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EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - AUDIOEYE INCex31-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICER - AUDIOEYE INCex32-1.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - AUDIOEYE INCex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - AUDIOEYE INCFinancial_Report.xls


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2013
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 
 EXCHANGE ACT OF 1934
 
For the transition period from o to o
 
Commission file number 333-177463
 
 
AudioEye, Inc.
 
(Exact name of registrant as specified in its charter)
 
 
Delaware
      20-2939845
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
  9070 South Rita Road, Suite 1450, Tucson, Arizona       85747  
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:
    866-331-5324
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days. 
 Yes o    No x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).           
Yes o    No x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer          
o
Non-accelerated filer
o
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
As of May 14, 2013, 43,062,199 shares of the registrant’s common stock were issued and outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
   
Page
 
   
 
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2
 
 
 
 
3
   
 
 
4
   
 
 
5
   
 
10
     
14
     
14
   
 
 
     
15
     
15
     
15
     
15
     
15
     
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16
     
 
  17
 
 
 

 
 
 
 
The financial information set forth below with respect to the financial statements as of March 31, 2013 and 2012 and for the three month period ended March 31, 2013 and 2012 is unaudited. This financial information, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three month period ended March 31, 2013 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31.
 
 
1

 
 
AUDIOEYE, INC.
(UNAUDITED)
 
   
March 31, 2013
   
December 31, 2012
 
ASSETS
           
Current Assets
           
Cash
  $ 93,420     $ 11,710  
Accounts receivable, net
    13,000       16,256  
Related party receivables
    16,125       16,125  
Marketable securities
    21,000       30,000  
Total Current Assets
    143,545       74,091  
                 
Property and equipment, net
    6,244       7,043  
Intangible assets, net
    3,361,264       3,448,221  
Goodwill
    700,528       700,528  
    Total Assets
    4,211,581     $ 4,229,883  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current Liabilities
               
Accounts payable and accrued expenses
  $ 456,202     $ 498,365  
Deferred Revenue
    44,443       54,823  
Notes and loans payable-current
    24,000       1,466,700  
Related party payable
          829,418  
Total Current Liabilities
    524,645       2,849,306  
                 
Long term liabilities
               
Notes and loans payable-long term
    91,800       97,800  
Related party loans
    10,000       10,000  
Total Long term Liabilities
    101,800       107,800  
                 
Total Liabilities
    626,445       2,957,106  
                 
STOCKHOLDERS’ DEFICIT
               
Common stock, $0.00001 par value, 100,000,000 shares authorized, 43,062,199 and 35,192,045 issued and outstanding, as of March 31, 2013 and December 31, 2012, respectively
    431       352  
Additional paid in capital
    4,491,413       1,783,047  
Accumulated deficit
    (906,708 )     (510,622 )
Total Stockholders’ Deficit
    3,585,136       1,272,777  
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 4,211,581     $ 4,229,883  
 
See Notes to Unaudited Consolidated Financial Statements

 
2

 

AUDIOEYE, INC.
 
 
(UNAUDITED)
 
   
   
For the Three Months ended
 
   
March 31, 2013
   
March 31, 2012
 
             
Revenue
  $ 224,297     $ 14,255  
Revenue from related party
          750  
Cost of revenues
    45,023       89,735  
                 
Gross Profit
    179,274       (74,730 )
                 
General and administrative expenses
    541,393       172,846  
                 
Operating income (loss)
    (362,119 )     (247,576 )
                 
Other income (expense)
               
Unrealized gain (loss) on marketable securities
    (9,000 )     25,500  
Interest expense
    (24,967 )     (3,536 )
Total other income (expense)
    (33,967 )     21,964  
                 
Net (loss)
  $ (396,086 )   $ (225,612 )
                 
Net (loss) per common share - basic and diluted
  $ (0.01 )   $ (0.01 )
                 
Weighted average common shares outstanding - basic and diluted
    36,965,057       30,005,185  
                 
See Notes to Unaudited Consolidated Financial Statements
 
 
3

 
 
AUDIOEYE, INC.
(UNAUDITED)
 
   
For the Three Months ended
 
   
March 31, 2013
   
March 31, 2012
 
Cash Flows from Operating Activities:
           
Net (loss)
  $ (396,086 )   $ (225,612 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
Depreciation and amortization
    89,593       3,455  
Stock, option and warrant expense
    169,756        
Unrealized (gain) loss on investments
    9,000       (25,500 )
Changes in operating assets and liabilities:
               
Accounts receivable
    3,256       (11,877 )
Related party receivable
          (750 )
Other assets
          (3,271 )
Accounts payable and accruals
    70,071       (28,782 )
Deferred revenue
    (10,380 )     13,370  
Related party payables
          79,615  
Net cash (used in) operating activities
    (64,790 )     (199,352 )
                 
Cash Flows from financing activities:
               
Repayment of note payable
    (206,000 )      
Proceeds from third party loans
    352,500       244,000  
Net cash provided by financing activities
    146,500       244,000  
                 
Increase (decrease) in cash
    81,710       44,648  
Cash - beginning of period
    11,710       32,156  
Cash - end of period
  $ 93,420     $ 76,804  
                 
NON-CASH FINANCING ACTIVITIES
               
Common stock issued for conversion of debt
  $ 1,692,932     $  
Warrants issued for related party loans
    829,418        
Common Stock Issued to CMGO for debt repayment
    241,339        
Patents capitalized in accounts payable
    1,837       3,470  
Accounts payable converted into debt
    30,000        
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Interest paid
  $ 24,967     $  
Income taxes paid
  $     $  
 
See Notes to Unaudited Consolidated Financial Statements

 
4

 

AUDIOEYE, INC.
 MARCH 31, 2013 (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, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K.
 
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the fiscal year ended December 31, 2012 as reported in the Company’s Annual Report on Form 10-K have been omitted.
 
Corporate Organization
 
The Company was formed as a Delaware corporation on May 20, 2005. On March 31, 2010, CMG Holdings Group, Inc., (“CMGO”) acquired the Company. In connection with the acquisition, the former stockholders of the Company retained rights to receive cash from the exploitation of the Company’s technology, (the “Rights”) consisting of 50% of any cash received from income earned, settlements or judgments directly resulting from the Company’s patent strategy and a share of its net income for 2010, 2011 and 2012 from the exploitation of the Company’s technology.  The Rights were then contributed to a newly formed Nevada corporation, AudioEye Acquisition Corporation, (“AEAC”), in exchange for shares of AEAC.  During the period as a wholly-owned subsidiary of CMGO, the Company continued to expand its patent portfolio to protect its proprietary Internet content publication and distribution technology.
 
On June 22, 2011, CMGO entered into a Master Agreement with AEAC pursuant to which: (i) the stockholders of AEAC would acquire from the CMGO 80% of the Company’s capital stock, (the “Separation”) and (ii) CMGO would distribute to its stockholders, in the form of a dividend, 5% of the Company’s capital stock, (the “Spin-off”).  Pursuant to the Master Agreement, AEAC was required to arrange for the release of senior secured notes, (the “Senior Notes”) issued by CMGO in an aggregate principal amount of $1,025,000, which CMGO had been unable to service.  On August 15, 2012, the Company, CMGO and AEAC completed the Separation.  In connection with the Separation, AEAC arranged for the release of CMGO under the Senior Notes by payment to the holders thereof of $700,000, the delivery of a secured promissory note in the principal amount of $425,000 and the issuance of 1,500,000 shares of the common stock of AEAC.  On January 29, 2013, the Securities and Exchange Commission declared effective the Company’s registration statement on Form S-1 with respect to 1,500,259 shares of its common stock to be issued in the Spin-off. On February 6, 2013, the secured promissory note was repaid in full. On February 22, 2013, CMGO completed the Spin-off.
 
In connection with the Separation, the Company entered into a Royalty Agreement with CMGO. Pursuant to the Royalty Agreement, for a period of five years, the Company will pay to CMGO 10% of cash received from income earned or settlements on judgments directly resulting from the Company’s patent enforcement and licensing strategy, whether received by the Company on any of its affiliates, net in either case of any direct costs or tax implications incurred in pursuit of such strategy as they relate to the patents described in the Master Agreement.  Additionally, the Company entered into a Services Agreement with CMGO whereby, without duplication to the amounts payable under the Royalty Agreement, for a period of 5 years, CMGO will receive a commission of 7.5% of all revenues received by the Company after the Separation from all business, clients or
 
 
5

 
 
other sources of revenue procured by CMGO or its employees, officers or subsidiaries and directed to the Company and 10% of net revenues obtained from a specified customer.
 
On March 22, 2013, the Company and AEAC entered into an Agreement and Plan of Merger, (the “Merger Agreement”) pursuant to which AEAC would be merged with and into the Company, (the “Merger”) with the Company being the surviving entity.  Pursuant to the Merger Agreement, each share of AEAC common stock issued and outstanding immediately prior to the Merger effective date would be converted into .94134 share of the Company’s common stock and the outstanding convertible debentures of AEAC, (the “AEAC Debentures”) in the aggregate principal amount of $1,400,200, together with accrued interest thereon, would be assumed by the Company and then exchanged for the Company’s convertible debentures, (the “AE Debentures”).
 
Effective March 25, 2013, the Merger was completed.  In connection with the Merger, the stockholders of AEAC received on a pro rata basis the 24,004,143 shares of the Company’s common stock that were held by AEAC, and the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of the Company’s common stock pursuant to their conversion of all of the AE Debentures issued to replace the AEAC Debentures.  The principal asset of AEAC was the Rights that had been contributed to AEAC by the Company’s former stockholders.  As a result of the Merger, the Rights have been extinguished.
 
NOTE 2: GOING CONCERN
 
As shown in the accompanying financial statements, the Company has incurred net losses of $396,086 and $225,612 for the quarters ended March 31, 2013 and 2012, respectively. In addition, the Company had an accumulated deficit of $906,708 and $510,622 and a working capital deficit of  and $381,100 and $2,775,215 as of March 31, 2013 and December 31, 2012, respectively. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. In response to these conditions, the Company is attempting to raise additional capital through the sale of equity securities, an offering of debt securities or borrowings from financial institutions or other third parties or a combination of the foreging.  No assurance can be given that the Company will be able to raise sufficient financing to implement its business plan.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
NOTE 3: RELATED PARTY TRANSACTIONS
 
As of March 31, 2013 and December 31, 2012, Related Party Loans totaled $10,000 and $10,000, respectively.
 
As of March 31, 2013 and December 31, 2012, there were Related Party Payables of $0 and $829,418, respectively, for services performed by related parties.
 
As of March 31, 2013 and December 31, 2012, there were outstanding receivables of $16,125 and $16,125, respectively, for services performed for related parties.
 
For the three months ended March 31, 2013 and 2012, there were revenues earned of $0 and $750, respectively, for services performed for related parties.
 
NOTE 4: NOTES PAYABLE
 
As of December 31, 2012 and 2011, the Company had an outstanding loan to a third party in the amount of $74,900, which was originally issued during 2006 as part of an Investment Agreement.  The loan was unsecured and bore interest at 25% per year for four years. The Company had accrued interest of $74,900, which was included in accounts payable and accrued expenses on the balance sheet.  The note was in default until October 24, 2011, at which time the Company entered into a Termination and Release Agreement, (“Release”) with the third party.  The terms of the Release, among other things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the third-party in the combined amount of
 
 
6

 
 
principal and accrued interest to date, for a total principal amount of $149,800.  The note is interest free, and is payable in monthly installments of $2,000 beginning November 1, 2011.  As of March 31, 2013 and December 31, 2012, the principal amount owing was $115,800 and $121,800, respectively, of which $24,000 and $24,000, has been recorded as the current portion of the note, and $91,800 and $97,800 as the long-term portion of the note, respectively.
 
On August 15, 2012, the Company issued a Secured Promissory Note to CMGO Investors LLC, the agent for the former holders of CMGO’s senior debt, in the amount of $425,000, related to the separation of the Company from its parent, which took place on August 17, 2012.  The note bore interest at 8% per annum.  Pursuant to an extension granted by the noteholder, the note was due on February 6, 2013.  The noteholder had the option to convert the principal and interest into 10% of the Company’s total issued and outstanding common shares as of the date of the notice to convert, but in no event more than 6,000,000 shares. On February 6, 2013, the Secured Promissory Note was repaid in full. Payment consisted of cash payments of $200,000, of which $16,339 was interest and $183,661 was principal. The balance of the principal of $241,339 was repaid with the issuance of 1,998,402 common shares of the Company, which represented 5.678562% of the outstanding shares on February 6, 2013.

During the period ended March 31, 2013, the Company borrowed an additional $382,500 of AEAC Debentures, $30,000 of which was accounts payable converted into debt. These notes bore interest at 8% per annum and are due one year from the date of issuance. The noteholders had the option to convert the principal and interest at an exercise price $0.25 per share.
 
In connection with the Merger that occurred March 22, 2013, the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of the Company’s common stock pursuant to their conversion of all of the AE Debentures issued to replace the AEAC Debentures totalling $1,400,200 of principal and $67,732 of interest. These shares were issued for the conversion of total principal and accrued interest on the former AEAC Debentures.
 
NOTE 5: STOCKHOLDERS’ EQUITY
 
As of March 31, 2013 and December 31, 2012, the Company had 43,062,199 and 35,192,045 shares of common stock issued and outstanding, respectively.
 
On February 6, 2013 the Secured Promissory Note to CMGO Investors LLC was repaid in full. Payment consisted of cash payments of $200,000 of which $16,339 was interest and $183,661 was principal. The balance of the principal of $241,339 was repaid with the issuance of 1,998,402 common shares of the Company, which was 5.678562% of the outstanding shares on February 6, 2013.
 
In connection with the Merger that occurred March 22, 2013, the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of the Company’s common stock pursuant to their conversion of all of the AE Debentures issued to replace the AEAC Debentures totalling $1,400,200 of principal and $67,732 of interest. These shares were issued for the conversion of total principal and accrued interest on the former AEAC Debentures.
 
NOTE 6: OPTIONS AND WARRANTS
 
As of March 31, 2013 the Company has 2,820,000 options issued and outstanding. The AudioEye, Inc. 2012 Incentive Compensation Plan has a total of 5,000,000 authorized shares and a balance of 2,180,000 shares remaining in the plan. These options were issued on December 19, 2012, vest 25% at each 6 month anniversary of the grant date, have an exercise price of $0.25 per share, and expire on December 19, 2017.
 
 
7

 
 
 
       
Outstanding and Exercisable Options
             
             
Remaining
   
Exercise Price
   
Weighted
       
       
Number of
   
Contractual Life
   
times Number
   
Average
   
Intrinsic
 
Exercise Price    
Shares
   
(in years)
   
of Shares
   
Exercise Price
   
Value
 
$
    0.25
      2,820,000       5     $ 705,000     $ 0.25     $ 0  
          2,820,000             $ 705,050     $ 0.25       0  
 
The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 3.25 years, expected volatility of 250%, risk free interest rate of 0.39%, and expected dividend yield of 0%. The grant date fair value of the options were determined to be $688,005.
 
For the three months ended March 31, 2013, stock compensation expense related to the options totaled $86,006
 
On March 19, 2013, the Company’s board of directors approved the issuance of warrants to James Crawford, Nathaniel Bradley and Sean Bradley to purchase up to 464,593, 1,696,155 and 1,491,924, respectively, shares of Company common stock. The warrants have an issuance date of March 19, 2013, expire on March 19, 2018, have a strike price of $0.25 per share, and vest in 1/3 increments on the annual anniversaries of the issuance. The warrants to purchase up to an aggregate of 3,652,672 shares of common stock were valued at $913,168, which is the same amount as the related party payables forgiven. As of December 31, 2012, the Company had accrued $829, 418 of these payables.  As a result, warrant expense of $83,750 was recorded during the three months ended March 31, 2013.
 
NOTE 7: ACQUISITION OF AUDIOEYE, INC. BY AUDIOEYE ACQUISITION CORPORATION
 
On August 17, 2012  AEAC acquired 80% of AudioEye, Inc.  for $1,125,000 and 1,500,000 shares of AEAC common stock with a fair value of $375,000.
 
On August 17, 2012, the Company determined the fair value its patents to be $3,551,814. The following table sets forth the purchase price allocation for the acquisition of AudioEye, Inc. as of August 17, 2012:
 
Purchase Price Allocation
 
Purchase Price:
Cash
  $ 1,125,000        
 
1,500,000 shares of AEAC stock
    375,000     $ 1,500,000  
                   
Less: Net Assets (deficit)
            2,752,342 *
Less: Identifiable Intangibles - Patents
            (3,551,814 )
 
Goodwill
          $ 700,528  
                   
 
Net Assets (deficit)
   
Book Value
 
   
at 08/17/12
 
Current Assets
 
$
 109,521
 
Property, Plant & Equipment, net
 
7,688
 
Patents
   
                 —
 
Current Liabilities
   
     (1,517,724
)
L/T Liabilities
   
     (1,351,827
)
Contingent Liabilities (Note 2)
   
 
Net Assets (deficit)
$
(2,752,342
)*
       
 
 
8

 
 
In accordance with ASC 805, the Company has accounted for the combination using the Acquisition Method for the purpose of allocating the purchase price and determining goodwill. The fair value of the Company’s current tangible assets, property and equipment and liabilities approximated book value on the date of the acquisition. Therefore no adjustment has been made to the book value of the Company’s existing tangible assets and liabilities. The Company has determined that the value of goodwill is $700,528, based upon the Company’s enterprise allocation , less the Company’s net assets at the time of purchase, less any identifiable intangible assets, and is comprised of the expected synergies and intangible assets that do not qualify for separate recognition. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value net assets as of the Separation date of August 17, 2012, the purchase price allocation could change during the measurement period (not to exceed one year) if new information is obtained about facts and circumstances that existed as of the Separation date that, if known, would have resulted in the recognition of additional, or change in existing, assets and liabilities as of that date.
 
The Company has identified its patents as qualifying for separate recognition, in accordance with ASC 820.  In determining the fair market value associated with the patents, the Company used the Income Method. Inasmuch as the Company has previously determined that there existed an impairment of the patent based upon an analysis utilizing the Company’s historical cash flows, it was necessary for the Company to consider any identifiable future cash flows that were reliably estimable at the date of Separation. The Company has determined that the only identifiable revenue stream for future cash flows directly related to the patents at the date of the Separation are those related to the licensing of its technology to the US Government, more fully described below.  All other potential revenue is highly speculative, and/or not directly related to the patents at the date of the Separation. Based on the analysis performed, the Company determined the fair value of the patents on the date of separation to be $3,551,814.
 
NOTE 8: MERGER OF AUDIOEYE, INC. AND AUDIOEYE ACQUISITION CORPORATION
 
On March 22, 2013, the Company and AEAC entered into the Merger Agreement.  Pursuant to the Merger Agreement, each share of AEAC common stock issued and outstanding immediately prior to the Merger effective date would be converted into .94134 share of the Company’s common stock and the outstanding convertible debentures of AEAC, (the “AEAC Debentures”) in the aggregate principal amount of $1,400,200, together with accrued interest thereon of $67,732, would be assumed by the Company and then exchanged for convertible debentures of the Company, (the “AE Debentures”). Effective March 25, 2013, the Merger was completed.  In connection with the Merger, the stockholders of AEAC received on a pro rata basis the 24,004,143 shares of the Company’s common stock that were held by AEAC, and the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of the Company’s common stock pursuant to their conversion of all of the AE Debentures issued to replace the AEAC Debentures.
 
This transaction was accounted for as a combination of entities under common control under ASC 805-10-15.  Accordingly, the historical financial statements have been adjusted retroactively assuming the transaction occurred on January 1, 2012.  The Company recorded the following net assets after elimination of intercompany receivables and payables between AudioEye, Inc.:
 
Assets
     
Cash
    4,593  
Intangible Assets
    3,551,814  
Goodwill
    700,528  
     Total Assets
    4,256,935  
         
Liabilities
       
Accounts payable and accrued expenses
    117,162  
Net Assets
    4,139,773  
 
 
9

 
 
NOTE 9: INTANGIBLE ASSETS
 
Prior to March 31, 2013, patents, technology and other intangibles with contractual terms were 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.
 
Prior to any impairment adjustment, intangible assets consisted of the following:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
             
Patents
  $ 3,553,651     $ 3,553,651  
Accumulated Amortization
    (192,387 )     (105,430 )
Intangible Assets, Net
  $ 3,361,264     $ 3,448,221  
 
Amortization expense totaled $88,794 and $0 for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively.
 
 
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.
 
The following discussion should be read in conjunction with our consolidated unaudited financial statements and the related notes for the three months ended March 31, 2013 and 2012 that appear in this quarterly  report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this quarterly  report.
 
Background
 
Our company was formed as a Delaware corporation on May 20, 2005. On March 31, 2010, CMG Holdings Group, Inc., (“CMGO”) acquired our company .  In connection with the acquisition, the former stockholders of our company retained rights to receive cash from the exploitation of our technology, (the “Rights”) consisting of 50% of any cash received from income earned, settlements or judgments directly resulting from our patent strategy and a share of our net income for 2010, 2011 and 2012 from the exploitation of the Company’s technology.  The Rights were then contributed to a newly formed Nevada corporation, AudioEye Acquisition Corporation, (“AEAC”), in exchange for shares of AEAC.  During the period as a wholly-owned subsidiary of
 
 
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CMGO, we continued to expand our patent portfolio to protect our proprietary Internet content publication and distribution technology.
 
On June 22, 2011, CMGO entered into a Master Agreement with AEAC pursuant to which: (i) the stockholders of AEAC would acquire from the CMGO 80% of our capital stock, (the “Separation”) and (ii) CMGO would distribute to its stockholders, in the form of a dividend, 5% of our capital stock, (the “Spin-off”).  Pursuant to the Master Agreement, AEAC was required to arrange for the release of senior secured notes, (the “Senior Notes”) issued by CMGO in an aggregate principal amount of $1,025,000, which CMGO had been unable to service.  On August 15, 2012, we, CMGO and AEAC completed the Separation.  In connection with the Separation, AEAC arranged for the release of CMGO under the Senior Notes by payment to the holders thereof of $700,000, the delivery of a secured promissory note in the principal amount of $425,000 and the issuance of 1,500,000 shares of the common stock of AEAC.  On January 29, 2013, the Securities and Exchange Commission declared effective our registration statement on Form S-1 with respect to 1,500,259 shares of our common stock to be issued in the Spin-off. On February 6, 2013, the secured promissory note was repaid in full. On February 22, 2013, CMGO completed the Spin-off.
 
In connection with the Separation, we entered into a Royalty Agreement with CMGO. Pursuant to the Royalty Agreement, for a period of five years, we will pay to CMGO 10% of cash received from income earned or settlements on judgments directly resulting from our patent enforcement and licensing strategy, whether received by us on any of our affiliates, net in either case of any direct costs or tax implications incurred in pursuit of such strategy as they relate to the patents described in the Master Agreement.  Additionally, we entered into a Services Agreement with CMGO whereby, without duplication to the amounts payable under the Royalty Agreement, for a period of 5 years, CMGO will receive a commission of 7.5% of all revenues received by us after the Separation from all business, clients or other sources of revenue procured by CMGO or its employees, officers or subsidiaries and directed to us and 10% of net revenues obtained from a specified customer.
 
On March 22, 2013, we and AEAC entered into an Agreement and Plan of Merger, (the “Merger Agreement”) pursuant to which AEAC would be merged with and into our company, (the “Merger”) with our company being the surviving entity.  Pursuant to the Merger Agreement, each share of AEAC common stock issued and outstanding immediately prior to the Merger effective date would be converted into .94134 share of our common stock and the outstanding convertible debentures of AEAC, (the “AEAC Debentures”) in the aggregate principal amount of $1,400,200, together with accrued interest thereon, would be assumed by us and then exchanged for convertible debentures of our company, (the “AE Debentures”).
 
Effective March 25, 2013, the Merger was completed.  In connection with the Merger, the stockholders of AEAC received on a pro rata basis the 24,004,143 shares of our common stock that were held by AEAC, and the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of our common stock pursuant to their conversion of all of the AE Debentures issued to replace the AEAC Debentures.  The principal asset of AEAC was the Rights that had been contributed to AEAC by the former stockholders of our company.  As a result of the Merger, the Rights have been extinguished.
 
Overview
 
We have developed patented Internet content publication and distribution software that enables conversion of any media into accessible formats and allows for real time distribution to end users on any Internet-connected device. We have a patent portfolio comprised of five patents in the United States, as well as several pending U.S. patents.  Our portfolio includes a number of patents that describe unique systems and methods for navigating devices and Internet content, as well as publication and automated solutions that connect to any content management system, and can deliver a mobile, usable, and accessible user experience to any consumer device.
 
 
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This patented technology is the foundation of our mission to become a leader in Internet accessibility, mobile audio Internet navigation, and multi-format publishing technology as well as Internet content publication and distribution software.  Our management believes that there is significant market opportunity for our services as most websites are developed with the assumption that users can see the site, with the result that visually-impaired users have difficulty using such websites. Accordingly, providing accessibility services for these websites has become a significant market opportunity, as there are approximately 33 million computer users who have some form of visual impairment.
 
In October 2010, Congress passed and the President signed into law the Twenty-First Century Communication and Video Accessibility Act of 2010, which mandates that all government websites (city, state and federal) be compliant and provide accessibility to persons with disabilities. As a result, our management believes that providing accessibility services for these government websites has become a significant market opportunity in view of the potential demand for our patented solution.
 
Our consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles, (“GAAP”).
       
Results of Operations
 
Three Months Ended
March 31,
 
   
2013
   
2012
 
                 
Revenue
  $ 224,297     $ 14,255  
                 
Revenue from related party
          750  
                 
Cost of Sales
    45,023       89,735  
                 
Gross profit (loss)
    179,274       (74,730 )
                 
General and administrative expenses
    541,393       172,846  
                 
Patent impairment expense
           
                 
Operating (loss)
    (362,119 )     (247,576 )
                 
Unrealized gain (loss) on marketable securities
    (9,000 )     25,500  
                 
Loss attributable to non-controlling interest
           
                 
Interest expense
    (24,967 )     (3,536 )
                 
Net (loss)
  $ (396,086 )   $ (225,612 )
                 
Net (loss) per Weighted average common shares outstanding – basic and diluted
  $ (0.01 )   $ (0.01 )
 
Revenue
 
For the three months ended March 31, 2013 and 2012, revenue in the amount of $224,297 and $14,255, respectively, consisted primarily of various levels of website design and maintenance. Revenues increased due to increased demand for our services. Additionally, for the three months ended March 31, 2013 and 2012, revenue from related party in the amount of $0 and $750, respectively, consisted primarily of various levels of website design and maintenance.
 
 
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Cost of Sales
 
For the three months ended March 31, 2013 and 2012, cost of sales in the amount of $45,023 and $89,735, respectively, consisted primarily of sub-contracting to outside sources, direct labor and direct technology costs. Cost of sales decreased due to a reduction of sub-contracting costs and efficient implementation of our products.
 
Gross Profit
 
The increase in revenue and decrease in sub-contracting and direct labor resulted in a gross profit of $179,274 and a gross loss of $74,730 for the three months ended March 31, 2013 and 2012, respectively. Gross profit increased as a result of increasing sales combined with a reduction in sub-contracting costs and efficient implementation of our products.
 
General and Administrative Expenses
 
General and administrative expenses were $541,393 and $172,846 for the three months ended March 31, 2013 and 2012, respectively. General and administrative expenses increased as a result of increases in amortization, new employees and stock, option and warrant expense.
 
Liquidity and Capital Resources
 
Working Capital
   
 
At March 31,
   
At December 31,
 
 
2013
   
2012
 
Current Assets
$ 143,545     $ 74,091  
Current Liabilities
  524,645       2,849,306  
Working Capital (Deficit)
$ (381,100 )   $ (2,775,215 )
 
The working capital deficit the three months ended March 31, 2013 and December 31, 2012 was $381,100 and $2,775,215, respectively. The decrease in deficit was primarily due to decreases in current portion of related party payables and notes and loans payable.
 
Cash Flows
 
 
For the three months ended
 
   
March 31,
 
   
2013
   
2012
 
             
Net Cash (Used in) Operating Activities
  $ (64,790 )   $ (199,352 )
Net Cash Provided by Financing Activities
    146,500       244,000  
Increase (Decrease) in Cash
  $ 81,710     $ 44,648  
 
We had cash in the amount of $93,420 and $76,804 as of March 31, 2013 and 2012, respectively.
 
In view of our working capital deficit, continuing operating losses and limited cash position, we will be required to raise additional capital through the sale of equity or debt securities or borrowings from financial institutions or third parties or a combination of the foregoing.  We cannot assure you that we will be able to obtain sufficient funds at all or on acceptable terms.  Without such funds, we will be unable to implement our business plan or continue operations.
 
 
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Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
 
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, 2012, relate to capitalized legal patent costs, income taxes, business combinations, goodwill, intangible assets, share-based payments, revenue recognition, and research and other accounting descriptions. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
 
Not applicable.
 
 
Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow for timely decisions regarding required disclosure.  Our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2013 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles due to our management identifying a material weakness in lack of control processes in place that provide multiple levels of supervision and review as of March 31, 2013.  Please refer to our Annual Report on Form 10-K as filed with the SEC on April 15, 2013 for a complete descussion relating to the foregoing evaluation of our controls and procedures.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2013 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
 
 
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None.
 
 
Not applicable.
 
 
None.
 
Sales of Unregistered Securities
 
On February 6, 2013, we repaid the remaining principal under a Secured Promissory Note to CMGO Investors LLC with the issuance of 1,998,402 shares of our common stock. The offer and sale of the shares were exempt from the registration requirements of the Securities Act of 1933, as amended, (the “Securities Act”) pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The only consideration that we received in the transaction was the satisfaction of our obligation under the note.
 
Use of Proceeds from Public Offering of Common Stock
 
None.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
 
None.
 
 
None.
 
 
None.
 
 
None.

 
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Exhibit
No.
 
Description
10.1
 
Agreement and Plan of Merger dated as of March 22, 2013 between AudioEye, Inc. and AudioEye Acquisition Corporation (1)
     
31.1*
 
     
31.2*
 
     
32.1*
 
     
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Taxonomy Extension Schema Document
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB
  XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

 
*         Filed herewith.
 
(1)
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 27, 2013.
 
 
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Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of May 2013.
 
  AUDIOEYE, INC.
     
     
  By:
/s/ Nathaniel Bradley
   
Nathaniel Bradley
   
Chief Executive Officer and President
     
  By:
/s/ Edward O’Donnell
   
Edward O’Donnell
     
Chief Financial Officer
 
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