AUDIOEYE INC - FORM 10-Q/A

Attached files

file	filename
EX-32.2 - EX-32.2 - AUDIOEYE INC	a15-8835_1ex32d2.htm
EX-32.1 - EX-32.1 - AUDIOEYE INC	a15-8835_1ex32d1.htm
EX-31.1 - EX-31.1 - AUDIOEYE INC	a15-8835_1ex31d1.htm
EXCEL - IDEA: XBRL DOCUMENT - AUDIOEYE INC	Financial_Report.xls

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from [ ] to [ ]

Commission file number 333-177463

AudioEye, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-2939845
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5210 East Williams Circle, Suite 500, Tucson, Arizona		85711
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 866-331-5324

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 11, 2014, 69,367,752 shares of the registrant’s common stock were issued and outstanding.

Table of Contents

TABLE OF CONTENTS

		Page
	Explanatory Note	1

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (unaudited)	2

	Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 (unaudited)	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)	4

	Notes to Consolidated Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Mine Safety Disclosures	21

Item 5.	Other Information	21

Item 6.	Exhibits	21

SIGNATURES

Table of Contents

EXPLANATORY NOTE

The Registrant is filing this Amendment No. 1 on Form 10-Q/A (this “Amended Filing”) to its Quarterly Report on Form 10-Q for the three and six months ended June 30, 2014 as originally filed with the Securities and Exchange Commission on August 11, 2014 (“Original Filing”) to restate its consolidated balance sheet as of June 30, 2014, and its consolidated statement of operations and consolidated statement of cash flow for the three and six months ended June 30, 2014.

In connection therewith, the Registrant hereby amends and replaces in their entirety Items 1, 2 and 4 in Part I, and Item 1A in Part II in the Original Filing. For the convenience of the reader, this Amended Filing sets forth the Original Filing, as modified where necessary to reflect the restatement and revisions.

The reasons for the restatement and the effect thereof is discussed in Footnote 2 to our consolidated financial statements.

As required by Rule 12b-15, the Registrant’s principal executive officer and principal financial officer are providing new currently dated certifications. Accordingly, the Registrant hereby amends Item 6 in Part II in the Original Filing to reflect the filing of the new certifications.

We are also separately amending our quarterly reports on Form 10-Q for the periods ending March 31, 2014 and September 30, 2014 in connection with the restatements of our interim financial statements for such periods.

Except as described above, this Amended Filing does not amend, update or change any other items or disclosures in the Original Filing and does not purport to reflect any information or events subsequent to the filing thereof. As such, this Amended Filing speaks only as of the date the Original Filing was filed, and the Registrant has not undertaken herein to amend, supplement or update any information contained in the Original Filing to give effect to any subsequent events. Accordingly, this Amended Filing should be read in conjunction with the Registrant’s filings made with the SEC subsequent to the filing of the Original Filing, including any amendment to those filings.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The financial information set forth below with respect to the financial statements as of June 30, 2014 and 2013 and for the three and six month periods ended June 30, 2014 and 2013 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 periods ended June 30, 2014 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31.

Table of Contents

AUDIOEYE, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	Restated June 30, 2014			December 31, 2013
ASSETS
Current Assets
Cash	$	514,165		$	1,847,004
Accounts receivable, net	538,942			569,297
Related party receivables	26,375			82,250
Prepaid assets and security deposits	68,938			—
Stock subscriptions receivable	60,000			—
Marketable securities	60,000			—
Total Current Assets	1,268,420			2,498,551

Property and equipment, net	2,249			3,847
Intangible assets, net	3,280,404			3,073,945
Goodwill	700,528			700,528
Total Assets	$	5,251,601		$	6,276,871

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	1,165,633		$	416,531
Deferred revenue	600			—
Billing in excess of costs	17,772
Notes and loans payable-current, net of unamortized discounts of $0 and $1,155, respectively	24,000			172,845
Related party payables	87,000			243,424
Related party loans	35,000			35,000
Total Current Liabilities	1,330,005			867,800

Long Term Liabilities
Notes and loans payable-long term	65,800			79,800
Total Long Term Liabilities	65,800			79,800
Total Liabilities	1,395,805			947,600

STOCKHOLDERS’ EQUITY
Preferred stock, $0.00001 par value, 10,000,000 shares authorized, none issued and outstanding, as of June 30, 2014 and December 31, 2013	—			—
Common stock, $0.00001 par value, 250,000,000 shares authorized, 59,256,291 and 53,239,369 issued and outstanding, as of June 30, 2014 and December 31, 2013 respectively	593			532
Treasury stock	(623,000		)	(623,000		)
Additional paid-in capital	15,823,868			13,231,212
Accumulated deficit	(11,345,665		)	(7,279,473		)
Total Stockholders’ Equity	3,855,796			5,329,271
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,251,601		$	6,276,871

See Notes to Unaudited Consolidated Financial Statements

Table of Contents

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	Restated June 30, 2014			June 30, 2013			Restated June 30, 2014			June 30, 2013

Revenue	$	50,195		$	182,232		$	92,722		$	406,529
Revenue from related party	1,125			18,000			4,250			18,000
Total revenues	51,320			200,232			96,972			424,529

Cost of revenues	334,312			50,767			375,465			95,790

Gross profit	(282,992		)	149,465			(278,493		)	328,739

Operating expenses:
Selling and marketing	251,705			41,866			522,088			49,616
Research and development	108,146			—			238,770			—
General and administrative expenses	1,135,947			547,574			2,803,547			991,618
Amortization and depreciation	116,577			89,726			215,850			179,325
Total operating expenses	1,612,375			679,166			3,780,255			1,220,559

Operating income (loss)	(1,895,367		)	(529,701		)	(4,058,748		)	(891,820		)

Other income (expense)
Unrealized loss on marketable securities	—			—			—			(9,000		)
Interest expense	(461		)	(199		)	(7,444		)	(25,166		)
Total other income (expense)	(461		)	(199		)	(7,444		)	(34,166		)

Net income (loss)	$	(1,895,828	)	$	(529,900	)	$	(4,066,192	)	$	(925,986	)

Net income (loss) per common share - basic	$	(0.03	)	$	(0.01	)	$	(0.07	)	$	(0.02	)
Net income (loss) per common share - diluted	$	(0.03	)	$	(0.01	)	$	(0.07	)	$	(0.02	)
Weighted average common shares outstanding - basic	55,484,007			43,324,188			54,946,209			40,287,985
Weighted average common shares outstanding - diluted	57,957,031			43,324,188			54,946,209			40,287,985

See Notes to Unaudited Consolidated Financial Statements

Table of Contents

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	Restated June 30, 2014			June 30, 2013

Cash Flows from Operating Activities:
Net loss	$	(4,066,192	)	$	(925,986	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	215,850			179,189
Stock, option and warrant expense	1,227,408			253,358
Shares issued for services	396,620			50,000
Unrealized loss on investments	—			9,000
Amortization of debt discount	1,155			—
Changes in operating assets and liabilities:
Accounts receivable	30,355			2,265
Related party receivable	55,875			(18,000		)
Prepaid and other assets	(68,938		)	—
Accounts payable and accruals	689,102			3,503
Billings in excess of costs	17,772			—
Deferred revenue	600			(54,575		)
Related party payables	(156,424		)	122,083
Net cash used in operating activities	(1,656,817		)	(379,163		)

Cash Flows from Investing Activities:
Cash paid for intangible assets	(420,711		)	(6,266		)
Net cash used in investing activities	(420,711		)	(6,266		)

Cash Flows from Financing Activities:
Repayment of note payable	(164,000		)	(212,000		)
Issuance of common stock for cash, net of issuance costs	895,689			426,900
Issuance of equity for cash exercise of options and warrants	13,000			—
Proceeds from third party loans	—			352,500
Net cash provided by financing activities	744,689			567,400

Net (decrease) increase in cash	(1,332,839		)	181,971
Cash - beginning of period	1,847,004			11,710
Cash - end of period	$	514,165		$	193,681

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	7,444		$	24,967
Income taxes paid	—			—

NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for conversion of debt	$	—		$	1,709,291
Warrants issued for related party loans	—			1,002,501
Issuance of common stock for subscriptions receivable	60,000			—
Common stock issued for accounts payable	—			50,000
Accounts payable converted into debt	—			30,000
Accounts receivable converted to marketable securities	60,000			—

See Notes to Unaudited Consolidated Financial Statements

Table of Contents

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014 (Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements of AudioEye, Inc. and its wholly-owned subsidiary (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2014.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2013 as reported in the Company’s Annual Report on Form 10-K have been omitted.

Corporate Information and Background

AudioEye, Inc. was formed as a Delaware corporation on May 20, 2005. The Company focuses on working to improve the mobility, usability and accessibility of all Internet-based content through the development, sale, licensing and use of its proprietary accessibility technologies. Audio Internet® is a technology that utilizes patented architecture to deliver a fully accessible audio equivalent of a visual website or mobile website in a compliant format that can be navigated, utilized, interacted with, and transacted from, without the use of a monitor or mouse, by individuals with visual impairments. For individuals with hearing impairments, Audio Internet® provides captioning for websites, and the challenges of reaching those with other impairments are also addressed by the technology platform.

Complete with an ever-growing suite of utilities tailored to the needs of different disabled users, the AudioEye® Audio Internet® Accessibility Platform is a fully scalable cloud-based solution designed and developed to meet the needs and compliance mandates for an ever-growing demographic.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

Revenue Recognition

Revenue is recognized when all applicable recognition criteria have been met, which generally include: (a) persuasive evidence of an existing arrangement; (b) a fixed or determinable price; (c) delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably assured. For software and technology development contracts, where applicable, the Company recognizes revenues on a percentage of completion method based upon several factors including but not limited to: (a) an estimate of total hours and milestones to complete; (b) the total hours completed; (c) the delivery of services rendered; (d) the change in estimates; and (e) the collectability of the contract.

Licensing revenues for intangible assets, including intellectual property such as patents and trademarks, are recognized when all applicable criteria have been met: (a) persuasive evidence of an existing arrangement; (b) a fixed or determinable price; (c) the delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably assured. Licensing revenues are recognized over the term of the contract or, in the case of a perpetual license, revenues are recognized in the period the criteria have been met. In transactions where the Company engages in a non-cash exchange for a license of the Company for the license of the Company’s customer, the Company follows ASC 845 and any potential revenues is recorded as other income.

NOTE 2: RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company has restated its consolidated balance sheet as of June 30, 2014, and its consolidated statement of operations and consolidated statement of cash flow for the three and six months ended June 30, 2014.

At the time the Company issued the financial statements subject to this restatement, the Company believed that it was relying on generally accepted accounting principles and properly applying those principles. It remains the case that the Company relied upon the correct accounting principles in the accounting in those statements. However, in conjunction certain changes in the management of the Company, as well as during the course of an internal review initiated by the Audit Committee at the Board of Directors during the first quarter and into the second quarter of 2015 (“Internal Review”) the Company identified errors in the application of the accounting principles for revenue recognition and costing of non-monetary

Table of Contents

transactions related to its intellectual property portfolio. Specifically, the Company had no prior cash sales of licenses of its patents as of March 31, 2014. To recognize revenue on a non-monetary exchange of a license of its patents for services or licenses to be provided by a counterparty, the Company looked to establish fair value of either the licensed patents or the services or licenses to be received. Based on the nature of the transactions, and after consultation with the Company’s auditors and another outside accounting firm, the Company applied ASC 845-10-30-1, holding that fair value of the services or licenses it would receive in each transaction was more clearly evident than the fair value of the asset surrendered. This methodology was approved by Company’s auditors and another outside accounting firm; this is the correct methodology, and it was the methodology used by the Company.

Under ASC 845, fair value in a license-for-services or license-for-license contract in which the cost of the asset being surrendered is not determinable can rely on the fair value of the asset received if it is determinable. The subsequent licenses for services or licenses transactions, as such, might have in the alternative considered the fair value of the services or licenses being provided by the counterparties. However, the Company has now determined following its Internal Review that in applying this methodology it did not have sufficient support to establish the value of the services or licenses provided under the subsequent license-for-services or license-for-license transactions, did not adequately track the consulting services provided by the various counterparties, and did not have sufficient support to establish such services were actually provided as per the terms of the contracts.

The Company recorded these revenues as “non-monetary” transactions, and the actual cash position of the Company is unaffected by this restatement.

The restatement also reflects that the Company discovered following its Internal Review errors associated with the timing of revenues recognized under certain contracts in terms of the percentage of completion methodology. In such cases, the Company has now learned that it did not maintain sufficient documentation to measure the production activities necessary for such computation.

Finally, the Company discovered, following its Internal Review, errors which impacted revenues recognized where collection of the sales price was not reasonably assured.

None of the adjustments necessary to correct the errors impacted net cash used in operating activities or the Company’s cash balance.

Following its Internal Review, the Company has determined that these errors resulted from material weakness in internal control over financial reporting as discussed under Part 1, Item 4. In particular, the Company concluded that there was a misapplication of relevant accounting guidance and the absence of documentation to support transactions including the failure to trace the delivery of services. The following tables present the impact of the corrections on the previously reported unaudited quarterly financial information. The “As Reported” column in the tables below reflects balances previously reported by the Company in its quarterly report on Form 10-Q. The “Revisions” column shows the impact of adjustments made by the Company to reflect changes in presentation retrospectively as follows:

Table of Contents

AUDIOEYE, INC.

CONSOLIDATED BALANCE SHEETS-RESTATED

(UNAUDITED)

	As Reported June 30, 2014			Cumulative Revisions		Restated June 30, 2014
ASSETS
Current Assets
Cash	$	514,165				$	514,165
Accounts receivable, net	645,119			(106,177	) (a)	538,942
Related party receivables	26,375					26,375
Prepaid assets and security deposits	2,985,924			(2,916,986	) (b)	68,938
Stock subscriptions receivable	60,000					60,000
Marketable securities	60,000					60,000
Total Current Assets	4,291,583			(3,023,163	)	1,268,420

Property and equipment, net	2,249					2,249
Intangible assets, net	3,898,530			(618,126	) (b)	3,280,404
Goodwill	700,528					700,528
Total Assets	$	8,892,890		(3,641,289	)	$	5,251,601

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	1,165,633				$	1,165,633
Billings in excess of costs	—			17,772	(c)	17,772
Deferred revenue	600					600
Notes and loans payable	24,000					24,000
Related party payables	87,000					87,000
Related party loans	35,000					35,000
Total Current Liabilities	1,312,233			17,772		1,330,005

Long Term Liabilities
Notes and loans payable-long term	65,800					65,800
Total Long Term Liabilities	65,800					65,800
Total Liabilities	1,378,033			17,772		1,395,805

STOCKHOLDERS’ EQUITY
Preferred stock	—					—
Common stock	593					593
Treasury stock	(623,000		)			(623,000		)
Additional paid-in capital	15,823,868					15,823,868
Accumulated deficit	(7,686,604		)	(3,659,061	)	(11,345,665		)
Total Stockholders’ Equity	7,514,857			(3,659,061	)	3,855,796
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	8,892,890		(3,641,289	)	$	5,251,601

(a) Revenues associated with collectability not reasonably assured

(b) Revenues associated with non-cash transactions

Table of Contents

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS-RESTATED

(UNAUDITED)

	Six Months Ended
	As Reported June 30, 2014			Cumulative Revisions		Restated June 30, 2014

Revenue	$	4,041,669		(3,948,947	) (a, b, c)	$	92,722
Revenue from related party	4,250					4,250
Total revenues	4,045,919			(3,948,947	)	96,972

Cost of revenues	375,465					375,465

Gross profit	3,670,454			(3,948,947	)	(278,493		)

Operating expenses:
Selling and marketing	755,100			(233,012	) (b)	522,088
Research and development	238,770					238,770
General and administrative expenses	2,803,547					2,803,547
Amortization and depreciation	272,724			(56,874	) (b)	215,850
Total operating expenses	4,070,141			(289,886	)	3,780,255

Operating income (loss)	(399,687		)	(3,659,061	)	(4,058,748		)

Other income (expense)
Unrealized loss on marketable securities	—					—
Interest expense	(7,444		)			(7,444		)
Total other income (expense)	(7,444		)			(7,444		)

Net income (loss)	$	(407,131	)	(3,659,061	)	$	(4,066,192	)

Net income (loss) per common share - basic	$	(0.01	)	(0.06	)	$	(0.07	)
Net income (loss) per common share - diluted	$	(0.01	)	(0.06	)	$	(0.07	)
Weighted average common shares outstanding — basic	54,946,209					54,946,209
Weighted average common shares outstanding — diluted	54,946,209					54,946,209

(a) Revenues associated with collectability not reasonably assured

(b) Revenues associated with non-cash transactions

Table of Contents

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS-RESTATED

(UNAUDITED)

	Three Months Ended
	As Reported June 30, 2014			Quarterly Revisions		Restated June 30, 2014

Revenue	$	3,011,908		(2,961,713	) (a, b, c)	$	50,195
Revenue from related party	1,125					1,125
Total revenues	3,013,033			(2,961,713	)	51,320

Cost of revenues	334,312					334,312

Gross profit	2,678,721			(2,961,713	)	(282,992		)

Operating expenses:
Selling and marketing	259,719			(8,014	) (b)	251,705
Research and development	108,146					108,146
General and administrative expenses	1,135,947					1,135,947
Amortization and depreciation	172,827			(56,250	) (b)	116,577
Total operating expenses	1,676,639			(64,264	)	1,612,375

Operating income (loss)	1,002,082			(2,897,449	)	(1,895,367		)

Other income (expense)
Unrealized loss on marketable securities	—					—
Interest expense	(461		)			(461		)
Total other income (expense)	(461		)			(461		)

Net income (loss)	$	1,001,621		(2,897,449	)	$	(1,895,828	)

Net income (loss) per common share - basic	$	0.02		(0.05	)	$	(0.03	)
Net income (loss) per common share - diluted	$	0.02		(0.05	)	$	(0.03	)
Weighted average common shares outstanding — basic	55,484,007					55,484,007
Weighted average common shares outstanding — diluted	57,957,031					57,957,031

(a) Revenues associated with collectability not reasonably assured

(b) Revenues associated with non-cash transactions

Table of Contents

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS-RESTATED

(UNAUDITED)

	Six Months Ended
	As Reported June 30, 2014			Cumulative Revision			Restated June 30, 2014

Cash Flows from Operating Activities:
Net loss	$	(407,131	)	(3,659,061	)		$	(4,066,192	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	272,724			(56,874	)	(b)	215,850
Stock, option and warrant expense	1,227,408						1,227,408
Shares issued for services	396,620						396,620
Unrealized loss on investments	—						—
Amortization of debt discount	1,155						1,155
Licenses sold in exchange for licenses	(675,000		)	675,000		(b)	—
Licenses sold in exchange for prepaid services	(3,150,000		)	3,150,000		(b)	—
Changes in operating assets and liabilities:
Accounts receivable	(135,822		)	166,177		(a)	30,355
Related party receivable	55,875						55,875
Prepaid and other assets	164,076			(233,014	)	(b)	(68,938		)
Accounts payable and accruals	749,102			(60,000	)	(b)	689,102
Billings in excess of costs	—			17,772		(c)	17,772
Deferred revenue	600						600
Related party payables	(156,424		)				(156,424		)
Net cash used in operating activities	(1,656,817		)				(1,656,817		)

Cash Flows from Investing Activities:
Cash paid for intangible assets	(420,711		)				(420,711		)
Net cash used in investing activities	(420,711		)				(420,711		)

Cash Flows from Financing Activities:
Repayment of note payable	(164,000		)				(164,000		)
Issuance of common stock for cash, net of issuance costs	895,689						895,689
Issuance of equity for cash exercise of options and warrants	13,000						13,000
Proceeds from third party loans	—						—
Net cash provided by financing activities	744,689						744,689

Net (decrease) increase in cash	(1,332,839		)				(1,332,839		)
Cash - beginning of period	1,847,004						1,847,004
Cash - end of period	$	514,165					$	514,165

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	7,444					$	7,444
Income taxes paid	—						—

NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for conversion of debt	$	—					$	—
Warrants issued for related party loans	—						—
Issuance of common stock for subscriptions receivable	60,000						60,000
Common stock issued for accounts payable	—						—
Accounts payable converted into debt	—						—
Accounts receivable converted to marketable securities	60,000						60,000

(a) Revenues associated with collectability not reasonably assured

(b) Revenues associated with non-cash transactions

Table of Contents

NOTE 3: RELATED PARTY TRANSACTIONS

As of June 30, 2014 and December 31, 2013, related party loans totaled $35,000.

As of June 30, 2014 and December 31, 2013, there were related party payables of $87,000 and $243,424, respectively, for services performed by related parties. During the six months ended June 30, 2014, the Company repaid $156,424 to related parties for services, payroll and reimbursable expenses.

As of June 30, 2014 and December 31, 2013, there were outstanding receivables of $26,375 and $82,250, respectively, for services performed for related parties.

For the three and six months ended June 30, 2014 and 2013, there were revenues earned of $1,125 and $18,000 and $4,250 and $18,000, respectively, for services performed for related parties.

NOTE 4: NOTES PAYABLE

As of June 30, 2014 and December 31, 2013, the Company had the short term and long term notes payable as shown in the table below.

Notes and loans payable	June 30, 2014		December 31, 2013

Short Term
Maryland TEDCO Note	$	24,000	$	24,000
Note Payable (net of $0 and $1,155 discount, respectively)	—		148,845
Total	$	24,000	$	172,845
Long Term
Maryland TEDCO Note	$	65,800	$	79,800
Total	$	65,800	$	79,800

The Company previously had an outstanding loan from 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 noteholder. The terms of the Release, among other things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the noteholder in the combined amount of principal and accrued interest owed to date, for a total principal amount of $149,800 (the “Maryland TEDCO Note”). The Maryland TEDCO Note is interest free, and is payable in monthly installments of $2,000 beginning November 1, 2011. As of June 30, 2014 and December 31, 2013, the principal amount owed was $89,800 and $103,800, respectively, of which $24,000 and $24,000, respectively, has been recorded as the current portion of the note, and $65,800 and $79,800, respectively, as the long-term portion of the note.

On August 3, 2013, the Company borrowed $150,000 from a third party with a coupon rate of 10%, due on September 10, 2013 with a warrant to purchase 20,000 common shares that vested immediately with a strike price of $0.50. The warrant was valued at $6,930 on August 3, 2013 using a closing price that day of $0.47, a strike price of $0.50, term of 5 years, volatility of 100%, dividends of 0%, and a discount rate of 1.36%. The value of the warrant of $6,930 was reflected as a discount to the note for a net amount of $143,070. For the year ended December 31, 2013, interest was accrued in the amount of $2,384 and $5,755 was recognized as amortization expense. During the six months ending June 30, 2014, the note principal of $150,000 and interest of $3,658 was paid in full and $1,155 was recognized as amortization expenses.

NOTE 5: STOCKHOLDERS’ EQUITY

As of June 30, 2014 and December 31, 2013, the Company had 59,256,291 and 53,239,369 shares of common stock issued and outstanding, respectively.

On January 30, 2014, the Company sold an aggregate of 666,667 units to two accredited investors for gross proceeds of $200,000 in the second closing of a private placement (the “Second Private Placement”). Placement fees of $18,463 were paid and the Company received net proceeds of $181,537. The units in the Second Private Placement consisted of 666,667 shares of the Company’s common stock and warrants to purchase an additional 666,667 shares of the Company’s common stock. The warrants in the Second Private Placement have a term of five years and an exercise price of $0.40 per share.

On February 3, 2014, the Company issued 44,307 shares of common stock valued at $13,292 and a five-year warrant to purchase 44,307 shares of common stock with a strike price of $0.40, volatility of 100% and a risk free rate of 1.44% and a fair value of $8,186,

Table of Contents

which was completely expensed in the current period. The warrant was issued to compensate for consulting services provided by a third-party. The shares were valued at the market price of the respective date of issuance.

On March 27, 2014, the Company filed a Certificate of Amendment to the Certificate of Incorporation increasing the authorized number of shares of Company common stock to 250,000,000 from 100,000,000.

On March 28, 2014, the Company issued 49,496 shares of common stock pursuant to the cashless exercise of 100,000 options.

From January 1, 2014 through March 31, 2014, the Company also issued 100,000 shares of common stock for services for an expense of $28,500 with no future period amortization and 1,300,000 shares of common stock pursuant to exercise of warrants for total proceeds of $13,000. The shares were valued at the market price of the respective date of issuance.

On June 30, 2014, the Company sold an aggregate of 2,766,667 units to three accredited investors for gross proceeds of $830,000 in the third closing of a private placement (the “Third Private Placement”), $60,000 of which was paid for on July 14, 2014 and booked as a stock subscription receivable as of June 30, 2014. Placement fees of $55,848 were paid and the Company received net proceeds of $774,152. The units in the Third Private Placement consisted of 2,766,667 shares of the Company’s common stock and warrants to purchase an additional 2,766,667 shares of the Company’s common stock. The warrants have a term of five years and an exercise price of $0.40 per share.

From April 1, 2014 through June 30, 2014, the Company also issued 1,071,915 shares of common stock for services for an expense of $354,828 with no future period amortization. Additionally, the Company issued 17,870 shares of common stock pursuant to the cashless exercise of 50,000 warrants.

NOTE 6: OPTIONS

As of June 30, 2014 and December 31, 2013, the Company has 9,287,350 and 4,485,250 options to purchase shares of common stock issued and outstanding, respectively, as follows:

	Number of Options	Wtd Avg. Exercise Price		Wtd Avg. Remaining Term	Intrinsic Value
Outstanding at December 31, 2013	4,485,250	$	0.38	3.96	$	105,410

Granted	4,902,100	0.42
Less Exercised	100,000	0.25

Outstanding at June 30, 2014	9,287,350	$	0.40	4.09	$	121,534

The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation during the six months ended June 30, 2014 include expected terms of 2.50 to 3.33 years, expected volatility of 100%, risk free interest rate of 0.83% to 1.76%, and expected dividend yield of 0%.

On January 27, 2014, the Company awarded 1,500,000 options, one third of which vested immediately, one third vest upon the Company reporting a minimum of $10 million in annualized revenues by the second anniversary of the grant date and one third vest upon the Company reporting a minimum of $20 million in annualized revenues by the third anniversary of the grant date, with an exercise price of $0.40 per share and an expiration date of January 27, 2019. The fair value on the grant date of the options was $303,562 and it is being recognized over the vesting period of the options.

On February 17, 2014, the Company awarded 55,000 options, which vest over three years, with an exercise price of $0.305 per share and an expiration date of February 17, 2019. The fair value on the grant date of the options was $10,556 and it is being recognized over the vesting period of the options.

On March 3, 2014, the Company awarded 250,000 options, of which 20% vested immediately and 20% vest every 90 days thereafter, with an exercise price of $0.40 per share and an expiration date of March 3, 2019. The fair value on the grant date of the options was $36,935 and it is being recognized over the vesting period of the options.

On March 24, 2014, the Company awarded 2,522,100 options, which vest over three years, with the exception of 200,000 options issued to one individual that vested immediately upon grant. The options have an exercise price of $0.45 per share and an expiration date of March 24, 2019. The value on the grant date of the options was $724,948 and it is being recognized over the vesting period of the options.

On March 28, 2014, 100,000 options were exercised in a cashless manner and 49,496 shares of common stock were issued.

Table of Contents

On June 2, 2014 and June 9, 2014, the Company issued 175,000 options, which vest over three years. The options have an exercise price of $0.33 per share and an expiration date of June 2, 2019 and June 9, 2019. The value on the grant date of the options was $35,834 and it is being recognized over the vesting period of the options.

On June 11, 2014 and June 30, 2014, the Company awarded 400,000 options, which vest over three years. The options have an exercise price of $0.33 and $0.34 per share and an expiration date of June 11, 2019 and June 30, 2019. The value on the grant date of the options was $68,830 and it is being recognized over the vesting period of the options.

For the three and six months ended June 30, 2014 and 2013, stock compensation expense related to options totaled $290,158 and $168,542, respectively, and totaled $624,353 and $253,358, respectively.

NOTE 7: WARRANTS

Below is a table summarizing the Company’s outstanding warrants as of June 30, 2014 and December 31, 2013:

	Number of Warrants	Wtd Avg. Exercise Price		Wtd Avg. Remaining Term	Intrinsic Value
Outstanding at December 31, 2013	18,770,591	$	0.35	4.64	$	—

Granted	5,048,975	0.40
Less Exercised	1,350,000	0.02

Outstanding at June 30, 2014	22,469,566	$	0.40	4.15	$	71,836

The warrants were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation during the six months ended June 30, 2014 include expected terms of 1.50 to 2.50 years, expected volatility of 100%, risk free interest rate of 0.29% to 1.76%, and expected dividend yield of 0%.

On November 16, 2013, the Company issued warrants to purchase 1,300,000 shares of common stock which vested immediately and have an exercise price of $0.01 per share and expire on December 13, 2018. The fair value on the grant date of the options was $331,287 and the expense for year ended December 31, 2013 was determined to be $331,287. As of June 30, 2014, these warrants have been exercised in their entirety.

On January 27, 2014, the Company issued five-year fully-vested warrants to purchase 250,000 shares of the Company’s common stock with an exercise price of $0.40 per share. The fair value on the grant date of the warrants was $44,370 and was expensed during the six months ended June 30, 2014. As of June 30, 2014, these warrants have not been exercised.

On January 30, 2014, the Company sold an aggregate of 666,667 units to two accredited investors for gross proceeds of $200,000 in the Second Private Placement. The units in the Second Private Placement consisted of 666,667 shares of the Company’s common stock and warrants to purchase an additional 666,667 shares of the Company’s common stock, as well as 53,334 placement agent warrants. The warrants in the Second Private Placement have a term of five years, an exercise price of $0.40 per share and a fair value determined to be $122,287. As of June 30, 2014, these warrants have not been exercised.

On February 3, 2014, the Company issued 44,307 shares of common stock and five-year fully-vested warrants to purchase 44,307 shares of common stock with an exercise price of $0.40 per share for payment for services. The fair value on the grant date of the warrants was $8,186 and was expensed during the six months ended June 30, 2014. As of June 30, 2014, these warrants have not been exercised.

On March 24, 2014, the Company issued warrants to purchase 1,000,000 shares of common stock. The warrants vest as follows: one warrant share for every $10 of gross sales by the Company during the 12-month period immediately following the date of grant to customers introduced by an affiliate of the warrant holder. The warrants have an exercise price of $0.40 per share and an expiration date of March 24, 2019. The fair value on the grant date of the warrants was $321,746 and was expensed during the six months ended June 30, 2014. As of June 30, 2014, these warrants have not been exercised.

On June 30, 2014, the Company sold an aggregate of 2,766,667 units to three accredited investors for gross proceeds of $830,000 in the Third Private Placement. The units in the Third Private Placement consisted of 2,766,667 shares of the Company’s common stock and warrants to purchase an additional 2,766,667 shares of the Company’s common stock, as well as 168,000 placement agent warrants. The warrants in the Third Private Placement have a term of five years, an exercise price of $0.40 per share and a fair value determined to be $503,884. As of June 30, 2014, these warrants have not been exercised.

Table of Contents

On June 30, 2014, the Company issued five-year fully-vested warrants to purchase 100,000 shares of common stock with an exercise price of $0.35 per share for payment for services. The fair value on the grant date of the warrants was $13,202 and was expensed during the six months ended June 30, 2014. As of June 30, 2014, these warrants have not been exercised.

For the three and six months ended June 30, 2014 and 2013, the Company has incurred warrant-based expense of $13,202 and $0, respectively, and $387,504 and $0, respectively.

NOTE 8: PERFORMANCE SHARE UNITS

On January 27, 2014, the Company entered into a Performance Share Unit Agreement under the AudioEye, Inc. 2013 Incentive Compensation Plan with Paul Arena, the Company’s Executive Chairman. Mr. Arena was granted an award of up to an aggregate of 3,000,000 Performance Share Units (“PSUs”). Each PSU represents the right to receive one share of the Company’s common stock. The number of PSUs for a performance period will be determined by the level of achievement of performance goals in accordance with the terms and provisions of the Performance Share Unit Agreement.

Below is a table summarizing the Company’s outstanding performance share units as of June 30, 2014 and December 31, 2013:

	Number of PSUs	Wtd Avg. Grant Price		Wtd Avg. Remaining Term
Outstanding at December 31, 2013	1,000,000	$	0.45	1.75

Granted	3,000,000	0.33

Outstanding at June 30, 2014	4,000,000	$	0.36	2.31

For the three and six months ended June 30, 2014 and 2013, the Company has incurred performance share unit-based expense of $119,897 and $0, respectively, and $215,551 and $0, respectively.

For the three and six months ended June 30, 2014 and 2013, aggregate stock compensation expense related to the options, warrants and performance stock units totaled $423,257 and $168,542, respectively and $1,227,408 and $253,358, respectively. The aggregate stock compensation expense related to the options, warrants and performance stock units to be amortized through March 2017 is $2,147,341 as of June 30, 2014.

NOTE 9: INTANGIBLE ASSETS

As of June 30, 2014, patents, technology and other intangibles with contractual terms were generally amortized over their estimated useful lives of five or ten years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

Prior to any impairment adjustment, intangible assets consisted of the following:

	June 30,			December 31,
	2014			2013

Patents	$	3,601,555		$	3,563,343
Software Development Costs	382,500			—
Accumulated Amortization	(703,651		)	(489,398		)
Intangible Assets, Net	$	3,280,404		$	3,073,945

Software development costs and licensing intangible assets both have an estimated useful life of 3 years. Software development costs are incurred during the building of the Company’s Internet platform. Licensing costs are those costs incurred to use processes and technologies not developed by the Company. Both software development and licensing costs are subject to annual impairment testing. During the six months ended June 30, 2014, $382,500 and $38,211 was capitalized as software development cost and patent costs.

Amortization expense totaled $214,253 and $177,727 for the six months ended June 30, 2014 and 2013, respectively.

NOTE 10: INVESTMENTS

In March 2013, the Company was granted an aggregate of 300,000 common shares in Beta Music Group, Inc. (OTCBB: BEMG) for consulting services. An active trading market for shares of common stock of Beta Music Group, Inc. has yet to be established as of

Table of Contents

June 30, 2014. The Company has received the 300,000 common shares and assigned a value of $0 to those shares until a liquid trading market is established.

On June 27, 2014, the Company and Ecologic Transportation, Inc. agreed to convert $60,000 of accounts receivable owed to the Company into 600,000 shares of Ecologic Transportation, Inc. common stock at a rate of $0.10 per share. The shares of Ecologic Transportation, Inc. common stock are expected to be issued to the Company in the third quarter of 2014.

NOTE 11: SUBSEQUENT EVENTS

On July 8, 2014 the Company issued 50,000 common shares for services.

On July 16, 2014, the Company collected the $60,000 stock subscription receivable that was booked pursuant to the closing of the Third Private Placement on June 30, 2014.

On July 17, 2014, an employee cashlessly exercised 75,000 options and was issued 34,459 common shares.

On July 22, 2014, the Company awarded 250,000 options, which vest twenty percent upon grant and twenty percent every ninety days thereafter. The options have an exercise price of $0.65 per share and an expiration date of July 22, 2019.

In July 2014, the Company offered holders of a series of its warrants, including the warrants issued in the Second Private Placement and the Third Private Placement, the opportunity to exercise their warrants for a 10% discount to the stated exercise price in exchange for their agreement to exercise their warrants in full and for cash on or before July 31, 2014. Under the warrant exercise offer, in July 2014 the Company issued 10,027,002 shares of common stock pursuant to exercise of warrants for total proceeds of $3,632,801.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with our consolidated financial statements and related notes in Part I, Item 1 of this report.

As used in this quarterly report, the terms “we,” “us,” “our” and similar references refer to AudioEye, Inc. and our wholly-owned subsidiary, unless otherwise indicated.

Cautionary Note Regarding Forward-Looking Statements

Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”, “positioned”, “strategy”, “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in “Part I, Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended December 31, 2013. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.

Overview

AudioEye, Inc. was formed as a Delaware corporation on May 20, 2005. We focus on working to improve the mobility, usability and accessibility of all Internet-based content through the development, sale, licensing and use of our proprietary accessibility technologies. Our Audio Internet® is a technology that utilizes patented architecture to deliver a fully accessible audio equivalent of a visual website or mobile website in a compliant format that can be navigated, utilized, interacted with, and transacted from, without the use of a monitor or mouse, by individuals with visual impairments. For individuals with hearing impairments, Audio Internet® provides captioning for websites, and the challenges of reaching those with other impairments are also addressed by the technology platform.

Table of Contents

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 six 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.

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 Annual Report on Form 10-K for the year ended December 31, 2013 provides additional information about our business and operations.

Results of Operations

The discussion of the results of our operations compares the three and six months ended June 30, 2014 with the three and six months ended June 30, 2013 and are not necessarily indicative of the results which may be expected for any subsequent period. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in similar positions. We may not be successful in addressing these risks and difficulties.

Comparative for the Three Months ended June 30, 2014 and June 30, 2013

Revenue

For the three months ended June 30, 2014 and 2013, revenue was $50,195 and $182,232, respectively, consisting primarily of revenues from various levels of website design and maintenance. Revenues decreased due to decreased demand for our software product sales and SaaS services. Additionally, for the three months ended June 30, 2014 and 2013, revenue from related party was $1,125 and $18,000, respectively, consisting primarily of revenue from website design and maintenance.

Cost of Sales

For the three months ended June 30, 2014 and 2013, cost of sales was $334,312 and $50,767, respectively, consisting primarily of sub-contracting to outside sources, direct labor and direct technology costs.

Gross Profit

The decrease in revenue resulted in a gross loss of $282,992 during the three months ended June 30, 2014 as compared to a gross profit of $149,465 for the three months ended June 30, 2013. Gross profit decreased as a result of decreasing sales combined with an increase in dedicated resources associated with implementation costs of our products.

Selling and Marketing Expenses

Selling and marketing expenses were $251,705 and $-0- for the three months ended June 30, 2014 and 2013, respectively. The increase results from the establishment of dedicated resources to actively sell and market our products and services.

Research and Development Expenses

Research and development expenses were $108,146 and $-0- for three months ended June 30, 2014 and 2013, respectively. Research and development expenses increased as a result of the establishment of a dedicated research group during 2013.

Table of Contents

General and Administrative Expenses

General and administrative expenses were $1,135,947 and $547,574 for the three months ended June 30, 2014 and 2013, respectively. General and administrative expenses increased as a result of an increase in the number of employees and the associated benefits costs as well as increased stock, option and warrant expense.

Amortization and Depreciation

Amortization and depreciation expenses were $116,577 and $89,726 for the three months ended June 30, 2014 and 2013, respectively. The increase in expense was primarily related to an increase in software development and patent acquisition cost.

Other Income/Expenses

Other income and expenses were charges of $461 and $199 for the three months ended June 30, 2014 and 2013, respectively. The resulting change to expense was due to decreases in unrealized losses from marketable equity securities and a decrease in interest expense.

Comparative for the Six Months ended June 30, 2014 and June 30, 2013

Revenue

For the six months ended June 30, 2014 and 2013, revenue was $92,722 and $406,529, respectively, consisting primarily of revenues from various levels of website design and maintenance. Revenues decreased due to increased focus on software products an SaaS services. Additionally, for the six months ended June 30, 2014 and 2013, revenue from related party was $4,250 and $18,000, respectively, consisting primarily of revenue from website design and maintenance.

Cost of Sales

For the six months ended June 30, 2014 and 2013, cost of sales was $375,465 and $95,790, respectively, consisting primarily of sub-contracting to outside sources, direct labor and direct technology costs.

Gross Profit

The decrease in revenue resulted in a gross loss of $278,493 during the six months ended June 30, 2014 as compared to a gross profit of $328,739 for the six months ended June 30, 2013. Gross profit decreased as a result of decreased sales combined with increased costs related to additional resources dedicated to the implementation of our products.

Selling and Marketing Expenses

Selling and marketing expenses were $522,088 and $49,616 for the six months ended June 30, 2014 and 2013, respectively. The increase results from the establishment of dedicated resources to actively sell and market our products and services.

Research and Development Expenses

Research and development expenses were $238,770 and $-0- for six months ended June 30, 2014 and 2013, respectively. Research and development expenses increased as a result of the establishment of a dedicated research group during 2014.

General and Administrative Expenses

General and administrative expenses were $2,803,547 and $991,618 for the six months ended June 30, 2014 and 2013, respectively. General and administrative expenses increased as a result an increase in the number of employees and the associated benefits costs as well as increased stock, option and warrant expense.

Amortization and Depreciation

Amortization and depreciation expenses were $215,850 and $179,325 for the six months ended June 30, 2014 and 2013, respectively. The increase in expense was primarily related to a increase in intellectual property amortization.

Table of Contents

Other Income/Expenses

Other income and expenses were charges of $7,444 and $34,166 for the six months ended June 30, 2014 and 2013, respectively. The resulting change to expense was due to decreases in unrealized losses from marketable equity securities and a substantial decrease in interest expense.

Liquidity and Capital Resources

Working Capital

	Restated At June 30,			At December 31,
	2014			2013
Current Assets	$	1,268,420		$	2,498,551
Current Liabilities	1,330,005			867,800
Working Capital	$	(61,585	)	$	1,630,751

The working capital for the periods ended June 30, 2014 and December 31, 2013 was $(61,585) and $1,630,751, respectively. The decrease in surplus was primarily due to an decrease in cash and an increase in payables.

Cash Flows

	For the six months ended
	June 30,
	2014			2013

Net Cash Used in Operating Activities	$	(1,656,817	)	$	(379,163	)
Net Cash Used in Investing Activities	(420,711		)	(6,266		)
Net Cash Provided by Financing Activities	744,689			576,400
(Decrease) Increase in Cash	$	(1,332,839	)	$	181,971

We had cash in the amount of $514,165 and $1,847,004 as of June 30, 2014 and December 31, 2013, respectively.

In view of our working capital position, continuing operating losses and limited cash, 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 to continue to fund operations. We cannot assure you that we will be able to obtain sufficient funds on acceptable terms or at all. Without such funds, we will be unable to implement our business plan or continue operations.

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, 2013, 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, 2013 except as set forth below.

Revenue is recognized when all applicable recognition criteria have been met, which generally include: (a) persuasive evidence of an existing arrangement; (b) a fixed or determinable price; (c) delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably assured. For software and technology development contracts where applicable, we recognize revenues on a percentage of completion method based upon several factors including but not limited to: (a) an estimate of total hours and milestones to complete; (b) the total hours completed; (c) the delivery of services rendered; (d) the change in estimates; and (e) the collectability of the contract.

Table of Contents

criteria have been met. In transactions where we engage in a non-cash exchange for a license of our company for the license of our customer, we follow ASC 845 and any potential revenue is recorded as other income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure. Our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure, controls and procedures were not effective as of June 30, 2014 due to omissions of disclosures in accordance with generally accepted accounting principles and errors existed in the effectiveness of the design and operations of our company’s internal controls and procedures for non-monetary transactions and non-monetary revenue recognition as described below.

Material Weakness

Our management has concluded that a material weakness exists in the effectiveness of the design and operations of our internal controls over financial reporting in the area of revenue recognition. The material weakness relates to (i) a lack of sufficient accounting personnel who have the requisite U.S. GAAP knowledge with respect to non-monetary transactions and non-monetary revenue recognition; and (ii) we did not maintain an adequate financial reporting organizational structure to support the complexity and operating activities of our company resulting in a weakness in the controls related to the financial reporting and disclosures regarding revenue recognition, which have affected and could continue to affect our company’s ability to ensure reliable financial reports. The errors in revenue recognition impacted the revenues associated with non-cash transactions, the timing of revenue recognition on certain contracts utilizing the percentage of completion methodology and revenues on certain agreements where the price was not reasonably assured of collection.

Management’s Remediation Plan

We are committed to remediating the control deficiencies that constitute the 2014 material weaknesses by implementing changes to our internal control over financial reporting and in particular to the recognition of revenue and costing related to non-monetary transactions. Our chief financial officer is responsible for implementing changes and improvements in the internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses.

To that end, we plan on achieving this primarily through additional training efforts as well as ensuring appropriate review of the related significant accounting policies by the members of management with the requisite level of knowledge, experience and training to appropriately apply GAAP, including outside accounting and consulting firms. We plan to undertake additional review processes to ensure the related significant accounting policies are implemented and applied on a consistent basis throughout our company.

Additionally, any potential future license transaction revenues will be recorded as “Other Income” in future periods.

We have also implemented new operational management systems to capture all data required for the computation of revenue under the percentage of completion methodology.

Finally, we established new policies for customer acceptance to mitigate the issues surrounding the reasonableness of customer collections.

We believe these measures will remediate the control deficiencies. However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the control deficiencies that resulted in the material weaknesses, we may determine to take additional measures to address the control deficiencies.

Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are currently involved in various routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, our management believes that the resolution of all such pending or threatened litigation is not likely to have a material adverse effect on our financial position or results of operations.

Item 1A. Risk Factors

We have identified material weaknesses in our internal control over financial reporting, which have resulted in a restatement of our previously issued financial statements. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain errors and we could be required to further restate our financial results, which could adversely affect our stock price and result in an inability to maintain compliance with applicable stock exchange listing requirements.

We have concluded that there are material weaknesses in our internal control over financial reporting, as we did not maintain effective controls over the selection and application of accounting principles generally accepted in the United States (“GAAP”) related to revenue recognition for certain non-monetary transactions. Specifically, the members of our management team with the requisite level of accounting knowledge, experience and training commensurate with our financial reporting requirements did not analyze certain accounting issues at the level of detail required to ensure the proper application of GAAP in certain circumstances. One material weakness related to our failure to maintain effective internal controls over the accounting for revenue recognition. Our Quarterly Reports on Form 10-Q have been amended by an Amendments No. 1 on Form 10-Q/A to reflect the restatement of our financial statements for the restated periods and the change in management’s conclusion regarding the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of March 31, June 30 and September 30, 2014.

Our non-monetary intellectual property licensing plan may not be realized. If our intellectual property licensing plan proves to be unsuccessful, our business may fail to generate royalty revenues.

Our intellectual licensing plan is subject to all of the risks inherent in the establishment of a new business. We have yet to receive patent royalty payments related to the non-monetary intellectual property licensing agreements and we cannot assure you about future collections of royalties.

Except for the risk factors listed above there have been no material changes from the risk factors disclosed in Item 1.A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

From April 1, 2014 through June 30, 2014, we issued 1,071,915 shares of common stock for services for an expense of $354,828 with no future period amortization.

On June 30, 2014, we sold an aggregate of 2,766,667 units to three accredited investors for gross proceeds of $830,000 in the third closing of a private placement (the “Third Private Placement”), $60,000 of which was paid for on July 14, 2014 and booked as a stock subscription receivable as of June 30, 2014. Placement fees of $55,848 were paid, including placement agent warrants to purchase 168,000 shares of our common stock, and we received net proceeds of $771,152, which are being used for general working capital purposes. The units in the Third Private Placement consisted of 2,766,667 shares of our common stock and warrants to purchase an additional 2,766,667 shares of our common stock. The warrants in the Third Private Placement have a term of five years and an exercise price of $0.40 per share.

The offer and sale of the securities set forth above were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder. We determined that the investors were accredited based on representations made by the investors to us.

Use of Proceeds from Public Offering of Common Stock

None.

Table of Contents

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description

31.1*		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

*Filed herewith.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 18th day of May 2015.

	AUDIOEYE, INC.


	By:	/s/ Sean Bradley
		Sean Bradley
		President

	By:	/s/ Donald Weinstein
		Donald Weinstein
		Chief Financial Officer

AUDIOEYE INC - FORM 10-Q/A - May 18, 2015

Attached files

AUDIOEYE INC Reports