Item 1. Financial Statements
The financial information set forth below
with respect to the financial statements as of June 30, 2019 and December 31, 2018 and for the three- and six-month periods ended
June 30, 2019 and 2018 is unaudited. This financial information, in the opinion of our management, includes all adjustments, consisting
of normal recurring entries, necessary for the fair presentation of such data. The results of operations for the three- and six-month
period ended June 30, 2019 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year
end is December 31. Certain prior period amounts have been reclassified to conform to current period classification.
AUDIOEYE, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,804,456
|
|
|
$
|
5,741,549
|
|
Accounts receivable, net
|
|
|
632,706
|
|
|
|
172,384
|
|
Marketable securities, held in related party
|
|
|
306
|
|
|
|
510
|
|
Deferred costs, short term
|
|
|
182,042
|
|
|
|
176,006
|
|
Prepaid expenses and other current assets
|
|
|
152,837
|
|
|
|
49,901
|
|
Total current assets
|
|
|
3,772,347
|
|
|
|
6,140,350
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
166,591
|
|
|
|
108,007
|
|
Right of use assets
|
|
|
942,588
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred costs, long term
|
|
|
116,417
|
|
|
|
93,790
|
|
Intangible assets, net
|
|
|
1,837,452
|
|
|
|
2,061,404
|
|
Goodwill
|
|
|
700,528
|
|
|
|
700,528
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,535,923
|
|
|
$
|
9,104,079
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
698,498
|
|
|
$
|
93,544
|
|
Related party payables
|
|
|
24,467
|
|
|
|
14,467
|
|
Finance lease liabilities
|
|
|
44,556
|
|
|
|
30,172
|
|
Operating lease liabilities
|
|
|
190,559
|
|
|
|
-
|
|
Deferred rent
|
|
|
-
|
|
|
|
4,472
|
|
Deferred revenue
|
|
|
2,944,630
|
|
|
|
2,626,712
|
|
Total current liabilities
|
|
|
3,902,710
|
|
|
|
2,769,367
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Finance lease liabilities
|
|
|
59,542
|
|
|
|
51,150
|
|
Operating lease liabilities
|
|
|
762,305
|
|
|
|
-
|
|
Deferred rent
|
|
|
-
|
|
|
|
6,585
|
|
Deferred revenue
|
|
|
232,021
|
|
|
|
402,075
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,956,578
|
|
|
|
3,229,177
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value, 10,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, $0.00001 par value, 200,000 shares designated, 105,000 shares issued and outstanding as of June 30, 2019 and December 31, 2018
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.00001 par value, 50,000,000 shares authorized, 7,656,046 and 7,579,995 shares issued and outstanding as of June 30, 2019 and December 31, 2018
|
|
|
77
|
|
|
|
76
|
|
Additional paid-in capital
|
|
|
48,883,802
|
|
|
|
48,017,926
|
|
Accumulated deficit
|
|
|
(46,304,535
|
)
|
|
|
(42,143,101
|
)
|
Total stockholders' equity
|
|
|
2,579,345
|
|
|
|
5,874,902
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
7,535,923
|
|
|
$
|
9,104,079
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
2,435,622
|
|
|
$
|
1,234,897
|
|
|
$
|
4,421,300
|
|
|
$
|
2,384,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,147,424
|
|
|
|
622,645
|
|
|
|
2,050,408
|
|
|
|
1,210,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,288,198
|
|
|
|
612,252
|
|
|
|
2,370,892
|
|
|
|
1,174,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
1,093,827
|
|
|
|
576,894
|
|
|
|
1,965,702
|
|
|
|
1,187,556
|
|
Research and development
|
|
|
146,577
|
|
|
|
49,362
|
|
|
|
361,830
|
|
|
|
99,029
|
|
General and administrative
|
|
|
2,066,687
|
|
|
|
1,081,840
|
|
|
|
4,203,013
|
|
|
|
2,146,465
|
|
Total operating expenses
|
|
|
3,307,091
|
|
|
|
1,708,096
|
|
|
|
6,530,545
|
|
|
|
3,433,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,018,893
|
)
|
|
|
(1,095,844
|
)
|
|
|
(4,159,653
|
)
|
|
|
(2,258,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities
|
|
|
(186
|
)
|
|
|
1,422
|
|
|
|
(204
|
)
|
|
|
1,650
|
|
Interest income (expense), net
|
|
|
(929
|
)
|
|
|
(105
|
)
|
|
|
(1,577
|
)
|
|
|
132
|
|
Total other (loss) income
|
|
|
(1,115
|
)
|
|
|
1,317
|
|
|
|
(1,781
|
)
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,020,008
|
)
|
|
|
(1,094,527
|
)
|
|
|
(4,161,434
|
)
|
|
|
(2,257,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Series A Convertible Preferred Stock
|
|
|
(13,089
|
)
|
|
|
(13,524
|
)
|
|
|
(26,034
|
)
|
|
|
(27,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(2,033,097
|
)
|
|
$
|
(1,108,051
|
)
|
|
$
|
(4,187,468
|
)
|
|
$
|
(2,284,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic and diluted
|
|
|
7,645,872
|
|
|
|
6,471,832
|
|
|
|
7,628,679
|
|
|
|
6,469,212
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
THREE AND SIX MONTHS ENDED JUNE 30, 2019
AND 2018
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
Preferred
stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance, December 31, 2018
|
|
|
7,579,995
|
|
|
$
|
76
|
|
|
|
105,000
|
|
|
$
|
1
|
|
|
$
|
48,017,926
|
|
|
$
|
(42,143,101
|
)
|
|
$
|
5,874,902
|
|
Common stock issued in exchange for exercise of options and warrants
|
|
|
43,232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,450
|
|
|
|
-
|
|
|
|
42,450
|
|
Restricted stock units, warrants and options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
448,900
|
|
|
|
-
|
|
|
|
448,900
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,141,426
|
)
|
|
|
(2,141,426
|
)
|
Balance, March 31, 2019
|
|
|
7,623,227
|
|
|
$
|
76
|
|
|
|
105,000
|
|
|
$
|
1
|
|
|
$
|
48,509,276
|
|
|
$
|
(44,284,527
|
)
|
|
$
|
4,224,826
|
|
Common stock issued in exchange for exercise of options and warrants
|
|
|
32,819
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99,273
|
|
|
|
-
|
|
|
|
99,274
|
|
Restricted stock units, warrants and options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
275,253
|
|
|
|
-
|
|
|
|
275,253
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,020,008
|
)
|
|
|
(2,020,008
|
)
|
Balance, June 30, 2019
|
|
|
7,656,046
|
|
|
$
|
77
|
|
|
|
105,000
|
|
|
$
|
1
|
|
|
$
|
48,883,802
|
|
|
$
|
(46,304,535
|
)
|
|
$
|
2,579,345
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
THREE AND SIX MONTHS ENDED JUNE 30, 2019
AND 2018
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Preferred stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance, December 31, 2017
|
|
|
6,467,066
|
|
|
$
|
65
|
|
|
|
110,000
|
|
|
$
|
1
|
|
|
$
|
40,121,845
|
|
|
$
|
(39,425,900
|
)
|
|
$
|
696,011
|
|
Effect of adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,153
|
|
|
|
80,153
|
|
Reclassify derivative liability to equity upon adoption of Accounting Standards Update No. 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
|
|
|
6,467,066
|
|
|
$
|
65
|
|
|
|
110,000
|
|
|
$
|
1
|
|
|
$
|
41,250,638
|
|
|
$
|
(38,285,838
|
)
|
|
$
|
2,964,866
|
|
Common stock issued upon conversion of preferred stock
|
|
|
13,204
|
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock issued in exchange for exercise of warrants and options on a cashless basis
|
|
|
8,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted stock units, warrants and options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
270,722
|
|
|
|
-
|
|
|
|
270,722
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,094,527
|
)
|
|
|
(1,094,527
|
)
|
Balance, June 30, 2018
|
|
|
6,488,281
|
|
|
$
|
65
|
|
|
|
105,000
|
|
|
$
|
1
|
|
|
$
|
41,521,360
|
|
|
$
|
(39,380,365
|
)
|
|
$
|
2,141,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated
Financial Statements
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Six months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,161,434
|
)
|
|
$
|
(2,257,138
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
349,108
|
|
|
|
265,077
|
|
Option, warrant, RSU and PSU expense
|
|
|
724,153
|
|
|
|
638,025
|
|
Unrealized loss (gain) on marketable securities
|
|
|
204
|
|
|
|
(1,650
|
)
|
Amortization of deferred commission
|
|
|
108,075
|
|
|
|
25,491
|
|
Noncash operating lease expense
|
|
|
116,738
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(460,322
|
)
|
|
|
(151,916
|
)
|
Deferred costs
|
|
|
(136,738
|
)
|
|
|
(66,324
|
)
|
Other current assets
|
|
|
(102,936
|
)
|
|
|
(1,168
|
)
|
Accounts payable and accruals
|
|
|
604,954
|
|
|
|
2,128
|
|
Operating lease liabilities
|
|
|
(116,738
|
)
|
|
|
(1,865
|
)
|
Deferred revenue
|
|
|
147,864
|
|
|
|
463,512
|
|
Related party payables
|
|
|
10,000
|
|
|
|
(9,068
|
)
|
Net cash used in operating activities
|
|
|
(2,917,072
|
)
|
|
|
(1,094,896
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(45,804
|
)
|
|
|
(10,893
|
)
|
Software development costs
|
|
|
(97,279
|
)
|
|
|
(173,597
|
)
|
Net cash used in investing activities
|
|
|
(143,083
|
)
|
|
|
(184,490
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options and warrants
|
|
|
141,724
|
|
|
|
-
|
|
Repayments of finance leases
|
|
|
(18,662
|
)
|
|
|
(1,454
|
)
|
Net cash provided by (used in) financing activities
|
|
|
123,062
|
|
|
|
(1,454
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(2,937,093
|
)
|
|
|
(1,280,840
|
)
|
Cash-beginning of period
|
|
|
5,741,549
|
|
|
|
1,960,430
|
|
Cash-end of period
|
|
$
|
2,804,456
|
|
|
$
|
679,590
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,798
|
|
|
$
|
255
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
ROU assets and operating lease obligations recognized upon adoption of ASU 2016-02
|
|
|
568,268
|
|
|
|
-
|
|
Right-of-use assets and operating lease obligations recognized during the year
|
|
|
483,565
|
|
|
|
-
|
|
Equipment acquired under finance leases
|
|
|
40,657
|
|
|
|
60,668
|
|
Reclassify fair value of warrant liabilities to equity upon adoption of ASU 2017-11
|
|
|
-
|
|
|
|
2,984,010
|
|
Effect of adoption of ASU 2014-09, Revenue from Contracts with Customers
|
|
|
-
|
|
|
|
80,153
|
|
See Notes to Unaudited Consolidated Financial
Statements
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (unaudited)
NOTE 1 — ORGANIZATION AND BASIS
OF PRESENTATION
The accompanying unaudited interim financial
statements of AudioEye, Inc. (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 (the “SEC”),
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 for the fiscal year ended December 31, 2018, as filed with the SEC on March 27, 2019.
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. Certain prior period amounts have been reclassified to conform to current
period classification. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited
financial statements for the year ended December 31, 2018 as reported in the Company’s Annual Report on Form 10-K
have been omitted.
Corporate Information and Background
AudioEye, Inc. (“we”,
“our” or the “Company”) was incorporated on May 20, 2005 in the state of Delaware. The Company has
developed patented, Internet content publication and distribution software that enables conversion of any media into accessible
formats and allows for real time distribution to end users on any Internet connected device. The Company’s focus is to create
more comprehensive access to Internet and other media to all people regardless of their network connection, device, location, or
disabilities.
The Company is focused on developing innovations
in the field of networked and device embedded audio technology. The Company owns a unique patent portfolio comprised of six issued
patents in the United States, a notice of allowance from the U.S. Patent and Trademark Office for a seventh patent, and two U.S.
patents pending with additional patents being drafted for filing with the U.S. Patent and Trademark Office and internationally.
Our common stock has been listed on the
NASDAQ Capital Market under the symbol “AEYE” since September 4, 2018. Prior to September 4, 2018, our common stock
was quoted on the OTCQB and the OTC Bulletin Board beginning on April 15, 2013 under the same symbol.
In August 2018, the Company sold 1,000,000
shares (the “Shares”) of its common stock at $6.25 per share for net proceeds of $5,609,215, after costs and expenses
of $640,785 (the “Private Placement”). At the closing of the Private Placement, the Company 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. On September 4, 2018, the Company filed a registration statement on Form S-1 covering the resale of the
securities subject to the Registration Rights Agreement. On July 5, 2019, the Company filed a post-effective amendment to the registration
statement on Form S-1 covering the resale of the securities subject to the Registration Rights Agreement, in order to, among other
things, incorporate into the filing the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2019.
On August 1, 2018, the Company amended
its Certificate 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 shares of common stock from 250,000,000 to 50,000,000. As a result, 186,994,384 shares of
the Company’s common stock were exchanged for 7,479,775 shares of the Company's common stock. These financial statements
have been retroactively restated to reflect the reverse stock split.
Revenue Recognition
Revenue is recognized when delivery of
the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that
the Company expects to be entitled to in exchange for those goods or services.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (unaudited)
We determine revenue recognition through the following five
steps:
|
·
|
Identify the contract with the customer;
|
|
·
|
Identify the performance obligations in the contract;
|
|
·
|
Determine the transaction price;
|
|
·
|
Allocate the transaction price to the performance obligations in the contract; and
|
|
·
|
Recognize revenue when, or as, the performance obligations are satisfied.
|
Certain Software as a Service (“SaaS”)
invoices are prepared on an annual basis. Any funds received for services not provided yet are held in deferred revenue and are
recorded as revenue when earned. Subscription revenue is recognized on a ratable basis, using a mid-month convention, over the
contractual subscription term of the arrangement beginning on the date that our service is made available to the customer. Payments
received in advance of services being rendered are recorded as deferred revenue. Any funds received for services not provided
yet are held in deferred revenue and are recorded as revenue when earned. We generate most of our revenue from subscription services,
which are primarily comprised of subscription fees from customers on the Ally Platform.
The following table presents our revenue
disaggregated by type of good or service and sales channel:
|
|
Six months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue – Direct
|
|
$
|
3,287,570
|
|
|
$
|
1,928,447
|
|
Revenue – Indirect (Strategic partners)
|
|
|
1,133,730
|
|
|
|
455,792
|
|
Total revenue
|
|
$
|
4,421,300
|
|
|
$
|
2,384,239
|
|
There were significant changes in contract
liabilities balances during the six months ended June 30, 2019. The table below summarizes the activity within the deferred revenue
accounts during the six months ended June 30, 2019:
|
|
December 31,
|
|
|
Cash
|
|
|
Revenue
|
|
|
June 30,
|
|
|
|
2018
|
|
|
received
|
|
|
recognized
|
|
|
2019
|
|
Deferred revenue
|
|
$
|
3,028,787
|
|
|
$
|
3,414,210
|
|
|
$
|
3,266,346
|
|
|
$
|
3,176,651
|
|
As of June 30, 2019, $2,944,630 was classified
as short term deferred revenue and is expected to be recognized over the next twelve months following June 30, 2019. The remaining
$232,021 is long-term deferred revenue to be recognized thereafter.
At June 30, 2019, the Company had one
customer representing 25% of the outstanding accounts receivable. At December 31, 2018, the Company had a different customer representing
22% of the outstanding accounts receivable.
The Company had
one major customer (including such customer’s affiliates) which generated approximately 10% and 11% of the Company’s
revenue in the three and six months ended June 30, 2019, respectively and 9% and 11% of the Company’s revenue in the three
and six months ended June 30, 2018, respectively.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (unaudited)
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 revenue and
expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation
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. The fair value of the award is measured
on the grant date. 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.
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated
by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s
common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could
occur if our share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect
of our share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and
the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental
shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive,
are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible preferred stock is computed
using the if-converted method, which assumes conversion at the beginning of the year. However, when a net loss exists, no potential
common stock equivalents are included in the computation of the diluted per-share amount because the computation would result
in an anti-dilutive per-share amount.
Potentially dilutive securities excluded
from the computation of basic and diluted net earnings (loss) per share for the six months ended June 30, 2019 and 2018 are as
follows:
|
|
2019
|
|
|
2018
|
|
Preferred stock
|
|
|
289,344
|
|
|
|
277,371
|
|
Options to purchase common stock
|
|
|
954,602
|
|
|
|
1,062,609
|
|
Warrants to purchase common stock
|
|
|
1,648,159
|
|
|
|
1,766,122
|
|
Restricted stock units
|
|
|
222,514
|
|
|
|
194,672
|
|
Totals
|
|
|
3,114,619
|
|
|
|
3,300,774
|
|
Fair Value Measurements
Fair value is an estimate of the exit price,
representing the amount that would be received 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
JUNE 30, 2019 (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 Company has no liabilities measured
at fair value on a recurring basis as of June 30, 2019 and December 31, 2018. The following are the Company’s assets measured
at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
|
Hierarchy
|
|
Assets
|
|
|
|
|
|
|
|
|
Marketable securities, June 30, 2019
|
|
$
|
306
|
|
|
|
Level 1
|
|
Marketable securities, December 31, 2018
|
|
$
|
510
|
|
|
|
Level 1
|
|
Leases
In February 2016, the Financial Accounting
Standards Board (“FASB”) established ASC Topic 842, Leases (Topic 842), by issuing ASU No. 2016-02, which requires
lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that
requires a lessee to recognize an ROU asset and lease liability on the balance sheet. Leases are classified as finance or operating,
with classification affecting the pattern and classification of expense recognition in the statement of operations. The Company
adopted the new standard on January 1, 2019 using the modified-retrospective method, with an effective date or application date
of January 1, 2019 and thus did not adjust comparative periods.
The new standard provides a number of optional
practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it
not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct
costs. The Company did not elect the use-of-hindsight practical expedient.
The new standard had a material effect
on the Company’s financial statements. The most significant effects of adoption relate to (1) the recognition of new ROU
assets and lease liabilities on the Company’s balance sheet for real estate operating leases; and (2) providing significant
new disclosures about the Company’s leasing activities.
As of January 1, 2019, the Company recognized
additional operating lease liabilities of $568,268 based on the present value of the remaining minimum rental payments under current
leasing standards for existing operating leases. The Company recognized corresponding ROU assets of $557,212. In February 2019,
the Company entered into a new lease in Marietta, Georgia, which resulted in ROU assets of an incremental $483,565 being recognized
on the balance sheet upon lease commencement in June 2019.
The new standard also provides practical
expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases
that qualify. This means, for those leases that qualify, that the Company does not recognize ROU assets or lease liabilities, and
this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The
Company expects changes to its disclosed lease recognition policies and practices, as well as to other related financial statement
disclosures due to the adoption of this standard. See Note 6 for these revised disclosures for fiscal year 2019.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (unaudited)
Recent Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07,
regarding ASC Topic 718
Compensation - Stock Compensation
, which largely aligns the accounting for share-based compensation
for non-employees with the accounting for share-based compensation for employees. The guidance is effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period. The adoption of this standard
did not have a material effect on our consolidated financial statements.
There are various other 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 June 30, 2019, the Company had cash
of $2,804,456 and a working capital deficit of $130,363. In addition, the Company used actual net cash in operations of $1,291,581
and $2,917,072 during the three- and six-months ended June 30, 2019.
In August 2018, the Company sold 1,000,000
shares of its common stock at $6.25 per share for net proceeds of $5,609,215, after costs and expenses of $640,785. In connection
with the October 9, 2015 Note and Warrant Purchase Agreement, the Company received proceeds from the issuance of convertible notes
payable of $100,000 in September 2018 and $124,975 in October 2018.
In July and August 2019, the Company held
discussions and negotiations with holders of certain warrants to purchase the Company’s common stock with respect to a transaction
in which the Company and the holders agreed to amend certain warrant agreements to provide that from the date of amendment through
August 16, 2019, the exercise price was reduced from $2.50 to $1.63 per share for warrants to purchase an aggregate of 1,194,990
shares and from $6.25 to $4.07 per share for warrants to purchase an aggregate of 85,719 shares, provided that any exercise during
such period was in full and the exercise price was paid in cash. Potential proceeds if all 1,280,709 amended warrants are exercised
would be approximately $2.2 million.
In August 2019, the Company negotiated
an agreement for a $2.0 million Line of Credit (the “LOC”) with a private lender. 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. With the early warrant exercises and the LOC, it is anticipated that the Company will have cash
sufficient to fund operations for the next twelve months.
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2019 and December 31,
2018 is summarized as follows:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Computer equipment
|
|
$
|
64,195
|
|
|
$
|
62,170
|
|
Equipment under finance lease
|
|
|
136,162
|
|
|
|
95,506
|
|
Furniture and fixtures
|
|
|
48,748
|
|
|
|
4,968
|
|
Total
|
|
|
249,105
|
|
|
|
162,644
|
|
Less accumulated depreciation
|
|
|
(82,514
|
)
|
|
|
(54,637
|
)
|
Property and equipment, net
|
|
$
|
166,591
|
|
|
$
|
108,007
|
|
Property and equipment are stated at cost
and depreciated using the straight-line method over their estimated useful life of 3 years. When property or equipment is retired
or otherwise disposed of, 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 and equipment
are assets under finance leases (formerly known as capital leases) of $136,162, less accumulated depreciation of $35,359 as of
June 30, 2019 and $95,506, less accumulated depreciation of $16,117, as of December 31, 2018.
The Company spent $45,804 and $10,893 in
the purchase of furniture and equipment during the six months ended June 30, 2019 and 2018, respectively. The Company also leased
$40,657 and $60,668 in equipment during the six months ended June 30, 2019 and 2018, respectively. Depreciation expense was $14,503
and $27,877 for the three and six months ended June 30, 2019, respectively. Depreciation expense was $7,432 and $11,749 for the
three and six months ended June 30, 2018, respectively.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (Unaudited)
NOTE 4 — INTANGIBLE ASSETS
For the six months ended June 30, 2019
and 2018, the Company invested in software development costs in the amounts of $97,279 and $173,597, 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.
Intangible assets consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Patents
|
|
$
|
3,697,709
|
|
|
$
|
3,697,709
|
|
Capitalized software development
|
|
|
1,507,538
|
|
|
|
1,410,259
|
|
Domain name
|
|
|
10,000
|
|
|
|
10,000
|
|
Accumulated amortization
|
|
|
(3,377,795
|
)
|
|
|
(3,056,564
|
)
|
Intangible assets, net
|
|
$
|
1,837,452
|
|
|
$
|
2,061,404
|
|
Amortization expense for patents totaled
$93,658 and $187,316 for the three and six months ended June 30, 2019, respectively; and $93,658 and $180,684 for the three and
six months ended June 30, 2018, respectively. Amortization expense for software development totaled $67,672 and $133,915 for the
three and six months ended June 30, 2019, respectively; and $36,322 and $72,644 for the three and six months ended June 30, 2018,
respectively.
Total amortization expense was $321,231
and $253,328 for the six months ended June 30, 2019 and 2018, 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 the commissions are amortized consistent with the transfer of the goods or services to the customer over the expected period
of benefit, which we have deemed to be the contract term.
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. The table below summarizes the activity within the deferred commission costs account,
during the six months ended June 30, 2019:
|
|
December 31,
|
|
|
Commission
|
|
|
Commission
|
|
|
June 30,
|
|
|
|
2018
|
|
|
Costs Deferred
|
|
|
Amortized
|
|
|
2019
|
|
Deferred costs, short term
|
|
$
|
176,006
|
|
|
$
|
114,111
|
|
|
$
|
(108,075
|
)
|
|
$
|
182,042
|
|
Deferred costs, long term
|
|
|
93,790
|
|
|
|
22,627
|
|
|
|
-
|
|
|
|
116,417
|
|
Deferred commission costs
|
|
$
|
269,796
|
|
|
$
|
136,738
|
|
|
$
|
(108,075
|
)
|
|
$
|
298,459
|
|
During the three and six months ended June
30, 2019, the Company deferred an aggregate of $71,269 and $136,738 for commissions paid. Amortization of deferred costs for the
three and six months ended June 30, 2019 was $56,676 and $108,075, respectively.
During the six months ended June 30, 2018,
the Company deferred an aggregate of $66,324 for commissions paid and reclassified from equity $80,153 previously paid amounts
that were originally expensed as commissions. Amortization of deferred costs for the three and six months ended June 30, 2018 was
$15,517 and $25,491, respectively.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (Unaudited)
NOTE 6 — LEASE LIABILITIES AND RIGHT OF USE ASSETS
Finance Leases
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Finance equipment lease dated April 5, 2018
|
|
$
|
10,410
|
|
|
$
|
13,056
|
|
Finance equipment lease dated May 8, 2018
|
|
|
11,581
|
|
|
|
14,525
|
|
Finance equipment lease dated June 27, 2018
|
|
|
17,616
|
|
|
|
21,701
|
|
Finance equipment lease dated September 18, 2018
|
|
|
12,670
|
|
|
|
15,368
|
|
Finance equipment lease dated September 28, 2018
|
|
|
13,932
|
|
|
|
16,672
|
|
Finance equipment lease dated February 20, 2019
|
|
|
17,518
|
|
|
|
-
|
|
Finance equipment lease dated June 4, 2019
|
|
|
20,371
|
|
|
|
-
|
|
Total finance lease liabilities
|
|
|
104,098
|
|
|
|
81,322
|
|
Less current portion
|
|
|
(44,556
|
)
|
|
|
(30,172
|
)
|
Long term portion
|
|
$
|
59,542
|
|
|
$
|
51,150
|
|
During the six months ended June 30, 2019,
the Company entered into two finance leases for computer equipment, each for a three-year term. The Company recognized these
arrangements as finance leases based on the determination that the leases exceeded 75% of the economic life of the underlying assets.
The Company initially recorded the equipment and the finance leases liability at the estimated present value of the minimum lease
payments of $19,754 and $20,903, respectively.
During the year ended December 31, 2018,
the Company entered into five finance leases (formerly known as capital leases) for computer equipment for a three-year term.
The Company recognized these arrangements as finance leases based on the determination that the leases exceeded 75% of the economic
life of the underlying assets. The Company initially recorded the equipment and the finance lease liability at the estimated
present value of the minimum lease payments of $95,506.
The leases include base monthly payments
in the aggregate of $4,131, due on the monthly anniversary of each contract. 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 has made payments
under these leases in the total amount of $18,662 during the six months ended June 30, 2019. The effective interest rate of the
finance leases is estimated at 6% based on the implicit rate in the lease agreements.
The following summarizes the right to use
assets under finance leases included in property and equipment:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Classes of property
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
136,162
|
|
|
$
|
95,506
|
|
Less: accumulated depreciation
|
|
|
(35,359
|
)
|
|
|
(16,117
|
)
|
|
|
$
|
100,803
|
|
|
$
|
79,389
|
|
The following summarizes total future minimum finance lease
payments at June 30, 2019:
Period ending December 31,
|
|
|
|
2019
|
|
$
|
23,649
|
|
2020
|
|
|
49,571
|
|
2021
|
|
|
33,827
|
|
2022
|
|
|
4,416
|
|
Total minimum lease payments
|
|
|
111,463
|
|
Amount representing interest
|
|
|
(7,365
|
)
|
Present value of minimum lease payments
|
|
|
104,098
|
|
Current portion of finance lease obligations
|
|
|
44,556
|
|
Finance lease obligations, less current portion
|
|
$
|
59,542
|
|
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (Unaudited)
Operating Leases
The Company’s principal executive
offices are located at 5210 E. Williams Circle, Suite 750, Tucson, Arizona 85711, consisting of approximately 5,151 square feet
as of June 30, 2019. The Company’s principal office originally consisted of approximately 2,362 square feet. On December
21, 2017, effective February 1, 2018, the Company amended its existing lease to expand its Arizona office to approximately 4,248
square feet and to extend the expiration date to September 30, 2021. Beginning February 1, 2018, the basic rent increased to $9,598
per month. On October 2, 2018, effective December 1, 2018, the Company further amended its existing lease to expand its Arizona
office to approximately 5,151 square feet. In accordance with the amended lease, rent increased to $11,810 on January 1, 2019,
escalating over time to $12,977 at the end of the lease, which was further extended to October 31, 2022.
The Company also has offices in Atlanta,
located at 3901 Roswell Road, Suite 134, leased for an aggregate of $3,937 per month as of December 31, 2017 under a lease expiring
on September 30, 2019. On December 29, 2017, effective February 1, 2018, the Company amended its existing lease to expand its Georgia
office from approximately 2,739 square feet to approximately 3,831 square feet. Beginning February 1, 2018, the basic rent increased
by $1,500 through the remainder of the lease term. In February 2019, the Company entered into a lease for new offices in Marietta,
Georgia located at 450 Franklin Gateway, Marietta, Georgia consisting of approximately 9,662 square feet. The new lease commenced
on June 1, 2019, with move-in on June 15, 2019.
Beginning in 2017, we leased office space
in New York for $300 per month, which was increased to $850 per month in October 2018 through May 31, 2019. Beginning in June 2019,
we moved to larger office space in New York, leased for $4,482 per month, for a term of 12 months ending May 31, 2020. Beginning
November 1, 2015, we subleased an office in Scottsdale, Arizona from a company controlled by our Executive Chairman for $3,578
per month, which continues on a month to month basis as of June 30, 2019. These New York and Scottsdale properties were considered
short-term leases and therefore were not measured under Topic 842.
The Company has made operating lease payments in the amount
of $191,843 during the six months ended June 30, 2019. Rent expense charged to operations, which differs from rent paid due to
rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments on a straight-line basis
over the term of the lease. Operating lease liabilities at June 30, 2019 and January 1, 2019 consist of:
|
|
June 30,
|
|
|
January 1,
|
|
|
|
2019
|
|
|
2019
|
|
Tucson Arizona office lease
|
|
$
|
461,170
|
|
|
$
|
518,309
|
|
Marietta Georgia office lease
|
|
|
474,708
|
|
|
|
-
|
|
Atlanta Georgia office lease
|
|
|
16,986
|
|
|
|
49,959
|
|
Total operating lease liabilities
|
|
|
952,864
|
|
|
|
568,268
|
|
Less current portion
|
|
|
(190,559
|
)
|
|
|
(166,252
|
)
|
Long term portion
|
|
$
|
762,305
|
|
|
$
|
402,016
|
|
As of January 1, 2019, the Company adopted
the provisions of ASC Topic 842 using the modified retrospective method. In adopting ASC Topic 842,
Leases
(Topic 842),
the Company elected the ‘package of practical expedients’, which permitted it not to reassess under the new standard
its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the
use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition,
the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Effective January 1, 2019,
the Company initially recognized operating lease liabilities of $568,268 based on the present value of the remaining minimum rental
payments under current leasing standards for existing operating leases. The discount rate utilized in such present value calculation
was 6% based on an estimate of the Company’s incremental borrowing rate. At such time, the Company also recognized corresponding
right-of-use (ROU) assets of $557,212 and eliminated the prior period deferred rent of $11,056.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (Unaudited)
During the six months ended June 30, 2019,
the Company entered into an operating lease for new office space in Marietta, Georgia, for a five-year term. The Company measured
and recorded a right of use asset and corresponding operating lease liability of $483,565 at the lease commencement date in June
2019.
The following summarizes total future minimum operating lease
payments at June 30, 2019:
Period ending December 31,
|
|
|
|
2019
|
|
$
|
124,838
|
|
2020
|
|
|
267,500
|
|
2021
|
|
|
262,219
|
|
2022
|
|
|
244,245
|
|
2023
|
|
|
118,166
|
|
2024
|
|
|
80,638
|
|
Total minimum lease payments
|
|
|
1,097,606
|
|
Less: present value discount
|
|
|
(144,742
|
)
|
Present value of minimum lease payments
|
|
|
952,864
|
|
Current portion of operating lease obligations
|
|
|
190,559
|
|
Operating lease obligations, less current portion
|
|
$
|
762,305
|
|
The following summarizes lease expenses for the six months ended
June 30, 2019:
Finance lease expenses:
|
|
|
|
|
Depreciation/amortization expense
|
|
$
|
27,877
|
|
Interest on lease liabilities
|
|
|
2,693
|
|
Finance lease expense
|
|
|
30,570
|
|
Operating lease expense
|
|
|
114,120
|
|
Short-term lease expense
|
|
|
38,698
|
|
Total lease expenses
|
|
$
|
183,388
|
|
NOTE 7 — RELATED PARTY TRANSACTIONS
As of June 30, 2019, and December 31,
2018, the total balances of related party payable were $24,467 and $14,467, respectively, related to rent payable for the Scottsdale
office and to reimbursement for employee paid travel on behalf of the Company.
NOTE 8 — STOCKHOLDERS’ EQUITY
Preferred Stock
As of June 30, 2019 and December 31,
2018, the Company had 105,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”), issued at $10
per share, paying a 5% cumulative annual dividend and convertible for common stock at a price of $4.385 per share. For the six
months ended June 30, 2019, preferred stockholders earned, but were not paid, $26,034 in annual dividends, or equivalent to 5,937
shares of common stock based on a conversion price of $4.385 per share. As of June 30, 2019 and December 31, 2018, cumulative and
unpaid dividends were $218,774 and $192,740, respectively, or equivalent to 49,891 and 43,954 shares of common stock, respectively,
based on a conversion price of $4.385 per share.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (Unaudited)
On any matter presented to the stockholders
of the Company, holders of Preferred Stock are entitled to cast the number of votes equal to the number of shares of common stock
into which the shares of Preferred Stock are convertible as of the record date to vote on such matter. As long as any shares of
Preferred Stock are outstanding, the Company has certain restrictions on share repurchases or amendments to the Certificate of
Incorporation in a manner that adversely affects any rights of the preferred stockholders.
In addition, the preferred stockholders
have a liquidation preference for purposes of which the Preferred Stock would be valued at $10 per share plus accrued cumulative
annual dividend. At June 30, 2019 and December 31, 2018, the total liquidation preference was valued at $1,268,774 and $1,242,740,
respectively. In the event of any liquidity event, holders of each share of Preferred Stock shall be entitled to be paid the liquidation
preference out of the assets of the Company legally available before any sums shall be paid to holders of common stock.
Common Stock
As of June 30, 2019 and December 31,
2018, the Company had 7,656,046 and 7,579,995 shares, respectively, of common stock issued and outstanding.
In the six months ended June 30, 2019,
the Company issued 21,932 shares of its common stock upon the exercise of options, for aggregate proceeds of $24,897. In the six
months ended June 30, 2019, the Company issued 40,183 shares of its common stock, upon the exercise of outstanding warrants to
purchase an aggregate of 40,183 shares of common stock, for aggregate proceeds of $116,827. In the six months ended June 30, 2019,
the Company issued an aggregate of 9,999 shares of its common stock upon the net exercise of 13,341 outstanding options and issued
an aggregate of 3,937 shares of its common stock upon the net exercise of outstanding warrants to purchase 11,446 shares of common
stock.
Options
The following table summarizes the Company’s
outstanding options activity during the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Value
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
of
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Exercisable
|
|
|
Options
|
|
Outstanding at December 31, 2018
|
|
|
997,989
|
|
|
$
|
4.67
|
|
|
|
2.14
|
|
|
|
925,545
|
|
|
$
|
4,705,220
|
|
Granted
|
|
|
121,639
|
|
|
|
7.48
|
|
|
|
8.83
|
|
|
|
|
|
|
|
-
|
|
Exercised
|
|
|
(35,273
|
)
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(129,753
|
)
|
|
|
10.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
954,602
|
|
|
$
|
4.41
|
|
|
|
2.82
|
|
|
|
804,103
|
|
|
$
|
3,870,943
|
|
On February 7, 2019, the Company granted
an aggregate of 28,700 incentive stock options to employees newly hired since June 4, 2018. The options to purchase shares of common
stock are exercisable at $10.55 per share, have a term of five years, and vest as to 50% of the options at the vesting commencement
date, which is generally one year from the date of hire (vesting commencement dates range from June 4, 2019 through January 25,
2020), and vest as to the remaining 50% of the options in eight equal quarterly installments commencing on the first day of each
calendar quarter following the vesting commencement date and installments continuing on the first day of each of the seven calendar
quarters thereafter. All vesting is subject to the employee’s continued service through the vesting date. The exercise price
was determined using the closing price of the Company’s common stock on February 7, 2019. The Black-Scholes value on the
grant date of the options was $258,392.
On June 3, 2019, the Company granted an
aggregate of 92,939 nonqualified stock options to employees newly hired since February 7, 2019, and longer-tenured employees for
performance in 2018. The options to purchase shares of common stock are exercisable at $6.53 per share, have a term of ten years,
and vest in three approximately equal annual installments on the first three anniversaries of the grant date. All vesting is subject
to the employee’s continued service through the vesting date. The exercise price was determined using the closing price
of the Company’s common stock on June 3, 2019. The Black-Scholes value on the grant date of the options was $571,471.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (Unaudited)
Option grants during the six months ended
June 30, 2019 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected
term of 3.25 to 6.00 years, expected volatility of 152.58% to 156.23%, risk free interest rate of 1.83% to 2.48%, and expected
dividend yield of 0%. For the three and six months ended June 30, 2019, total stock compensation expense related to options totaled
$93,495 and $165,769, respectively. For the three and six months ended June 30, 2018, total stock compensation expense related
to options totaled $78,152 and $223,198, respectively. As of June 30, 2019, the outstanding unamortized stock compensation expense
related to options was $760,202 (which will be recognized through June 2022).
Warrants
The following table summarizes the Company’s
outstanding warrants activity for the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Intrinsic
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Value
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
of
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Warrants
|
|
Outstanding at December 31, 2018
|
|
|
1,781,715
|
|
|
$
|
4.20
|
|
|
|
2.23
|
|
|
$
|
8,930,058
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(51,629
|
)
|
|
|
3.67
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(81,927
|
)
|
|
|
8.03
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
1,648,159
|
|
|
$
|
4.19
|
|
|
|
1.86
|
|
|
$
|
7,303,284
|
|
For the three and six months ended June
30, 2019, warrant-based compensation expense was $0. For the three and six months ended June 30, 2018, the Company incurred warrant-based
compensation expense of $109,207 and $110,600, respectively. There was no outstanding unamortized stock-based compensation
expense related to warrants as of June 30, 2019.
Restricted stock units (“RSUs”)
The following table summarizes the restricted
stock unit activity for the six months ended June 30, 2019:
Restricted stock units issued as of December 31, 2018
|
|
|
222,514
|
|
Granted
|
|
|
134,740
|
|
Total Restricted stock units issued at June 30, 2019
|
|
|
357,254
|
|
Vested at June 30, 2019
|
|
|
222,514
|
|
Unvested restricted stock units as of June 30, 2019
|
|
|
134,740
|
|
On June 3, 2019, the Company granted 11,280
RSUs to each of Alexandre Zyngier, Ernest Purcell and Anthony Coelho for their continued service on the Board of Directors. Such
RSUs will vest on June 30, 2020, subject to the director’s continuous service through the vesting date. The settlement date
for such RSUs is the earlier of (i) June 3, 2026 or (ii) the date on which the Company undergoes a change of control. The fair
value of the RSUs at grant date was $220,975.
On June 3, 2019, the Company granted 20,000
RSUs to David Kovacs, an employee who is also a shareholder. Such RSUs will vest on September 3, 2019, subject to Mr. Kovac’s
continuous service through the vesting date. The settlement date for such RSUs is the earlier of (i) promptly after the vesting
date or (ii) in any event no later than March 15, 2020. The fair value of the RSUs at grant date was $130,600.
On June 3, 2019, the Company granted 80,900
RSUs to Sachin Barot, its Chief Financial Officer, in accordance with his employment agreement. Such RSUs will vest annually over
a three-year period, in installments of (i) 26,967 RSUs on June 3, 2020, (ii) 26,967 RSUs on June 3, 2021 and (iii) 26,966 on June
3, 2022, subject to Mr. Barot’s continuous service through the vesting date. The settlement date for such RSUs is the earlier
of (a) promptly after each vesting date or (b) in any event no later than March 15 of the calendar year following the calendar
year in which such vesting occurs. The fair value of the RSUs at grant date was $528,277.
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019 (Unaudited)
For the three and six months ended June
30, 2019, the Company incurred RSU-based compensation expense of $181,757 and $558,384, respectively. For the three and six months
ended June 30, 2018, the Company incurred RSU-based compensation expense of $83,363 and $304,227, respectively. The outstanding
unamortized stock-based compensation expense related to RSUs was $809,691 (which will be recognized through May 2022) as of June
30, 2019.
NOTE 9 — COMMITMENTS AND CONTINGENCIES
Litigation
We may become involved in various routine
disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition
of these matters, our management believes that the resolution of 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
In July 2019, the Company issued an aggregate
of 8,373 shares of common stock upon the net exercise of outstanding options and warrants to purchase an aggregate of 18,040 shares
of common stock.
In July and August 2019, the Company held
discussions and negotiations with holders of certain warrants to purchase the Company’s common stock with respect to a transaction
in which the Company and the holders agreed to amend certain warrant agreements to provide that from the date of amendment through
August 16, 2019, the exercise price was reduced from $2.50 to $1.63 per share for warrants to purchase an aggregate of 1,194,990
shares and from $6.25 to $4.07 per share for warrants to purchase an aggregate of 85,719 shares, provided that any exercise during
such period was in full and the exercise price was paid in cash. Potential proceeds if all 1,280,709 amended warrants are exercised
would be approximately $2.2 million.
In August 2019, the Company negotiated
and signed an agreement for a $2.0 million LOC with a private lender.
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., 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, 2018. 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.
Background
AudioEye, Inc. (“AudioEye”
or the “Company”) was formed as a Delaware corporation on May 20, 2005. On August 1, 2018, the Company amended
its Certificate 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 shares of common stock from 250,000,000 to 50,000,000. As a result, 186,994,384 shares of
the Company’s common stock were exchanged for 7,479,775 shares of the Company's common stock. The financial statements have
been retroactively restated to reflect the reverse stock split.
In August 2018, the Company completed a private placement of
$6.25 million (before expenses) growth equity financing with institutional investors to accelerate expansion efforts for the Company's
direct and indirect sales channels as well as development of new channels in the kiosk and PDF markets. Further, we listed the
Company's common stock on the NASDAQ Capital Market.
Overview
AudioEye is a marketplace leader providing
web accessibility solutions for our clients’ customers primarily 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 many users
.
When implemented, we believe that our solutions offer businesses, educational institutions,
and governments 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 U.S., Canadian, Australian, and United Kingdom accessibility laws.
We generate revenue primarily through the
sale of subscriptions of our software as a service (“SaaS”) technology platform, called the AudioEye Ally Platform,
to website owners, publishers, developers, Content Management System (“CMS”) platform providers and operators and through
the delivery of managed services combined with the implementation of our solutions. 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, retail/ecommerce,
food services, automotive, transportation, hospitality, media, and education. Government agencies, both at the federal and state
and local levels have also integrated our software in their digital platforms.
AudioEye customers fall into one of two
distinct sales channels: Direct and Indirect. In the Direct channel, AudioEye sales personnel engage directly with the customer.
In the Indirect channel, AudioEye engages with customers, who are referred to as Indirect Channel Partners, who provide a website
hosting platform for their end-user customers, and who serve as authorized resellers of the AudioEye solution to their customers.
Indirect channel sales have been a factor in the acceleration of the AudioEye sales and marketing strategy. We work with strategically
identified reseller Partners that provide a unique opportunity for AudioEye to onboard more customers in a shorter period of time.
By working with providers of proprietary content management systems, AudioEye leverages economies of scale to deliver the AudioEye
solution in a cost-effective and highly efficient way. In middle and lower markets, this strategy has helped make accessibility
available to industries that might otherwise neglect the important issue of digital inclusion altogether. We believe that there
is significant opportunity for us to increase revenue in the future by delivering our solutions through this Indirect channel and
therefore will continue to invest capital and resources in expanding our strategic partner business.
We have seen momentous growth in both our
Direct and Indirect or “Partner” business channels. Since most of these Partners' underlying clients are billed monthly,
we believe our bookings, revenue, and cash flow will converge in this segment. Customer renewal rates for the Direct channel continue
in the range of mid 90%'s which further illustrates the confidence our customers have in the AudioEye accessibility solution.
Our accelerating topline growth is a testament
to the ongoing demand for solutions aimed at addressing the broad issues of digital accessibility, and more specifically, to our
internal efforts at continually refining our go-to-market strategy as well as expanding our sales and implementation teams to meet
the building demand we are experiencing. AudioEye presents the only “all-in-one solution” created to address the public
call for compliance with WCAG 2.1 standards.
During the first half of 2019, as well
as throughout 2018, we continued to see significant growth within our direct and indirect sales channels, which was fueled by a
number of factors. The increasing number of legal cases related to issues of accessibility has driven adoption of our solutions
from a compliance perspective. Further, more companies are recognizing the business value of making their sites accessible to millions
more consumers. Recognition of these tremendous business opportunities is sparked by demand from end-users who are letting companies
and organizations know of the significant importance of accessibility to their websites.
Beyond this secular momentum, we have remained
focused on several internal initiatives that are designed to make us more effective at an operational level. More specifically,
we have made refinements to our lead generation processes, which have led to expansion of our overall sales pipeline, and we have
continued to make enhancements to the technology that underlies our solution.
Overall, AudioEye believes that it has
an opportunity to capitalize on the market in front of it. At the same time, we are dedicated to serving a vital role in leading
the charge toward a more accessible online future for all.
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 solutions help with compliance and 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 in and is made freely available to users within our customers’
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 intellectual property is primarily
comprised of trade secrets, trademarks, issued, published and pending patent applications, copyrights and technological innovation.
We have a patent portfolio comprised of six issued patents in the United States and we have received notice of allowance from the
U.S. Patent and Trademark Office for a seventh patent. We also have four published/pending patent applications, one pending patent
application and one patent application being prepared for filing with the Patent Cooperation Treaty (“PCT”) (internationally).
We have a trademark portfolio comprised
of one allowed trademark application, two published trademark applications, and six trademark registrations.
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.
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 on Form 10-K for the year ended December 31,
2018 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, 2019 with the three and six months
ended June 30, 2018, which 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, 2019 and
June 30, 2018
Results of Operations
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
2,435,622
|
|
|
$
|
1,234,897
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,147,424
|
|
|
|
622,645
|
|
Gross profit
|
|
|
1,288,198
|
|
|
|
612,252
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
1,093,827
|
|
|
|
576,894
|
|
Research and development
|
|
|
146,577
|
|
|
|
49,362
|
|
General and administrative
|
|
|
2,066,687
|
|
|
|
1,081,840
|
|
Total operating expenses
|
|
|
3,307,091
|
|
|
|
1,708,096
|
|
Operating loss
|
|
|
(2,018,893
|
)
|
|
|
(1,095,844
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities
|
|
|
(186
|
)
|
|
|
1,422
|
|
Interest expense
|
|
|
(929
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,020,008
|
)
|
|
|
(1,094,527
|
)
|
Deemed dividend on Series A Convertible Preferred Stock
|
|
|
(13,089
|
)
|
|
|
(13,524
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(2,033,097
|
)
|
|
$
|
(1,108,051
|
)
|
Net income per common share – basic and diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.17
|
)
|
Weighted average common shares outstanding – basic and diluted
|
|
|
7,645,872
|
|
|
|
6,471,832
|
|
Revenue
For the three months ended June 30, 2019
and 2018, revenue was $2,435,622 and $1,234,897, respectively, consisting primarily of revenue from core product sales and maintenance
services. Revenue increased due to the execution of the Company’s business plan which included the hiring of additional sales
and marketing team members, securing new negotiated channel partnerships, and continued marketing focus on highly transactional
industry verticals.
The following table presents our revenue
disaggregated by type of good or service and sales channel:
|
|
Three months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue – Direct
|
|
$
|
1,826,946
|
|
|
$
|
982,810
|
|
Revenue – Indirect (Strategic partners)
|
|
|
608,676
|
|
|
|
252,087
|
|
Total revenue
|
|
$
|
2,435,622
|
|
|
$
|
1,234,897
|
|
Cost of Revenue
For the three months ended June 30, 2019
and 2018, cost of revenue was $1,147,424 and $622,645, respectively, consisting primarily of employee-related costs, including
payroll, benefits and stock-based compensation expense for our technology operations and customer experience teams, fees paid to
our managed hosting providers and other third-party service providers, amortization of capitalized software development costs and
acquired technology, and allocated overhead costs. The increase in cost of revenue was due to a significant increase in direct
labor headcount and related payroll and the use of sub-contracting to support the increase in revenue.
Gross Profit
An increase in our revenue and increase
in cost of revenue resulted in a gross profit of $1,288,198 for the current period, as compared to a gross profit of $612,252 during
the three months ended June 30, 2018. Gross profit increased as a result of increased revenue through higher sales and through
recognition of deferred revenue as contractual obligations are fulfilled, offset in part by an increase in sub-contracting and
direct labor costs.
Selling and Marketing Expenses
Selling and marketing expenses were $1,093,827
and $576,894 for the three months ended June 30, 2019 and 2018, respectively. The increase resulted primarily from staff
additions and salary increases as we expand our business lines.
Research and Development Expenses
Research and development expenses were
$146,577 and $49,362 for the three months ended June 30, 2019 and 2018, respectively. Research and development expenses increased
primarily as a result of an increase in technology staff.
General and Administrative Expenses
General and administrative expenses were
$2,066,687 and $1,081,840 for the three months ended June 30, 2019 and 2018, respectively. General and administrative expenses
increased $984,847 due primarily to higher salaries and service provider costs in the 2019 period as compared to the 2018 period.
Salaries, wages and benefits expenses increased to $667,124 in the current year period compared to $237,125 in the second quarter
of 2018. Legal, consulting and recruiting fees increased significantly over such fees for the prior year period and were $545,727
in the second quarter of 2019 compared to $88,425 in the prior year comparable period.
Interest Income (Expense), net
Interest expense, net, during the three
months ended June 30, 2019 was $929 compared to $105 for the three months ended June 30, 2018.
Comparative for the Six Months ended June 30, 2019 and
June 30, 2018
Results of Operations
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
4,421,300
|
|
|
$
|
2,384,239
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,050,408
|
|
|
|
1,210,109
|
|
Gross profit
|
|
|
2,370,892
|
|
|
|
1,174,130
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
1,965,702
|
|
|
|
1,187,556
|
|
Research and development
|
|
|
361,830
|
|
|
|
99,029
|
|
General and administrative
|
|
|
4,203,013
|
|
|
|
2,146,465
|
|
Total operating expenses
|
|
|
6,530,545
|
|
|
|
3,433,050
|
|
Operating loss
|
|
|
(4,159,653
|
)
|
|
|
(2,258,920
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities
|
|
|
(204
|
)
|
|
|
1,650
|
|
Interest expense
|
|
|
(1,577
|
)
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,161,434
|
)
|
|
|
(2,257,138
|
)
|
Deemed dividend on Series A Convertible Preferred Stock
|
|
|
(26,034
|
)
|
|
|
(27,274
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(4,187,468
|
)
|
|
$
|
(2,284,412
|
)
|
Net income per common share – basic and diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.35
|
)
|
Weighted average common shares outstanding – basic and diluted
|
|
|
7,628,679
|
|
|
|
6,469,212
|
|
Revenue
For the six months ended June 30, 2019
and 2018, revenue was $4,421,300 and $2,384,239, respectively, consisting primarily of revenue from core product sales and maintenance
services. Revenue increased due to the execution of the Company’s business plan which included the hiring of additional sales
and marketing team members, securing new negotiated channel partnerships, and continued marketing focus on highly transactional
industry verticals.
The following table presents our revenue
disaggregated by type of good or service and sales channel:
|
|
Six months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Subscription revenue and support – Direct
|
|
$
|
3,287,570
|
|
|
$
|
1,928,447
|
|
Subscription revenue and support – Indirect (Strategic partners)
|
|
|
1,133,730
|
|
|
|
455,792
|
|
Total revenue
|
|
$
|
4,421,300
|
|
|
$
|
2,384,239
|
|
Cost of Revenue
For the six months ended June 30, 2019
and 2018, cost of revenue was $2,050,408 and $1,210,109, respectively, consisting primarily of employee-related costs, including
payroll, benefits and stock-based compensation expense for our technology operations and customer experience teams, fees paid to
our managed hosting providers and other third-party service providers, amortization of capitalized software development costs and
acquired technology, and allocated overhead costs. The increase in cost of revenue was due to a significant increase in direct
labor headcount and related payroll and the use of sub-contracting to support the increase in revenue.
Gross Profit
An increase in our revenue and increase
in cost of revenue resulted in a gross profit of $2,370,892 for the current period, as compared to a gross profit of $1,174,130
during the six months ended June 30, 2018. Gross profit increased as a result of increased sales volume, an increasing revenue
renewal rate and recognition of deferred revenue as contractual obligations are fulfilled, offset in part by an increase in sub-contracting
and direct labor costs.
Selling and Marketing Expenses
Selling and marketing expenses were $1,965,702
and $1,187,556 for the six months ended June 30, 2019 and 2018, respectively. The increase resulted primarily from staff
additions and salary increases as we expand our business lines.
Research and Development Expenses
Research and development expenses were
$361,830 and $99,029 for the six months ended June 30, 2019 and 2018, respectively. Research and development expenses increased
primarily as a result of an increase in technology staff.
General and Administrative Expenses
General and administrative expenses were
$4,203,013 and $2,146,465 for the six months ended June 30, 2019 and 2018, respectively. General and administrative expenses increased
$2,056,548 due primarily to higher salaries and service provider costs in the 2019 period as compared to the 2018 period. Salaries,
wages and benefits expenses increased to $1,466,873 in the current year period compared to $473,231 in the six months ended June
30, 2018. Legal, consulting and recruiting fees increased significantly over such fees for the prior year period and were $954,233
in the six months ended June 30, 2019 compared to $139,499 in the prior year comparable period.
Contracts in Process/Revenue Recognition
Under current accounting procedures, revenue
is recognized when delivery of the promised goods or services is transferred to customers, in an amount that reflects the consideration
that the Company expects to be entitled to in exchange for those goods or services. Certain invoices are prepared on an annual
basis. Any funds received for services not provided yet are held in deferred revenue and are recorded as revenue when earned.
Subscription revenue is recognized on a ratable basis over the contractual subscription term of the arrangement beginning on the
date that our service is made available to the customer.
Payments received in advance of services
being rendered are recorded as deferred revenue. 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 revenue recognized prior to 2019 of $4.94 million, our deferred revenue of $3.18 million and the
amount recognized as revenue in 2019 of $4.42 million. Contract amount in excess and deferred revenue are expected to be recognized
in future periods. The Company also receives contracts for service hours where 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, 2019
|
|
|
|
Contract
Amount
|
|
|
Revenue
Recognized
prior to 2019
|
|
|
Revenue
Recognized
Six Months
Ended
June 30, 2019
|
|
|
Deferred
Revenue
June 30, 2019
|
|
|
Contract
Amount in
Excess of
Deferred
Revenue and
Recognized
Revenue
|
|
Contracts
|
|
$
|
26,251,539
|
|
|
$
|
4,942,754
|
|
|
$
|
4,421,300
|
|
|
$
|
3,176,651
|
|
|
$
|
13,710,834
|
|
Revenue for the first half of 2019 were
a record $4.42 million, representing an increase of 85% from $2.38 million in the prior year comparable period. Revenue for the
second quarter of 2019 were $2.44 million, an increase of 23% from $1.99 million in the first quarter of 2019. The revenue for
the second quarter of 2019 represent the 14
th
consecutive quarter of topline growth for the Company. In addition, contract
amounts in excess of revenue, or the Company’s pipeline, continues to grow.
Contract bookings (as defined below) for
the second quarter of 2019 were approximately $7.28 million. This represents an increase of 140% from $3.03 million in the prior
year comparable period, and an increase of 112% sequentially from $3.43 million in the 1
st
quarter of 2019.
About Key Operating Metrics
To supplement our financial information
presented in accordance with GAAP, we consider certain operating measures that are not GAAP measures, including contract bookings.
AudioEye reviews a number of operating metrics such as these to evaluate its business, measure performance, identify trends, formulate
business plans, and make strategic decisions. We believe these metrics and measures are useful to facilitate period-to-period comparisons
of our business and to facilitate comparisons of our performance to that of other similar companies.
AudioEye's “Contract Bookings”
or “Bookings” are the amount of money the customer commits to spend with the Company over an agreed amount of time,
generally ranging from 12 to 60 months. Contract Bookings are stated at total contract value committed during a specified time
and recognized as revenue when services are delivered. While some contracts are cancellable under certain circumstances during
the contract period, the Company has a very good track record of customer retention.
“Partner” or “Strategic
Partner” is a company which provides a web-hosting platform for private and public entities and resells the AudioEye services
as a new accessibility service offering to its customers.
Liquidity and Capital Resources
Working Capital
As of June 30, 2019, the Company had cash of $2,804,456 and
a working capital deficit of $130,363. While the Company has been successful in raising capital in the past, there is no assurance
that it will be successful at raising additional capital in the future. Additionally, if the Company’s plans are not achieved
and/or if significant unanticipated events occur, the Company may have to further modify its business plan, which may require
us to raise additional capital.
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current assets
|
|
$
|
3,772,347
|
|
|
$
|
6,140,350
|
|
Current liabilities
|
|
|
3,902,710
|
|
|
|
2,769,367
|
|
Working capital surplus (deficit)
|
|
$
|
(130,363
|
)
|
|
$
|
3,370,983
|
|
The working capital deficit (current liabilities
in excess of current assets) for the periods ended June 30, 2019 and December 31, 2018 was $(130,363) and $3,370,983, respectively.
The decrease in working capital was primarily due to uses of cash described below. The Company has incurred net losses since
inception.
Cash Flows
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(2,917,072
|
)
|
|
$
|
(1,094,896
|
)
|
Net cash used in investing activities
|
|
|
(143,083
|
)
|
|
|
(184,490
|
)
|
Net cash provided by financing activities
|
|
|
123,062
|
|
|
|
(1,454
|
)
|
Net decrease in cash
|
|
$
|
(2,937,093
|
)
|
|
$
|
(1,280,840
|
)
|
We had cash in the amount of $2,804,456
and $5,741,549 as of June 30, 2019 and December 31, 2018, respectively. Cash used in operating activities resulted from increased
headcount, personnel, legal, sales and marketing costs, an increase in our accounts receivable of $460,322, and deferred costs
of $136,738, partially offset by a decrease in accounts payable and a decrease in accrued expenses of $604,954. In addition, the
Company used actual net cash in operations of $2,917,073 during the six months ended June 30, 2019 compared to $1,094,896 during
the six months ended June 30, 2018.
In July and August 2019, the Company held
discussions and negotiations with holders of certain warrants to purchase the Company’s common stock with respect to a transaction
in which the Company and the holders agreed to amend certain warrant agreements to provide that from the date of amendment through
August 16, 2019, the exercise price was reduced from $2.50 to $1.63 per share for warrants to purchase an aggregate of 1,194,990
shares and from $6.25 to $4.07 per share for warrants to purchase an aggregate of 85,719 shares, provided that any exercise during
such period was in full and the exercise price was paid in cash. Potential proceeds if all 1,280,709 amended warrants are exercised
would be approximately $2.2 million.
In August 2019, the Company negotiated
an agreement for a $2.0 million Line of Credit (the “LOC”) with a private lender. With the early warrant exercises
and the LOC, it is anticipated that the Company will have cash sufficient to fund operations for the next twelve months.
We may raise additional capital through
the sale of equity or debt securities or borrowings from financial institutions or third parties or a combination of the foregoing.
Capital raised will be used to implement our business plan, grow current operations, make acquisitions and/or start new vertical
businesses among some of the anticipated uses of such capital.
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 U.S. GAAP. 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, 2018, relate to revenue recognition, cost of
revenue, capitalized legal patent costs, income taxes, goodwill, intangible assets, share-based payments, and research and development.
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, 2018.