10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

oTRANSITION 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

		Page
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	14
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	22
SIGNATURES

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.

1

AUDIOEYE, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30, 2014			December 31, 2013
ASSETS
Current Assets
Cash	$	514,165		$	1,847,004
Accounts receivable, net	645,119			569,297
Related party receivables	26,375			82,250
Prepaid assets and security deposits	2,985,924			—
Stock subscriptions receivable	60,000			—
Marketable securities	60,000			—
Total Current Assets	4,291,583			2,498,551
Property and equipment, net	2,249			3,847
Intangible assets, net	3,898,530			3,073,945
Goodwill	700,528			700,528
Total Assets	8,892,890			$	6,276,871
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	1,165,633		$	416,531
Deferred revenue	600			—
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	1,312,233			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	1,378,033			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	(7,686,604		)	(7,279,473		)
Total Stockholders’ Equity	7,514,857			5,329,271
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	8,892,890		$	6,276,871

See Notes to Unaudited Consolidated Financial Statements

2

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Revenue	$	3,011,908		$	182,232		$	4,041,669		$	406,529
Revenue from related party	1,125			18,000			4,250			18,000
Total revenues	3,013,033			200,232			4,045,919			424,529
Cost of revenues	334,312			50,767			375,465			95,790
Gross profit	2,678,721			149,465			3,670,454			328,739
Operating expenses:
Selling and marketing	259,719			41,866			755,100			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	172,827			89,726			272,724			179,325
Total operating expenses	1,676,639			679,166			4,070,141			1,220,559
Operating income (loss)	1,002,082			(529,701		)	(399,687		)	(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)	$	1,001,621		$	(529,900	)	$	(407,131	)	$	(925,986	)
Net income (loss) per common share - basic	$	0.02		$	(0.01	)	$	(0.01	)	$	(0.02	)
Net income (loss) per common share - diluted	$	0.02		$	(0.01	)	$	(0.01	)	$	(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

3

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	June 30, 2014			June 30, 2013
Cash Flows from Operating Activities:
Net loss	$	(407,131	)	$	(925,986	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	272,724			179,189
Stock, option and warrant expense	1,227,408			253,358
Shares issued for sevices	396,620			50,000
Unrealized loss on investments	—			9,000
Amortization of debt discount	1,155			—
Licenses sold in exchange for licenses	(675,000		)	—
Licenses sold in exchange for prepaid services	(3,150,000		)	—
Changes in operating assets and liabilities:
Accounts receivable	(135,822		)	2,265
Related party receivable	55,875			(18,000		)
Prepaid and other assets	164,076			—
Accounts payable and accruals	749,102			3,503
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

4

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

5

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 of the following 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 of a license of the Company for the license of the Company’s customer, the Company follows Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The licenses received from the Company’s customers are sold, licensed or leased in a different line of business from the Company license delivered to the Company’s customers in the exchange. The fair value of the technology or products exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence with the purpose to enhance product offerings for the sale or license to third parties. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The contracts are then evaluted for commercial substance, including that the licenses received by the Company in the exchange are expected, at the time of the exchange, to be deployed and used by the software vendor and the value ascribed to the transaction reasonably reflects such expected use.

In transactions where the Company engages in a non-cash exchange of a license of the Company for the services of the Company’s customer, the Company follows Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The fair value of the technology or services exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The revenue under these transactions is recognized upon delivery of the license and the services received in exchange are recognized as a prepaid asset that is amortized to expense as the services are received. The Company evaluates whether the period over which the services are received requires treatment as extended payment terms under ASC 985-605-25-33 and the Company evaluates the collectibility of the services to be received under ASC 985-605.

For the three and six months ended June 30, 2014, the Company sold an aggregate of thirteen and seventeen licenses, respectively for $225,000 per license and exchanged the license with its customers for either a license to their intellectual property or prepaid services. The thirteen and seventeen licenses exhanged were determined to meet the aforementioned criteria. During the three and six months ended June 30, 2014, nonmmonetary revenue of $2,925,000 and $3,825,000, respectively, was recognized. This resulted in an increase to intangible assets and prepaid expenses of $675,000 and $3,150,000, respectively.

Total revenues for the three and six months ended June 30, 2014 and 2013 consisted of the following:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues	$	86,908	$	182,232	$	216,669	$	406,529
Revenue from related party	1,125		18,000		4,250		18,000
Revenues from nonmonetary transactions	2,925,000		—		3,825,000		—
Total revenues	$	3,013,033	$	200,232	$	4,045,919	$	424,529

The nonmonetary transactions for the three and six months ended June 30, 2014 and 2013 supported by vendor-specific objective evidence of fair value are listed in the table below:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues from license exchanges	$	—	$	—	$	675,000	$	—
Revenues from service exchanges	2,925,000		—		3,150,000		—
Revenues from nonmonetary transactions	$	2,925,000	$	—	$	3,825,000	$	—

6

NOTE 2: 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 reimburseable 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 3: 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.

7

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 recognzied 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 4: 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, 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.

8

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 5: 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 reveunes 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.

9

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 6: 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.

10

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.

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 7: 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

11

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 8: 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			—
Licensing	675,000			—
Accumulated Amortization	(760,025		)	(489,398		)
Intangible Assets, Net	$	3,898,530		$	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.  During the six months ended June 30, 2014, a total of $675,000 of licenses were purchased by exchanging the Company’s own licenses and were accounted for as a non-cash transaction in accordance with ASC 985-845. See Note 1 for more details.

Amortization expense totaled $271,126 and $177,727 for the six months ended June 30, 2014 and 2013, respectively.

12

NOTE 9: 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 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 10: 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.

13

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

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.

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.

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.

14

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 subsequesnt 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 $3,011,908 and $182,232, respectively, consisting primarily of revenues from various levels of licensing, website design and maintenance. Revenues increased due to increased demand for our services and nonmonetary sales of our licenses. 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 various levels of 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 increase in revenue resulted in a gross profit of $2,678,721 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 increased as a result of increasing sales combined with consistent and efficient implementation costs of our products.

15

Selling and Marketing Expenses

Selling and marketing expenses were $259,719 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.

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 $172,827 and $89,726 for the three months ended June 30, 2014 and 2013, respectively. The increase in expense was primarily related to a increase in intellectual property amortization.

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 $4,041,669 and $406,529, respectively, consisting primarily of revenues from various levels of licensing, website design and maintenance. Revenues increased due to increased demand for our services and nonmonetary sales of our licenses. 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 various levels of 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.

16

Gross Profit

The increase in revenue resulted in a gross profit of $3,670,454 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 increased as a result of increasing sales combined with consistent and efficient implementation costs of our products.

Selling and Marketing Expenses

Selling and marketing expenses were $755,100 and $-0- 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 2013.

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 $272,724 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.

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

	At June 30,		At December 31,
	2014		2013
Current Assets	$	4,291,583	$	2,498,551
Current Liabilities	1,312,233		867,800
Working Capital	$	2,979,350	$	1,630,751

17

The working capital surplus for the periods ended June 30, 2014 and December 31, 2013 was $2,979,350 and $1,630,751, respectively. The inccrease in surplus was primarily due to an increase in prepaid assets and capital raised.

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

18

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.

Licensing revenues for intangible assets, including intellectual property such as patents and trademarks, are recognized when all of the following 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 Accounting Standards Codification (“ASC”) 985-605 and ASC 958-845-10. The licenses received from the Company’s customers are sold, licensed or leased in a different line of business from the Company license delivered to the Company’s customers in the exchange. The fair value of the technology or products exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence with the purpose to enhance product offerings for the sale or license to third parties. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The contracts are then evaluted for commercial substance, including that the licenses received by the Company in the exchange are expected, at the time of the exchange, to be deployed and used by the software vendor and the value ascribed to the transaction reasonably reflects such expected use.

For the three and six months ended June 30, 2014, the Company sold an aggregate of thirteen and seventeen licenses, respectively for $225,000 per license and exchanged the license with its customers for either a licenses to their intellectual property or prepaid services. The thirteen and sevenxteen licenses exhanged were determined to meet the aforementioned criteria. During the three and six months ended June 30, 2014, nonmmonetary revenue of $2,925,000 and $3,825,000, respectively, was recognized. This resulted in an increase to intangible assets and prepaid expenses of $675,000 and $3,150,000, respectively.

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 effective as of June 30, 2014 in accordance with generally accepted accounting principles. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2013 as

19

filed with the SEC on March 31, 2014 for a complete discussion relating to the foregoing evaluation of our controls and procedures.

Changes in Internal Control over Financial Reporting

There have been improvements in our internal controls over financial reporting that occurred after the year ended December 31, 2013. In the first and second quarters of 2014, we remediated inconsistencies and omissions related to certain equity transactions by identifying potential issues in a timely manner and properly classifying those transactions by adding an additional layer of review to equity transactions.

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

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. The Company determined that the investors were accredited based on representations made by the investors to the Company

20

Use of Proceeds from Public Offering of Common Stock

None.

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.

21

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.

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 11th day of August 2014.

AUDIOEYE, INC.
By:	/s/ Nathaniel Bradley
	Nathaniel Bradley
	Chief Executive Officer and President
By:	/s/ Edward O’Donnell
	Edward O’Donnell
	Chief Financial Officer

22

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Nathaniel Bradley, certify that:

1.I have reviewed this quarterly report on Form 10-Q of AudioEye, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2014

/s/ Nathaniel Bradley

Nathaniel Bradley

Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Edward O’Donnell, certify that:

1.I have reviewed this quarterly report on Form 10-Q of AudioEye, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2014

/s/ Edward O’Donnell

Edward O’Donnell

Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION

In connection with the periodic report of AudioEye, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2014 as filed with the Securities and Exchange Commission (the “Report”), we, Nathaniel Bradley, Chief Executive Officer (Principal Executive Officer) and Edward O’Donnell, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of our knowledge:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date: August 11, 2014

/s/ Nathaniel Bradley

Nathaniel Bradley

Chief Executive Officer (Principal Executive Officer)

/s/ Edward O’Donnell

Edward O’Donnell

Chief Financial Officer (Principal Financial and Accounting Officer)

XML

SUBSEQUENT EVENTS (Details) (USD $)	0 Months Ended	1 Months Ended	3 Months Ended			6 Months Ended	0 Months Ended				1 Months Ended	0 Months Ended
	Mar. 28, 2014	Mar. 31, 2013	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Jun. 30, 2014 Stock options	Jun. 30, 2014 Accredited investors	Jan. 30, 2014 Accredited investors	Jul. 17, 2014 Subsequent events	Jul. 08, 2014 Subsequent events	Jul. 31, 2014 Subsequent events Warrant	Jul. 22, 2014 Subsequent events Stock options	Jul. 22, 2014 Subsequent events Stock options Options Vested on Grant Date	Jul. 22, 2014 Subsequent events Stock options Vesting every 90 days	Jul. 17, 2014 Subsequent events Accredited investors	Jul. 14, 2014 Subsequent events Accredited investors
Subsequent event
Common stock issued for services (in shares)		300,000	1,071,915	100,000						50,000
Collection of stock subscription receivable from the sale of units to accredited investors															$ 60,000	$ 60,000
Common Stock, shares issued	49,496		59,256,291		53,239,369				75,000
Common shares for the exercise of options	100,000					100,000			34,459
Number of options awarded						4,902,100						250,000
Vesting percentage													20.00%	20.00%
Exercise price of units (in dollars per share)							$ 0.40	$ 0.40				$ 0.65
Percentage of discount on warrant exercise											10.00%
Issuance of warrants (in shares)											10,027,002
Proceeds from exercise of warrants											$ 3,632,801

XML

NOTES PAYABLE (Details) (USD $)	6 Months Ended				0 Months Ended			0 Months Ended	6 Months Ended	12 Months Ended	0 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 27, 2014	Dec. 31, 2013	Oct. 24, 2011 Maryland TEDCO Note	Jun. 30, 2014 Maryland TEDCO Note	Dec. 31, 2013 Maryland TEDCO Note	Aug. 03, 2013 Note Payable	Jun. 30, 2014 Note Payable	Dec. 31, 2013 Note Payable	Oct. 24, 2011 Loans Payable
Notes Payable
Short Term	$ 24,000			$ 172,845		$ 24,000	$ 24,000			$ 148,845
Long Term	65,800			79,800		65,800	79,800
Discount	0			1,155				6,930	0	1,155
Carrying amount of debt						89,800	103,800	143,070			74,900
Interest rate (as a percent)								10.00%			25.00%
Due date from the date of issuance											4 years
Accrued interest										2,384	74,900
Face amount of debt					149,800			150,000
Monthly payments					2,000
Warrants to purchase shares								20,000
Strike price (in dollars per share)								$ 0.50
Share price (in dollars per share)			$ 0.10					$ 0.47
Term								5 years
Volatility (as a percent)								100.00%
Dividends (as a percent)								0.00%
Discount rate (as a percent)								1.36%
Amortization expense	271,126	177,727							1,155	5,755
Payment of accrued interest									3,658
Repayment of Principal									$ 150,000

XML

STOCKHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2014

STOCKHOLDERS' EQUITY

STOCKHOLDERS' EQUITY

NOTE 4: 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, 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.

XML

WARRANTS (Details 2) (USD $)	1 Months Ended	3 Months Ended			6 Months Ended		0 Months Ended		3 Months Ended		6 Months Ended		0 Months Ended	12 Months Ended	0 Months Ended	6 Months Ended	0 Months Ended	6 Months Ended	0 Months Ended	6 Months Ended	0 Months Ended	6 Months Ended
	Mar. 31, 2013	Jun. 30, 2014	Mar. 31, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 Accredited investors item	Jan. 30, 2014 Accredited investors item	Jun. 30, 2014 Warrants	Jun. 30, 2013 Warrants	Jun. 30, 2014 Warrants	Jun. 30, 2013 Warrants	Nov. 16, 2013 Warrants Warrants granted on November 16, 2013	Dec. 31, 2013 Warrants Warrants granted on November 16, 2013	Mar. 24, 2014 Warrants Warrants granted on March 24, 2014	Jun. 30, 2014 Warrants Warrants granted on March 24, 2014	Jan. 27, 2014 Warrants Warrants granted on January 27, 2014	Jun. 30, 2014 Warrants Warrants granted on January 27, 2014	Feb. 03, 2014 Warrants Warrants granted on February 3, 2014	Jun. 30, 2014 Warrants Warrants granted on February 3, 2014	Jun. 30, 2014 Warrants Warrants granted on June 30, 2014	Jun. 30, 2014 Warrants Warrants granted on June 30, 2014	Jun. 30, 2014 Warrants Minimum	Jun. 30, 2014 Warrants Maximum
Significant assumptions used in the valuation
Expected term																							1 year 6 months	2 years 6 months
Expected volatility (as a percent)											100.00%
Risk-free interest rate (as a percent)																							0.29%	1.76%
Expected dividend yield (as a percent)											0.00%
Issuance of warrants (in shares)													1,300,000
Strike price (in dollars per share)													$ 0.01		$ 0.40		$ 0.40		$ 0.40		$ 0.35	$ 0.35
Grant date fair value of options								$ 122,287					$ 331,287
Stock compensation expense related to the options and warrants		423,257		168,542	1,227,408	253,358			13,202	0	387,504	0		331,287		321,746		44,370		8,186		13,202
Grant date fair value of warrants							503,884								321,746		44,370		8,186		13,202	13,202
Common stock issued for services (in shares)	300,000	1,071,915	100,000																44,307
Warrants to purchase shares															1,000,000		250,000		44,307		1,000,000	1,000,000
Number of warrants, which will vest for every specified dollars of gross sales															1
Amount of gross sales for which one warrant share will vest															10
Period immediately following the issue date during which warrants will vest for every specified dollars of gross sales															12 months
Term of warrant																	5 years		5 years		5 years
Units sold to accredited investors (in shares)							2,766,667	666,667
Number of accredited investors to whom the entity sold units							3	2
Proceeds from sale of units to accredited investors							$ 830,000	$ 200,000
Number of shares of common stock included with the units sold							2,766,667	666,667
Additional number of shares of common stock included with the units sold							2,766,667	666,667
Number of shares of warrants included with the units sold							2,766,667	666,667
Additional number of shares of common stock included with the units sold to agents							168,000	53,334
Term of warrants issued to accredited investor							5 years	5 years
Exercise price of units (in dollars per share)							$ 0.40	$ 0.40

XML

WARRANTS (Details) (Warrant, USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Warrant
Number of warrants
Number of shares, beginning	18,770,591
Number of shares, granted	5,048,975
Number of shares, less exercised	1,350,000
Number of shares, ending	22,469,566	18,770,591
Weighted average exercise price
Weighted average exercise price, beginning (in dollars per share)	$ 0.35
Weighted average exercise price, granted (in dollars per share)	$ 0.40
Weighted average exercise price, less exercised (in dollars per share)	$ 0.02
Weighted average exercise price, ending (in dollars per share)	$ 0.40	$ 0.35
"Wtd Avg. Remaining Term "
Outstanding at beginning of the period	4 years 1 month 24 days	4 years 7 months 20 days
Outstanding at end of the period	4 years 1 month 24 days	4 years 7 months 20 days
Intrinsic Value
Outstanding at end of the period	$ 71,836

XML

PERFORMANCE SHARE UNITS (Details) (USD $)	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended		12 Months Ended	0 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 PSUs	Jun. 30, 2013 PSUs	Jun. 30, 2014 PSUs	Jun. 30, 2013 PSUs	Dec. 31, 2013 PSUs	Jan. 27, 2014 Mr. Arena PSUs
PERFORMANCE SHARE UNITS
Performance share unit agreement granted (in shares)							3,000,000			3,000,000
Number of shares issued for each performance share unit										1
Number of PSUs
Number of shares, beginning							1,000,000
Granted (in shares)							3,000,000			3,000,000
Number of shares, ending					4,000,000		4,000,000		1,000,000
Wtd Avg. Grant Price
Weighted average exercise price, beginning (in dollars per share)							$ 0.45
Granted (in dollars per share)							$ 0.33
Weighted average exercise price, ending (in dollars per share)					$ 0.36		$ 0.36		$ 0.45
Wtd Avg. Remaining Term
Outstanding at the beginning of the period							2 years 3 months 22 days		1 year 9 months
Outstanding at the end of the period							2 years 3 months 22 days		1 year 9 months
Stock compensation expense related to the options and warrants	$ 423,257	$ 168,542	$ 1,227,408	$ 253,358	$ 119,897	$ 0	$ 215,551	$ 0
Aggregate stock compensation expense to be amortized through March 2017	$ 2,147,341		$ 2,147,341

XML

INTANGIBLE ASSETS (Details) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Intangible Assets
Accumulated Amortization	$ (760,025)		$ (489,398)
Intangible Assets, Net	3,898,530		3,073,945
Total licenses purchased as a non-cash transaction	675,000
Amortization expense	271,126	177,727
Minimum
Intangible Assets
Estimated useful lives of intangible assets	5 years
Maximum
Intangible Assets
Estimated useful lives of intangible assets	10 years
Patents
Intangible Assets
Intangible Assets, Gross	3,601,555		3,563,343
Capitalized cost	38,211
Software Development Costs
Intangible Assets
Estimated useful lives of intangible assets	3 years
Intangible Assets, Gross	382,500
Capitalized cost	382,500
Licensing
Intangible Assets
Estimated useful lives of intangible assets	3 years
Intangible Assets, Gross	675,000
Total licenses purchased as a non-cash transaction	$ 675,000

XML

NOTES PAYABLE

6 Months Ended

Jun. 30, 2014

NOTES PAYABLE

NOTES PAYABLE

NOTE 3: 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 recognzied 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.

XML

INVESTMENTS (Details) (USD $)	0 Months Ended	1 Months Ended	3 Months Ended		6 Months Ended
	Jun. 27, 2014	Mar. 31, 2013	Jun. 30, 2014	Mar. 31, 2014	Jun. 30, 2014
INVESTMENTS
Common shares grants in Beta Music Group, Inc. for consulting services (in shares)		300,000	1,071,915	100,000
Share price (in dollars per share)	$ 0.10
Number of shares repurchased by the Company					300,000
Cash paid by the Company					$ 0
Amount of accounts receivable to be converted into shares of common stock	$ 60,000
Accounts receivable converted into shares of common stock	600,000

XML

CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2014	Dec. 31, 2013
Current Assets
Cash	$ 514,165	$ 1,847,004
Accounts receivable, net	645,119	569,297
Related party receivables	26,375	82,250
Prepaid assets and security deposits	2,985,924
Stock subscriptions receivable	60,000
Marketable securities	60,000
Total Current Assets	4,291,583	2,498,551
Property and equipment, net	2,249	3,847
Intangible assets, net	3,898,530	3,073,945
Goodwill	700,528	700,528
Total Assets	8,892,890	6,276,871
Current Liabilities
Accounts payable and accrued expenses	1,165,633	416,531
Deferred revenue	600
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	1,312,233	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	1,378,033	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	(7,686,604)	(7,279,473)
Total Stockholders' Equity	7,514,857	5,329,271
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 8,892,890	$ 6,276,871

XML

ORGANIZATION AND BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2014

ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION AND BASIS OF PRESENTATION

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 of the following 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 of a license of the Company for the license of the Company’s customer, the Company follows Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The licenses received from the Company’s customers are sold, licensed or leased in a different line of business from the Company license delivered to the Company’s customers in the exchange. The fair value of the technology or products exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence with the purpose to enhance product offerings for the sale or license to third parties. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The contracts are then evaluted for commercial substance, including that the licenses received by the Company in the exchange are expected, at the time of the exchange, to be deployed and used by the software vendor and the value ascribed to the transaction reasonably reflects such expected use.

In transactions where the Company engages in a non-cash exchange of a license of the Company for the services of the Company’s customer, the Company follows Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The fair value of the technology or services exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The revenue under these transactions is recognized upon delivery of the license and the services received in exchange are recognized as a prepaid asset that is amortized to expense as the services are received. The Company evaluates whether the period over which the services are received requires treatment as extended payment terms under ASC 985-605-25-33 and the Company evaluates the collectibility of the services to be received under ASC 985-605.

For the three and six months ended June 30, 2014, the Company sold an aggregate of thirteen and seventeen licenses, respectively for $225,000 per license and exchanged the license with its customers for either a license to their intellectual property or prepaid services. The thirteen and seventeen licenses exhanged were determined to meet the aforementioned criteria. During the three and six months ended June 30, 2014, nonmmonetary revenue of $2,925,000 and $3,825,000, respectively, was recognized. This resulted in an increase to intangible assets and prepaid expenses of $675,000 and $3,150,000, respectively.

Total revenues for the three and six months ended June 30, 2014 and 2013 consisted of the following:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues	$	86,908	$	182,232	$	216,669	$	406,529
Revenue from related party	1,125		18,000		4,250		18,000
Revenues from nonmonetary transactions	2,925,000		—		3,825,000		—
Total revenues	$	3,013,033	$	200,232	$	4,045,919	$	424,529

The nonmonetary transactions for the three and six months ended June 30, 2014 and 2013 supported by vendor-specific objective evidence of fair value are listed in the table below:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues from license exchanges	$	—	$	—	$	675,000	$	—
Revenues from service exchanges	2,925,000		—		3,150,000		—
Revenues from nonmonetary transactions	$	2,925,000	$	—	$	3,825,000	$	—

XML

INTANGIBLE ASSETS (Tables)

6 Months Ended

Jun. 30, 2014

INTANGIBLE ASSETS

Schedule of intangible assets

	June 30,			December 31,
	2014			2013
Patents	$	3,601,555		$	3,563,343
Software Development Costs	382,500			—
Licensing	675,000			—
Accumulated Amortization	(760,025		)	(489,398		)
Intangible Assets, Net	$	3,898,530		$	3,073,945

XML

RELATED PARTY TRANSACTIONS (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
RELATED PARTY TRANSACTIONS
Related party loans	$ 35,000		$ 35,000		$ 35,000
Related party payables	87,000		87,000		243,424
Payment to related party			156,424
Related party receivables	26,375		26,375		82,250
Revenue from related party	$ 1,125	$ 18,000	$ 4,250	$ 18,000

XML

RELATED PARTY TRANSACTIONS

6 Months Ended

Jun. 30, 2014

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 2: 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 reimburseable 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.

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2014	Dec. 31, 2013
CONSOLIDATED BALANCE SHEETS
Notes and loans payable-current, discount amount	$ 0	$ 1,155
Preferred Stock, par value (in dollars per share)	$ 0.00001	$ 0.00001
Preferred Stock, shares authorized	10,000,000	10,000,000
Preferred Stock, shares issued	0	0
Preferred Stock, shares outstanding	0	0
Common Stock, par value (in dollars per share)	$ 0.00001	$ 0.00001
Common Stock, shares authorized	250,000,000	250,000,000
Common Stock, shares issued	59,256,291	53,239,369
Common Stock, shares outstanding	59,256,291	53,239,369

XML

ORGANIZATION AND BASIS OF PRESENTATION (Tables)

6 Months Ended

Jun. 30, 2014

ORGANIZATION AND BASIS OF PRESENTATION

Schedule of total revenues

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues	$	86,908	$	182,232	$	216,669	$	406,529
Revenue from related party	1,125		18,000		4,250		18,000
Revenues from nonmonetary transactions	2,925,000		—		3,825,000		—
Total revenues	$	3,013,033	$	200,232	$	4,045,919	$	424,529

Schedule of nonmonetary transactions supported by vendor-specific objective evidence of fair value

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues from license exchanges	$	—	$	—	$	675,000	$	—
Revenues from service exchanges	2,925,000		—		3,150,000		—
Revenues from nonmonetary transactions	$	2,925,000	$	—	$	3,825,000	$	—

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 11, 2014
Document And Entity Information
Entity Registrant Name	AUDIOEYE INC
Entity Central Index Key	0001362190
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		69,367,752
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2014

XML

NOTES PAYABLE (Tables)

6 Months Ended

Jun. 30, 2014

NOTES PAYABLE

Schedule of short term and long term notes payable

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

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenue	$ 3,011,908	$ 182,232	$ 4,041,669	$ 406,529
Revenue from related party	1,125	18,000	4,250	18,000
Total revenues	3,013,033	200,232	4,045,919	424,529
Cost of revenues	334,312	50,767	375,465	95,790
Gross profit	2,678,721	149,465	3,670,454	328,739
Operating expenses:
Selling and marketing	259,719	41,866	755,100	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	172,827	89,726	272,724	179,325
Total operating expenses	1,676,639	679,166	4,070,141	1,220,559
Operating income (loss)	1,002,082	(529,701)	(399,687)	(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)	$ 1,001,621	$ (529,900)	$ (407,131)	$ (925,986)
Net income (loss) per common share - basic (in dollars per share)	$ 0.02	$ (0.01)	$ (0.01)	$ (0.02)
Net income (loss) per common share - diluted (in dollars per share)	$ 0.02	$ (0.01)	$ (0.01)	$ (0.02)
Weighted average common shares outstanding - basic (in shares)	55,484,007	43,324,188	54,946,209	40,287,985
Weighted average common shares outstanding - diluted (in shares)	57,957,031	43,324,188	54,946,209	40,287,985

XML

PERFORMANCE SHARE UNITS

6 Months Ended

Jun. 30, 2014

PERFORMANCE SHARE UNITS

PERFORMANCE SHARE UNITS

NOTE 7: 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.

XML

WARRANTS

6 Months Ended

Jun. 30, 2014

WARRANTS

WARRANTS

NOTE 6: 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.

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.

XML

ORGANIZATION AND BASIS OF PRESENTATION (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014 item	Jun. 30, 2013	Jun. 30, 2014 item	Jun. 30, 2013
ORGANIZATION AND BASIS OF PRESENTATION
Aggregate number of licenses sold for cash	13		17
Number of licenses exchanged	13		17
Cash amount received from sale of per license	$ 225,000		$ 225,000
Revenue recognized for licenses exchanged meeting revenue recognition criteria	2,925,000		3,825,000
Increase in intangible assets			675,000
Total revenues
Revenue	86,908	182,232	216,669	406,529
Revenue from related party	1,125	18,000	4,250	18,000
Revenues from nonmonetary transaction	2,925,000		3,825,000
Total revenues	3,013,033	200,232	4,045,919	424,529
Nonmonetary transactions supported by vendor-specific objective evidence of fair value
Increase in prepaid expenses			3,150,000
Revenues from license exchanges			675,000
Revenues from service exchanges	2,925,000		3,150,000
Revenues from nonmonetary transactions	$ 2,925,000		$ 3,825,000

XML

OPTIONS (Tables)

6 Months Ended

Jun. 30, 2014

OPTIONS.

Summary of the Company's outstanding options

	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

XML

SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2014

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 10: 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.

XML

INTANGIBLE ASSETS

6 Months Ended

Jun. 30, 2014

INTANGIBLE ASSETS

INTANGIBLE ASSETS

NOTE 8: 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			—
Licensing	675,000			—
Accumulated Amortization	(760,025		)	(489,398		)
Intangible Assets, Net	$	3,898,530		$	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.  During the six months ended June 30, 2014, a total of $675,000 of licenses were purchased by exchanging the Company’s own licenses and were accounted for as a non-cash transaction in accordance with ASC 985-845. See Note 1 for more details.

Amortization expense totaled $271,126 and $177,727 for the six months ended June 30, 2014 and 2013, respectively.

XML

INVESTMENTS

6 Months Ended

Jun. 30, 2014

INVESTMENTS

INVESTMENTS

NOTE 9: 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 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.

XML

ORGANIZATION AND BASIS OF PRESENTATION (Policies)

6 Months Ended

Jun. 30, 2014

ORGANIZATION AND BASIS OF PRESENTATION

Reclassification

Reclassification

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

Revenue Recognition

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 of the following 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 of a license of the Company for the license of the Company’s customer, the Company follows Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The licenses received from the Company’s customers are sold, licensed or leased in a different line of business from the Company license delivered to the Company’s customers in the exchange. The fair value of the technology or products exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence with the purpose to enhance product offerings for the sale or license to third parties. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The contracts are then evaluted for commercial substance, including that the licenses received by the Company in the exchange are expected, at the time of the exchange, to be deployed and used by the software vendor and the value ascribed to the transaction reasonably reflects such expected use.

In transactions where the Company engages in a non-cash exchange of a license of the Company for the services of the Company’s customer, the Company follows Accounting Standards Codification (“ASC”) 985-605 and ASC 985-845-10. The fair value of the technology or services exchanged or received is determined within reasonable limits and used to determine vendor-specific objective evidence. The Company uses fair value guidance of the vendor-specific objective evidence of fair value (“VSOE”) under ASC 985-605. The revenue under these transactions is recognized upon delivery of the license and the services received in exchange are recognized as a prepaid asset that is amortized to expense as the services are received. The Company evaluates whether the period over which the services are received requires treatment as extended payment terms under ASC 985-605-25-33 and the Company evaluates the collectibility of the services to be received under ASC 985-605.

For the three and six months ended June 30, 2014, the Company sold an aggregate of thirteen and seventeen licenses, respectively for $225,000 per license and exchanged the license with its customers for either a license to their intellectual property or prepaid services. The thirteen and seventeen licenses exhanged were determined to meet the aforementioned criteria. During the three and six months ended June 30, 2014, nonmmonetary revenue of $2,925,000 and $3,825,000, respectively, was recognized. This resulted in an increase to intangible assets and prepaid expenses of $675,000 and $3,150,000, respectively.

Total revenues for the three and six months ended June 30, 2014 and 2013 consisted of the following:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues	$	86,908	$	182,232	$	216,669	$	406,529
Revenue from related party	1,125		18,000		4,250		18,000
Revenues from nonmonetary transactions	2,925,000		—		3,825,000		—
Total revenues	$	3,013,033	$	200,232	$	4,045,919	$	424,529

The nonmonetary transactions for the three and six months ended June 30, 2014 and 2013 supported by vendor-specific objective evidence of fair value are listed in the table below:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues from license exchanges	$	—	$	—	$	675,000	$	—
Revenues from service exchanges	2,925,000		—		3,150,000		—
Revenues from nonmonetary transactions	$	2,925,000	$	—	$	3,825,000	$	—

XML

PERFORMANCE SHARE UNITS (Tables)

6 Months Ended

Jun. 30, 2014

PERFORMANCE SHARE UNITS

Summary of outstanding performance share units

	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

XML

STOCKHOLDERS' EQUITY (Details) (USD $)	0 Months Ended	1 Months Ended	3 Months Ended		6 Months Ended			0 Months Ended
	Mar. 28, 2014	Mar. 31, 2013	Jun. 30, 2014	Mar. 31, 2014	Jun. 30, 2014	Mar. 27, 2014	Dec. 31, 2013	Jul. 17, 2014 Subsequent Event	Jul. 08, 2014 Subsequent Event	Feb. 03, 2014 Warrants granted on February 3, 2014 Warrants	Jun. 30, 2014 Accredited investors item	Jan. 30, 2014 Accredited investors item	Jul. 17, 2014 Accredited investors Subsequent Event	Jul. 14, 2014 Accredited investors Subsequent Event
STOCKHOLDERS' EQUITY
Common Stock, shares issued	49,496		59,256,291		59,256,291		53,239,369	75,000
Common Stock, shares outstanding			59,256,291		59,256,291		53,239,369
Common stock issued for services (in shares)		300,000	1,071,915	100,000					50,000	44,307
Expenses related to common stock issued for service			$ 354,828	$ 28,500
Stockholders' Equity
Units sold to accredited investors (in shares)											2,766,667	666,667
Number of accredited investors											3	2
Proceeds from sale of units to accredited investors											830,000	200,000
Stock subscription receivable from the sale of units to accredited investors													60,000	60,000
Units sold to accredited investors, number of common shares											2,766,667	666,667
Units sold to accredited investors, number of warrants											2,766,667	666,667
Term of warrants issued to accredited investor											5 years	5 years
Exercise price of units (in dollars per share)											$ 0.40	$ 0.40
Common stock value										13,292
Warrants to purchase shares										44,307
Term of warrant										5 years
Strike price (in dollars per share)										$ 0.40
Value of warrants										8,186	503,884
Common Stock, shares authorized			250,000,000		250,000,000	250,000,000	250,000,000
Common Stock, shares authorized before amendment						100,000,000
Common Stock, shares issued	49,496		59,256,291		59,256,291		53,239,369	75,000
Common shares for the exercise of options	100,000							34,459
Common stock issued for services (in shares)		300,000	1,071,915	100,000					50,000	44,307
Expenses related to common stock issued for service			354,828	28,500
Common stock issued for exercise of warrants (in shares)			17,870	1,300,000
Proceeds from exercise of warrants				13,000	13,000
Placement fee paid											55,848	18,463
Net proceeds from sale of units to accredited investors											$ 774,152	$ 181,537
Volatility (as a percent)										100.00%
Risk-free interest rate (as a percent)										1.44%
Amortization period			0 years
Number of warrants for which cashless options exercised			50,000

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash Flows from Operating Activities:
Net loss	$ (407,131)	$ (925,986)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	272,724	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
Licenses sold in exchange for licenses	(675,000)
Licenses sold in exchange for prepaid services	(3,150,000)
Changes in operating assets and liabilities:
Accounts receivable	(135,822)	2,265
Related party receivable	55,875	(18,000)
Prepaid and other assets	164,076
Accounts payable and accruals	749,102	3,503
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
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

XML

OPTIONS

6 Months Ended

Jun. 30, 2014

OPTIONS.

OPTIONS

NOTE 5: 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 reveunes 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.

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.

XML

OPTIONS (Details) (USD $)	0 Months Ended	3 Months Ended		6 Months Ended			3 Months Ended		6 Months Ended		12 Months Ended	6 Months Ended		0 Months Ended
	Mar. 28, 2014	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Jun. 30, 2014 Options	Jun. 30, 2013 Options	Jun. 30, 2014 Options	Jun. 30, 2013 Options	Dec. 31, 2013 Options	Jun. 30, 2014 Options Minimum	Jun. 30, 2014 Options Maximum	Jan. 27, 2014 Options Options issued on January 27, 2014	Jan. 27, 2014 Options Options issued on January 27, 2014 Immediate vesting	Jan. 27, 2014 Options Options issued on January 27, 2014 Vesting upon company reporting minimum $10 million in annualized revenue by 2nd anniversary	Jan. 27, 2014 Options Options issued on January 27, 2014 Vesting upon company reporting minimum $20 million in annualized revenue by 3rd anniversary	Feb. 17, 2014 Options Options issued on February 17, 2014	Mar. 03, 2014 Options Options issued on March 3, 2014	Mar. 03, 2014 Options Options issued on March 3, 2014 Immediate vesting	Mar. 03, 2014 Options Options issued on March 3, 2014 Vesting every 90 days	Mar. 24, 2014 Options Options issued on March 24, 2014	Mar. 24, 2014 Options Options issued on March 24, 2014 One individual	Jun. 02, 2014 Options Options awarded on June 2, 2014	Jun. 09, 2014 Options Options awarded on June 9, 2014	Jun. 11, 2014 Options Options awarded on June 11, 2014	Jun. 30, 2014 Options Options awarded on June 30, 2014
Options
Options to purchase shares of common stock issued and outstanding							9,287,350		9,287,350		4,485,250
Number of options:
Outstanding at beginning of the period (in shares)									4,485,250
Granted (in shares)									4,902,100					1,500,000				55,000	250,000			2,522,100	200,000	175,000	175,000	400,000	400,000
Less Exercised (in shares)	100,000								100,000
Outstanding at the end of the period (in shares)							9,287,350		9,287,350		4,485,250
Wtd Avg. Exercise Price
Outstanding at beginning of the period (in dollars per share)									$ 0.38
Granted (in dollars per share)									$ 0.42
Less Exercised (in dollars per share)									$ 0.25
Outstanding at end of the period (in dollars per share)							$ 0.40		$ 0.40		$ 0.38
Wtd Avg. Remaining Term
Outstanding at beginning of the period, wtd Avg. Remaining Term									4 years 1 month 2 days		3 years 11 months 16 days
Outstanding at end of the period, wtd Avg. Remaining Term									4 years 1 month 2 days		3 years 11 months 16 days
Intrinsic Value
Outstanding at beginning of the period, Intrinsic Value (in dollars)									$ 105,410
Outstanding at end of the period, Intrinsic Value (in dollars)							121,534		121,534		105,410
Significant assumptions used in the valuation
Expected term												2 years 6 months	3 years 3 months 29 days
Expected volatility (as a percent)									100.00%
Risk-free interest rate (as a percent)												0.83%	1.76%
Expected dividend yield (as a percent)									0.00%
Grant date fair value of options														303,562				10,556	36,935			724,948		35,834	35,834	68,830	68,830
Share based compensation expense		423,257	168,542	1,227,408	253,358		290,158	168,542	624,353	253,358
Number of options awarded									4,902,100					1,500,000				55,000	250,000			2,522,100	200,000	175,000	175,000	400,000	400,000
Vesting percentage															33.33%	33.33%	33.33%			20.00%	20.00%
Minimum annualized revenues reported by second anniversary from the grant date																10,000,000
Minimum annualized revenues reported by third anniversary from the grant date																	$ 20,000,000
Exercise Price (in dollars per share)														$ 0.40				$ 0.305	$ 0.40			$ 0.45		$ 0.33	$ 0.33	$ 0.33	$ 0.34
Vesting period																		3 years				3 years		3 years	3 years	3 years	3 years
Common shares for the exercise of options	100,000								100,000
Common Stock, shares issued	49,496	59,256,291		59,256,291		53,239,369

XML

WARRANTS (Tables)

6 Months Ended

Jun. 30, 2014

WARRANTS

Summary of the Company's outstanding warrants

	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