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.

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 5, 2016, 107,333,432 shares of the registrant’s common stock were issued and outstanding.

The financial information set forth below with respect to the financial statements as of June 30, 2016 and 2015 and for the three and six month periods ended June 30, 2016 and 2015 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, 2016 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

The accompanying unaudited 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 30, 2016.

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, 2015 as reported in the Company’s Annual Report on Form 10-K have been omitted.

AudioEye, Inc. was formed as a Delaware corporation on May 20, 2005. The Company focuses on providing its customers with the most complete and inclusive web accessibility solution available. The Company’s suite of technologies allows its customers to provide their site visitors with an enhanced web experience. When implemented, the Company believes its solutions offer businesses the opportunity to reach more customers, improve brand image, and build additional brand loyalty. In addition, the Company’s solutions provide organizations with the ability to comply with internationally accepted web content accessibility guidelines (WCAG) as well as United States, Canadian and United Kingdom accessibility laws.

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

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

The Company had three major customers including their affiliates which generated approximately 66% (39%, 14% and 13%) of its revenue in the three months ended June 30, 2016.

The Company had three major customers including their affiliates which generated approximately 64% (32%, 19% and 14%) of its revenue in the six months ended June 30, 2016.

At June 30, 2016, the Company had one customer representing 56% of the outstanding accounts receivable.

Certain Software as a Service (SaaS) and website hosting contracts are prepared and invoiced on an annual basis. Any funds received for hosting services not provided yet are held in deferred revenue, and are recorded as revenue when earned.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash.

The Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges.

On October 9, 2015, the Company issued convertible promissory notes representing $2,500,000 in aggregate principal together with warrants exercisable for up to 25,000,000 shares of Common Stock. The warrants have a strike price of $0.10 and term of 5 years. In addition on May 9, 2016, in connection with the sale of the Company’s common stock, the Company issued warrants exercisable for up to 1,312,000 shares of Common Stock. The warrants have a strike price of $0.25 and a term of 5 years.

In accordance with ASC 815, these outstanding warrants are deemed to contain embedded derivatives. The value of the derivative instrument will fluctuate with the price of the Company’s common stock and is recorded as a current liability on the Company’s Consolidated Balance Sheets. The change in the value of the liability is recorded as “unrealized gain (loss) on derivative liability” on the Consolidated Statements of Operations. This is a non-cash income (expense) item and is adjusted in the “operating activities” of the Consolidated Statements of Cash Flow. At June 30, 2016 and December 31, 2015, the derivative liability was stated at $3,999,298 and $439,361, respectively. The change in fair value of $3,341,151 was driven by the increased value of the Company’s common stock in the period and recorded as the “Loss on change in derivative liability” in the Consolidated Statements of Operations for the six months ended June 30, 2016. As the warrants are exercised or expire, the derivative liability will be adjusted on the balance sheet and an adjustment will be reflected in stockholders equity under additional paid-in capital.

Fair value is an estimate of the exit price, representing the amount that would be received to, sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction cost. Fair value measurement under generally accepted accounting principles provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3: Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.

In October and November 2015, the Company issued warrants with an exercise price of $0.10 in connection with a convertible debt instruments. The five year warrants also contain a provision that the warrant exercise price will automatically be adjusted for any common stock equity issuances at less than $0.10 per share. The Company determined that the warrants were not afforded equity classification because the warrants are not considered to be indexed to the Company’s own stock due to the anti-dilution provision. Accordingly, the warrants are treated as a derivative liability and are carried at fair value.

The Company estimated the fair value of these derivative warrants at initial issuance and again at each balance sheet date. The changes in fair value are recognized in earnings in the Consolidated Statements of Operations under the caption “unrealized gain/(loss) – derivative liability” until such time as the derivative warrants are exercised or expire. The Company used the Black-Scholes Option Pricing model to estimate the fair value of the dates of issuance, the price of the Company stock ranged $0.031 to $0.058, volatility was estimated to be 102%, the risk free rate ranged 1.14% to 1.75% and the remaining term was 5 years.

In April and May 2016, the Company issued warrants with an exercise price of $0.25 in connection with the sale of Common Stock. The five year warrants also contain a provision that the warrant exercise price will automatically be adjusted for any common stock equity issuances at less than $0.25 per share. The Company determined that the warrants were not afforded equity classification because the warrants are not considered to be indexed to the Company’s own stock due to the anti-dilution provision. Accordingly, the warrants are treated as a derivative liability and are carried at fair value.

The Company estimated the fair value of these derivative warrants at initial issuance and again at each balance sheet date. The changes in fair value are recognized in earnings in the Consolidated Statements of Operations under the caption “unrealized gain/(loss) – derivative liability” until such time as the derivative warrants are exercised or expire. The Company used the Black-Scholes Option Pricing model to estimate the fair value of the dates of issuance, the price of the Company stock ranged $0.169 to $0.195, volatility was estimated to be from 169% to 178%, the risk free rate ranged 1.22% to 1.35% and the remaining term was 5 years. The estimated initial fair value of these warrants of $218,786 was reclassified from equity to liability at the date of issuance.

At June 30, 2016, the price of the Company stock was 0.161, volatility was estimated to be 172.95%, the risk free rate of 1.01% and the remaining term ranged from 4.28 to 4.81 years. As of June 30, 2016, the fair value of the warrants was determined to be $3,999,298, resulting in an unrealized gain (loss) on the change in the fair value of this derivative liability of $70,908 and $(3,341,151) for the three and six months ended June 30, 2016, respectively.

The following are the Company’s assets and liabilities, measured at fair value on a recurring basis, as of June 30, 2016 and December 31, 2015:

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.

As of June 30, 2016, the Company had cash of $2,144,220 and working capital deficit of $2,421,945, principally due to the inclusion of non-cash derivative liability recorded in current liabilities. Excluding the derivative liability, the Company’s working capital would have been $1,577,353. In addition, the Company used actual net cash in operations of $1,069,147 during the six months ended June 30, 2016. The Company has incurred net losses since inception.

In May 2016, the Company sold shares of common stock and warrants for net proceeds, after commissions and other costs, of approximately $1,579,082. It is anticipated that the proceeds from the sale of its common stock and warrants will provide the Company with cash sufficient to fund operations through July 2017.

Management believes that the Company has sufficient funds to meet its operating funding requirements for at least the next twelve months. The Company expects that cash used in operations will decrease significantly over the next several years as the Company executes its business plan. In the event that the Company is not able to fully achieve its plan, the Company may need to raise additional funds through equity or debt financing. If the Company is unsuccessful in raising additional financing, it will need to reduce costs and operations in the future.

As of June 30, 2016 and December 31, 2015, the Company owed Dr. Bettis $49,742 and $72,944 in accrued salary, respectively. In addition, AudioEye sub-leases an office for the Company’s CEO Todd Bankofier from Verus Analytics, Inc, a company in which Dr. Bettis has a controlling interest in. The sub-lease amount is $500 per month totaling $1,500 and $3,000 in three and six months ended June 30, 2016.

As of June 30, 2016 and December 31, 2015 and 2014, the Company owed Sean Bradley $9,794 and $6,250 in accrued salary, respectively.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

As of December 31, 2015 the Company owed David Moradi $70,000 in principal and $4,280 in accrued interest. During the six months ended June 30, 2016, Mr. Moradi was paid in full.

In summary, as of June 30, 2016 and December 31, 2015 the total balances of related party payables were $59,536 and $153,474, respectively.

For the six months ended June 30, 2016 and 2015, the Company invested in Patents in the amounts of $40,972 and $29,650 respectively.

Prior to December 31, 2015, patents, technology and other intangibles with contractual terms were generally amortized over their estimated useful lives of ten years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

Software development costs are amortized over their estimated useful life of three years.

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

Amortization expense for patents totaled $94,076 and $186,855 for the three and six months ended June 30, 2016, respectively; and $90,736 and $181,555 for the three and six months ended June 30, 2015, respectively. Amortization expense for software development totaled $45,759 and $91,518 for the three and six months ended June 30, 2016, respectively; and $43,125 and $86,250 for the three and six months ended June 30, 2015, respectively.

Total amortization expense totaled $278,373 and $267,804 for the six months ended June 30, 2016 and 2015, respectively.

As of June 30, 2016 and December 31, 2015, the Company has short term and long term notes payable of $24,000 and $11,800, and $24,000 and $1,923,499, respectively as shown in the table below.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

As of December 31, 2012, the Company had an outstanding loan to a third party in the amount of $74,900, which was originally issued during 2006 as part of an Investment Agreement. The loan was unsecured and bore interest at 25% per year for four years. The Company had accrued interest of $74,900, which was included in accounts payable and accrued expenses on the consolidated balance sheets. The note was in default until October 24, 2011, at which time the Company entered into a Termination and Release Agreement (“Release”) with the third party. The terms of the Release, among other things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the third-party in the combined amount of principal and accrued interest to date, for a total principal amount of $149,800. The note is interest free, and is payable in monthly installments of $2,000 beginning November 1, 2011. As of June 30, 2016 and December 31, 2015, the principal amount owing was $35,800 and $47,800, respectively, of which $24,000 and $24,000, respectively, has been recorded as the current portion of the note, and $11,800 and $23,800, respectively, as the long-term portion of the note. The Company has paid $12,000 for the six months ended June 30, 2016.

On October 9, 2015 (the “Initial Closing Date”), AudioEye, Inc. (the “Company”) entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the issuance and sale of convertible promissory notes in an aggregate principal amount of up to $3,750,000 (the “Notes”) and warrants (the “Warrants”) to purchase up to an aggregate of 37,500,000 shares of common stock of the Company (the “Common Stock”) (the “Transaction”). Notes representing up to $2,500,000 in aggregate principal, and Warrants exercisable for up to 25,000,000 shares of Common Stock in the aggregate, may be issued and sold at one or more closings during the 30-day period immediately following the Initial Closing Date. The maximum of $2,500,000 in aggregate principal was sold as of November 8, 2015. In addition, upon the election of any Investor within the three-year period immediately following the Initial Closing Date, any Investor may purchase an additional Note in the principal amount equal to 50% of the principal amount of the Notes purchased by such Investor at previous closings (the “Option Principal Amount”) and an additional Warrant with an aggregate exercise price equal to such Investor’s Option Principal Amount.

The Notes mature three years from the date of issuance (the “Maturity Date”) and, until the Notes are repaid or converted into shares of the Company’s equity securities (“Equity Securities”), accrue payable-in-kind interest at the rate of 10% per annum. As described in the Purchase Agreement, as amended (see below), if the Company sold Equity Securities in a single transaction or series of related transactions for cash of at least $1,000,000 (excluding the conversion of the Notes and excluding the shares of Common Stock to be issued upon exercise of the Warrants) on or before the Maturity Date (the “Equity Financing”), all of the unpaid principal on the Notes plus accrued interest shall be automatically converted at the closing of the Equity Financing into a number of shares of the same class or series of Equity Securities as are issued and sold by the Company in such Equity Financing (or a class or series of Equity Securities identical in all respects to and ranking pari passu with the class or series of Equity Securities issued and sold in such Equity Financing) as is determined by dividing (i) the principal and accrued and unpaid interest amount of the Notes by (ii) 60% of the price per share at which such Equity Securities are issued and sold in such Equity Financing. The Notes, if not converted, shall be due and payable in full on the Maturity Date.

The Notes contained customary events of default provisions. In connection with the issuance of the Notes, on October 9, 2015, the Company entered into a Security Agreement with the Investors (the “Security Agreement”) pursuant to which the Company granted a security interest in all of its assets to the Investors as collateral for the Company’s obligations under the Notes. As noted below, on April 18, 2016, the parties agreed to remove the security interest feature from the form of convertible promissory note that may be issued in the future under the Original Agreement.

The Warrants are exercisable at $0.10 per share and expire 60 months following the date of issuance. The Warrants are subject to anti-dilution protection, subject to certain customary exceptions.

During 2015, the Company issued notes under this offering totaling $2,500,000. The fair value of the warrants issued in connection with the notes was determined to be $627,293 and was recognized as a discount to the debt being amortized to interest expense over the life of the loans. During three and six months ended June 30, 2016, aggregate amortization (and write-off) of $554,160 and $600,301 was recognized against the discount.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

In connection with the transaction, the Company also entered into amendments to certain agreements. On April 18, 2016, the Company entered into a First Amendment to Note and Warrant Purchase Agreement (the “Purchase Agreement Amendment”) and an Omnibus Amendment to Secured Promissory Notes (the “Note Amendment”), which collectively amend that certain Note and Warrant Purchase Agreement dated as of October 9, 2015 (the “Original Agreement”) and the convertible promissory notes previously issued thereunder to, among other things (i) remove the right of Anthion Partners II, LLC (together with its affiliates, “Anthion”) to designate a member of the Board of Directors of the Company; (ii) amend the convertible promissory notes issued thereunder to provide that if a change of control of the Company occurs prior to the maturity date or an equity financing (as defined therein), the convertible promissory note shall be repaid in an amount equal to the product of (a) 1.4 and (b) the outstanding principal amount and all accrued and unpaid interest thereunder; (iii) reduce the conversion threshold in the definition of “qualified financing” under the convertible promissory notes from $2,000,000 to $1,000,000; (iv) remove the security interest feature from the form of convertible promissory note that may be issued in the future under the Original Agreement, as amended, and (v) provide for optional conversion into warrants containing “blocker” provisions (“Special Warrants”) instead of shares upon an equity financing. The Company also made certain amendments to outstanding warrants to add similar “blocker” provisions.

On April 18, 2016, the Company issued an aggregate of 12,834,800 shares of its common stock to the Note holders other than Anthion, and 18,353,310 warrants to acquire its common stock to Anthion in lieu of common stock. Collectively the common stock and warrants issued were in full settlement of $2,500,000 convertible notes and accrued interest of $74,658. The warrants issued to Anthion are exercisable at $0.001 per share for five years from the date of issuance.

At the date of conversion, the Company determined that the conversion price of $0.84 per share did not exceed the fair value of Common Stock at note inception, therefore there was no beneficial conversion feature upon conversion of $1,025,000 of convertible notes and accrued interest. However, the Company determined that the estimated fair value of the 18,353,310 warrants of $3,205,959 exceeded the settlement of $1,541,678 of convertible notes and accrued interest and accordingly recorded a loss of settlement of debt of $1,664,281 for the six months ended June 30, 2016. The Company used the Black-Scholes Option Pricing model to estimate the fair value of the warrants at the date of conversion using the following assumptions: the price of the Company stock of $0.175, volatility was estimated to be 178%, the risk free rate of 1.24% and the remaining term was 5 years.

As of June 30, 2016 and December 31, 2015, the Company had 107,250,100 and 81,717,154 shares of common stock issued and outstanding, respectively, and the company had 160,000 and 175,000 shares of Series A Convertible Preferred Stock, respectively, issued at $10 per share, paying a 5% cumulative annual dividend and convertible at 0.1754 per share of common stock.

In April 2016, the Company issued an aggregate 83,336 shares of its common stock in payment for consulting services at a fair value of $14,292.

In April 2016, the Company issued an aggregate of 12,834,800 shares of its common stock to Note holders in settlement of $1,025,000 in convertible notes and accrued interest (Note 5).

In May 2016, the Company sold an aggregate of 11,714,285 shares of common stock of the Company and 1,312,000 warrants to purchase the Company’s common stock to accredited investors for net proceeds of $1,579,082. The warrants have a term of five years, an exercise price of $0.25 per share and are subject to anti-dilution protection, as defined.

In May 2016, the Company issued 900,525 shares of its common stock upon conversion of 15,000 shares of Series A Convertible Preferred Stock and accrued dividends.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

Under the purchase agreement, the Company has agreed to use its reasonable best efforts to prepare and file with the SEC registration statement within 60 days of the initial closing date, covering the resale by the investors of any common stock previously issued to the investors, and any common stock into which any convertible promissory notes previously issued to the investors are convertible and any common stock for which the warrants or any warrants previously issued to the investors are exercisable.

As of June 30, 2016 and December 31, 2015, the Company has outstanding options to purchase 25,059,629 and 14,759,914 shares of common stock, respectively.

On January 15, 2016, the Company granted performance options to acquire shares of the Company’s common stock in aggregate of 6,500,000 to key board member and officers at an exercise price of $0.038 per share for five years. Vesting shall only occur if the closing share price of the Company’s common stock on each of the 20 trading days before and including the end of any performance period is not less than $0.20 per share (market condition). Of the granted options, 5,500,000 include performance conditions (as defined) with both conditions (market and performance) to be met before vesting. All determinations of whether performance goals have been achieved, the number of vested performance options earned by the grantee, and all other matters related to the award of performance options shall be made by the compensation committee of the Company’s board of directors in its sole discretion.

The estimated fair values of the options with performance and market conditions were determined using a Monte Carlo pricing model. Significant assumptions used in the valuation include expected term of 5 years, expected volatility of 162%, risk free interest rate of 1.46%, and expected dividend yield of 0%.

Nonperformance option grants during the six months ended June 30, 2016 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 1.5 to 3.5 years, expected volatility of 102.00% to 174.99%, risk free interest rate of 0.87% to 1.73%, and expected dividend yield of 0%.

On April 15, 2016, the Company issued 49,715 options, which vest immediately, have an exercise price of $0.179, and expire on April 15, 2019. The value on the grant date of the options was $6,250.

On May 12, 2016, the Company issued 100,000 options, which vest 50% after one year and 4.17% every month thereafter, have an exercise price of $0.177, and expire on May 12, 2021. The value on the grant date of the options was $16,694.

On May 12, 2016, the Company issued an aggregate of 3,400,000 options, which vest 50% immediately and 50% vesting quarterly over 12 months, have an exercise price of $0.177, and expire on May 12, 2021. The value on the grant date of the options was $559,603.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

For the three and six months ended June 30, 2016 and 2015, total stock compensation expense related to the options totaled $414,031 and $540,119 and $397,134 and $774,700, respectively.

Below is a table summarizing the Company’s outstanding warrants as of June 30, 2016 and December 31, 2015:

The warrant grants during the six months ended June 30, 2016 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 1.5 to 2.5 years, expected volatility of 166.74% to 178.98%, risk free interest rate of 0.85% to 1.08%, and expected dividend yield of 0%.

During the six months ended June 30, 2016, the Company issued an aggregate of 1,181,329 warrants to purchase shares of the Company’s common stock with an exercise prices of $0.038 to $0.179 per share vested immediately for services. The fair value on the grant date of the warrants was $106,750.

In April 2016, the Company issued an aggregate of 18,353,310 warrants to acquire its common stock in settlement of $1,541,678 convertible notes and accrued interest. The warrants issued to Anthion are exercisable at $0.001 per share for five years from the date of issuance.

The Company determined that the estimated fair value of the 18,353,311 warrants of $3,205,959 exceeded the settlement of $1,541,678 of convertible notes and accrued interest and accordingly recorded a loss of settlement of debt of $1,664,281 for the six months ended June 30, 2016. The Company used the Black-Scholes Option Pricing model to estimate the fair value of the warrants at settlement with the following assumptions: the price of the Company stock of $0.175, volatility was estimated to be 178%, the risk free rate of 1.24% and the remaining term was 5 years.

In May 2016, the Company issued 1,312,000 warrants with an exercise price of $0.25 in connection with the sale of Common Stock. The five year warrants also contain a provision that the warrant exercise price will automatically be adjusted for any common stock equity issuances at less than $0.25 per share.

For the three and six months ended June 30, 2016 and 2015, the Company has incurred warrant-based expense of $58,483 and $148,173 and $415,445 and $470,187, respectively.

On July 15, 2016, the Company issued 394,625 warrants to Dr. Carr Bettis as compensation for services rendered. The warrants are exercisable at $0.156 for three years, vesting immediately. The exercise price was determined using the 10-day average closing price beginning with the closing price on July 1, 2016.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (Unaudited)

On July 15, 2016, the Company granted 56,375 options to Sean Bradley as compensation for services rendered. The options are exercisable at $0.156 for three years, vesting immediately. The exercise price was determined using the 10-day average closing price beginning with the closing price on July 1, 2016.

In July 2015, the Company issued an aggregate of 83,332 shares of its common stock for consulting services rendered valued at $14,166.

On July 25, 2016, the Company reached an agreement in principle to settle the consolidated securities class action lawsuit pending in the United States District Court for the District of Arizona, titled In re AudioEye, Inc. Sec. Litig. The consolidated case was brought against the Company and two former Officers following the restatement of the 2015 quarterly financial statements of the Company. The agreement was reached in connection with a voluntary mediation led by Bob Meyer, a mediator with JAMS in Los Angeles.

The settlement agreement is subject to definitive documentation, shareholder notice, and court approval. The terms of the agreement include a settlement payment to the class of $1,525,000 from the Company’s insurer, with no admission of liability by any party.

On July 26, 2016, a shareholder derivative complaint entitled Denese M. Hebert, derivatively on Behalf of Nominal Defendant AudioEye, Inc., v. Bradley, et al., was filed in the State of Arizona Superior Court for Pima County. The complaint generally asserts causes of action related to the Company’s restatement of its financial statements for the first three fiscal quarters of 2014. As a derivative complaint, the shareholder is purported to act on behalf of AudioEye, Inc. (the “Company”) against certain of the Company's current and former officers and directors (the “Named Individuals”). The Company is named as a nominal defendant. The Company understands that the Named Individuals intend to vigorously defend the lawsuit. While the Company believes that its legal defense costs may be reimbursed by the Company’s insurance carrier, no reasonable estimate of the outcome of the litigation, the related legal fees, or the impact on the financial results of the Company can be made as of the date of this statement.

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

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

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

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, 2015. 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.

AudioEye is a marketplace leader providing web accessibility solutions for our clients’ customers through our Ally Platform Products. Our technology advances accessibility with patented technology solutions that reduce barriers, expand access for individuals with disabilities, and enhance the user experience for a broader audience of users. When implemented, we believe that our solutions offer businesses the opportunity to reach more customers, improve brand image, and build additional brand loyalty. In addition, our solutions help organizations comply with internationally accepted Web Content Accessibility Guidelines (WCAG) as well as US, Canadian, Australian, and United Kingdom accessibility laws.

We generate revenues through the sale of subscriptions of our software as a service (SaaS) technology platform, called the AudioEye Ally Platform, to website owners, publishers, developers, and operators and through the delivery of managed services combined with the implementation of the AudioEye solution. Our solutions have been adopted by some of the largest and most influential companies in the world. Our customers span disparate industries and target market verticals, which encompass (but are not limited to) the following categories: human resources, finance, transportation, media, and education. Government agencies have also integrated our software in their digital platforms.

AudioEye uses proprietary technology and development tools to offer web accessibility solutions that offer significant savings in time and money relative to traditional solutions. Our compliance solutions focus on rapid remediation of the most important accessibility issues, followed by in-depth analysis identifying and addressing a more comprehensive compliance program. Our technology was built to not only provide users with a cloud-based assistive toolset that gets embedded and made freely available to users within our client websites, but to also improve the code in a way that optimizes the user experience for users of existing third-party assistive technologies, such as screen readers.

Our technology development was initiated at the University of Arizona Science & Technology Park in Tucson, Arizona. In 2006, we received technology development venture funding from the Maryland Technology Development Corporation (TEDCO), which contributed to the development of our platform strategy. Beginning in 2009, we engaged in a multi-year technology development program with the Eller College of Management’s Department of Management Information Systems at the University of Arizona. In connection with our proprietary technology, our company has been issued a number of U.S. patents in two distinct patent families. Today, an experienced team of in-house engineers, designers, and developers in our Atlanta, GA, and Tucson, AZ, offices develop the Company’s technology & software and are actively engaged in the expansion of the AudioEye IP Portfolio.

Our patented technology was a 2013 Edison Gold Award winner for innovation in the category of “Quality of Life.”

Our intellectual property is primarily comprised of trade secrets, trademarks, issued and pending patents, copyrights and technological innovation. We have a patent portfolio comprised of six patents issued in the United States, we have received a notice of allowance from the U.S. Patent and Trademark Office for a seventh patent, and we have several additional patents that are either pending or are being prepared for filing in the United States and internationally.

Our current patented invention relates to a server-side method and apparatus that enables users to audibly navigate websites and hear high-quality streaming audio narration and descriptions of websites. This patented invention involves creating an audio-enabled web experience by utilizing voice talent and automated text-to-speech conversion methods to read and describe web content. It involves the creation of audio files for each section within a website, and then assigning a hierarchy and navigation system in line with the website design. To implement the system, a script is installed across the pages of the website and, when loaded, it plays an audible tone upon a user’s visit indicating that the website is enhanced with our proprietary technology. Upon hearing the tone, a user presses a key on the keyboard to enter the audible website. Audible narration is played through the user’s computer, reading text and describing non-text information, such as images. The narration includes menus for navigating the site which have a hierarchy in line that of the original website. Users navigate the website menus and move from webpage to webpage by making keystrokes or using a mouse.

Our current portfolio has established a foundation for building unique technology solutions that contribute to the way in which we differentiate ourselves from other competitors in the B2B Web Accessibility marketplace. We plan to continue to invest in research and development, and expand our portfolio of proprietary intellectual property.

Our Annual Report filed on Form 10-K for the year ended December 31, 2015 provides additional information about our business and operations.

Our consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). The discussion of the results of our operations compares the three and six months ended June 30, 2016 with the three and six months ended June 30, 2015 and are not necessarily indicative of the results which may be expected for any subsequent period. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in similar positions. We may not be successful in addressing these risks and difficulties.

For the three months ended June 30, 2016 and 2015, revenue was $186,859 and $104,423, respectively, consisting primarily of revenues from various levels of licensing, website design and maintenance. Revenues increased due to a change of marketing focus.

For the three months ended June 30, 2016 and 2015, cost of sales was $297,764 and $394,502, respectively, consisting primarily of sub-contracting to outside sources, direct labor and direct technology costs.

An increase in our implementation costs resulted in a gross loss of $110,905 and $290,079 during the three months ended June 30, 2016 and 2015, respectively. Gross loss decreased as a result of lower implementation costs as compared to the same period in 2015.

Selling and marketing expenses were $194,201 and $210,029 for the three months ended June 30, 2016 and 2015, respectively. The decrease resulted from the reduction primarily in staffing levels.

Research and development expenses were $84,996 and $58,738 for three months ended June 30, 2016 and 2015, respectively. Research and development expenses increased from period to period and reflect additional developments of our product.

General and administrative expenses were $821,898 and $2,167,320 for the three months ended June 30, 2016 and 2015, respectively. General and administrative expenses decreased as a result of employee staff reductions and the associated benefits costs as well as decrease in stock based compensation year over year.

Amortization and depreciation expenses were $139,835 and $133,944 for the three months ended June 30, 2016 and 2015, respectively. The increase in expense was primarily related to added patent costs in later 2015 and 2016.

In 2015 and in 2016, we issued warrants with an embedded reset provisions requiring us to fair value the derivatives each reporting period and mark to market as a non-cash adjustment to our current period operations. This resulted in a gain of $70,908 on change in fair value of derivative liabilities for the three months ended June 30, 2016. None were issued as of June 30, 2015.

In April 2016, we issued common stock warrants in settlement of convertible debt and accrued interest. As such, we incurred a non-cash loss on debt settlement between the estimated fair value of the issued warrants and the carrying value of the debt and accrued interest of $1,664,281.

Interest income (expense), net during the three months ended June 30, 2016 was $(566,282) compared to $157 three months ended June 30, 2015. For 2016, Interest expense consists of amortization of debt discounts and interest incurred relating to our issued notes payable, as compared to interest income of $157 for the three months ended June 30, 2016

For the six months ended June 30, 2016 and 2015, revenue was $311,561 and $205,461, respectively, consisting primarily of revenues from various levels of licensing, website design and maintenance. Revenues increased due to a change of marketing focus.

For the six months ended June 30, 2016 and 2015, cost of sales was $592,572 and $856,633, respectively, consisting primarily of sub-contracting to outside sources, direct labor and direct technology costs.

An increase in our implementation costs resulted in a gross loss of $281,011 and $651,172 during the six months ended June 30, 2016 and 2015, respectively. Gross loss decreased as a result of lower implementation costs as compared to the same period in 2015.

Selling and marketing expenses were $317,567 and $576,396 for the six months ended June 30, 2016 and 2015, respectively. The decrease resulted from the reduction primarily in staffing levels.

Research and development expenses were $170,613 and $201,020 for six months ended June 30, 2016 and 2015, respectively. Research and development expenses declined from period to period and reflect the material completion of our product.

General and administrative expenses were $1,292,923 and $4,188,547 for the six months ended June 30, 2016 and 2015, respectively. General and administrative expenses decreased as a result of employee staff reductions and the associated benefits costs as well as decrease in stock based compensation year over year.

Amortization and depreciation expenses were $278,373 and $267,888 for the six months ended June 30, 2016 and 2015, respectively. The increase in expense was primarily related to added patent costs in later 2015 and 2016.

In 2015 and in 2016, we issued warrants with an embedded reset provisions requiring us to fair value the derivatives each reporting period and mark to market as a non-cash adjustment to our current period operations. This resulted in a loss of $3,341,151 on change in fair value of derivative liabilities for the three months ended June 30, 2016. None were issued as of June 30, 2015.

Interest income (expense), net during the six months ended June 30, 2016 was $(676,447) compared to $3,264 for the six months ended June 30, 2015. For 2016, Interest expense consists of amortization of debt discounts and interest incurred relating to our issued notes payable, as compared to interest income of $3,264 for the six months ended June 30, 2016

Under current accounting procedures, the Company only recognizes revenue on new contracts for the actual services delivered in the period under the following criteria: i) the contract has been signed and delivered to the Company; ii) the services have been performed or delivered; and iii) the client has been billed for the services delivered. The Company does not record deferred revenues for new contracts until the first payment for services has been received. The Company only records accounts receivable for the amount of revenue recognized as service is rendered, even if the client has been billed for the entire contract value. The table below summarizes the amount of contract value in excess of the revenue recognized of $311,265 and the deferred revenue recognized of $416,447, in the amount of $364,830. This amount is expected to be recognized in future periods. The Company also receives contracts for service hours but whose total contract value is uncertain. These “fee for service contracts” are recorded in the table below only if the services have been delivered and the associated revenue has been recognized.

The working capital (deficit)/surplus for the periods ended June 30, 2016 and December 31, 2015 was $(2,421,945) and $913,741 respectively. The decrease in Working Capital was primarily due to an increase in our non-cash derivative liability, accounts payable, and deferred revenue, net with an increase in Cash. Adjusting for the non-cash derivative liability, Working Capital would have been $1,577,353 at June 30, 2016.

Management believes that the Company has sufficient funds to meet its operation funding requirements for at least the next twelve months. The Company expects that cash used in operations will decrease significantly over the next several years as the Company executes its business plan. In the event that the Company is not able to fully achieve its plan, the Company may need to raise additional funds through equity or debt financing. If the Company is unsuccessful in raising additional financing, it will need to reduce costs and operations in the future.

We had cash in the amount of $2,144,220 and $1,687,257 as of June 30, 2016 and December 31, 2015, respectively.

On April 18, 2016 (the “Initial Closing Date”) , the Company entered into a Common Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with certain investors for the issuance and sale of 11,714,285 shares of common stock of the Company and warrants to purchase up to an aggregate of 1,312,000 shares of Common Stock, representing up to $1,640,000 of proceeds, in one or more closings within 30 days of the Initial Closing Date (the “Transaction”). The warrants are exercisable at $0.25 per share for five years from the date of issuance and subject to anti-dilution protection as defined. As of July 23, 2016, the Company has received proceeds, net of costs, of $1,581,206.

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, 2015, relate to capitalized legal patent costs, income taxes, goodwill, intangible assets, share-based payments, revenue recognition, and research and other accounting descriptions. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

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, 2016 in accordance with generally accepted accounting principles. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC on July 10, 2015 for a complete discussion relating to the foregoing evaluation of our controls and procedures.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In April 2015, two shareholder class action lawsuits were filed against us and our former officer Nathaniel Bradley and former officer Edward O’Donnell in the U.S. District Court for the District of Arizona. The plaintiffs allege various causes of action against the defendants arising from our announcement that our previously issued financial results for the first three quarters of 2014 and the guidance for the fourth quarter of 2014 and the full year of 2014 could no longer be relied upon. The complaints seek, among other relief, compensatory damages and plaintiff’s counsel’s fees and experts’ fees. The Court has appointed a lead plaintiff and lead counsel. We have responded to the complaints and also filed a motion to dismiss. We believe that the lawsuits have no merit and intend to mount a vigorous defense. Given the current stage of the proceedings in this case, our management currently cannot assess the probability of losses, or reasonably estimate the range of losses, related to these matters. As of December 31, 2015, we have paid the deductible pursuant to the D&O insurance policy, in the amount of $100,000 regarding this matter.

On May 16, 2016, a shareholder derivative complaint entitled LiPo Ching, Derivatively and on Behalf of AudioEye, Inc., v. Bradley, et al., was filed in the United States District Court for the District of Arizona. As a derivative complaint, the shareholder is purported to act on behalf of AudioEye, Inc. (the “Company”) against certain of the Company's current and former officers and directors (the “Named Individuals”). The Company is named as a nominal defendant. The complaint asserts causes of action including breach of fiduciary duty and others, arising from the Company’s restatement of its financial results for the first three quarters of 2014. The complaint seeks, among other relief, compensatory damages, restitution and attorneys’ fees. Under the By-Laws of the Company, the Directors and Officers (both former and current) are indemnified in connection with such action as long as they have “acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interest of the Corporation”. None of the defendants have responded to the complaint and no discovery has occurred. The Company understands that the Named Individuals intend to vigorously defend the lawsuit. While the Company believes that its legal defense costs may be reimbursed by the Company’s insurance carrier, no reasonable estimate of the outcome of the litigation, the related legal fees, or the impact on the financial results of the Company can be made as of the date of this statement.

We may become involved in various other routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition of these matters, our management believes that the resolution of any such matters, should they arise, is not likely to have a material adverse effect on our financial position or results of operations.

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, 2015.

On April 18, 2016, we entered into a Common Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with certain investors for the issuance and sale of 11,714,285 shares of common stock of the Company and warrants to purchase up to an aggregate of 1,312,000 shares of Common Stock, representing up to $1,640,000 of proceeds. The warrants are exercisable at $0.25 per share for five years from the date of issuance and subject to anti-dilution protection as defined.

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 Rule 506 of Regulation D promulgated thereunder. We determined that the investors were accredited based on representations made by the investors to us.

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 15 day of August 2016.

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

5210 East Williams Circle, Suite 750, Tucson, Arizona		85711
(Address of principal executive offices)		(Zip Code)

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

		Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)	2

	Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (unaudited)	3

	Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2016 (unaudited)	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosures	25

Item 5.	Other Information	25

Item 6.	Exhibits	26

SIGNATURES		27

	June 30,			December 31,
	2016			2015
ASSETS
Current assets:
Cash	$	2,144,220		$	1,687,257
Accounts receivable, net		26,288			22,741
Marketable securities, held in related party		2,700			3,600
Non-marketable securities, held in related party		50,000			50,000
Prepaid expenses and other current assets		41,388			41,388
Total current assets		2,264,596			1,804,986

Intangible assets, net		2,603,455			2,840,856
Goodwill		700,528			700,528

Total assets	$	5,568,579		$	5,346,370

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	187,258		$	213,620
Notes and loans payable, current		24,000			24,000
Related party payables		59,536			153,474
Derivative liabilities		3,999,298			439,361
Deferred revenue		416,449			60,790
Total current liabilities		4,686,541			891,245

Long term liabilities:
Convertible notes and loans payable, net		11,800			1,923,499

Total liabilities		4,698,341			2,814,744

Stockholders' equity:
Preferred stock, $0.00001 par value, 10,000,000 shares authorized, 160,000 and 175,000 issued and outstanding as of June 30, 2016 and December 31, 2015, respectively		2			2
Common stock, $0.00001 par value, 250,000,000 shares authorized, 107,250,100 and 81,717,154 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively		1,072			817
Treasury stock		(623,000	)		(623,000	)
Additional paid-in capital		33,754,111			27,393,238
Accumulated deficit		(32,261,947	)		(24,239,431	)
Total stockholders' equity		870,238			2,531,626

Total liabilities and stockholders' equity	$	5,568,579		$	5,346,370

	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Revenues	$	186,859		$	104,423		$	311,561		$	205,461

Cost of revenue		297,764			394,502			592,572			856,633

Gross Loss		(110,905	)		(290,079	)		(281,011	)		(651,172	)

Operating expenses:
Selling and marketing		194,201			210,029			317,567			576,396
Research and development		84,996			58,738			170,613			201,020
General and administrative		821,898			2,167,320			1,292,923			4,188,547
Amortization and depreciation		139,835			133,944			278,373			267,888
Total operating expenses		1,240,930			2,570,031			2,059,476			5,233,851

Operating loss		(1,351,835	)		(2,860,110	)		(2,340,487	)		(5,885,023	)

Other income (expense):
Unrealized gain (loss) on derivative liabilities		70,908			-			(3,341,151	)		-
Unrealized loss on marketable securities		(900	)		-			(900	)		-
Loss on settlement of debt		(1,664,281	)		-			(1,664,281	)		-
Other income		750			-			750			-
Interest income (expense)		(566,282	)		157			(676,447	)		3,264
Total other income (expense)		(2,159,805	)		157			(5,682,029	)		3,264

Net loss		(3,511,640	)		(2,859,953	)		(8,022,516	)		(5,881,759	)

Preferred stock dividend		(18,125	)		(594,641	)		(40,000	)		(594,641	)

Net loss available to common stockholders	$	(3,529,765	)	$	(3,454,594	)	$	(8,062,516	)	$	(6,476,400	)

Net loss per common share-basic and diluted	$	(0.04	)	$	(0.04	)	$	(0.09	)	$	(0.08	)

Weighted average common shares outstanding-basic and diluted		98,295,458			79,531,225			90,006,306			79,139,308

													Non-controlling
										Additional			Interest/
	Common stock				Preferred stock					Paid-in			Treasury			Accumulated
	Shares		Amount		Shares			Amount		Capital			Stock			Deficit			Total
Balance, December 31, 2015		81,717,154	$	817		175,000		$	2	$	27,393,238		$	(623,000	)	$	(24,239,431	)	$	2,531,626
Common stock issued for services		83,336		1		-			-		14,291			-			-			14,292
Common stock issued in settlement of convertible notes and accrued interest		12,834,800		128		-			-		1,077,995			-			-			1,078,123
Common stock and warrants issued for cash, net of placement costs of $58,794		11,714,285		117		-			-		1,578,965			-			-			1,579,082
Common stock issued upon conversion of preferred stock		900,525		9		(15,000	)		-		(9	)		-			-			-
Fair value of warrants issued in settlement of convertible debt and accrued interest		-		-		-			-		3,205,959			-			-			3,205,959
Reclassify fair value of liability warrants issued in connection with sale of common stock		-		-		-			-		(218,786	)		-			-			(218,786	)
Warrants and Options issued for services		-		-		-			-		688,292			-			-			688,292
Stock based compensation		-		-		-			-		14,166			-			-			14,166
Net loss		-		-		-			-		-			-			(8,022,516	)		(8,022,516	)
Balance, June 30, 2016		107,250,100	$	1,072		160,000		$	2	$	33,754,111		$	(623,000	)	$	(32,261,947	)	$	870,238

			Fair Value
	Fair Value		Hierarchy
Assets
Marketable securities, June 30, 2016	$	2,700	Level 1
Marketable securities, December 31, 2015	$	3,600	Level 1

Liabilities
Derivative Liability , June 30, 2016	$	3,999,298	Level 3
Derivative Liability , December 31, 2015	$	439,361	Level 3

Notes and loans payable	June 30, 2016		December 31, 2015
Short Term
Maryland TEDCO	$	24,000	$	24,000
Total	$	24,000	$	24,000
Long Term
Convertible Secured Note (net of unamortized discounts of $600,301 in 2015)		-		1,899,699
Maryland TEDCO	$	11,800	$	23,800
Total	$	11,800	$	1,923,499

										Intrinsic
						Wtd Avg.				Value
	Number of			Wtd Avg.		Remaining				of Exercisable
	Options			Exercise Price		Term		Exercisable		Options
Outstanding at December 31, 2015		14,759,914		$	0.30		3.61		8,374,294	$	—

Granted		10,699,715			0.03		4.91				—
Forfeited		(400,000	)		0.88						—

Outstanding at June 30, 2016		25,059,629		$	0.20		4.01		12,299,177	$	425,513

	Three Months Ended
	June 30,
	2016			2015
Revenue		186,859		$	104,423

Cost of sales		297,764			394,502
Gross loss		(110,905	)		(290,079	)
Operating expenses:
Selling & marketing		194,201			210,029
Research & development		84,996			58,738
General and administrative expenses		821,898			2,167,320
Amortization & depreciation		139,835			133,944
Total operating expenses		(1,240,930	)		(2,570,031	)
Operating loss		(1,351,835	)		(2,860,110	)

Unrealized gain on derivative liabilities		70,908			-
Unrealized loss on marketable securities		(900	)		-
Loss on settlement of debt		(1,664,281	)		-
Other income		750			-
Interest income/(expense)		(566,282	)		157

Net (loss)		(3,511,640	)		(2,859,953	)
Deemed dividend on Series A Convertible preferred stock		(18,125	)		(594,641	)
Net loss attributable to common stockholders	$	(3,529,765	)	$	(3,454,594	)
Net loss per common share – basic and diluted		(0.04	)		(0.04	)
Weighted average common shares outstanding – basic and diluted		98,295,458			79,531,225

	Six Months Ended
	June 30,
	2016			2015
Revenue		311,561		$	205,461

Cost of sales		592,572			856,633
Gross loss		(281,011	)		(651,172	)
Operating expenses:
Selling & marketing		317,567			576,396
Research & development		170,613			201,020
General and administrative expenses		1,292,923			4,188,547
Amortization & depreciation		278,373			267,888
Total operating expenses		(2,059,476	)		(5,233,851	)
Operating loss		(2,340,487	)		(5,885,023	)

Unrealized loss on derivative liabilities		(3,341,151	)		-
Unrealized loss on marketable securities		(900	)
Loss on settlement of debt		(1,664,281	)		-
Other income		750			-
Interest income/(expense)		(676,447	)		3,264

Net (loss)	$	(8,022,516	)	$	(5,881,759	)
Deemed dividend on Series A Convertible preferred stock		(40,000	)		(594,641	)
Net loss attributable to common stockholders		(8,062,516	)		(6,476,400	)
Net loss per common share – basic and diluted		(0.09	)		(0.08	)
Weighted average common shares outstanding – basic and diluted		90,006,306			79,139,308

	Contracts in Process
	June 30, 2016

			Revenue		Revenue Recognized		Deferred		Contract Amount in Excess of Deferred
	Contract		Recognized		6 Months Ended		Revenue		Revenue and
	Amount		prior to 2016		June 30, 2016		June 30, 2016		Recognized Revenue
Fixed Contracts	$	1,070,297	$	50,889	$	238,131	$	416,447	$	364,830
Fee for Service Contracts		73,431				73,431
	$	1,143,728	$	50,889	$	311,562	$	416,447	$	364,830

	At June 30,			At December 31,
	2016			2015
Current Assets	$	2,264,596		$	1,804,986
Current Liabilities		4,686,541			891,245
Working Capital (Deficit)	$	(2,421,945	)	$	913,741

	For the six months ended
	June 30,
	2016			2015

Net Cash (Used in) Operating Activities	$	(1,069,147	)	$	(3,775,711	)
Net Cash (Used in) Investing Activities		(40,972	)		(29,650	)
Net Cash Provided by Financing Activities		1,567,082			3,277,942
Increase (Decrease) in Cash	$	456,963		$	(527,419	)

Exhibit No.		Description
31.1*		Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of the Principal Executive Officer and Principal 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

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

	AUDIOEYE, INC.

	By:	/s/ Dr. Carr Bettis
		Dr. Carr Bettis
		Principal Executive Officer

	By:	/s/ Todd Bankofier
		Todd Bankofier
		Chief Executive Officer