10-Q 1 v465826_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

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

For the transition period from [ ] to [ ]

Commission file number 333-177463

AudioEye, Inc.

(Exact name of registrant as specified in its charter)

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

5210 East Williams Circle, Suite 750, 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, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 May 15, 2017, 112,564,118 shares of the registrant’s common stock were issued and outstanding.

		Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)	2

	Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)	3

	Consolidated Statement of Stockholders’ (Deficit) Equity for the three months ended March 31, 2017 (unaudited)	4

	Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (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	21

Item 4.	Controls and Procedures	21

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Mine Safety Disclosures	23

Item 5.	Other Information	23

Item 6.	Exhibits	23

SIGNATURES		24

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The financial information set forth below with respect to the financial statements as of March 31, 2017 and 2016 and for the three month periods ended March 31, 2017 and 2016 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 month period ended March 31, 2017 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31.

AUDIOEYE, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 31,			December 31,
	2017			2016
ASSETS
Current assets:
Cash	$	783,664		$	1,409,418
Accounts receivable, net		57,599			44,645
Marketable securities, held in related party		1,200			1,200
Prepaid expenses and other current assets		13,689			19,560
Total current assets		856,152			1,474,823

Property and equipment, net		5,289			-

Intangible assets, net		2,219,178			2,313,249
Goodwill		700,528			700,528

Total assets	$	3,781,147		$	4,488,600

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	257,530		$	245,677
Notes and loans payable, current		17,800			23,800
Related party payables		25,535			32,118
Derivative liabilities		3,173,915			3,478,626
Deferred rent		2,811			207
Deferred revenue		456,444			386,485
Total current liabilities		3,934,035			4,166,913

Long term liabilities:
Deferred rent		11,461			14,450

Total liabilities		3,945,496			4,181,363

Stockholders' (deficit) equity:
Preferred stock, $0.00001 par value, 10,000,000 shares authorized, 160,000 shares issued and outstanding as of March 31, 2017 and December 31, 2016		2			2
Common stock, $0.00001 par value, 250,000,000 shares authorized, 111,994,142 and 111,512,001 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively		1,120			1,115
Additional paid-in capital		34,455,786			34,124,181
Accumulated deficit		(34,621,257	)		(33,818,061	)
Total stockholders' (deficit) equity		(164,349	)		307,237

Total liabilities and stockholders' (deficit) equity	$	3,781,147		$	4,488,600

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended March 31,
	2017			2016
Revenues	$	434,507		$	124,702

Cost of revenue		341,042			294,808

Gross profit (loss)		93,465			(170,106	)

Operating expenses:
Selling and marketing		279,727			123,366
Research and development		44,702			85,617
General and administrative		737,681			471,025
Amortization and depreciation		145,488			138,538
Total operating expenses		1,207,598			818,546

Operating loss		(1,114,133	)		(988,652	)

Other income (expense):
Unrealized gain (loss) on derivative liabilities		310,773			(3,412,059	)
Interest income (expense), net		164			(110,165	)
Total other income (expense)		310,937			(3,522,224	)

Net loss		(803,196	)		(4,510,876	)

Dividend on Series A Convertible preferred stock		(20,000	)		(21,875	)

Net loss available to common stockholders	$	(823,196	)	$	(4,532,751	)

Net loss per common share-basic and diluted	$	(0.01	)	$	(0.06	)

Weighted average common shares outstanding-basic and diluted		111,884,024			81,717,154

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY

THREE MONTHS ENDED MARCH 31, 2017

(unaudited)

									Additional
	Common stock				Preferred stock				Paid in			Accumulated
	Shares		Amount		Shares		Amount		Capital			Deficit			Total
Balance, December 31, 2016		111,512,001	$	1,115		160,000	$	2	$	34,124,181		$	(33,818,061	)	$	307,237
Common stock sold for cash		357,143		4		-		-		49,996			-			50,000
Common stock issued for services		124,998		1		-		-		17,874			-			17,875
Reclassify fair value of liability warrants issued in connection with sale of common stock		-		-		-		-		(6,062	)		-			(6,062	)
Warrants and options issued for services		-		-		-		-		211,464			-			211,464
Restricted stock units issued in payment of accrued compensation		-		-		-		-		58,333			-			58,333
Net loss		-		-		-		-		-			(803,196	)		(803,196	)
Balance, March 31, 2017		111,994,142	$	1,120		160,000	$	2	$	34,455,786		$	(34,621,257	)	$	(164,349	)

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months ended March 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)	$	(803,196	)	$	(4,510,876	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		145,488			138,538
Amortization of debt discounts		-			46,141
Option, warrant, RSU and PSU expense		211,464			215,778
Stock issued for services		17,875			-
(Loss) gain on change in derivative liabilities		(310,773	)		3,412,059
Changes in operating assets and liabilities:
Accounts receivable		(12,954	)		3,459
Other current assets		5,871			-
Accounts payable and accruals		11,853			58,459
Deferred rent		(385	)		-
Deferred revenue		69,959			89,506
Related party payables		51,750			(17,764	)
Net cash (used in) operating activities		(613,048	)		(564,700	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(5,736	)		-
Cash (paid for) intellectual property		(50,970	)		(36,067	)
Net cash (used in) investing activities		(56,706	)		(36,067	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and warrants for cash		50,000			-
Repayments of notes payable		(6,000	)		(6,000	)
Net cash provided by financing activities		44,000			(6,000	)

Net (decrease) increase in cash		(625,754	)		(606,767	)
Cash-beginning of period		1,409,418			1,687,257
Cash-end of period	$	783,664		$	1,080,490

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	-		$	-
Income taxes paid		-			-

Non-cash investing and financing activities:
Reclassify fair value of liability warrants from equity to liability upon issuance	$	6,062		$	-
Restricted stock units issued in payment of accrued compensation		58,333			-

See Notes to Unaudited Consolidated Financial Statements

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

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, 2017.

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, 2016 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 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.

Revenue Recognition

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 two major customers including their affiliates which each generated approximately 16% and 16% (an aggregate of approximately 32%) of its revenue in the three months ended March 31, 2017.

At March 31, 2017, the Company had five customers representing 20%, 21%, 30%, 13% and 11% (an aggregate of approximately 95%) 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.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

Stock based compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. 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.

Derivative Instrument Liability

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 hedging relationships and the types of relationships designated are based on the exposures hedged. At March 31, 2017 and December 31, 2016, 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 the Company’s common stock. The warrants have a strike price of $0.10 and term of 5 years. In addition, in 2016 and the three months ended March 31, 2017, in connection with the sale of the Company’s common stock, the Company issued warrants exercisable for up to 1,792,000 shares of the Company’s 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 March 31, 2017 and December 31, 2016, the derivative liability was stated at $3,173,915 and $3,478,626, respectively. The change in fair value of $310,773 was driven by the decreased value of the Company’s common stock in the period and recorded as the “Gain on change in derivative liability” in the Consolidated Statements of Operations for the three months ended March 31, 2017. 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 Measurements

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

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

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

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

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

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

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 2016 and the three months ended March 31, 2017, the Company issued warrants with an exercise price of $0.25 in connection with the sale of the Company’s 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 $0.152 to $0.195, volatility was estimated to be from 169% to 178%, the risk free rate ranged 1.22% to 1.87% and the remaining term was 5 years. The estimated initial fair value of these warrants of $280,777 during 2016 and $6,062 during the three months ended March 31, 2017 was reclassified from equity to liability at the date of issuance.

At March 31, 2017, the price of the Company stock was $0.13, volatility was estimated to be 172.0%, the risk free rate of 1.93% and the remaining term ranged from 3.53 to 4.79 years. As of March 31, 2017, the fair value of the warrants was determined to be $3,173,915, resulting in an unrealized gain on the change in the fair value of this derivative liability of $310,773 for the three months ended March 31, 2017.

The following are the Company’s assets and liabilities, measured at fair value on a recurring basis, as of March 31, 2017 and December 31, 2016:

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

			Fair Value
	Fair Value		Hierarchy
Assets
Marketable securities, March 31, 2017	$	1,200		Level 1
Marketable securities, December 31, 2016	$	1,200		Level 1

Liabilities
Derivative Liability, March 31, 2017	$	3,173,915		Level 3
Derivative Liability, December 31, 2016	$	3,478,626		Level 3

Recent Accounting Pronouncements

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.

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

As of March 31, 2017, the Company had cash of $783,664 and a working capital deficit of $3,077,883, 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 $96,032. In addition, the Company used actual net cash in operations of $613,048 during the three months ended March 31, 2017. The Company has incurred net losses since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

During the three months ended March 31, 2017, the Company sold shares of common stock and warrants for net proceeds, after commissions and other costs, of $50,000. In addition, in April 2017, the Company issued a convertible promissory note for net proceeds of $50,000. 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.

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.

Accordingly, the accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2017 and December 31, 2016 is summarized as follows:

	March 31, 2017			December 31, 2016
Computer equipment	$	31,214		$	25,478
Less accumulated depreciation		(25,925	)		(25,478	)
Property and equipment, net	$	5,289		$	-

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful life of 3 years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.

Depreciation expense was $447 and $0 for the three months ended March 31, 2017 and 2016, respectively.

NOTE 4 — RELATED PARTY TRANSACTIONS

Dr. Carr Bettis, Executive Chairman and Chairman of Board of Directors

As of March 31, 2017 and December 31, 2016, the Company owed Dr. Bettis $5,992 and $20,575 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. The sub-lease amount is $500 per month totaling $1,500 for the three months ended March 31, 2017 and 2016. The amount of $0 was due as of March 31, 2017 and December 31, 2016. At March 31, 2017 and December 31, 2016, an estimated $16,000 and $8,000 was due and accrued to Dr. Bettis for unreimbursed travel related expenses, respectively.

Sean Bradley, President, Chief Technology Officer, and Secretary

As of March 31, 2017 and December 31, 2016, the Company owed Sean Bradley $3,543 in accrued salary.

Other

The Company holds 60,000 shares in Peartrack Security Systems, formerly Ecologic Transportation, as of March 31, 2017, resulting from the conversion of a $60,000 accounts receivable balance in 2014. Peartrack Security Systems is an entity whose Executive Chairman was former Company director, Edward Withrow III.

In summary, as of March 31, 2017 and December 31, 2016, the total balances of related party payables were $25,535 and $32,118, respectively.

NOTE 5: INTANGIBLE ASSETS

For the three months ended March 31, 2017, the Company invested in software development and patents in the amounts of $50,970 and $-0- respectively; and $-0- and 36,067 for the three months ended March 31, 2016, 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:

	March 31,			December 31,
	2017			2016
Patents	$	3,697,710		$	3,697,710
Capitalized software development		672,537			621,567
Accumulated amortization		(2,151,069	)		(2,006,028	)
Intangible assets, net	$	2,219,178		$	2,313,249

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

Amortization expense for patents totaled $91,582 and $92,779 for the three months ended March 31, 2017 and 2016, respectively. Amortization expense for software development totaled $53,459 and $45,759 for the three months ended March 31, 2017 and 2016, respectively.

Total amortization expense totaled $145,041 and $138,538 for the three months ended March 31, 2017 and 2016, respectively.

NOTE 6 — NOTES PAYABLE

As of March 31, 2017 and December 31, 2016, the Company has short term notes payable of $17,800 and $23,800, respectively as shown in the table below.

Notes and loans payable	March 31, 2017		December 31, 2016
Short Term
Maryland TEDCO	$	17,800	$	23,800
Total	$	17,800	$	23,800

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 March 31, 2017 and December 31, 2016, the principal amount owing was $17,800 and $23,800, respectively, all of which is current. The Company has paid $6,000 for the three months ended March 31, 2017.

NOTE 7: STOCKHOLDERS’ EQUITY

As of March 31, 2017 and December 31, 2016, the Company had 111,994,142 and 111,512,001 shares of common stock issued and outstanding, respectively, and the Company had 160,000 shares of Series A Convertible Preferred Stock issued at $10 per share, paying a 5% cumulative annual dividend and convertible at 0.1754 per share of common stock.

In January 2017, the Company sold 357,143 shares of common stock of the Company and 40,000 warrants to purchase the Company’s common stock to an accredited investor for net proceeds of $50,000. 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 January 2017, the Company issued 41,666 shares of its common stock in payment for consulting services at a fair value of $6,625.

In February 2017, the Company issued 41,666 shares of its common stock in payment for consulting services at a fair value of $5,333.

In March 2017, the Company issued 41,666 shares of its common stock in payment for consulting services at a fair value of $5,917.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

Registration rights

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. The Company filed a registration statement on September 30, 2016 and became effective on December 21, 2016.

Options

As of March 31, 2017 and December 31, 2016, the Company has outstanding options to purchase 25,931,207 and 25,731,207 shares of common stock, respectively.

									Intrinsic
					Wtd Avg.				Value
	Number of		Wtd Avg.		Remaining				of
	Options		Exercise Price		Term		Exercisable		Options
Outstanding at December 31, 2016		25,731,207	$	0.20		3.34		15,091,366	$	1,161,244
Granted		200,000		0.15		5.00				-
Forfeited/Expired
Outstanding at March 31, 2017		25,931,207	$	0.20		3.10		15,943,384	$	1,032,718

On January 17, 2017, the Company granted 100,000 options, which vest 50% after one year and 2.08% every month thereafter, have an exercise price of $0.159, and expire on January 17, 2022. The value on the grant date of the options was $11,119.

On March 10, 2017, the Company granted 100,000 options, which vest 50% after one year and 2.08% every month thereafter, have an exercise price of $0.145, and expire on March 10, 2022. The value on the grant date of the options was $12,541.

Option grants during the three months ended March 31, 2017 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 3.50 years, expected volatility of 173.08% to 175.56%, risk free interest rate of 1.42% to 1.66%, and expected dividend yield of 0%.

For the three months ended March 31, 2017 and 2016, total stock compensation expense related to the options totaled $167,414 and $138,046, respectively.

The outstanding unamortized stock compensation expense related to options was $313,184 (which will be recognized through March 2020) as of March 31, 2017.

Warrants

Below is a table summarizing the Company’s outstanding warrants as of March 31, 2017 and December 31, 2016:

							Intrinsic
					Wtd Avg.		Value
	Number of		Wtd Avg.		Remaining		of
	Warrants		Exercise Price		Term		Warrants
Outstanding at December 31, 2016		63,433,041	$	0.15		3.55	$	3,662,610
Granted		290,000		0.14		3.28
Exercised		-
Forfeited		-
Outstanding at March 31, 2017		63,723,041	$	0.15		3.30	$	3,218,660

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

In January 2017, the Company issued 40,000 warrants with an exercise price of $0.25 in connection with the sale of the Company’s 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.

In January 2017, in exchange for services rendered, the Company issued 250,000 warrants to purchase shares of the Company’s common stock with an exercise price of $0.12 per share that vested immediately. The fair value on the grant date of the warrants was $29,433.

The warrant grants for services during the three months ended March 31, 2017 were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 3.0 years, expected volatility of 175.64%, risk free interest rate of 1.48%, and expected dividend yield of 0%.

For the three months ended March 31, 2017 and 2016, the Company has incurred warrant-based expense of $44,050 and $77,732, respectively. The outstanding unamortized stock compensation expense related to warrants was $33,068 (which will be recognized through March 2018) as of March 31, 2017.

Restricted stock units (“RSU”)

The following table summarizes the restricted stock unit activity for the three months ended March 31, 2017:

Restricted stock units issued as of January 1, 2017			1,252,620
Granted			402,297
Total Restricted stock units issued at March 31, 2017			1,654,917
Vested at March 31, 2017			-
Unvested restricted stock units as of March 31, 2017			1,654,917

On February 23, 2017, the Company granted 402,297 RSUs for accrued and unpaid compensation for the period from December 1, 2016 through March 31, 2017 in the amount of $58,333. The RSUs vest upon the satisfaction of both of the following conditions: (i) recipient remains in service to the Company continuously through and until June 30, 2017, and (ii) the Company undergoes a change of control during the seven-year term of the award.

In connection with the issuance of the above described RSUs as payment for accrued compensation, the Company reclassified to equity the settled salary accrual of $58,333 during the three months ended March 31, 2017.

NOTE 8: COMMITMENTS AND CONTINGENCIES

Litigation

In April 2015, two shareholder class action lawsuits were filed against the Company and former officers Nathaniel Bradley and 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 sought among other relief, compensatory damages and plaintiff’s counsel’s fees and experts’ fees. The Court appointed a lead plaintiff and lead counsel, and consolidated the actions. A consolidated amended complaint was filed under the caption In re AudioEye, Inc. Sec. Litigation. The Company and individual defendants filed a motion to dismiss.

On July 25, 2016, in connection with a voluntary mediation, the parties reached an agreement in principle to settle the consolidated actions. 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. In 2015, the Company paid a deductible under its D&O insurance policy in the amount of $100,000 regarding this matter. On May 8, 2017, the Court approved the settlement in all respects, and dismissed the case with prejudice.

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

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 plaintiff-shareholder purports to act on behalf of the Company against the Named Individuals.

The Company is named as a nominal defendant. The Company understands that the Named Individuals intend to vigorously defend the lawsuit. The defendants filed a motion to dismiss the complaint in February 2017. On May 8, 2017, the Court granted the motion to dismiss, and denied Plaintiff’s request for leave to amend the complaint. 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.

NOTE 9: SUBSEQUENT EVENTS

Convertible promissory note

On April 11, 2017, the Company issued a convertible promissory note in the principal amount of $50,000 (the “Note”) and warrant (the “Warrant”) to purchase 500,000 shares of common stock of the Company The Note and Warrant were issued in connection with an election granted under our October 9, 2015 Note and Warrant Purchase Agreement (the “October 2015 Purchase Agreement”) whereby any investor in the October 2015 Purchase Agreement within the three-year period immediately following the initial closing date, may purchase an additional note in the principal amount equal to 50% of the principal amount of the initial note purchased by such investor at previous closings and an additional warrant with an aggregate exercise price equal to such investor’s the principal amount of such additional note.

The Note bears interest at 10% and matures the earlier of October 9, 2018 or after the occurrence an event of default (as defined in the Note). In the event of any conversion, all interest shall be also converted into equity and shall not be payable in cash.

If the Company sells equity securities in a single transaction or series of related transactions for cash of at least $1,000,000 (excluding the conversion of the Note and excluding the shares of common stock to be issued upon exercise of the warrants) on or before the maturity date, all of the unpaid principal on the Note 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 Note by (ii) 60% of the price per share at which such equity securities are issued and sold in such equity financing.

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

AUDIOEYE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

Common stock

In April 2017, the Company issued 41,674 shares of its common stock for consulting services rendered valued at $7,126.

In May 2017, the Company issued 528,302 shares of its common stock in exchange for 1,000,000 warrants exercised on a cashless basis.

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

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

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

Cautionary Note Regarding Forward-Looking Statements

Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”, “positioned”, “strategy”, “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in “Part I, Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended December 31, 2016. 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 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.

The AudioEye Solution

AudioEye uses proprietary technology and development tools to offer web accessibility solutions that offer significant savings in time and money relative to traditional solutions. Our 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.

Intellectual Property

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, 2016 provides additional information about our business and operations.

Results of 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 months ended March 31, 2017 with the three months ended March 31, 2017 and are not necessarily indicative of the results which may be expected for any subsequent period. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in similar positions. We may not be successful in addressing these risks and difficulties.

Comparative for the Three Months ended March 31, 2017 and March 31, 2016

Results of Operations

	Three Months Ended
	March 31,
	2017			2016
Revenue		434,507		$	124,702

Cost of sales		341,042			294,808
Gross profit (loss)		93,465			(170,106	)
Operating expenses:
Selling & marketing		279,727			123,366
Research & development		44,702			85,617
General and administrative expenses		737,681			471,025
Amortization & depreciation		145,488			138,538
Total operating expenses		1,207,598			818,546
Operating loss		(1,114,133	)		(988,652	)

Unrealized gain (loss) on derivative liabilities		310,773			(3,412,059	)
Interest income/(expense)		164			(110,165	)
Net (loss)		(803,196	)		(4,510,876	)
Deemed dividend on Series A Convertible preferred stock		(20,000	)		(21,875	)
Net loss attributable to common stockholders	$	(823,196	)	$	(4,532,751	)
Net loss per common share – basic and diluted		(0.01	)		(0.06	)
Weighted average common shares outstanding – basic and diluted		111,884,024			81,717,154

Revenue

For the three months ended March 31, 2017 and 2016, revenue was $434,507 and $124,702, respectively, consisting primarily of revenues from various levels of licensing, website design and maintenance. Revenues increased due to a change of marketing focus.

Cost of Sales

For the three months ended March 31, 2017 and 2016, cost of sales was $341,042 and $294,808, respectively, consisting primarily of sub-contracting to outside sources, direct labor and direct technology costs.

Gross Profit (Loss)

An increase in our revenues resulted in a gross profit of $93,465 for the current period, as compared to a gross loss of $170,106 during the three months ended March 31, 2016. Gross profit increased as a result of lower implementation costs as compared to the same period in 2016.

Selling and Marketing Expenses

Selling and marketing expenses were $279,727 and $123,366 for the three months ended March 31, 2017 and 2016, respectively. The increase resulted from the higher sales activity in 2017 as compared to 2016.

Research and Development Expenses

Research and development expenses were $44,702 and $85,617 for three months ended March 31, 2017 and 2016, respectively. Research and development expenses decreased from period to period and reflect continued developments of our product.

General and Administrative Expenses

General and administrative expenses were $737,681 and $471,025 for the three months ended March 31, 2017 and 2016, respectively. General and administrative expenses increased $266,656 due to increases in sales and support personnel and service providers. Stock based compensation for the three months ended March 31, 2017 was $211,464 as compared to $215,778 for the same period last year.

Amortization and Depreciation

Amortization and depreciation expenses were $145,488 and $138,538 for the three months ended March 31, 2017 and 2016, respectively. The increase in expense was primarily related to added patent costs in later 2016 and 2017.

Gain (Loss) on change in Fair Value of Derivative Liabilities

In October 2015, 2016 and 2017, 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 $310,733 on change in fair value of derivative liabilities for the three months ended March 31, 2017 as compared to a loss of $3,412,059 for the same period last year. The primary driver of the change in our derivative liability is our stock price. Generally, as our stock price increases, the liability increases resulting in a larger non-cash loss for the period to period change.

Interest Income (Expense), net

Interest income (expense), net during the three months ended March 31, 2017 was $164 compared to $(110,165) for the three months ended March 31, 2017. 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 $164 for the three months ended March 31, 2017.

Contracts in Process/Revenue Recognition

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 $1,797,367, our deferred revenue of $456,444 and amount recognized in the amount of $434,507. Contract and deferred revenues are 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.

A summary of our contracts in process is as follows:

	Contracts in Process
	March 31, 2017
			Revenue		Revenue Recognized		Deferred		Contract Amount in Excess of Deferred
	Contract		Recognized		3 Months Ended		Revenue		Revenue and
	Amount		prior to 2017		March 31, 2017		March 31, 2017		Recognized Revenue
Fixed Contracts	$	3,295,831	$	607,513	$	434,507	$	456,444	$	1,797,367
Fee for Service Contracts		-				-
	$	3,295,831	$	607,513	$	434,507	$	456,444	$	1,797,367

Liquidity and Capital Resources

Working Capital

	At March 31,			At December 31,
	2017			2016
Current Assets	$	856,152		$	1,474,823
Current Liabilities		3,934,035			4,166,913
Working Capital (Deficit)	$	(3,077,883	)	$	(2,692,090	)

The working capital (deficit) (current liabilities in excess of current assets) for the periods ended March 31, 2017 and December 31, 2016 was $(3,077,883) and $(2,692,090) respectively. The increase in working capital deficit was primarily due to decrease in our cash of $625,754, net with a decrease in current liabilities of $232,878. Adjusting for the non-cash derivative liability, working capital would have been $96,032 at March 31, 2017. In addition, the Company used actual net cash in operations of $613,048 during the three months ended March 31, 2017. The Company has incurred net losses since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Cash Flows

	For the three months ended
	March 31,
	2017			2016

Net Cash (Used in) Operating Activities	$	(613,048	)	$	(564,700	)
Net Cash (Used in) Investing Activities		(56,706	)		(36,067	)
Net Cash Provided by (Used in) Financing Activities		44,000			(6,000	)
Decrease in Cash	$	(625,754	)	$	(606,767	)

We had cash in the amount of $783,664 and $1,409,418 as of March 31, 2017 and December 31, 2016, respectively.

On January 12, 2017, we entered into a Common Stock and Warrant Purchase Agreement with an investor for the issuance and sale of 357,143 shares of common stock of the Company and warrants to purchase up to an aggregate of 40,000 shares of common stock of the Company, representing $50,000 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.

On April 11, 2017, the Company issued a convertible promissory note in the principal amount of $50,000 (the “Note”) and warrant (the “Warrant”) to purchase 500,000 shares of common stock of the Company. The Note and Warrant were issued in connection with an election granted under our October 9, 2015 Note and Warrant Purchase Agreement (the “October 2015 Purchase Agreement”) whereby any investor in the October 2015 Purchase Agreement within the three-year period immediately following the initial closing date may purchase an additional note in the principal amount equal to 50% of the principal amount of the initial note purchased by such investor at previous closings and an additional warrant with an aggregate exercise price equal to such investor’s the principal amount of such additional note.

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, 2016, 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, 2016.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of March 31, 2017 were not effective, for the same reasons as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-(f) of the Exchange Act) that occurred during the our last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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, 2016.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
31.1*		Certification of the 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

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 15 day of May 2017.

	AUDIOEYE, INC.

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

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