NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
NOTE 1: OVERVIEW
AudioEye, Inc. (the "Company") was incorporated on May 20, 2005 in the state of Delaware. On March 31, 2010, the Company was acquired by CMG Holdings
Group, Inc., a Nevada corporation ("CMG"). Effective August 17, 2012, AudioEye Acquisition Corporation, a Nevada corporation ("AEAC"), acquired 80% of the Company's then-outstanding
common stock from CMG.
The
Company has developed patented, Internet content publication and distribution software that enables conversion of any media into accessible formats and allows for real time
distribution to end users on any Internet connected device. The Company's focus is to create more comprehensive access to Internet, print, broadcast and other media to all people regardless of their
network connection, device, location, or disabilities.
The
Company is focused on developing innovations in the field of networked and device embedded audio technology. The Company owns a unique patent portfolio comprised of five issued
patents in the
United States, as well as three U.S. patents pending with additional patents being drafted for filing with the U.S. Patent and Trademark Office and internationally.
On
August 17, 2012, AEAC acquired 80% of the Company from CMG. Pursuant to the agreement:
1. CMG
would retain 15% of the Company.
2. CMG
would distribute to its stockholders, in the form of a dividend, 5% of the capital stock of the Company.
3. The
Company entered into a Royalty Agreement with CMG to pay to CMG 10% of cash received from income earned, settlements or judgments directly resulting from the
Company's patent enforcement and licensing strategy whether received by the Company or any of its affiliates, net of any direct costs or tax implications incurred in pursuit of such strategy
pertaining to the patents.
4. The
Company entered into a Services Agreement with CMG whereby CMG will receive a commission of not less than 7.5% of all revenues received by the Company after the
closing date from all business, clients, or other sources of revenue procured by CMG or its employees, officers or subsidiaries, and directed to the Company, and 10% of net revenues obtained from a
third party described in the agreement.
On
March 22, 2013, the Company and AEAC entered into the Merger Agreement. Pursuant to the Merger Agreement, each share of AEAC common stock issued and outstanding immediately
prior to the Merger effective date would be converted into .94134 share of the Company's common stock and the outstanding convertible debentures of AEAC (the "AEAC Debentures") in the aggregate
principal amount of $1,400,200, together with accrued interest thereon of $67,732, would be assumed by the Company and then exchanged for convertible debentures of the Company (the "AE Debentures").
Effective March 25, 2013, the Merger was completed. In connection with the Merger, the stockholders of AEAC received on a pro rata basis the 24,004,143 shares of the Company's common stock that
were held by AEAC, and the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of the Company's common stock pursuant to their conversion of all of the AE Debentures issued
to replace the AEAC Debentures.
F-7
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 1: OVERVIEW (Continued)
On
November 12, 2013, the Company and CMG terminated the Royalty Agreement.
On
December 30, 2013, the Company completed the repurchase of 2,184,583 shares of its common stock owned by CMG which shares were transferred to the Company in January, 2014 and
retired to treasury. In connection, with the repurchase, the Company paid CMG $573,022 and forgave a $50,000 payable from an affiliate of CMG.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
This summary of significant accounting policies is presented to assist in understanding the Company's financial statements. These
accounting policies conform to accounting principles, generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.
Principles of Consolidation and Non-Controlling Interest
The consolidated financial statements include the accounts of the Company and its subsidiary, Empire Technologies, LLC
("Empire"). All significant inter-company accounts and transactions have been eliminated. In October 2010, the Company formed Empire as part
of a joint venture with LVS Health Innovations, Inc. ("LVS") whereby the Company owned 50% of Empire. Empire is considered a variable interest entity as defined by ASC 805-10 "Business
Combinations" and the primary beneficiary of Empire as defined by ASC 805-10 and therefore consolidates the accounts of Empire for the year ending December 31, 2011. On April 30, 2012,
LVS agreed to sell its 50% membership interest in Empire to the Company for consideration of $10 and the sum of previous LVS capital contributions paid in cash to Empire. The non-controlling interest
was then eliminated and Empire is now treated as a 100% owned consolidated subsidiary.
During
the year ended December 31, 2013 and 2012, Empire had no activity. Empire had no assets or liabilities as of December 31, 2013 and December 31, 2012.
The
Company acquired 19.5% of Couponicate for a nominal cost in the year ended December 31, 2012. The entity has no assets or liabilities and has no net income or loss.
Use of Estimates
The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America,
requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Research and technology expenses
Research and technology expenses are expensed in the period costs are incurred. For the year ended December 31, 2013, research
and technology expenses totaled $56,515.
F-8
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 generate 81% and 81% of its revenue in the fiscal years ended December 31, 2013 and 2012.
Deferred Revenue
Revenue is recognized when services are performed and/or the project is completed. Certain contracts contain payment terms of 2-3
installments, which become due upon the completion of various stages of the project or service.
The
Company evaluates contracts upon receipt of installment payments to determine if the project and/or service has been completed. In the event an installment payment is received prior
to the full completion of the contracted project or service, it is held as deferred revenue until the completion of the project and/or service.
Certain
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 is earned.
Fiscal Year End
The Company has a fiscal year ending on December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash
equivalents.
Marketable Securities
Marketable securities are classified as trading and consist of common stock holdings of publicly traded companies. These securities are
marked to market at the end of each reporting period based on the closing price of the security at each balance sheet date. Changes in fair value are recorded as unrealized gains or losses in the
consolidated statement of operations in accordance with ASC 320.
Allowance for Doubtful Accounts
The Company establishes an allowance for bad debts through a review of several factors including historical collection experience,
current aging status of the customer accounts, and financial condition
F-9
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of
the Company's customers. The Company does not generally require collateral for its accounts receivable. There was an allowance for doubtful accounts of $0 and $102,000 as of December 31,
2013 and 2012, respectively.
Property, Plant and Equipment
Property and equipment are carried at the cost of acquisition or construction and depreciated over the estimated useful lives of the
assets. Costs associated with repairs and maintenance are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency of the
Company's property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on dispositions of equipment are reflected in operations. Depreciation
is provided using the straight-line method over the estimated useful lives of the assets, which are 5 to 7 years.
Goodwill, Intangible Assets, and Long-lived
Goodwill is carried at cost and is not amortized. The Company tests goodwill for impairment on an annual basis at the end of each
fiscal year, relying on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. Company management uses its judgment
in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 350. The Company completed an evaluation of goodwill base on qualitative
assessment at December 31, 2013 and determined that there was no impairment.
The
fair value of the Company's reporting unit is dependent upon the Company's estimate of future cash flows and other factors. The Company's estimates of future cash flows include
assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate
derived from the Company's market capitalization plus a suitable control premium at date of the evaluation. The financial and credit market volatility directly impacts the Company's fair value
measurement through the Company's weighted average cost of capital that the Company uses to determine its discount rate and through the Company's stock price that the Company uses to determine its
market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the
assessment date by the average market price of the Company's common stock over a 30- day period before each assessment date. The Company's uses this 30-day duration to consider inherent market
fluctuations that may affect any individual closing price. The Company believes that its market capitalization alone does not fully capture the fair value of its business as a whole, or the
substantial value that an acquirer would obtain from its ability to obtain control of the Company's business. As such, in determining fair value, the Company adds a control premium to its market
capitalization. To estimate the control premium, the Company considered its unique competitive advantages that would likely provide synergies to a market participant. In addition, the Company
considered external market factors, which it believes, contributed to the decline and volatility in the Company's stock price that did not reflect the Company's underlying fair value.
F-10
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or
divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized
over their useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying
amount exceeds its fair value.
The
Company reviews its long-lived assets, including property and equipment, identifiable intangibles, and goodwill annually or whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will
be less than the carrying amount of the assets.
Impairment of Long-Lived Assets
The Company's long-lived assets, including intangibles, are reviewed for impairment whenever events or changes in circumstances
indicate that the historical-cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected
to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is
measured as the difference between the net book value and the fair value of the long-lived asset.
Patents
were evaluated for impairment and no impairment losses were incurred during the years ended December 31, 2013 and 2012, respectively.
Equity-Based Payments
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505-50, "Equity-Based
Payments to Non-Employees", which requires that such equity instruments are recorded at their fair value on the measurement date, with the measurement of such compensation being subject to periodic
adjustment as the underlying equity instruments vest.
The
Company account for equity instruments issued to employees in accordance with ASC 718 "Stock Compensation". Under this guidance, stock compensation expense is measured at the grant
date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which the temporary differences are expected to reverse.
F-11
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
Company has net operating loss carryforwards available to reduce future taxable income. Future tax benefits for these net operating loss carryforwards are recognized to the extent
that realization of these benefits is considered more likely than not. To the extent that the Company will not realize a future tax benefit, a valuation allowance is established.
Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net income, or loss, by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings (loss) per share and basic earnings (loss) per share are not included in the net loss per share computation until the Company has Net Income. Diluted loss
per share including the dilutive effects of common stock equivalents on an "as if converted" basis would reduce the loss per share and thereby be antidilutive.
Financial instruments
The carrying amount of the Company's financial instruments, consisting of cash equivalents, short-term investments, account and notes
receivable, accounts and notes payable, short-term borrowings and certain other liabilities, approximate their fair value due to their relatively short maturities. The carrying amount of the Company's
long-term debt approximates fair value since the stated rate of interest approximates a market rate of interest.
Fair Value Measurements
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:
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.
F-12
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
following are the Company's marketable securities as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
Fair Value
|
|
Fair Value
Hierarchy
|
Marketable securities, December 31, 2013
|
|
$
|
-0-
|
|
Level 1
|
Marketable securities, December 31, 2012
|
|
$
|
30,000
|
|
Level 1
|
New Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a
material effect on the accompanying financial statements.
NOTE 3: MARKETABLE SECURITIES
As of the years ended December 31, 2013 and 2012, the Company held - 0- and 150,000 shares of the common stock of Ecologic Transportation, Inc. with a fair value of $-0-
and $30,000, respectively. A realized loss of $19,500 was recorded for the year ended December 31, 2013. A realized gain of $12,000 was recorded for the years ended December 31, 2012.
NOTE 4: PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
|
Computer & Peripherals
|
|
$
|
25,478
|
|
$
|
25,478
|
|
Accumulated Deprecation
|
|
|
(21,631
|
)
|
|
(18,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Plant & Equipment, Net
|
|
$
|
3,847
|
|
$
|
7,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense totaled $3,196 and $3,883 for the years ended December 31, 2013 and 2012, respectively.
NOTE 5: INTANGIBLE ASSETS
Prior to December 31, 2013, patents, technology and other intangibles with contractual terms were generally amortized over their estimated useful lives of ten years. When certain
events or changes in
operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
Prior
to any impairment adjustment, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 30, 2013
|
|
December 31, 2012
|
|
Patents
|
|
$
|
3,563,343
|
|
$
|
3,553,651
|
|
Accumulated Amortization
|
|
|
(489,398
|
)
|
|
(135,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, Net
|
|
$
|
3,073,945
|
|
$
|
3,418,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 5: INTANGIBLE ASSETS (Continued)
Amortization
expense totaled $354,368 and $135,030 for the year ended December 31, 2013 and 2012, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
CMG
On March 31, 2010, CMG Holdings Group, Inc. ("CMG") acquired the Company. In connection with the acquisition, the
Company's former stockholders retained rights to receive cash from the exploitation of its technology (the "Rights") consisting of 50% of any cash received from income earned, settlements or judgments
directly resulting from the Company's patent strategy and a share of its net income for 2010, 2011 and 2012 from the exploitation of its technology. The Rights were then contributed to a newly formed
Nevada corporation, AudioEye Acquisition Corporation ("AEAC") in exchange for shares of AEAC.
On
June 22, 2011, CMG entered into a Master Agreement with AEAC pursuant to which: (i) the stockholders of AEAC would acquire from the CMG 80% of the Company's capital
stock (the "Separation") and (ii) CMG would distribute to its stockholders, in the form of a dividend, 5% of the Company's capital stock (the "Spin-off"). Pursuant to the Master Agreement, AEAC
was required to arrange for the release of senior secured notes (the "Senior Notes") issued by CMG in an aggregate principal amount of $1,025,000, which CMG had been unable to service. On
August 15, 2012, the Company, CMG and AEAC completed the Separation. In connection with the Separation, AEAC arranged for the release of CMG under the Senior Notes by payment to CMGO
Investors LLC ("Investors") the holder thereof of $700,000, the delivery of a secured promissory note in the principal amount of $425,000 and the issuance of 1,500,000 shares of the common
stock of AEAC. On February 6, 2013, the note to Investors was paid in full. Payment consisted of cash payments of $200,000 of which $16,339 was interest and $183,661 was principal. The balance
of the principal of $241,359 was repaid with the issuance to Investors of 1,998,402 common shares of the Company, which was 5.678562% of the outstanding shares on February 6, 2013. On
January 29, 2013, the Securities and Exchange Commission declared effective the Company's registration statement on Form S-1 with respect to 1,500,259 shares of its common stock to be
issued in the Spin-off. On February 22, 2013, CMG completed the Spin-off.
In
connection with the Separation, the Company entered into a Royalty Agreement with CMG. Pursuant to the Royalty Agreement, for a period of five years, the Company would pay to CMG 10%
of cash received from income earned or settlements on judgments directly resulting from the Company's patent enforcement and licensing strategy, whether received by it on any of its affiliates, net in
either case of any direct costs or tax implications incurred in pursuit of such strategy as they relate to the patents described in the Master Agreement. Additionally, the Company entered into a
Services Agreement with CMG whereby, without duplication to the amounts payable under the Royalty Agreement, for a period of 5 years, CMG will receive a commission of 7.5% of all revenues
received by the Company after the Separation from all business, clients or other sources of revenue procured by CMG or its employees, officers or subsidiaries and directed to us and 10% of net
revenues obtained from a specified customer.
On
November 12, 2013, the Company and CMG terminated the Royalty Agreement.
F-14
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 6: RELATED PARTY TRANSACTIONS (Continued)
On
December 30, 2013, the Company completed the repurchase of 2,184,583 shares of its common stock owned by CMG which shares were transferred to the Company in January, 2014 and
retired to treasury. In connection, with the repurchase, the Company paid CMG $573,022 and forgave a $50,000 payable from an affiliate of CMG.
AEAC
On March 22, 2013, the Company and AEAC entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
AEAC would be merged with and into the Company (the "Merger") with the Company being the surviving entity. Pursuant to the Merger Agreement, each share of AEAC common stock issued and outstanding
immediately prior to the Merger effective date would be converted into .94134 share of the Company's common stock and the outstanding convertible debentures of AEAC (the "AEAC Debentures") in the
aggregate principal amount of $1,400,200, together with accrued interest thereon, would be assumed by the Company and then exchanged for convertible debentures of the Company (the "AE Debentures").
Effective
March 25, 2013, the Merger was completed. In connection with the Merger, the stockholders of AEAC received on a pro rata basis the 24,004,143 shares of the Company's
common stock that were held by AEAC, and the former holders of the AEAC Debentures received an aggregate of 5,871,752
shares of the Company's common stock pursuant to their conversion of all of the AE Debentures issued to replace the AEAC Debentures. The principal assets of AEAC were the Rights that had been
contributed to AEAC by the former stockholders of the Company. As a result of the Merger, the Rights have been extinguished.
Nathaniel Bradley, President, Chief Executive Officer and Director
As of December 31, 2011, the Company had a note balance of $1,245,840 due to Mr. Bradley.
On
August 31, 2012, the officer paid $50,000 of the Company's accounts payable. As a result, the Company issued the officer a Convertible Promissory Note, which is payable within
two years, accrues interest at 8% per annum, and is convertible into common stock of the Company at a price of $0.25 per share.
On
November 27, 2012 and December 12, 2012, the officer loaned the Company $2,500 and $10,000, respectively. As a result, the Company issued the officer a Convertible
Promissory Note, which is payable within two years, accrues interest at 8% per annum, and is convertible into common stock of the Company at a price of $0.25 per share.
The
Company analyzed the convertible notes for derivative accounting consideration under FASB ASC 815-15 and FASB ASC 815-40. The Company determined the embedded conversion option in the
convertible notes met the criteria for classification in stockholders equity under ASC 815-15 and ASC 815- 40 "Derivatives and Hedging". In addition, the Company determined that the convertible
notes did not contain a beneficial conversion feature under FASB ASC 470-20 "Debt with Conversion and Other Options".
On
December 5, 2012, the Company received a Notice to Convert from its president, Mr. Nathaniel Bradley, in which Mr. Bradley requested that 100% of his debt be
converted into the
F-15
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 6: RELATED PARTY TRANSACTIONS (Continued)
Company's
common stock at a price of $0.25 per share. As a result, the debt in the amount of $1,296,715, which includes accrued interest in the amount of $875, was converted into 5,186,860 shares
of the Company's common stock, and the related Promissory Note was deemed paid in full. Accrued interest in the amount of $84,581 was considered forgiven due to this conversion.
As
of December 31, 2012, related party loan totaled $10,000.
During
the year ended December 31, 2013, the Company borrowed a total of $224,000, due on demand with a warrant to purchase 28,400 common shares, vesting immediately with a strike
price of $0.40. The 28,400 common share warrant was valued at $6,901 on the date the note was granted using a closing price that day of $0.35 through $0.43, a strike price of $0.40, term of
5 years, volatility of 100%, dividends of 0% and a discount rate of 1.37% through 1.43%. The value of the of $6,901 is reflected as a discount which was then amortized to expense because the
note is a demand note. In the same year, $199,000 of principal balance and $25,000 accrued salary was converted to 746,667of the Company's common stock along with a warrant to purchase 746,677 shares
of the Company's common stock. The warrant shall vest immediately with a strike price of $0.4 and expire in 2018. As of December 31, 2013, related party loan totaled $35,000.
As
of December 31, 2013 and 2012, the Company owed $39,500 and $386,539 in accrued salary to Mr. Bradley. During 2013, the Company recognized additional of salary expense
of which $461,539 was converted to warrant to purchase 1,831,783 shares of the Company's common stock, $25,000 was converted to common stock as discussed above and $10,500 was exchanged for marketable
securities the Company held as of December 31, 2012 which resulted a realized loss of $19,500 during the period of 2013.
Sean Bradley, Chief Technology Officer, Vice President, Secretary and Director
As of December 31, 2013 and 2012, the Company owed Sean Bradley $24,375 and $341,731 in accrued salary. During 2013, the Company
recognized additional salary expense of which $399,648 was converted to a warrant to purchase 1,587,290 shares of the Company's common stock.
Others
As of December 31, 2013 and 2012, the Company had accrued salary due to other officer of $29,375 and $101,148. During 2013, the
Company recognized additional salary
expense of which $161,564 was converted to a warrant to purchase 626,680 shares of the Company's common stock.
As
of December 31, 2013, there were $150,174 of accounts payable due to related party.
In
summary, as of December 31, 2013 and 2012, the total balances of related party payable were $243,424 and $829,418, respectively.
As
of December 31, 2013 and 2012, there were outstanding receivables of $82,250 and $16,125, respectively, for services performed for related parties.
For
the year ended December 31, 2013 and 2012, there were revenues earned of $108,500 and $3,000, respectively, for services performed for related parties.
F-16
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 7: NOTES PAYABLE
As at December 31, 2012 and 2013, the Company has current and long term notes payable of $172,845 and $1,466,700 and $79,800 and $97,800, respectively as shown in the table below.
|
|
|
|
|
|
|
|
Notes and loans payable
|
|
December 31,
2013
|
|
December 31,
2012
|
|
Short Term
|
|
|
|
|
|
|
|
Maryland TEDCO
|
|
$
|
24,000
|
|
$
|
24,000
|
|
Notes Payable (net of $1,155 discount)
|
|
|
148,845
|
|
|
|
|
AudioEye Acquisition Corp Notes
|
|
|
|
|
|
1,017,700
|
|
CMGO Investors, LLC
|
|
|
|
|
|
425,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,845
|
|
$
|
1,466,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term
|
|
|
|
|
|
|
|
Maryland TEDCO
|
|
$
|
79,800
|
|
$
|
97,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,800
|
|
$
|
97,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 balance sheet.
The note was in default until October 24, 2011, at which time the Company entered into a Termination and Release Agreement ("Release") with the third party. The terms of the Release, among
other things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the third-party in the combined amount of 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 December 31, 2013 and
2012, the principal amount owing was $103,800 and $121,800, respectively, of which $24,000 and $24,000, respectively, has been recorded as the current portion of the note, and $79,800 and $97,800,
respectively, as the long-term portion of the note, respectively. The Company has paid $18,000 and $24,000 in monthly installments for the year ended December 31, 2013 and 2012, respectively.
On
August 15, 2012, the Company issued a Secured Promissory Note to CMGO Investors LLC, the agent for the former holders of CMG's senior debt, in the amount of $425,000,
related to the separation of the Company from CMG, which took place on August 17, 2012. The note bore interest at 8% per annum. Pursuant to an extension granted by the noteholder, the note was
due on February 6, 2013. The noteholder had the option to convert the principal and interest into 10% of the Company's total issued and outstanding common shares as of the date of the notice to
convert, but in no event more than 6,000,000 shares. On February 6, 2013, the Secured Promissory Note was repaid in full. Payment consisted of cash payments of $200,000, of which $16,339 was
interest and $183,661 was principal. The balance of the principal of $241,359 was repaid with the issuance of 1,998,402 common shares of the Company, which represented 5.678562% of the outstanding
shares on February 6, 2013.
For
the period ending December 31, 2012, AEAC borrowed $1,017,7000 which was evidenced by the issuance of AEAC Debentures. These debentures bore interest at 8% per annum and were
due one year from the date of issuance. The debenture holders had the option to convert the principal and
F-17
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 7: NOTES PAYABLE (Continued)
interest
at an exercise price $0.25 per share. During the period ended March 31, 2013, AEAC borrowed an additional $382,500 under the same term.
In
connection with the Merger that occurred March 25, 2013, the Company assumed the obligations under the AEAC debentures and issued new AE Debentures which in turn were converted
by the holders thereof into an aggregate of 5,871,752 shares of the Company's common stock. These shares were issued for the conversion of total principal of $1,400,200 and accrued interest of $67,732
on the former AE Debentures.
On
August 3, 2013, the Company borrowed $150,000 with a coupon rate of 10%, due on September 10, 2013 with a warrant to purchase 20,000 common shares, vesting immediately
with a strike price of $0.50. The 20,000 common share warrant was valued at $6,930 on August 3, 2013 using a closing price that day of $0.47, a strike price of $0.50, term of 5 years,
volatility of 100%, dividends of 0%, and a discount rate of 1.36%. The value of the warrant of $6,930 is reflected as a discount to the note for a net amount of $143,070. For the period ended
December 31, 2013, interest was accrued in the amount of $2,384 and $5,755 was recognized as amortization expense. As of December 31, 2013, the note has a balance of $148,845, net of
discount of $1,155.
NOTE 8: COMMITMENTS AND CONTINGENCIES
The Company's principal executive offices are located at 5210 E. Williams Circle, Fifth Floor, Tucson, Arizona 85711, consisting of approximately 6,003 square feet as of
January 24, 2014. The Company's office is leased for an aggregate amount of $12,927 per month. The Company's total rent expense was approximately $38,388 and $30,165 under office leases for the
years ended December 31, 2013 and 2012, respectively.
On
August 7, 2013, the Company entered into agreements with the following executive officers:
Nathaniel
Bradley. Pursuant to an Executive Employment Agreement, Nathaniel Bradley was employed as the Company's Chief Executive Officer. The term of the Executive Employment Agreement
is three years commencing August 7, 2013, subject to extension upon mutual agreement. He is to receive a base annual salary of $200,000 during the employment period. He is entitled to receive
bonuses at the sole discretion of the Company's board of directors or the compensation committee. Mr. Bradley is also entitled to equity awards under the Company's incentive compensation plans.
In connection with entry into the Executive Employment Agreement, the Company and Mr. Bradley terminated the existing employment agreement, dated April 1, 2010, between the Company and
Mr. Bradley effective as of August 7, 2013.
Sean
Bradley. Pursuant to an Executive Employment Agreement, Sean Bradley was employed as the Company's Chief Technology Officer. The term of the Executive Employment Agreement is three
years commencing August 7, 2013, subject to extension upon mutual agreement. He is to receive a base annual salary of $195,000 during the employment period. He is entitled to receive bonuses at
the sole discretion of the Company's board of directors or the compensation committee. Mr. Bradley is also entitled to equity awards under the Comoany's incentive compensation plans. In
connection with entry into the Executive Employment Agreement, the Company and Mr. Bradley terminated the existing employment agreement, dated April 1, 2010, between the Company and
Mr. Bradley effective as of August 7, 2013.
F-18
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 8: COMMITMENTS AND CONTINGENCIES (Continued)
James
Crawford. Pursuant to an Executive Employment Agreement, James Crawford was employed as the Company's Chief Operating Officer. The term of the Executive Employment Agreement is
three years commencing August 7, 2013, subject to extension upon mutual agreement. He is to receive a base annual salary of $185,000 during the employment period. He is entitled to receive
bonuses at the sole discretion of the Company's board of directors or the compensation committee. Mr. Crawford is also entitled to equity awards under the Comoany's incentive compensation
plans.
Edward
O'Donnell. Pursuant to an Executive Employment Agreement, Mr. O'Donnell was employed as the Company's Chief Financial Officer. The term of the Executive Employment
Agreement is two years commencing August 7, 2013, subject to extension upon mutual agreement. He is to receive a base annual salary of $165,000 during the employment period. He is entitled to
receive bonuses at the sole discretion of the Company's board of directors or the compensation committee. Mr. O'Donnell is also entitled to equity awards under the Company's incentive
compensation plan.
Constantine
Potamianos. Pursuant to an Executive Employment Agreement, Constantine Potamianos was employed as the Company's Chief Legal Officer and General Counsel. The term of the
Executive Employment Agreement is two years commencing August 7, 2013, subject to extension upon mutual agreement. He is to receive a base annual salary of $150,000 during the employment
period. He is entitled to receive bonuses at the sole discretion of the Company's board of directors or the compensation committee. Mr. Potamianos is also entitled to equity awards under the
Company's incentive compensation plan.
NOTE 9: STOCKHOLDERS' EQUITY
The total number of authorized shares of common stock that may be issued by the Company was 4,000,000 with a par value of $0.00001 per share. On August 17, 2012, the Company
increased the total number of authorized shares of common stock to 100,000,000 shares, with a par value of $0.00001.
On
August 17, 2012, in connection with the separation of the Company from CMG, the Company effectuated a forward split of its outstanding shares of common stock. As a result, each
outstanding share of common stock was forward split into 11.78299032 shares of the Company's common stock, resulting in a total number of shares issued of 30,005,185.
As
a result of the acquisition of AEAC (see note 14), $3,123,136 has been recorded into additional paid in capital since the transaction was accounted as merger of entities under
common control. Also during 2012, AEAC paid $20,000 of the Company's accounts payable and forgave the debt. This amount has been recorded into paid in capital.
On
December 5, 2012, the Company received a Notice to Convert from its president, Mr. Nathaniel Bradley, in which Mr. Bradley requested that 100% of his debt be
converted into the Company's common stock at a price of $0.25 per share. As a result, the debt in the amount of $1,296,715, which includes accrued interest in the amount of $875, was converted into
5,186,860 shares of the Company's
common stock on December 20, 2012, and the related Promissory Note was deemed paid in full. Accrued interest in the amount of $84,581 was considered forgiven due to this conversion.
On
April 30, 2012, LVS agreed to sell its 50% membership interest in Empire to the Company for consideration of $10 and the sum of previous LVS capital contributions paid in cash
to Empire. The
F-19
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 9: STOCKHOLDERS' EQUITY (Continued)
non-controlling
interest of $14,701 was then eliminated and Empire is now treated, as a 100% owned consolidated subsidiary.
During
the year ended December 31, 2012, $11,309 was recognized was stock option expense. See note 11.
As
of December 31, 2013 and December 31, 2012, the Company had 53,239,369 and 35,192,045 shares of common stock issued and outstanding, respectively.
On
February 6, 2013, the Secured Promissory Note to CMGO Investors LLC was repaid in full. Payment consisted of cash payments of $200,000 of which $16,339 was interest and
$183,661 was principal. The balance of the principal of $241,359 was repaid with the issuance of 1,998,402 common shares of the Company, which was 5.678562% of the outstanding shares on
February 6, 2013.
In
connection with the Merger that occurred March 22, 2013, the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of the Company's common stock
pursuant to their conversion of all of the AE Debentures issued to replace the AEAC Debentures totalling $1,400,200 of principal and $67,732 of interest. These shares were issued for the conversion of
total principal and accrued interest on the former AE Debentures.
On
April 5, 2013 the Company issued 200,000 shares of the Company's common stock for services valued at $50,000. The shares were valued at the market price of the respective dates
of issuance.
On
September 10, 2013, the Company issued 142,500 common shares for the exercise of options and received proceeds of $37,188.
On
October 10, 2013, the Company issued 42,250 common shares for the exercise of options and received proceeds of $10,562.
In
the quarter ended June 30, 2013, pursuant to a private placement, the Company sold to a group of accredited investors 1,092,000 units for gross aggregate proceeds of $496,000
net of private placement cost of $39,100 and of which 100,000 of the units was for $50,000 of accounts payable to related party that was forgiven. Each unit consists of one share of the Company's
common stock and a three-year warrant to purchase one share of the Company's common stock. The warrants included in the units have an exercise price of $0.50 per share. The purchase price of each unit
was $0.50. On August 8, 2013, the Company issued a total of 1,092,000 shares of its common stock in connection with the private placement subscriptions received through June 30, 2013. As
of September 30, 2013, warrants to purchase up to a total of 1,092,000 shares of the Company's common stock were to be issued in connection with the sale of units through the private placement
(the "Private Placement". These warrants will not be issued until the final closing of the Private Placement.
On
November 25, 2013, the Company conducted a final closing of the Private Placement pursuant to which an additional 50,000 units were sold to an affiliate of a director. Each
unit consisted of one share of the Company's common stock and a three-year warrant to purchase one share of the Company's common stock. The warrants included in the units have an exercise price of
$0.50 per share. The purchase price of each unit was $0.50 for a total of $25,000.
On
December 23, 2013, the Company sold an aggregate of 10,088,336 units to 15 accredited investors for gross proceeds of $3,026,500 net of private placement cost of $276,408 in a
separate
F-20
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 9: STOCKHOLDERS' EQUITY (Continued)
private
placement (the "Second Private Placement"). The units in the Second Private Placement consisted of 10,088,336 shares of the Company's common stock and warrants to purchase an additional
10,088,336 shares of the Company's common stock, which warrants include warrants to purchase 952,564 shares of the Company's common stock issued to the placement agent in connection with their
services. The warrants in the Second Private Placement are for a term of five years and have an exercise price of $0.40 per share.
During
the year ended December 31, 2013, $199,000 of prinicpal balance and $25,000 acrued salary was converted to 746,667of the Company's common stock along with warrant to
purchase 746,677 shares of the Company's common stock. See Note 6.
On
December 30, 2013, the Company completed the repurchase of 2,184,583 shares of the Company's common stock owned by CMG which shares were transferred to the Company in January,
2014 and retired to treasury. In connection, with the repurchase, the Company paid CMG $573,022 and forgave a $50,000 payable to the Company from an affiliate of CMG.
During
the year ended December 31, 2013, 4,054,753 of the Company's warrants were issued to convert $1,022,751 of accrued salary. See note 6 and 12.
During
the year ended December 31, 2013, 41,872 of the Company's warrants were issued to convert $51,000 of accounts payable. See note 12.
During
the year ended December 31, 2013, $1,191,128 was recognized as stock option, warrant and PSU expense. See note 11, 12 and 13.
NOTE 10: INCOME TAXES
The Company accounts for income taxes under ASC 740, "Income Taxes". Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in future years. Under this method, deferred tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is
recorded when the ultimate realization of a deferred tax as The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are
presented below:
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
December 31,
2013
|
|
December 31,
2012
|
|
Net operating loss carry forwards
|
|
$
|
1,720,000
|
|
$
|
1,170,000
|
|
Less valuation allowance
|
|
|
(1,720,000
|
)
|
|
(1,170,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
this time, the Company is unable to determine if it will be able to benefit from its deferred tax asset. There are limitations on the utilization of net operating loss carry forwards,
including a requirement that losses be offset against future taxable income, if any. In addition, there are limitations imposed by certain transactions, which are deemed to be ownership changes.
Accordingly, a valuation allowance has been established for the entire deferred tax asset. The approximate net operating loss
F-21
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 10: INCOME TAXES (Continued)
carry
forward was $5,071,000 and $3,440,000 as of December 31, 2013 and 2012, respectively and will start to expire in 2029.
NOTE 11: OPTIONS
As at December 31, 2012 and 2013, the Company has 2,820,000 and 4,485,250 options issued and outstanding. There were no options outstanding and no option activity prior to
December 2012.
On
December 19, 2012, the Company issued 2,820,000 options for the initial option grant. Prior to this issuance there had been no option grants. This tranche of options vest over
2 years at exercise price of $0.25 and expire on December 19, 2017. The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include
expected term of 3.25 years, expected volatility of 250%, date of issue risk free interest rate of 0.39%, and expected dividend yield of 0%. The value on the grant date of the options was
$687,953 and the option expense for December 31, 2013 and 2012 was determined to be $377,121 and $11,309. As of December 31, 2013, 184,750 options have been exercised from this tranche
of options.
The
Company issued 400,000 options on May 10, 2013, which vest 50% on grant date and 12.5% every 90 days thereafter, have an exercise price of $1.00 per share, and expire
on May 9, 2016. The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 1.42 years, expected volatility of
100%, risk free interest rate of 0.82%, and expected dividend yield of 0%. The value on the grant date of the options was $152,067 and the option expense for December 31, 2013 and 2012 was
determined to be $124,987 and $0. As of December 31, 2013, no options have been exercised from this tranche of options.
On
July 29, 2013, the Company issued 350,000 options, which vest 50% on July 29, 2014 and 50% on July 29, 2015, have an exercise price of $0.35 and expire on
July 29, 2018. The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 2.67 years, expected volatility of
100%, risk free interest rate of 0.82%, and expected dividend yield of 0%. The value on the grant date of the options was $72,311 and the option expense for December 31, 2013 and 2012 was
determined to be $15,354 and $0. As of December 31, 2013, no options have been exercised from this tranche of options.
On
August 20, 2013, the Company issued 300,000 options, which vest 50% in February 2014 and 50% in August 2014, have an exercise price of $0.40 and $0.50 and expire on
August 20, 2018. The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 2.88 years, expected volatility of
100%, risk free interest rate of 0.82%, and expected dividend yield of 0%. The value on the grant date of the options was $67,928 and the option expense for December 31, 2013 and 2012 was
determined to be $24,752 and $0. As of December 31, 2013, no options have been exercised from this tranche of options.
On
August 20, 2013, the Company issued 700,000 options, which vest 50% immediately and 12.5% every 90 days thereafter, have an exercise price of $0.50. Out of the 700,000
options, 100,000 expire on August 20, 2016 and the rest 600,000 expire on August 20, 2018. The options were valued using the Black-Scholes pricing model. Significant assumptions used in
the valuation include expected term of 1.75 years for the options expiring in 2016 and expected term of 2.88 years for the options expiring in 2018, expected volatility of 100%, risk
free interest rate of 0.82%, and expected dividend yield of 0%.
F-22
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 11: OPTIONS (Continued)
The
value on the grant date of the options was $147,441 and the option expense for December 31, 2013 and 2012 was determined to be $100,583 and $0. As of December 31, 2013, no options
have been exercised from this tranche of options.
On
December 13, 2013, the Company issued 100,000 options, which vest 50% immediately and 12.5% every 90 days thereafter, have an exercise price of $0.50 and expire on
December 13, 2018. The options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 1.42 years, expected volatility
of 100%, risk free interest rate of 0.82%, and expected dividend yield of 0%. The value on the grant date of the options was $11,180 and the option expense for December 31, 2013 and 2012 was
determined to be $5,590 and $0. As of December 31, 2013, no options have been exercised from this tranche of options.
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Wtd Avg.
Exercise Price
|
|
None outstanding at December 31, 2011
|
|
|
|
|
|
|
|
Granted
|
|
|
2,820,000
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
2,820,000
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,850,000
|
|
$
|
0.57
|
|
Exercised
|
|
|
184,750
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
4,485,250
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2013 and 2012 the outstanding options had a weighted average remaining term and intrinsic value of 3.96 and 4.97 years and $99,070 and $0, respectively.
Outstanding and Exercisable Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Exercise Price
|
|
Number of
Shares
|
|
Remaining
Average
Contractual
Life
(in years)
|
|
Exercise
Price
times
number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Intrinsic
Value
|
|
|
|
$
|
0.25
|
|
|
4,485,250
|
|
|
3.96
|
|
$
|
1,716,313
|
|
$
|
0.38
|
|
$
|
99,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,485,250
|
|
|
|
|
$
|
1,716,313
|
|
$
|
0.38
|
|
$
|
99,070
|
|
The
options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 1.42 through 3.25 years, expected volatility
of 100% through 250%,
date of issue risk free interest rates, and expected dividend yield of 0%. The expensed amount for options for December 31, 2013 and 2012 was determined to be $648,387 and $11,309.
F-23
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 12: WARRANTS
On March 19, 2013, the Company's board of directors approved the issuance of warrants to James Crawford, Nathaniel Bradley and Sean Bradley to purchase up to 464,593, 1,696,155
and 1,491,924, respectively, shares of the Company's common stock in consideration for the release of an aggregate of $913,168 due to the issuees. The warrants have an issuance date of
March 19, 2013, expire on March 19, 2018, have a strike price of $0.25 per share, and vest in 1/3 increments on the annual anniversaries of the issuance. The warrants to purchase up to
an aggregate of 3,652,672 shares of common stock were valued at $913,168, which is the same amount as the related party payables forgiven.
On
May 10, 2013, the Company's board of directors approved the issuance of a warrant to a third party to purchase up to 41,872 shares of the Company's common stock in settlement
of accounts payable. The warrant expires on May 10, 2018, has a strike price of $1.22 per share, and was vested upon grant. The warrant was valued at $51,000, which is the same amount as the
accounts payable forgiven.
On
June 30, 2013, the Company's board of directors approved the issuance of warrants to James Crawford, Nathaniel Bradley and Sean Bradley to purchase up to 38,333, 32,500 and
28,333, respectively, shares of the Company's common stock in consideration for the release of an aggregate of $38,333 due to the issuees. The warrants have an issuance date of June 30, 2013,
expire on June 30, 2016, have a strike price of $0.50 per share, and were vested upon grant. The warrants to purchase up to 99,166 an aggregate of shares of common stock were valued at $38,333,
which is the same amount as the related party payables forgiven.
In
the 2013, pursuant to a private placement (the "Private Placement"), the Company sold 1,142,000 units to a group of accredited investors, with each unit consisting of one share of the
Company's common stock and a three-year warrant to purchase one share of the Company's common stock. The warrants included in the units have an exercise price of $0.50 per share. The purchase price of
each unit was $0.50. As of December 31, 2013, 1,042,000 shares of the Company's common stock were issued and warrants to purchase up to a total of 1,042,000 shares of the Company's common stock
were to be issued in connection with the Private Placement.
During
2013, the Company's board of directors approved the issuance of warrants to multiple entities to purchase up to 405,000, in aggregate, shares of Company common stock as a part of
the service contracts. The warrants expire in five years, have a strike price of $0.25 - $0.60 per share, and were vested upon grant. The warrants to purchase up to 405,000 an aggregate of shares of
common stock were valued at $98,851 and was expensed during the year ended December 31, 2013.
On
August 3, 2013, the Company issued a warrant to purchase up to 20,000 shares of Company common stock to the issuer of the $150,000 note detailed in Note 7. The warrant
has an issue date of August 3, 2013, expires on August 3, 2018, has a strike price of $0.50, and was vested upon grant. The warrant was valued at $6,930 and recorded as a debt discount
to the note.
During
the November and December of 2013, the Company issued a warrant to purchase up to 28,400 shares of Company common stock to the issuer of the $224,000 note detailed in
Note 6. The warrant will expire in five years, has a strike price of $0.40, and was vested upon grant. The warrant was valued at $6,901 and recorded as a debt discount to the note.
F-24
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 12: WARRANTS (Continued)
On
September 30, 2013, the Company's board of directors approved the issuance of warrants to James Crawford, Nathaniel Bradley, Sean Bradley and Ted O'Donnell to purchase up to
95,394, 103,128, 67,033, and 28,360, respectively, shares of the Company's common stock in consideration for the release of an aggregate of $71,250 due to the issuees. The warrants have an issuance
date of September 30, 2013, expire on September 30, 2016, have a strike price of $0.39 per share, and were vested upon grant. The warrants to purchase up to 293,915 an aggregate of
shares of common stock were valued at $71,250, which is the same amount as the related party payables forgiven.
On
November 16, 2013, the Company issued 1,300,000 warrants which vest immediately and have an exercise price of $0.01 and expire on December 13, 2018. The warrants were
valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 5 years, expected volatility of 100%, risk free interest rate of 1.68%, and
expected dividend yield of 0%. The value on the grant date of the options was $331,287 and the expense for December 31, 2013 and 2012 was determined to be $331,286 and $0. As of
December 31, 2013, no options have been exercised from this tranche of options.
On
December 24, 2013, the Company sold 10,088,336 units as a part of a private placement to a group of accredited investors, with each unit consisting of one share of the
Company's common stock and and a three-year warrant to purchase one share of the Company's common stock. The warrants included in the units have an exercise price of $0.40 per share. The purchase
price of each unit was $0.30. As of
December 24, 2013, 10,088,336 shares of the Company's common stock and warrants to purchase up to a total of 10,888,336 shares of the Company's common stock were to be issued in connection with
the Private Placement. The Company received net cash of $2,750,092 from the sale of units.
During
the year ended December 31, 2013, a related party converted $199,000 of related party loan and $25,000 acrued salary 746,667of the Company common stock along with warrant
to purchase 746,677 shares of the Company's common stock. The warrant shall vest immediately with s strike price of $0.4 and expire in 2018.
There
was no warrant activity before 2013. Below is a table summarizing the Company's outstanding warrants as of December 31, 2012 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Wtd Avg.
Exercise Price
|
|
Wtd Avg.
Remaining
Term
|
|
Intrinsic
Value
|
|
None outstanding at December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
18,770,591
|
|
|
0.35
|
|
|
4.62
|
|
$
|
416,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
18,770,591
|
|
|
0.35
|
|
|
4.62
|
|
|
|
|
The
warrants were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 1.5 to 5.0 years, expected volatility of
100% to 250%, risk free interest rate of 0.82% to 1.68%, and expected dividend yield of 0%.
For
the year ended December 31, 2013 and 2012, the Company has incurred warrants based expense of $430,138 and $0.
F-25
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 13: PERFORMANCE SHARE UNITS
On August 7, 2013, the Company entered into Performance Share Unit Agreements under the AudioEye, Inc. 2012 Incentive Compensation Plan with Nathaniel Bradley, Sean Bradley
and James Crawford:
-
-
Nathaniel Bradley.
Mr. Bradley was granted an
award of up to an aggregate of 200,000 Performance Share Units ("PSUs"), subject to increase of up to a total of 400,000 PSUs over a three-year period. Each PSU represents the right to receive one
share of the Company's common stock. The number of PSUs for a performance period will be determined by the level of achievement of performance goals in accordance with the terms and provisions of the
Performance Share Unit Agreement.
-
-
Sean Bradley.
Mr. Bradley was granted an award of
up to an aggregate of 200,000 PSUs, subject to increase of up to a total of 300,000 PSUs over a three-year period. Each PSU represents the right to receive one share of the Company's common stock. The
number of PSUs for a performance period will be determined by the level of achievement of performance goals in accordance with the terms and provisions of the Performance Share Unit Agreement.
-
-
James Crawford.
Mr. Crawford was granted an award
of up to an aggregate of 200,000 PSUs, subject to increase of up to a total of 300,000 PSUs over a three-year period. Each PSU represents the right to receive one share of the Company's common stock.
The number of PSUs for a performance period will be determined by the level of achievement of performance goals in accordance with the terms and provisions of the Performance Share Unit Agreement.
The
Company estimates that 100% of the PSUs or 1,000,000 incentive shares will be issued. The closing stock price on the date of the agreements on August 7, 2013 was $0.45. Total
PSUs expense of $450,000 will be amortized over the performance period from grant through March 31, 2016.
For
the year ending December 31, 2013, the Company has incurred performance share unit based expense of $112,603 and has additional expense to be amortized of $337,397 through the
first quarter of 2016.
NOTE 14: ACQUISITION OF AUDIOEYE, INC. BY AUDIOEYE ACQUISITION CORPORATION
On August 17, 2012 AEAC acquired 80% of AudioEye , Inc, for $1,125,000 and 1,500,000 shares of AEAC common stock with a fair value of $375,000.
F-26
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 14: ACQUISITION OF AUDIOEYE, INC. BY AUDIOEYE ACQUISITION CORPORATION (Continued)
On
August 17, 2012, the Company determined the fair value AudioEye's patents to be $3,551,814. The following table sets forth the purchase price allocation for the acquisition of
AudioEye, Inc. as of August 17, 2012:
Purchase Price Allocation
|
|
|
|
|
|
|
|
|
|
Purchase Price:
|
|
Cash
|
|
$
|
1,125,000
|
|
|
|
|
|
|
1,500,000 shares of AEAC stock
|
|
|
375,000
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net Assets (deficit)
|
|
|
|
|
|
2,752,342
|
*
|
Less: Identifiable IntangiblesPatents
|
|
|
|
|
|
(3,551,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
$
|
700,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets (deficit)
|
|
|
|
|
|
|
Book Value
at 08/17/12
|
|
Current Assets
|
|
$
|
109,521
|
|
Property, Plant & Equipment, net
|
|
|
7,688
|
|
Patents
|
|
|
|
|
Current Liabilities
|
|
|
(1,517,724
|
)
|
L/T Liabilities
|
|
|
(1,351,827
|
)
|
Contingent Liabilities (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets (deficit)
|
|
$
|
(2,752,342)
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
accordance with ASC 805, the Company has accounted for the combination using the Acquisition Method for the purpose of allocating the purchase price and determining goodwill. The fair
value of the Company's current tangible assets, property and equipment and liabilities approximated book value on the date of the acquisition. Therefore no adjustment has been made to the book value
of the Company's existing tangible assets and liabilities. The Company has determined that the value of goodwill is $700,528, based upon the Company's enterprise allocation, less the Company's net
assets at the time of purchase, less any identifiable intangible assets, and is comprised of the expected synergies and intangible assets that do not qualify for separate recognition. While the
Company uses its best estimates and assumptions as part of the purchase price allocation process to value net assets as of the
Separation date of August 17, 2012, the purchase price allocation could change during the measurement period (not to exceed one year) if new information is obtained about facts and
circumstances that existed as of the Separation date that, if known, would have resulted in the recognition of additional, or change in existing, assets and liabilities as of that date.
The
Company has identified its patents as qualifying for separate recognition, in accordance with ASC 820. In determining the fair market value associated with the patents, the Company
used the Income Method. Inasmuch as the Company has previously determined that there existed an impairment of the patent based upon an analysis utilizing the Company's historical cash flows, it was
necessary for
F-27
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 14: ACQUISITION OF AUDIOEYE, INC. BY AUDIOEYE ACQUISITION CORPORATION (Continued)
the
Company to consider any identifiable future cash flows that were reliably estimable at the date of Separation. The Company has determined that the only identifiable revenue stream for future cash
flows directly related to the patents at the date of the Separation are those related to the licensing of its technology to the US Government, more fully described below. All other potential revenue
is highly speculative, and/or not directly related to the patents at the date of the Separation. Based on the analysis performed, the Company determined the fair value of the patents on the date of
separation to be $3,551,814.
NOTE 15: MERGER OF AUDIOEYE, INC. AND AUDIOEYE ACQUISITION CORPORATION
On March 22, 2013, the Company and AEAC entered into the Merger Agreement. Pursuant to the Merger Agreement, each share of AEAC common stock issued and outstanding immediately
prior to the Merger effective date would be converted into .94134 share of the Company's common stock and the outstanding convertible debentures of AEAC (the "AEAC Debentures") in the aggregate
principal
amount of $1,400,200, together with accrued interest thereon of $67,732, would be assumed by the Company and then exchanged for convertible debentures of the Company (the "AE Debentures"). Effective
March 25, 2013, the Merger was completed. In connection with the Merger, the stockholders of AEAC received on a pro rata basis the 24,004,143 shares of the Company's common stock that were held
by AEAC, and the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares of the Company's common stock pursuant to their conversion of all of the AE Debentures issued to
replace the AEAC Debentures.
As
a result of the merger, AEAC is now a wholly owned subsidiary of AudioEye, Inc. This transaction was accounted for as a combination of entities under common control under
ASC 805-10-15. Accordingly, the historical financial statements have been adjusted retroactively assuming the transaction occurred on January 1, 2012. The Company recorded the following
net assets after elimination of intercompany receivables and payables between AudioEye, Inc.:
|
|
|
|
|
Assets
|
|
|
|
|
Cash
|
|
|
4,593
|
|
Intangible Assets
|
|
|
3,551,814
|
|
Goodwill
|
|
|
700,528
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
4,256,935
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
117,162
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
4,139,773
|
|
|
|
|
|
|
|
|
|
|
NOTE 16: CONCENTRATIONS
During the year ended December 31, 2013, the Company had two customers that each comprised approximately 70% and 10% of total revenues, respectively. During the year ended
December 31, 2012 one of these customers comprised approximately 58% of total revenues.
F-28
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 17: SUBSEQUENT EVENTS
Effective January 27, 2014, the Company entered into agreements with Paul Arena. Under an Executive Employment Agreement dated as of January 27, 2014 (the "Agreement"),
Mr. Arena will have direct responsibility working in conjunction with the Company's Chief Executive Officer, over operations,
sales marketing, financial accounting and SEC reporting, operational budgeting, sales costing analysis, billing and auditor interfacing. The initial term of Mr. Arena's employment is two years.
Mr. Arena's base salary is $275,000 per year. Mr. Arena is to receive a signing bonus of $35,000 and is entitled to a quarterly bonus of up to $50,000 based on recognized revenues for
the applicable quarter and additional bonuses at the discretion of the Company's board of directors or compensation committee. Mr. Arena has been granted five year warrants to purchase 250,000
shares of the Company's common stock at an exercise price of $0.40 per share and stock options to purchase 1,500,000 shares at an exercise price of $0.40 per share subject to vesting as set forth in
the Agreement. Pursuant to a separate Performance Share Unit Agreement dated as of January 27, 2014 (the "PSU Agreement"), the Company granted to Mr. Arena an award of up to 3,000,000
PSUs. Each PSU represents the right to receive one share of common stock. The number of PSUs that Mr. Arena actually earns will be determined by the level of achievement of the performance
goals set forth in the PSU Agreement.
On
January 27, 2014 the Company issued 44,307 shares of common stock and a five-year warrant to purchase 44,307 shares of common stock with a strike price of $0.40 for payment for
services.
On
January 30, 2014, the Company sold an aggregate of 666,667 units to 2 accredited investors for gross proceeds of $200,000 in a separate private placement (the "Second Private
Placement"). The units in the Second Private Placement consisted of 666,667 shares of the Company's common stock and warrants to purchase an additional 666,667 shares of the Company's common stock.
The warrants in the Second Private Placement are for a term of five years and have an exercise price of $0.40 per share.
The
Company registered the resale of a maximum of 26,286,836 shares of common stock under a registration statement, which was declared effective on February 11, 2014.
Effective
March 3, 2014, Ernest W. Purcell was elected to the Company's board of directors to fill a vacancy on the board as a result of the resignation of Craig Columbus, which
was also effective March 3, 2014. Pursuant to his appointment, Mr. Purcell has been granted stock options to purchase 250,000 shares of common stock at an exercise price of $0.40 per
share.
Effective
March 5, 2014, stockholders holding a majority of the Company's outstanding shares of common stock (i) approved the AudioEye, Inc. 2014 Incentive
Compensation Plan, (ii) granted authority to the Company's Chief Executive Officer to file a Certificate of Amendment to the Certificate of Incorporation to increase the authorized
number of shares of Company common stock to 250,000,000 from 100,000,000 and (iii) granted authority to the Company's Chief Executive Officer to file a Certificate of Amendment to the
Certificate of Incorporation prior to the Company's listing on a national market or exchange, and in connection with meeting the applicable listing requirements of such national market or exchange, to
implement a reverse stock split of the outstanding shares of common stock on the basis of one post-reverse split share for up to every ten pre-reverse split shares, with the exact ratio to be
determined by the Chief Executive Officer.
F-29
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013 AND 2012
NOTE 17: SUBSEQUENT EVENTS (Continued)
On
March 24, 2014, the Company's board of directors approved the issuance of a warrant to a third party to purchase up to 1,000,000 shares of the Company's common stock in
connection with services. The warrant has an issuance date of March 24, 2014, expires on March 24, 2017, has a strike price of $0.40 per share, and vests as follows: the warrant becomes
exercisable for one share for every $10 of gross sales by the Company during the 12-month period immediately following the date of the warrant to customers introduced by the holder's affiliate.
On
March 24, 2014, the Company's board of directors approved the grant of stock options to purchase 2,577,100 shares at an average exercise price of $0.45 per share under the
AudioEye, Inc. 2013 Incentive Compensation Plan and the AudioEye, Inc. 2014 Incentive Compensation Plan.
On
March 27, 2014, the Company filed a Certificate of Amendment to the Certificate of Incorporation increasing the authorized number of shares of Company common stock to
250,000,000 from 100,000,000.
Through
March 31, 2014, the Company has issued 100,000 shares of common stock for services and 1,300,000 shares of common pursuant to exercise of warrants for a total proceed of
$13,000.
F-30
Table of Contents
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
F-31
Table of Contents
AUDIOEYE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
492,718
|
|
$
|
1,847,004
|
|
Accounts receivable, net
|
|
|
1,295,051
|
|
|
569,297
|
|
Related party receivables
|
|
|
83,375
|
|
|
82,250
|
|
Prepaid assets & security deposits
|
|
|
49,643
|
|
|
|
|
Total Current Assets
|
|
|
1,920,787
|
|
|
2,498,551
|
|
Property and equipment, net
|
|
|
3,048
|
|
|
3,847
|
|
Intangible assets, net
|
|
|
3,830,823
|
|
|
3,073,945
|
|
Goodwill
|
|
|
700,528
|
|
|
700,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
6,455,186
|
|
$
|
6,276,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,275,184
|
|
$
|
416,531
|
|
Notes and loans payable-current, net of discount of $0 and $1,155, respectively
|
|
|
24,000
|
|
|
172,845
|
|
Related party payable
|
|
|
87,000
|
|
|
243,424
|
|
Related party loans
|
|
|
35,000
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,421,184
|
|
|
867,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
|
|
|
Notes and loans payable-long term
|
|
|
69,800
|
|
|
79,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Liabilities
|
|
|
69,800
|
|
|
79,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,490,984
|
|
|
947,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value, 10,000,000 shares authorized, none issued and outstanding, as of March 31, 2014 and December 31, 2013,
respectively
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value, 250,000,000 shares authorized, 55,399,839 and 53,239,369 issued and outstanding, as of March 31, 2014 and
December 31, 2013 respectively
|
|
|
554
|
|
|
532
|
|
Treasury stock
|
|
|
(623,000
|
)
|
|
(623,000
|
)
|
Additional paid in capital
|
|
|
14,274,875
|
|
|
13,231,212
|
|
Accumulated deficit
|
|
|
(8,688,227
|
)
|
|
(7,279,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Deficit
|
|
|
4,964,202
|
|
|
5,329,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
6,455,186
|
|
$
|
6,276,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
F-32
Table of Contents
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
For the Three Months ended
|
|
|
|
March 31,
2014
|
|
March 31,
2013
|
|
Revenue
|
|
$
|
1,029,761
|
|
$
|
223,172
|
|
Revenue from related party
|
|
|
3,125
|
|
|
1,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,032,886
|
|
|
224,297
|
|
Cost of revenues
|
|
|
41,153
|
|
|
45,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
991,733
|
|
|
179,274
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling & marketing
|
|
|
495,383
|
|
|
7,750
|
|
Research & development
|
|
|
130,624
|
|
|
|
|
General and administrative expenses
|
|
|
1,667,600
|
|
|
444,050
|
|
Amortization & depreciation
|
|
|
99,897
|
|
|
89,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,393,504
|
|
|
541,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,401,771
|
)
|
|
(362,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities
|
|
|
|
|
|
(9,000
|
)
|
Interest expense
|
|
|
(6,983
|
)
|
|
(24,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(6,983
|
)
|
|
(33,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(1,408,754
|
)
|
$
|
(396,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per common sharebasic and diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic and diluted
|
|
|
54,215,367
|
|
|
36,965,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
F-33
Table of Contents
AUDIOEYE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
For the Three Months ended
|
|
|
|
March 31, 2014
|
|
March 31, 2013
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(1,408,754
|
)
|
$
|
(396,086
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
99,897
|
|
|
89,593
|
|
Stock, option and warrant expense
|
|
|
849,148
|
|
|
169,756
|
|
Unrealized (gain) loss on investments
|
|
|
|
|
|
9,000
|
|
Amortization of debt discount
|
|
|
1,155
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(725,754
|
)
|
|
3,256
|
|
Related party receivable
|
|
|
(1,125
|
)
|
|
|
|
Prepaid & other assets
|
|
|
(49,643
|
)
|
|
|
|
Accounts payable and accruals
|
|
|
116,153
|
|
|
70,071
|
|
Deferred revenue
|
|
|
|
|
|
(10,380
|
)
|
Related party payables
|
|
|
(156,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
(1,275,347
|
)
|
|
(64,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
Cash paid for intangible assets
|
|
|
(113,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) by investing activities
|
|
|
(113,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
Repayment of note payable
|
|
|
(160,000
|
)
|
|
(206,000
|
)
|
Issuance of common stock for cash
|
|
|
181,537
|
|
|
|
|
Issuance of equity for cash exercise of options and warrants
|
|
|
13,000
|
|
|
|
|
Proceeds from third party loans
|
|
|
|
|
|
352,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
34,537
|
|
|
146,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
(1,354,286
|
)
|
|
81,710
|
|
Cashbeginning of period
|
|
|
1,847,004
|
|
|
11,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashend of period
|
|
$
|
492,718
|
|
$
|
93,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Common stock issued for conversion of debt
|
|
$
|
|
|
$
|
1,692,932
|
|
Warrants issued for related party loans
|
|
|
|
|
|
829,418
|
|
Common stock issued to CMGO for debt repayment
|
|
|
|
|
|
241,339
|
|
Patents capitalized in accounts payable
|
|
|
|
|
|
1,837
|
|
Accounts payable converted into debt
|
|
|
|
|
|
30,000
|
|
Intangible assets purchased with accounts payable
|
|
|
742,500
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,658
|
|
$
|
24,967
|
|
Income taxes paid
|
|
$
|
|
|
$
|
|
|
See Notes to Unaudited Consolidated Financial Statements
F-34
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (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 31, 2014.
In
the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the
interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the
financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2013 as reported in the Company's Annual
Report on Form 10-K have been omitted.
Corporate Information and Background
AudioEye, Inc. was formed as a Delaware corporation on May 20, 2005. The Company focuses on working to improve the
mobility, usability and accessibility of all Internet-based content through the development, sale, licensing and use of its proprietary accessibility technologies. Audio Internet® is a
technology that utilizes patented architecture to deliver a fully accessible audio equivalent of a visual website or mobile website in a compliant format that can be navigated, utilized, interacted
with, and transacted from, without the use of a monitor or mouse, by individuals with visual impairments. For individuals with hearing impairments, Audio Internet® provides captioning for
websites, and the challenges of reaching those with other impairments are also addressed by the technology platform.
Complete
with an ever-growing suite of utilities tailored to the needs of different disabled users, the AudioEye® Audio Internet® Accessibility Platform is a
fully scalable cloud-based solution designed and developed to meet the needs and compliance mandates for an ever-growing demographic.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
Revenue Recognition
Revenue is recognized when all applicable recognition criteria have been met, which generally include: (a) persuasive evidence
of an existing arrangement; (b) a fixed or determinable price; (c) delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably
assured. For software and technology development contracts where applicable, the Company recognizes revenues on a percentage of completion method based upon several factors including but not limited
to: (a) an estimate of total hours and milestones to complete; (b) the total hours completed; (c) the delivery of services rendered; (d) the change in estimates; and
(e) the collectability of the contract.
Licensing
revenues for intangible assets, including intellectual property such as patents and trademarks, are recognized when all applicable criteria have been met: (a) persuasive
evidence of an
F-35
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2014 (Unaudited)
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION (Continued)
existing
arrangement; (b) a fixed or determinable price; (c) the delivery has occurred or service has been rendered; and (d) the collectability of the sales price is reasonably
assured. Licensing revenues are recognized over the term of the contract or, in the case of a perpetual license, revenues are recognized in the period the criteria have been met. In transactions where
the Company engages in a non-cash exchange for a license of the Company for the license of the Company's customer, the Company follows ASC 985-605 and ASC 958-845-10. The licenses received from the
Company's customers are sold, licensed or leased in a different line of business from the Company license delivered to the Company's customers in the exchange. The fair value of the technology or
products exchanged or received is determinable within reasonable limits and used to determine vendor-specific objective evidence with the purpose to enhance product offerings for the sale or license
to third parties. The Company uses fair value guidance of the vendor-specific objective evidence of fair value ("VSOE") under ASC 985-605. The contracts are then evaluted for commercial substance,
including that the licenses received by the Company in the exchange are expected, at the time of the exchange, to be deployed and used by the software vendor and the value ascribed to the transaction
reasonably reflects such expected use. For the three months ended March 31, 2014, the Company sold one license for cash of $225,000 and exchanged the same license to three other customers for
licenses to their intellectual property. The three licenses exhanged were determined to meet the aforementioned criteria and were each recognized as revenue and intangible assets for $225,000 each for
a total of $675,000.
NOTE 2: RELATED PARTY TRANSACTIONS
As of March 31, 2014 and December 31, 2013, related party loans totaled $35,000 and $35,000, respectively.
As
of March 31, 2014 and December 31, 2013, there were related party payables of $87,000 and $243,424, respectively, for services performed by related parties. During the
three months ended March 31, 2014, the Company repaid $156,424 to related parties for services, payroll and reimburseable expenses.
As
of March 31, 2014 and December 31, 2013, there were outstanding receivables of $83,375 and $82,250, respectively, for services performed for related parties.
For
the three months ended March 31, 2014 and 2013, there were revenues earned of $3,125 and $1,125, respectively, for services performed for related parties.
F-36
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2014 (Unaudited)
NOTE 3: NOTES PAYABLE
As of March 31, 2014 and December 31, 2013, the Company had the current and long term notes payable of $24,000 and $172,845 and $69,800 and $79,800, respectively as shown
in the table below.
|
|
|
|
|
|
|
|
Notes and loans payable
|
|
March 31, 2014
|
|
December 31, 2013
|
|
Short Term
|
|
|
|
|
|
|
|
Maryland TEDCO Note
|
|
$
|
24,000
|
|
$
|
24,000
|
|
Note Payable (net of $0 and $1,155 discount, resepectively)
|
|
|
|
|
|
148,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,000
|
|
$
|
172,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term
|
|
|
|
|
|
|
|
Maryland TEDCO Note
|
|
$
|
69,800
|
|
$
|
79,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,800
|
|
$
|
79,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 balance sheet.
The note was in default until October 24, 2011, at which time the Company entered into a Termination and Release Agreement ("Release") with the noteholder. The terms of the Release, among other
things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the noteholder in the combined amount of principal and accrued interest owed to
date, for a total principal amount of $149,800 (the "Maryland TEDCO Note"). The Maryland TEDCO Note is interest free, and is payable in monthly installments of $2,000 beginning November 1,
2011. As of March 31, 2014 and December 31, 2013 the principal amount owing was $93,800 and $103,800, respectively, of which $24,000 and $24,000, respectively, has been recorded as the
current portion of the note, and $69,800 and $79,800, respectively, as the long-term portion of the note, respectively.
On
August 3, 2013, the Company borrowed $150,000 with a coupon rate of 10%, due on September 10, 2013 with a warrant to purchase 20,000 common shares, that vested
immediately with a strike price of $0.50. The warrant was valued at $6,930 on August 3, 2013 using a closing price that day of $0.47, a strike price of $0.50, term of 5 years, volatility
of 100%, dividends of 0%, and a discount rate of 1.36%. The value of the warrant of $6,930 is reflected as a discount to the note for a net amount of $143,070. For the year ended December 31,
2013, interest was accrued in the amount of $2,384 and $5,755 was recognized as amortization expense. During the quarter ending March 31, 2014, the note principal of $150,000 and interest of
$3,658 was paid in full and $1,155 was recognized as amortization expenses.
NOTE 4: STOCKHOLDERS' EQUITY
As of March 31, 2014 and December 31, 2013, the Company had 55,399,839 and 53,239,369 shares of common stock issued and outstanding, respectively.
On
January 30, 2014, the Company sold an aggregate of 666,667 units to two accredited investors for gross proceeds of $200,000 in the second closing of a private placement (the
"Second Private
F-37
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2014 (Unaudited)
NOTE 4: STOCKHOLDERS' EQUITY (Continued)
Placement").
Placement fees were paid and the company received net proceeds of $181,537. The units in the Second Private Placement consisted of 666,667 shares of the Company's common stock and
warrants to purchase an additional 666,667 shares of the Company's common stock. The warrants in the Second Private Placement have a term of five years and an exercise price of $0.40 per share.
On
February 3, 2014, the Company issued 44,307 shares of common stock valued at $13,292 and a five-year warrant to purchase 44,307 shares of common stock with a strike price of
$0.40, volatility of 100% and a risk free rate of 1.44% and a fair value of $9,103, which was completely expensed in the current period. The warrant was issued to compensate for consulting services
provided by a third-party. The shares were valued at the market price of the respective date of issuance.
On
March 27, 2014, the Company filed a Certificate of Amendment to the Certificate of Incorporation increasing the authorized number of shares of Company common stock to
250,000,000 from 100,000,000.
On
March 28, 2014, the Company issued 49,496 shares of common stock pursuant to the cashless exercise of 100,000 options.
From
January 1, 2014 through March 31, 2014, the Company also issued 100,000 shares of common stock for services for an expense of $28,500 with no future period
amortization and 1,300,000 shares of common stock pursuant to exercise of warrants for total proceeds of $13,000. The shares were valued at the market price of the respective date of issuance.
NOTE 5: OPTIONS
As of March 31, 2014 and December 31, 2013, the Company has 8,712,350 and 4,485,250 options issued and outstanding, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Wtd Avg.
Exercise Price
|
|
Wtd Avg.
Remaining
Term
|
|
Intrinsic
Value
|
|
Outstanding at December 31, 2013
|
|
|
4,485,250
|
|
$
|
0.38
|
|
|
3.96
|
|
$
|
99,070
|
|
Granted
|
|
|
4,327,100
|
|
|
0.43
|
|
|
5.17
|
|
|
|
|
Less Exercised
|
|
|
100,000
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
8,712,350
|
|
$
|
0.41
|
|
|
4.31
|
|
$
|
489,225
|
|
The
options were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 2.67 to 2.88 years, expected volatility of
100%, risk free interest rate of 1.54% to 1.76%, and expected dividend yield of 0%.
On
January 27, 2014, the Company awarded 1,500,000 options, one third of which vested immediately, one third upon the Company reporting a minimum of $10 million in
annualized revenues by the 2
nd
anniversary and one third upon the Company reporting a minimum of $20 million in annualized revenues by the
3
rd
anniversary from the grant date, with an exercise price of $0.40 per share and an expiration date of January 27, 2019. The fair value on the grant date of the options
was $274,463 and the option expense for three months ended March 31, 2014 was determined to be $91,488.
F-38
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2014 (Unaudited)
NOTE 5: OPTIONS (Continued)
On
February 17, 2014, the Company awarded 55,000 options, which vest over three years, with an exercise price of $0.305 per share and an expiration date of February 17,
2019. The fair value on the grant date of the options was $9,752 and the option expense for three months ended March 31, 2014 was determined to be $582.
On
March 3, 2014, the Company awarded 250,000 options, of which 20% vested immediately and 20% vest every 90 days thereafter, with an exercise price of $0.40 per share and
an expiration date of March 3, 2019. The fair value on the grant date of the options was $37,805 and the option expense for three months ended March 31, 2014 was determined to be $7,561.
On
March 24, 2014, the Company awarded 1,522,100 options, which vest over three years,with the exception of 200,000 options issued to one individual that vested immediately upon
grant. The options have an exercise price of $0.45 per share and an expiration date of March 24, 2019. The value on the grant date of the options was $675,775 and the option expense for three
months ended March 31, 2014 was determined to be $60,501.
On
March 28, 2014, 100,000 options were exercised in a cashless manner and 49,496 shares of common stock were issued.
For
the three months ended March 31, 2014 expense amortized for options issued prior to January 1, 2014 was $146,002.
For
the three months ended March 31, 2014 and 2013, stock compensation expense related to the options totaled $306,134 and $86,006, respectively. For the three months ended
March 31, 2014 and 2013, stock compensation expense related to the options, warrants and performance stock units totaled $807,356 and $86,006, respectively. The total stock compensation expense
related to the options, warrants and performance stock units to be amortized through March 2017 is $2,402,590 as of March 31, 2014.
NOTE 6: WARRANTS
Below is a table summarizing the Company's outstanding warrants as of March 31, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
Wtd Avg.
Exercise Price
|
|
Wtd Avg.
Remaining
Term
|
|
Intrinsic
Value
|
|
Outstanding at December 31, 2013
|
|
|
18,770,591
|
|
$
|
0.35
|
|
|
4.64
|
|
|
|
|
Granted
|
|
|
2,014,308
|
|
|
0.40
|
|
|
4.16
|
|
|
|
|
Less Exercised
|
|
|
1,300,000
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
19,484,899
|
|
$
|
0.38
|
|
|
4.32
|
|
$
|
1,918,848
|
|
The
warrants were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 3.17 years, expected volatility of 100%,
risk free interest rate of 1.55% to 1.76%, and expected dividend yield of 0%.
F-39
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2014 (Unaudited)
NOTE 6: WARRANTS (Continued)
On
November 16, 2013, the Company issued warrants to purchase1,300,000 of common stock which vested immediately and have an exercise price of $0.01 per share and expire on
December 13, 2018. The fair value on the grant date of the options was $331,287 and the expense for year ended December 31, 2013 was determined to be $331,286. As of March 31,
2014, these warrants have been exercised in their entirety.
On
January 27, 2014, the Company issued five-year fully-vested warrants to purchase 250,000 shares of the Company's common stock with an exercise price of $0.40 per share. The
fair value on the grant date of the warrants was $49,469 and the expense for the three months ended March 31, 2014 was determined to be $49,469. As of March 31, 2014, these warrants have
not been exercised.
On
January 30, 2014, the Company sold an aggregate of 666,667 units to two accredited investors for gross proceeds of $200,000 in the Second Private Placement. The units in the
Second Private Placement consisted of 666,667 shares of the Company's common stock and warrants to purchase an additional 666,667 shares of the Company's common stock, as well as 53,334 placement
agent warrants. The warrants in the Second Private Placement have a term of five years, an exercise price of $0.40 per share and a fair value determined to be $136,707. As of March 31, 2014,
these warrants have not been exercised.
On
February 3, 2014, the Company issued 44,307 shares of common stock and five-year fully-vested warrants to purchase 44,307 shares of common stock with an exercise price of $0.40
per share for payment for services. The fair value on the grant date of the warrants was $9,103 and the expense for the three months ended March 31, 2014 was determined to be $9,103. As of
March 31, 2014, these warrants have not been exercised.
On
March 24, 2014, the Company issued warrants to purchase 1,000,000 shares of common stock. The warrants vest as follows: one warrant share for every $10 of gross sales by the
Company during the 12-month period immediately following the date of grant to customers introduced by an affiliate of the warrant holder. The warrants have an exercise price of $0.40 per share and an
expiration date of March 24, 2019. The fair value on the grant date of the warrants was $346,997 and the warrant expense for March 31, 2014 was determined to be $346,997. As of
March 31, 2014, these warrants have not been exercised.
For
the three months ended March 31, 2014 and 2013, the Company has incurred warrant-based expense of $405,569 and $0, respectively. For the three months ended March 31,
2014 and 2013, stock compensation expense related to the options, warrants and performance stock units totaled $807,356
and $86,006, respectively. The total stock compensation expense related to the options, warrants and performance stock units to be amortized through March 2017 is $2,402,590 as of March 31,
2014.
NOTE 7: PERFORMANCE SHARE UNITS
On January 27, 2014, the Company entered into a Performance Share Unit Agreement under the AudioEye, Inc. 2013 Incentive Compensation Plan with Paul Arena, the Company's
Executive Chairman. Mr. Arena was granted an award of up to an aggregate of 3,000,000 Performance Share Units ("PSUs"). Each PSU represents the right to receive one share of the Company's
common stock. The number of PSUs for a performance period will be determined by the level of achievement of
F-40
Table of Contents
AUDIOEYE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2014 (Unaudited)
NOTE 7: PERFORMANCE SHARE UNITS (Continued)
performance
goals in accordance with the terms and provisions of the Performance Share Unit Agreement.
Below
is a table summarizing the Company's outstanding performance share units as of March 31, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
PSUs
|
|
Wtd Avg.
Grant Price
|
|
Wtd Avg.
Remaining
Term
|
|
Outstanding at December 31, 2013
|
|
|
1,000,000
|
|
$
|
0.45
|
|
|
2
|
|
Granted
|
|
|
3,000,000
|
|
|
0.33
|
|
|
2.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
4,000,000
|
|
$
|
0.36
|
|
|
2.50
|
|
For
the three months ended March 31, 2014 and 2013, the Company has incurred performance share unit-based expense of $95,653 and $0, respectively. For the three months ended
March 31, 2014 and 2013, stock compensation expense related to the options, warrants and performance stock units totaled $807,356 and $86,006, respectively. The total stock compensation expense
related to the options, warrants and performance stock units to be amortized through March 2017 is $2,402,590 as of March 31, 2014.
NOTE 8: INTANGIBLE ASSETS
As of March 31, 2014, patents, technology and other intangibles with contractual terms were generally amortized over their estimated useful lives of five or ten years. When
certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
Prior
to any impairment adjustment, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
|
Patents
|
|
$
|
3,564,319
|
|
$
|
3,563,343
|
|
Software Development Costs
|
|
|
180,000
|
|
|
|
|
Licensing
|
|
|
675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
(588,496
|
)
|
|
(489,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, Net
|
|
$
|
3,830,823
|
|
$
|
3,073,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
development costs and licensing intangible assets both have an estimated useful life of 3 years. Software development costs are incurred during the building of the
Company's Internet platform. Licensing costs are those costs incurred to use processes and technologies not developed by the Company. Both software development and licensing costs are subject to
annual impairment testing. During the three months ended March 31, 2014, $180,000 was capitalized as software development cost. During the three months ended March 31, 2014, a total of
$675,000 of licenses were purchased by exchanging the Company's own licenses and were accounted for as a non-cash transaction in accordance with ASC 985-845. See Note 1 for more details.
Amortization
expense totaled $99,098 and $88,794 for the three months ended March 31, 2014 and 2013, respectively.
F-41