,365. In addition,
the Company has received common stock subscriptions for 48,000 shares of its common stock at a sales price of $6.25 per share for
net proceeds of $288,000, after costs and expenses of $12,000. It is anticipated that the Company has cash sufficient to fund operations
for the next twelve months.
Cash Flows
|
|
For the Six
months ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net Cash (Used in) Operating Activities
|
|
$
|
(1,094,896
|
)
|
|
$
|
(1,021,316
|
)
|
Net Cash (Used in) Investing Activities
|
|
|
(184,490
|
)
|
|
|
(67,225
|
)
|
Net Cash (Used in) Provided by Financing Activities
|
|
|
(1,454
|
)
|
|
|
88,000
|
|
Decrease in Cash
|
|
$
|
(1,280,840
|
)
|
|
$
|
(1,000,541
|
)
|
We had cash in the amount of $679,590 and $1,960,430
as of June 30, 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.