Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the voting and non-voting equity
held by non-affiliates of the registrant as of June 30, 2015 was $8,756,678.
As of March 30, 2016, 81,717,154 shares of the
registrant’s common stock were issued and outstanding.
PART I
Item 1. Business
This annual report contains forward-looking
statements. These statements relate to either future events or our future financial performance. In some cases, you may be able
to identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential” or
“continue,” the negative of these terms or other synonymous terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors,”
that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different
from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend, and
we do undertake any obligation, to revise or update any of the forward-looking statements to match actual results. Readers are
urged to carefully review and consider the various disclosures made in this report, which aim to inform interested parties of the
risks factors that may affect our business, financial condition, results of operations and prospects.
Our financial statements are stated
in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
As used in this annual report, the terms
“we,” “us,” “our,” “AudioEye” the “Firm” the “Company”
and similar references refer to AudioEye, Inc.
Overview
AudioEye is a marketplace leader providing
web accessibility solutions for our clients’ customers through our
Ally Platform Products.
Our technology advances
accessibility with patented technology solutions that reduce barriers, expand access for individuals with disabilities, and enhance
the user experience for a broader audience of users
.
When implemented, we believe that our solutions offer businesses the
opportunity to reach more customers, improve brand image, and build additional brand loyalty. In addition, our solutions
help organizations comply with internationally accepted Web Content Accessibility Guidelines (WCAG) as well as US, Canadian, Australian,
and United Kingdom accessibility laws.
We generate revenues through the sale of
subscriptions of our software as a service (SaaS) technology platform, called the AudioEye Ally Platform, to website owners, publishers,
developers, and operators and through the delivery of managed services combined with the implementation of the AudioEye solution.
Our solutions have been adopted by some of the largest and most influential companies in the world. Our customers span disparate
industries and target market verticals, which encompass (but are not limited to) the following categories: human resources, finance,
transportation, media, and education. Government agencies have also integrated our software in their digital platforms.
Industry Background
Millions of Internet users suffer disabilities
that prevent them from accessing and using information on an equivalent basis. If not coded properly, a website may not offer full
functionality for all users, in particular for users of assistive technology (AT), such as a screen reader. As a result, they may
exclude potential customers. These sites also may not comply with U.S. and foreign laws addressing equal access and digital inclusion.
Traditional solutions addressing web accessibility
may be costly and difficult to implement. Historically, the process for achieving compliance has been driven by costly consulting
services and has not fully utilized emerging technologies to reduce the compliance cost burden. At the same time, web accessibility
efforts have generally focused on a limited number of disability use cases, leaving many users’ accessibility needs for digital
inclusion unaddressed. Businesses may have been reluctant to invest further in web accessibility solutions due to a perceived lack
of commercial return on the significant investment required in order to design and implement a thorough and usable compliance solution.
Conventional solutions have been developed
to help users access websites, but these systems often require software to be installed on the user’s computer. Many
of these solutions are tailored to single or a limited number of use cases and do not encompass multiple tool sets for addressing
a wider range of use cases. In some cases, these systems can be costly, unwieldy and inconvenient. Furthermore, the
assistive software’s ability to understand, process, and interpret complex and dynamic web applications that are prevalent
across the web, today, is dependent on the quality in which the code was designed and developed, including the level to which the
website adheres to best practices and standards.
The AudioEye Solution
AudioEye uses proprietary technology and
development tools to offer web accessibility solutions that offer significant savings in time and money relative to traditional
solutions. Our compliance solutions focus on rapid remediation of the most important accessibility issues, followed by in-depth
analysis identifying and addressing a more comprehensive compliance program. Our technology was built to not only provide users
with a cloud-based assistive toolset that gets embedded and made freely available to users within our client websites, but to also
improve the code in a way that optimizes the user experience for users of existing third-party assistive technologies, such as
screen readers.
Remediation
By deploying AudioEye remediation technology
to fix common and high-impact issues, AudioEye is able to improve the usability of our client sites on the first day that they
implement our solution into their site. Over a period that we believe averages approximately 90 days, with actual time dependent
on the complexity of the client’s web site and other client-specific factors, our proprietary Developer Tools empower AudioEye
engineers to run in-depth analysis to fully understand and manually fix issues. For organizations that do not want a managed SaaS
solution and prefer to achieve WCAG 2.0 Level AA compliance on their own, our cloud-based Developer Portal provides them with a
comprehensive single-source solution for tracking and maintaining a compliance audit of their web environments. These
tools, combined with managed services that include AT testing and support services, provide transparency for our clients affording
product owners to better understand accessibility and usability issues as they look to fix issues at the source. Ultimately, we
hope our clients learn to develop with web accessibility in mind. Each month, AudioEye fixes millions of website problems for its
clients; these site improvements help prevent usability issues and may enhance the user experience for site visitors – in
particular, those customers accessing websites through the use of assistive technology such as those provided by Microsoft, Apple,
Google, and others.
Business-Driven Accessibility
In addition to our compliance solutions,
AudioEye offers business-driven, cloud-based tools that enable our clients to provide a more accessible, usable, and customizable
experience to their customers. Fixing digital experiences for end users leveraging their own assistive technology is just one focus
for meeting the needs of our targeted end-users. In addition to AT users, a much larger demographic of users (many of whom do not
self-identify - or report - themselves as having a disability or impairment) may benefit from the availability of free user-friendly
tools that allow them to customize and optimize their digital experience. In short, we seek to enhance the user experience for
all individuals who arrive at digital experience without having full access and the type of high-quality user experience they deserve.
Our mission is not only one of inclusion but to also provide a superior user experience for anyone accessing our proprietary assistive
tools.
Implementation
We offer solutions that enable our clients
to enhance their brand by demonstrating a robust approach to web accessibility. When adopting our technology, clients implement
the Ally+ Toolbar into their website. By embedding the AudioEye JavaScript, our clients can offer our
Ally+
patent-protected
AT-in-the-Cloud solution that provides our clients’ new and returning customers the opportunity to thoroughly engage and
interact with client websites in a more meaningful and fully customizable way, regardless of their device type, language preference,
or preferred method of access. From the toolbar, site visitors are provided with a Player utility that allows them to listen to
the content of the website read aloud, a Reader utility that allows them to customize the visual display of the website, a Voice
utility that allows them to command the browser using their voice, and a Certification statement that helps our client promote
their commitment to accessibility and digital inclusion.
These tools offer benefits to a broad range
of site visitors, in particular aging populations and individuals who have vision, hearing, motor and intellectual disabilities,
including those who are color blind, dyslexic, learning to read, and looking to maintain focus, or multi-task.
AudioEye provides our customers with detailed
remediation statistics and analytics that demonstrate utilization of the Ally+ solution. This provides our clients with prompt
feedback into the different ways in which their site visitors are engaging with their optimized website and digital content. These
regularly processed confidential reports detail the usage experience of each end-user customer and tracks the time and interests
of the user across the Ally+ experience.
Intellectual Property
Our technology development was initiated
at the University of Arizona Science & Technology Park in Tucson, Arizona. In 2006, we received technology development
venture funding from the Maryland Technology Development Corporation (TEDCO), which contributed to the development of our platform
strategy. Beginning in 2009, we engaged in a multi-year technology development program with the Eller College of Management’s
Department of Management Information Systems at the University of Arizona. In connection with our proprietary technology,
our company has been issued a number of U.S. patents in two distinct patent families. Today, an experienced team of in-house
engineers, designers, and developers in our Atlanta, GA, and Tucson, AZ, offices develop the Company’s technology &
software and are actively engaged in the expansion of the AudioEye IP Portfolio.
Our patented technology was a 2013 Edison
Gold Award winner for innovation in the category of “Quality of Life.”
Our intellectual property is primarily
comprised of trade secrets, trademarks, issued and pending patents, copyrights and technological innovation. We have a patent portfolio
comprised of six patents issued in the United States, we have received a notice of allowance from the U.S. Patent and Trademark
Office for a seventh patent, and we have several additional patents that are either pending or are being prepared for filing in
the United States and internationally.
Our current patented invention relates
to a server-side method and apparatus that enables users to audibly navigate websites and hear high-quality streaming audio narration
and descriptions of websites. This patented invention involves creating an audio-enabled web experience by utilizing voice
talent and automated text-to-speech conversion methods to read and describe web content. It involves the creation of audio files
for each section within a website, and then assigning a hierarchy and navigation system in line with the website design.
To implement the system, a script is installed across the pages of the website and, when loaded, it plays an audible
tone upon a user’s visit indicating that the website is enhanced with our proprietary technology. Upon hearing the
tone, a user presses a key on the keyboard to enter the audible website. Audible narration is played through the user’s
computer, reading text and describing non-text information, such as images. The narration includes menus for navigating the
site which have a hierarchy in line that of the original website. Users navigate the website menus and move from webpage to
webpage by making keystrokes or using a mouse.
Our current portfolio has established a
foundation for building unique technology solutions that contribute to the way in which we differentiate ourselves from other competitors
in the B2B Web Accessibility marketplace. We plan to continue to invest in research and development, and expand our portfolio of
proprietary intellectual property.
Business Plan and Strategy
Leveraging our own patented and patent
pending Ally Platform product suite, we provide cloud-based, enterprise-grade technology solutions, as well as managed services
to fully implement our solution and provision our clients’ sites to conform with web accessibility best practices. Our technology
and professional service offerings may be purchased through a subscription for either a one year or multi-year term. Functionally,
the business is organized into Technology, Operations and Customer Support, Sales and Marketing, and Intellectual Property Development.
Intellectual Property Development is tasked with the development of new leading edge intellectual property.
Through the sale of managed and self-service
contracts, our business model is to sell Business to Business and to secure revenue from multiple business channels, including
(but not limited to): corporate website owners, publishers, developers, and operators, federal, state and local governments, educational
institutions and e-learning websites, and not-for-profit organizations.
In what Forrester has called the “age
of the customer”, we believe that, by adopting our solutions, our customers gain a competitive advantage by ensuring a superior
digital experience for all of their customers, in particular for persons with diverse abilities. Some of the many leading advantages
of our solution, include:
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1.
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Maintaining a mission of inclusion and accessibility for the 5%-10% of the population with a disability or physical limitation
who are denied full access to online digital content.
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2.
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Increasing the client Return On Investment by improving market penetration, brand reputation and
brand loyalty.
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3.
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Ensuring conformance with WCAG 2.0 Level AA success criteria.
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4.
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Deploying a cost effective and reliable solution that is scalable with rapid deployment and little to no project management.
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5.
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Consistently providing an enhanced customer experience for our client customers by providing access to innovative and universally
designed technology solutions.
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Our primary objective is to establish and
maintain a long standing relationship with our customers, as a trusted and relied upon provider of web accessibility technology
and service. The key tenants of this strategy, include:
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1.
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Continually innovating and strengthening the capabilities of our solution offering to attract new customers and entice existing
customers to expand their level of service.
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2.
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Providing industry-leading analytics and site analysis reports that demonstrate a clear Return on Investment.
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3.
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Maintaining a consistent record of low customer attrition through ongoing subscription renewals.
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4.
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Expanding customer adoption across different target market vertical and leveraging strong customer relationships to establish
a significant portfolio of clients within each vertical.
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5.
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Establishing a global client-base that demonstrates a clear and high level of value within the context of disparate international
laws and regulations surrounding the issue of web accessibility and best practices.
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6.
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Leveraging our board of directors and advisory board members to shorten sales cycles and to gain support and buy-in from C-level
executives.
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7.
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Investing in a long-term patent protection strategy to ensure industry leading technological innovations are protected.
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8.
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Leading the dialogue and establishing our voice as technology leaders as it pertains to industry related topics, news, developments
and events
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Product Service Offerings
We offer a diversified portfolio of service
offerings that are broken into three broad business categories: Subscription of our Web Accessibility Technology Platform and Managed
Services.
Our Web Accessibility Technology Platform
(The AudioEye Ally Platform), consists of the AudioEye Developer Portal and the Ally+ Product, which are offered as an Internet
Cloud Software as a Service (SaaS) subscription service.
AudioEye offers three (3) distinct Web Accessibility solution
offerings: Developer Portal, AudioEye Ally+ Standard Package, and the AudioEye Ally+ Premium Package.
The AudioEye
Developer Portal
empowers
web developers to improve their website using the most current, innovative, and industry-leading tools. Primarily, the Developer
Portal is a self-service solution for clients who want to own the accessibility process from beginning to end and puts the power
of accessibility issue tracking, auditing and remediation in the hands of developers to improve the usability and accessibility
of their web infrastructure. Customers leveraging the Developer Portal have the option of embedding the AudioEye JavaScript into
the front-end of their website, allowing them to not only get the benefits of auto-fixes that improve the usability and compliance
level of their site, but it also allows them to manage the remediation process in a controlled environment that serves as an important
resource for ongoing site auditing and issue tracking. At the same time, for organizations that are developing for accessibility,
this robust site evaluation tool provides detailed information to help developers and designers fully understand the identified
issues as well as the different WCAG 2.0 best-practices that may be implemented in order to improve their website through changes
implemented at the source.
For organizations looking to offload the
accessibility process, the
Ally+ Standard Package
allows AudioEye Accessibility Engineers and AT Usability Testers to do
all the heavy lifting in order to achieve accessibility and compliance for our clients. This unique offering leverages a balance
of system and engineer generated remediation techniques to programmatically fix website problems that inhibit full access to our
client’s electronic information technologies (EIT). By providing our customers with full access to the Developer Portal and
working with them on a long term basis to provide automated and manual testing in order to fully understand the issues of accessibility
and how to develop with web accessibility in mind, AudioEye is able to reduces the burden on IT resources, leaving only a limited
work for finite client resources. In conjunction with the implementation of the AudioEye JavaScript, AudioEye makes available the
option to publish the Ally+ Toolbar, which includes the Help Desk and Certification Statement. The Help Desk provides support for
end users who have issues accessing content, while the Certification Statement outlines our client’s commitment to providing
an accessible and usable website experience for individuals with disabilities. As part of the Ally+ Service, AudioEye makes available
detailed reporting that provide the client with the results of remediation efforts.
The AudioEye
Ally+ Premium Package
goes a significant step further. In addition to providing our clients with all the benefits that coincide with the Ally+ Standard
Package, the Ally+ Premium solution expands the capabilities of the Ally+ Toolbar to include easy-to-use, cloud-based assistive
tools that allow our clients to enhance the customer experience for those looking to customize the way in which they engage with
the web browser. The
Ally+
patent-protected AT-in-the-Cloud solution provides our clients’ site visitors with
the opportunity to thoroughly engage and interact with our clients’ websites in a more engaging and fully customizable way,
regardless of their device type, language preference, or preferred method of access.
From the Ally+ Toolbar, users may engage
the
Player
utility that mirrors the features and functions of traditional screen reader software, allowing the user to engage
with the web environment by using their keyboard (instead of a mouse) and listening to content instead of reading. Further, the
built-in
Reader
utility allows users to enlarge the viewport, increase font sizes, change color contrast, highlight text
as it is being read aloud, reduce clutter and distracting content, simplify and normalize the user interface (including complex
site menus) and other features intended to optimize the user experience for addressing specific use cases. Lastly, in 2016, AudioEye
is releasing the first iteration of it’s
Voice
utility, which allows site visitors to command the website user experience
using basic and standardized verbal commands. The free assistive tools made available within websites enabled with the AudioEye
solution have benefits for all site visitors, but, in particular, aging populations and individuals who have vision, hearing, motor
and intellectual disabilities, including those who are color blind, dyslexic, learning to read, and looking to maintain focus,
or multi-task. The AudioEye Ally+ Premium Package has a variable component that requires premium pricing. Customers adopting this
service also receive quarterly reports detailing usage analytics.
As an additional revenue center, AudioEye
provides
Managed Services
that support the SaaS Model infrastructure. When clients adopt the Developer Portal as a self-service
tool, AudioEye markets and sells managed services that include the following: Product Support, Accessibility Training from accessibility
engineers & subject matter experts, Manual Assistive Technology Usability Testing, and other ad hoc services such as Video
Transcription & Captioning, Manual Document Remediation (PDFs, et al), Audio Description Authoring, Accessibility Help Desk,
and more. These same services are also provided to those customers adopting the Ally+ Managed Service solution and go beyond the
inherent managed services that coincide with the implementation of website remediation, the provision of the Ally+ Player, Reader,
and Voice utilities, and, ultimately, the certification of our clients’ web infrastructure.
Customers
Our potential customer base includes a broad
range of private and public sector customers, in particular:
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Federal, State and Local Governments and Agencies
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Not-for-profit Organizations
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If we are unable to establish, maintain
or replace our relationships with customers and develop a diversified customer base, our revenues may fluctuate and our growth
may be limited. The Company had two major customers including their affiliates which generated approximately 58% (56.3% and 1.7%)
and 87% (77% and 10%) of its revenue in the fiscal years ended December 31, 2015 and 2014, respectively.
Corporate Enterprise
Our management believes that corporate enterprise
is a large market for the Company’s products and services. Management believes that the AudioEye Ally+ Premium product provides
a business advantage for our clients by enabling them to better reach the large population of customers who are not able to gain
equal access to our client’s content, products and services delivered via their websites.
Title III of the Americans with Disabilities
Act
was enacted to help eliminate barriers to access. Just as building owners must implement physical accommodations to remove
any physical barrier to access, transportation, or communication, website owners must adhere to Web Accessibility best practices
in order to ensure barrier-free access to their websites and online materials. Over time, a website owner must maintain and prove
their implementation of those techniques, such as those outlined within the globally recognized
Web Content Accessibility Guidelines
(WCAG) 2.0
. Overall, there are over 6 million business (666,000 public and private employers) that must comply with ADA Laws
(source: http://www.ada.gov/pubs/mythfct.txt)
Internet technologies have the potential
to give persons with disabilities the means to live on a more equitable basis within the global community in a manner that previously
was not possible. Our management believes that there is significant market opportunity for our services as most websites are developed
with the assumption that users can visually see the site. According to a study commissioned by Microsoft, conducted by Forester
Research, Inc., 22% (37.2 million) of working-age adults are very likely to benefit from the use of accessible technology due to
a severe difficulties and impairments (source: http://www.microsoft.com/enable/research/phase2.aspx). Persons with disabilities
form the world’s largest minority according to the United Nations. One billion people are estimated by the World Health Organization
to have a disability. According to a 2012 report from the United States Census Bureau, the overall percentage of people with a
disability in the US was 12.1 percent (source: http://www.disabilitystatistics.org/reports/2012/English/HTML/report2012.cfm).
Equally significant to this analysis of
market size are the studies surrounding the market influence of this demographic. Consumers are good to businesses that do good
and through cause related marketing strategies, there exists a non-trivial business opportunity. The disability market represents
an annual disposable income of $1 trillion—and $544 billion in the U.S. alone. When you include friends and family, this
adds another 2.3 billion people who control an incremental $6.9 trillion in annual disposable income (source: Fifth Quadrant
Analytics – The Global Economics of Disability Report -
http://returnondisability.com/disability-market/)
. According
to IBM, “approximately
420 million people worldwide are age 65 or older
, and this number is expected to increase dramatically
over the next two decades. This market
is
likely to have significant disposable income and retirement investments.
(Source: IBM and Banking: Reaching New Markets. Meeting Customer Needs. - https://www-03.ibm.com/able/dwnlds/BusinessAdvantBanking-ExecBrief-accessible.pdf)
Government and Not-for-Profit Organizations Market
Federal and state laws require that the
information and services made available across government agency websites meet the diverse and unique needs of all site visitors.
Conforming to Web Accessibility best practices and guidelines helps ensure public access to government information and improves
the value of agency investment in their websites and online services.
The Rehabilitation Act of 1973 requires
that individuals with disabilities, who are members of the public seeking information or services from a federal department or
agency, have access to and use of information and data that is comparable to that provided to the public without disabilities.
The federal government also requires vendors selling to the government to be compliant under Section 508 of the Rehabilitation
Act of 1973, unless covered by a provable exception. Canada and the European Union have similar requirements.
Seniors and print-impaired individuals need
the Internet’s critical access to fundamental state, local and federal government services and information such as tax forms,
social programs, emergency services and legislative representatives. In addition, the roughly 120,000 federal employees with disabilities
require Internet accessibility for workplace productivity. The AudioEye Reader in the cloud provides an intuitive Internet experience
across all Internet-enabled devices without imposing any additional costs on end users. For government site administrators, our
developer tools are designed to be user-friendly so that sites can be made accessible and maintained as part of any web management
process.
In October 2010, Congress passed -
and the President signed into law - the Twenty-First Century Communication and Video Accessibility Act of 2010, which mandates
that all government websites (city, state and federal) be compliant and provide accessibility to persons with disabilities. Since
this time, a growing number of legal mandates point to the WCAG 2.0 standard – sources range from the Department of Justice
(DOJ), the U.S. Access Board, and the Office of Civil Rights (OCR); The Company can help alleviate the risk that comes with non-conformance
to these accepted guidelines and principles. Over 100 Governments have signed and ratified the UN Convention on the Rights of Persons
with Disabilities. The Company’s certification seal demonstrates a website owner’s commitment to meeting internationally
accepted accessibility standards (limited exclusions apply). As a result, our management believes that providing accessibility
services for website owners and developers has become a significant market opportunity in view of the potential demand for our
patented solutions.
The AudioEye solution provides a unique
approach to solving a pervasive issue that has inhibited government agencies from embracing efficiencies gained through adopting
new cost-effective technological capabilities. More and more federal agencies are beginning to embrace cloud-based service offerings
and leveraging the capabilities afforded through the adoption of third-party cloud-based service providers. In many cases, when
deployed, a deep understanding of the level of adherence to accessibility is overlooked or, in other cases, lack of adherence to
accessibility restricts the federal agency from, ultimately, implementing the 3
rd
party solution. This hindrance is
problematic for agencies that are striving to move their organizations ahead and keeping pace with the many benefits that come
with integrating enterprise-level software solutions. Implementing the AudioEye solution allows federal, state, and local governments
to provide constituents with a reliable, scalable, and fully accessible web environment. By pairing the AudioEye Solution with
other disparate SaaS offerings, organizations can more readily comply with ADA standards. Implementing AudioEye mitigates risk
of non-conformance and goes beyond basic levels of compliance through the inclusion of free cloud-based assistive tools, which
lives up to the spirit of ADA - a noble and necessary aspiration for all federal and state government agencies.
Our solutions are sold by our direct sales
team and through strategic partnerships and resellers. This strategy enables us to address all of the broad markets covered by
our technology and allows for a depth and market penetration that we could never approach on our own.
Our management believes that the government
market imposes certain barriers to entry to new potential entrants. However, our management believes that the potential for recurring
revenue generation, the data value appreciation that occurs over time, and low turnover upon establishment of government business
all contribute to ideal long term conditions that make this a good market for us to conduct direct sales.
The federal government boasts nearly 2,000
top-level .gov domains and 24,000 websites of varying purpose, design, navigation, usability and accessibility. Including the 50
states and all local government websites, there are over 600,000 government websites in the United States.
Potential additional market segments of
focus include, but not limited to:
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Finance & Banking Institutions
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Public & Private Transportation Companies
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Air Carriers (as a result of the Air Carrier Access Act – ACAA - recently updated by the United States Department of
Transportation)
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Educational Institutions (as a results of frequent and recent settlement agreements involving and structured by the Department
of Justice)
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Software as a Service SaaS Providers
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Marketing and Sales
In addition to direct sales with industry
specialization and geographical diversification, we use strategic business development referral partners, who maintain a long standing
successful track record in securing introductions with C-level executives and key stakeholders that directly influence the buying
decision of our technology and services. As a proven means of breaking down barriers to entry and shortening sales cycles, these
strategic relationships contribute to the success of our sales operation. Conveying the Return on Investment of our technology
to our prospective clients is critical as a differentiator in our space. Success in all these efforts is not only critical in order
to meet our sales objectives, but they also raise market awareness of the Company’s products and brand.
In addition, the Company attends selected
accessibility and industry trade conferences, maintains memberships with key, industry-specific organizations, serves as subject
matter experts within well-attended panels covering industry related topics, leverages paid SEO for those looking online to learn
about or purchase accessibility products or services, and a variety of other conventional marketing and social marketing techniques.
Competition
Our management believes that the Company’s
technology and solutions will primarily compete against the following:
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1.
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Web Accessibility Assessment Technology Providers. There are a small number of Web Accessibility audit and tracking platform
providers but we do not believe their technology solutions offer the specific functionality offered through the AudioEye Developer
Portal. Furthermore, their solutions are currently more standalone in that they are not combined with a cloud-based tool with a
full suite of comparable assistive tools for end-users.
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2.
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Web Accessibility Remediation Technology Providers. Currently, other technology provider(s) that utilize technology to apply
compliance remediation through a server-side technology do not pair their solution with a full suite of assistive tools for end-users
and is, therefore, limited in its capacity to provide a fully inclusive user experience for the customers adopting the technology.
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3.
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Web Accessibility Consulting Service Providers. There is a substantial number of consulting service providers in the Web Accessibility
industry. Each generally provides an analysis of the various compliance issues associated with their client’s websites. They
ultimately provide resources and assistance in applying fixes and changes at the source. While we provide these services, we also
provide tools that empower a fully managed service, as well as tools that empower self-directed developers to fix issues without
requiring source-code remediation.
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4.
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Cloud-Based Assistive Technology Providers. There are other
cloud-based assistive technology providers. However, they do not offer a screen-reader-like
experience with mouse-less navigation and do not offer a solution with compliance detection
and remediation for users of existing, native assistive technologies, such as screen
readers. The Company’s patent portfolio should also help preclude competitors from
competing as it pertains to this specific category.
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Competitive Strengths
Our management believes the following competitive
strengths will enable our success in the marketplace:
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Unique Combination of Technology and Specialized Managed Service
. Our management believes, unlike any other company
in the marketplace, AudioEye has addressed the problem of Web Accessibility, holistically, and has uniquely positioned itself to
provide a combination of leading edge technology and high-quality specialized managed service. Our one-of-a-kind, combined solution
empowers our clients to ensure the highest level of access and usability across their digital infrastructure, while reducing burden
on finite IT resources, which leads to cost-savings and reduced time-to-market. Our management believes that the AudioEye solution
allows our customers to focus not only on achieving compliance, but also enables a tangible and non-trivial ROI – a true
competitive advantage. This ROI is derived from opening up access to the 5%-10% of the population with a disability or physical
limitation. This has allowed our clients to reach more customers, improve brand image, and build additional brand loyalty from
their customers in a competitive manner.
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Unique patented technology
. First and foremost, AudioEye builds all its products with the primary goal of enhancing
the user experience, in everyway possible, regardless of the end-user’s individual disability or physical limitation. AudioEye
is a marketplace technology leader providing unparalleled Web Accessibility solutions for our clients’ customers through
our
Ally Platform Products.
We own a unique patent portfolio comprised of six issued patents in the United States, we have
received a notice of allowance from the U.S. Patent and Trademark Office for a seventh patent, and have additional U.S. patents
pending. Our portfolio includes patents and pending patent applications in the United States with over 60 issued claims.
Our current portfolio has established a foundation for building unique technology solutions that contribute to the way in which
we differentiate ourselves from other competitors in the B2B Web Accessibility marketplace. We are actively pursuing the expansion
of this portfolio to include a broad range of pertinent and novel concepts that AudioEye has employed (or is in the process of
employing) for our growing client list. In this continued pursuit of expanding the capabilities of our technology and meeting the
demands of our customers, AudioEye is committed to growing its IP portfolio.
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Highly experienced inventors, technologists and product development team
. Our team is comprised of experienced
software, e-commerce, mobile marketing and Internet broadcasting developers and technologists that have worked together for over
fifteen years. During their careers, this team has developed several technologies programs for Fortune 500 organizations;
federal, state and local governments in the United States, and several leading organizations across the global marketplace.
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Patent and Trademark Rights
We have a portfolio comprised of six approved
patents in the United States, we have received a notice of allowance from the U.S. Patent and Trademark Office for a seventh patent,
and we have several additional patents that are either pending or are being prepared for filing.
The following is a list of our patents,
both issued and pending. The patents have been extended and cover a period from 2002 through 2026.
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No.
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I.D.
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Status
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Title
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1
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US7966184
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Issued
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System and method for audible website navigation
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2
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US7653544
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Issued
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Method and apparatus for website navigation by the visually impaired
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3
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US8260616
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Issued
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System and method for audio content generation
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4
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US8046229
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Issued
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Method and apparatus for website navigation by the visually impaired
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5
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US8296150
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Issued
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System and method for audio content navigation
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6
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US8589169
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Issued
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System and method for creating audio files
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7
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13/483758
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Notice of Allowance
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System and method for generating audio content
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8
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13/280184
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Pending
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System and method for audio content management
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9
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14/055366
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Pending
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System and method for communicating audio files
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We have also registered the following trademarks
with the U.S. Patent and Trademark Office:
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AUDIO INTERNET - U.S. Trademark Application Serial No. 85/396,756
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AUDIOEYE - U.S. Trademark Application Serial No. 85/676,991
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WHAT ACCESSIBILITY SHOULD BE - U.S. Trademark Application Serial No. 86/413,160
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EQUAL ACCESS FOR ALL - U.S. Trademark Application Serial No. 86/413,196
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Government Regulation
Government regulation in the United States
that affects the market and commercial potential for our products and services includes the Rehabilitation Act of 1973, the American
with Disabilities Act of 1990, Section 508 of the Rehabilitation Act, Section 504 of the Rehabilitation Act, the Twenty-First Century
Communications and Video Accessibility Act of 2010 (CVAA), the Air Carrier Accessibility Act (ACAA), and various State Laws.
The Rehabilitation Act of 1973 requires
that individuals with disabilities, who are members of the public seeking information or services from a federal department or
agency, have access to and use of information and data that is comparable to that provided to the public without disabilities.
The federal government also requires vendors selling to the government be compliant under Section 508 of the Rehabilitation
Act of 1973, unless covered by a provable exception. Canada and the European Union have similar requirements.
The Americans with Disabilities Act of 1990
(ADA) was passed to ensure equal opportunity for people with disabilities. It applies to employment, transportation, state
and local government services, and businesses that provide public accommodations or facilities.
Title II and Title III of the Americans
with Disabilities Act (ADA) prevent discrimination on the basis of disability in services, programs, and activities provided by
public entities (Title II) and private entities considered to be places of public accommodation (Title III). The Department of
Justice (DOJ) issues regulations implementing those mandates, and is currently in the process of formulating rules regarding the
accessibility of websites and mobile applications. The DOJ has divided its rulemaking into two efforts: the first will provide
guidance to state and local entities to comply with Title II, and the second will establish rules for private entities to comply
with Title III. The DOJ has delayed issuing those rulemakings several times; recent predictions suggest that the DOJ will issue
the proposed rules in 2015. The DOJ has released abstract summaries for both rulemakings.
Learn more at
www.ada.gov
Section 508 of the Rehabilitation Act Requires
that federal agencies’ electronic and information technology is accessible to people with disabilities, including employees
and the public.
The US Government Access Board is expected
to update the requirements to Section 508 compliance standards, commonly referred to as the “Section 508 Refresh,”
further formalizing the mandate to adhere to specific web accessibility best practices, namely those outlined under the Web Content
Accessibility Guidelines (WCAG), the international standards for web accessibility. Already, a growing number of legal mandates
and recent settlements point to the WCAG 2.0 standards as well as making it a requirement to hire third-party Accessibility Subject
Matter Experts to maintain an accessibility audit and provide certification – sources range from the Department of Justice
(DOJ), the U.S. Access Board, and the Office of Civil Rights (OCR)
For more information visit
www.section508.gov
Section 504 of the Rehabilitation Act entitles
individuals with disabilities to equal access to any program or activity that receives federal subsidy – this includes Web-based
communications for educational institutions and government agencies.
In October 2010, Congress passed and
the President signed into law the Twenty-First Century Communications and Video Accessibility Act of 2010 to update existing federal
laws requiring communications and video programming accessibility and to fill in any current gaps in accessibility so as to ensure
the full inclusion of people with disabilities in all aspects of daily living through accessible, affordable and usable communication
and video programming technologies.
Per the Department of Transportation, The
Air Carrier Access Act (ACAA, 49 U.S.C. 41705) prohibits discrimination by U.S. and foreign air carriers on the basis of physical
or mental disability. The Department of Transportation, in interpreting and implementing the ACAA, has issued a rule setting forth
the standards of service which air carriers are expected to provide to disabled individuals.
Beyond the federal level, many states have
enacted accessibility laws and, going further, internationally, over 100 Governments have signed and ratified the UN Convention
on the Rights of Persons with Disabilities.
Given the many government regulations in
place and/or in process, actions must be taken in order for businesses to comply with best practices and international standards.
This presents a significant business opportunity as more pressure is being put on businesses and organizations to improve the accessibility
of their web environments. In addition, from a risk mitigation standpoint, it is best if they consistently and reliably track and
demonstrate their level of conformance to these internationally recognized standards over time, the Web Content Accessibility Guidelines
(WCAG) 2.0).
Employees
As of December 31, 2015, we had 22 full-time
employees. None of our employees are subject to a collective bargaining agreement and we believe that relations with our
employees are very good.
Corporate Information and Background
AudioEye, Inc. was formed as a Delaware
corporation on May 20, 2005. On March 31, 2010, CMG Holdings Group, Inc. (“CMGO”) acquired our company.
In connection with the acquisition, the former stockholders of our company retained rights to receive cash from the exploitation
of our technology (the “Rights”) consisting of 50% of any cash received from income earned, settlements or judgments
directly resulting from our patent strategy and a share of our net income for 2010, 2011 and 2012 from the exploitation of our
technology. The Rights were then contributed to a newly formed Nevada corporation, AudioEye Acquisition Corporation (“AEAC”)
in exchange for shares of AEAC. During the period as a wholly-owned subsidiary of CMGO, we continued to expand our patent
portfolio to protect our proprietary Internet content publication and distribution technology.
On June 22, 2011, CMGO entered into
a Master Agreement with AEAC pursuant to which: (i) the stockholders of AEAC would acquire from the CMGO 80% of our capital
stock (the “Separation”) and (ii) CMGO would distribute to its stockholders, in the form of a dividend, 5% of
our 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 CMGO in an aggregate principal amount of $1,025,000, which CMGO
had been unable to service. On August 17, 2012, we, CMGO and AEAC completed the Separation. In connection with
the Separation, AEAC arranged for the release of CMGO under the Senior Notes by payment to the holders 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 was paid in full. On January 29, 2013, the Securities and Exchange
Commission declared effective our registration statement on Form S-1 with respect to 1,500,259 shares of our common stock
to be issued in the Spin-off. On February 22, 2013, CMGO completed the Spin-off.
In connection with the Separation, we entered
into a Royalty Agreement with CMGO. Pursuant to the Royalty Agreement, for a period of five years, we would pay to CMGO 10% of
cash received from income earned or settlements on judgments directly resulting from our patent enforcement and licensing strategy,
whether received by us on any of our 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, we entered into a Services
Agreement with CMGO whereby, without duplication to the amounts payable under the Royalty Agreement, for a period of 5 years, CMGO
will receive a commission of 7.5% of all revenues received by us after the Separation from all business, clients or other sources
of revenue procured by CMGO or its employees, officers or subsidiaries and directed to us and 10% of net revenues obtained from
a specified customer.
On March 22, 2013, we and AEAC entered
into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which AEAC would be merged with and into
our company (the “Merger”) with our 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 our 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 us and then exchanged for convertible
debentures of our 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 our common stock that were held by AEAC, and the former holders of the AEAC Debentures received an aggregate of 5,871,752 shares
of our 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 our company. As a result of
the Merger, the Rights have been extinguished.
On November 12, 2013, we and CMGO terminated
the Royalty Agreement.
On December 30, 2013, we completed
the repurchase of 2,184,583 shares of our common stock owned by CMGO which shares were transferred to us in January, 2014 and retired
to treasury. In connection, with the repurchase, we paid CMGO $573,022 and forgave a $50,000 payable from an affiliate of
CMGO.
Reports to Security Holders
We are not required to deliver an annual
report to our stockholders, but will voluntarily send our annual audited financial statements upon request. We are required to
file annual, quarterly and current reports and other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC’s website at http://www.sec.gov.
The public may read and copy any materials
filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic
filer. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. The Internet address of the site is http://www.sec.gov.
Item 1A. Risk Factors
In addition to the other information
included in this Annual Report, the following factors should be carefully considered in evaluating our business, financial position
and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business,
financial position or future prospects. If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, our actual results may vary materially from what we have projected. Investing in our common
stock is highly speculative and involves a high degree of risk. Any potential investor should carefully consider the risks and
uncertainties described below before purchasing any shares of our common stock. There may be additional risks that we do
not presently know or that we currently believe are immaterial which could also materially adversely affect our business, financial
position or future prospects. As a result, the trading price of our stock could decline, and you might lose all or part of
your investment. Our business, financial condition and operating results, or the value of any investment you make in the stock
of our company, or both, could be adversely affected by any of the factors listed and described below.
Risks Relating to Our Business and Industry
The report of our independent registered public accounting
firm expresses substantial doubt about the Company’s ability to continue as a going concern.
Our auditors, MaloneBailey LLP, have indicated in their report on the Company’s financial statements for the fiscal year ended December 31, 2015
that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses
from operations. A “going concern” opinion could impair our ability to finance our operations through the sale
of equity, incurring debt, or other financing alternatives.
As of December 31, 2015, the Company had
working capital of $913,741 but the Company used net cash in operations of $5,474,454 during the twelve months ended December 31,
2015. Even with a greater focus on cash revenue generation and the ongoing cost reductions, the conditions described in the
first paragraph, above, raise substantial doubt about the Company’s ability to continue as a going concern. While the Company
has been successful in raising capital in the past, there is no assurance that it will be successful at raising additional capital
in the future. Additionally, if the Company’s plans are not achieved and/or if significant unanticipated events occur, the
Company may have to further modify its business plan.
We have a history of generating significant losses and
may not be able to achieve and sustain profitability.
To date, we have not been profitable, and
we may never achieve profitability on a full-year or consistent basis. We incurred net losses of $7,209,145 for the year
ended December 31, 2015. As of December 31, 2015, we have an accumulated deficit of $24,239,431 and working capital
of $913,741. If we continue to experience losses, we may not be able to continue our operations, and investors may lose their
entire investment.
Our future development requires substantial capital, and
we may be unable to obtain needed capital or financing on satisfactory terms, which would prevent us from fully developing our
business and generating revenues.
As of December 31, 2015, our cash available
was $1,687,257. Our business plan will require additional capital expenditures, and our capital outlays could increase
substantially over the next several years as we implement our business plan. As a result, and since we do not believe we
will operate profitably during that period, we expect that we will need to raise substantial additional capital, through future
private or public equity offerings, strategic alliances or debt financing. Our future capital requirements will depend on
many factors, including: market conditions, sales personnel cost, cost of litigation in enforcing our patents, and information
technology (IT) development and acquisition costs. No assurance can be given that we can successfully raise additional equity or
debt capital, or that such financing will be available to us on favorable terms, if at all.
We are subject to ongoing Litigation
In April 2015, two shareholder class
action lawsuits were filed against us and our former officer Nathaniel Bradley and former officer Edward O’Donnell in the
U.S. District Court for the District of Arizona. The plaintiffs allege various causes of action against the defendants arising
from our announcement that our previously issued financial results for the first three quarters of 2014 and the guidance for the
fourth quarter of 2014 and the full year of 2014 could no longer be relied upon. The complaints seek, among other relief,
compensatory damages and plaintiff’s counsel’s fees and experts’ fees. The Court has appointed a lead plaintiff
and lead counsel. We have responded to the complaints and also filed a motion to dismiss. We believe that the lawsuits have no
merit and intend to mount a vigorous defense. Given the current stage of the proceedings in this case, our management currently
cannot assess the probability of losses, or reasonably estimate the range of losses, related to these matters. As of December 31,
2015, we have paid the deductible pursuant to the D&O insurance policy, in the amount of $100,000 regarding this matter.
We may become involved in various other
routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition
of these matters, our management believes that the resolution of any such matters, should they arise, is not likely to have a material
adverse effect on our financial position or results of operations.
Current economic and credit conditions could adversely
affect our plan of operations.
Our ability to secure additional financing
and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance,
which is subject to the prevailing general economic and credit market conditions, including interest rate levels and the availability
of credit generally, and financial, business and other factors, many of which are beyond our control. The prolonged continuation
or worsening of current credit market conditions would have a material adverse effect on our ability to secure financing on favorable
terms, if at all.
Our revenue and collections may be materially adversely
affected by an economic downturn.
Current macroeconomic conditions continue
to show signs of volatility and potential weakness. We believe commercial purchasing habits and corporate information technology
budgets have improved modestly in recent years, but remain relatively constrained and subject to such volatile and uncertain economic
conditions. Any deterioration in prevailing economic conditions would likely result in reduced demand for our services and products,
which could have a material adverse effect on our business financial position or results of operations.
An increase in market interest rates could increase our
interest costs on future debt and could adversely affect our stock price.
If interest rates increase, so could
our interest costs for any new debt. This increased cost could make the financing of any acquisition costlier. We may
incur variable interest rate indebtedness in the future. Rising interest rates could limit our ability to refinance debt
when it matures, or cause us to pay higher interest rates upon refinancing and increased interest expense on refinanced indebtedness.
We are dependent on certain members of our management
and technical team.
Investors in our common stock must
rely upon the ability, expertise, judgment and discretion of our management and the success of our technical team in exploiting
our technology. Our performance and success are dependent, in part, upon key members of our management and technical team.
The departure of key persons could be detrimental to our future success. Members of our current management hold a significant percentage
of our common stock. We cannot assure you that our management will remain in place. We do not maintain “key person”
life insurance policies. The loss of any of our management and technical team members could have a material adverse effect on our
results of operations and financial condition, as well as on the market price of our common stock.
We intend to pursue new strategic opportunities which
may result in the use of a significant amount of our management resources or significant costs, and we may not be able to fully
realize the potential benefit of such transactions.
We intend to seek other strategic
partners to help us pursue our strategic, marketing, sales or technical objectives. Although we may devote significant time and
resources in pursuit of such transactions, we may struggle to successfully identify such opportunities, or to successfully conclude
transactions with potential strategic partners. Should we be unable to identify or conclude important strategic transactions, our
business prospects and operations could be adversely affected as a result of the devotion of significant managerial effort required,
and the challenges of achieving our objectives in the absence of strategic partners. In addition, we may incur significant costs
in connection with seeking acquisitions or other strategic opportunities regardless of whether the transaction is completed and
in combining its operations if such a transaction is completed. In the event that we consummate an acquisition or strategic
alternative in the future, we cannot assure you that we would fully realize the potential benefit of such a transaction.
Our business plan may not be realized. If our business
plan proves to be unsuccessful, our business may fail and you may lose your entire investment.
Our operations are subject to all
of the risks inherent in the establishment of a new business enterprise with a limited operating history. The likelihood of our
success must be considered in light of the problems, expenses, complications and delays frequently encountered in connection with
the development of a new business. Unanticipated events may occur that could affect the actual results achieved during the forecast
periods. Consequently, the actual results of operations during the forecast periods will vary from the forecasts, and such variations
may be material. In addition, the degree of uncertainty increases with each successive year presented. We cannot assure you that
we will succeed in the anticipated operation of our business plan. If our business plan proves to be unsuccessful, our business
may fail and you may lose your entire investment.
If we are not able to adequately protect our patented
rights, our operations would be negatively impacted.
Our ability to compete largely depends
on the superiority, uniqueness and value of our technology and intellectual property. To protect our intellectual property
rights, we will rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our
employees and third parties, and protective contractual provisions. We cannot assure you that infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us or that
any such assertions or prosecutions will not materially adversely affect our business.
Regardless of whether these or any
future claims are valid or can be successfully asserted, defending against such claims could cause us to incur significant costs,
could jeopardize or substantially delay a successful outcome in any future litigation, and could divert resources away from our
other activities. In addition, assertion of infringement claims could result in injunctions that prevent us from distributing our
products. In addition to challenges against our existing patents, any of the following could also reduce the value of our intellectual
property now, or in the future:
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our applications for patents, trademarks and copyrights relating to
our business may not be granted and, if granted, may be challenged or invalidated;
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issued trademarks, copyrights or patents may not provide us with any
competitive advantages;
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our efforts to protect our intellectual property rights may not be
effective in preventing misappropriation of our technology; or
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our efforts may not prevent the development and design by others of
products or technologies similar to, competitive with, or superior to those that we develop.
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Also, we may not be able to effectively
protect our intellectual property rights in certain foreign countries where we may do business in the future or from which competitors
may operate. Obtaining patents will not necessarily protect our technology or prevent our international competitors from developing
similar products or technologies. Our inability to adequately protect our patented rights would have a negative impact on our operations
and revenues.
In addition, legal standards relating
to the validity, enforceability and scope of protection of intellectual property rights in Internet-related businesses are uncertain
and still evolving. Because of the growth of the Internet and Internet-related businesses, patent applications are continuously
and simultaneously being filed in connection with Internet-related technology. There are a significant number of U.S. and foreign
patents and patent applications in our areas of interest, and we believe that there has been, and is likely to continue to be,
significant litigation in the industry regarding patent and other intellectual property rights.
We may commence legal proceedings against third parties
who we believe are infringing on our intellectual property rights, and if we are forced to litigate to defend our intellectual
property rights, or to defend claims by third parties against us relating to intellectual property rights, legal fees and court
injunctions could adversely affect our financial condition or potentially end our business.
At present, we do not have any active
or pending litigation related to the violation of our patents. We expect the number of third parties to grow in number who could
violate our patents as the market develops new uses of similar products and consumers begin to increase their adoption of the technology
and integrate it into their daily lives. We do foresee the potential need to enter into active litigation to defend the enforcement
of our patents. We anticipate that these legal proceedings could continue for several years and may require significant expenditures
for legal fees and other expenses. In the event we are not successful through appeal and do not subsequently obtain monetary
and injunctive relief, these litigation matters may significantly reduce our financial resources and have a material impact on
our ability to continue our operations. The time and effort required of our management to effectively pursue these litigation matters
may adversely affect our ability to operate our business, since time spent on matters related to the lawsuits will take away from
the time spent on managing and operating the business. We cannot assure that any such potential lawsuits will result in a final
outcome that is favorable to our shareholders or the company.
We have experienced and will continue to experience competition
as more companies seek to provide products and services similar to our products and services; and because larger and better-financed
competitors may affect our ability to operate our business and achieve profitability, our business may fail.
We expect competition for our products
and services to become more intense. We compete directly against other companies offering similar products and services that will
compete directly with our proposed products and services. We also compete against established vendors in our markets.
These companies may incorporate other competitive technologies into their product offerings, whether developed internally or by
third parties. There are also established consultants who offer services to help their customers obtain compliance with accessibilities
standards. In many cases these consultants compete for the same funding from our prospective customers. For the foreseeable future,
substantially all of our competitors are likely to be larger, better-financed companies that may develop products superior to our
current and proposed products, which could create significant competitive advantages for those companies. Our future success
depends on our ability to compete effectively with our competitors. As a result, we may have difficulty competing with larger,
established competitors. Generally, these competitors have:
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substantially greater financial, technical and marketing resources;
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a larger customer base;
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better name recognition; and
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more expansive or different product offerings.
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These competitors may command a larger market
share than us, which may enable them to establish a stronger competitive position, in part, through greater marketing opportunities.
Further, our competitors may be able to respond more quickly to new or emerging technologies and changes in user preferences and
to devote greater resources to developing new products and offering new services. These competitors may develop products
or services that are comparable or superior to ours. If we fail to address competitive developments quickly and effectively,
we may not be able to remain a viable business.
The burdens of being a public company may adversely affect
our ability to develop our business and pursue a litigation strategy.
As a public company, our management
must devote substantial time, attention and financial resources to comply with U.S. securities laws. This may have a material
adverse effect on our management’s ability to effectively and efficiently develop our business initiatives. In addition,
our disclosure obligations under U.S. securities laws may require us to disclose information publicly that could have a material
adverse effect on our potential litigation strategies.
The current regulatory environment for our products and
services remains unclear.
We cannot assure you that our existing
or planned product and service offerings will be in compliance with local, state and/or federal U.S. laws or the laws of any foreign
jurisdiction where we may operate in the future. Further, we cannot assure you that we will not unintentionally violate such
laws or that such laws will not be modified, or that new laws will not be enacted in the future, which would cause us to be in
violation of such laws. More aggressive domestic or international regulation of the Internet may materially and adversely
affect our business, financial condition, operating results and future prospects.
As pressure of legal ramifications from non-compliance
with Web Accessibility increases, clients may be less inclined to permit or may delay AudioEye from promoting client relationships
and/or the specifics associated with those relationships, and if this restricts our public communications with investors and shareholders,
it may negatively impact our ability to gain interest in our business from investors and shareholders.
Due to an undefined regulatory environment
and a heightened sensitivity by plaintiffs seeking retribution for inaccessible and unusable digital interfaces, any organization
may be sued or served legal demands claiming non-compliance. As these demands may be served with or without merit, they present
a new level of risk for website owners and publishers. In an effort to avoid any potential unwanted attention pertaining to the
subject of compliance, AudioEye clients may enforce rigid stipulations pertaining to AudioEye’s promotion of their involvement
or engagement with AudioEye, regardless of the level of success or positive impact any such engagement may have or have had on
their business. Whether through the enforcement of Non Disclosure Agreements or through specific non-disclosure language associated
with client contracts, if AudioEye is not empowered to promptly make public announcements about its client base and the adoption
of AudioEye products and services, it may have a deleterious effect on the company’s capacity to accelerate its business
growth or attract investment from shareholders.
Our business greatly depends on the growth of online services,
streaming, file transfer and other next-generation Internet-based applications.
The Internet may ultimately prove not to
be a viable commercial marketplace for such applications for a number of reasons, including:
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unwillingness of consumers to shift to and use other such next-generation
Internet-based audio applications;
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refusal to purchase our products and services;
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perception by end-users with respect to product and service quality
and performance;
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limitations on access and ease of use;
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congestion leading to delayed or extended response times;
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inadequate development of Internet infrastructure to keep pace with
increased levels of use; and
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increased government regulations.
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If the market for our online services does not grow as
anticipated, our business would be adversely affected.
While other next-generation Internet-based
applications have grown rapidly in personal and professional use, we cannot assure you that the adoption of our products and services
will grow at a comparable rate, or grow at all.
We expect that we will experience long and unpredictable
sales cycles, which may impact our operating results.
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We expect that our sales cycles will be long and unpredictable due
to a number of uncertainties such as:
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the need to educate potential customers about the current state of
accessibility for those with disabilities.;
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customers’ willingness to invest potentially substantial resources
and infrastructures to take advantage of our products and services;
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customers’ budgetary constraints;
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the timing of customers’ budget cycles; and
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delays caused by customers’ internal review and procurement
processes.
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We historically have been dependent on a concentrated
number of customers, and have stopped doing business with the customers who have represented a significant portion of our revenues
during the past two years as the Company migrates to a SaaS model.
For the years ended December 31, 2015 and 2014, two major customers generated approximately 67.5% and
87% of our revenue, respectively. We have mutually agreed to terminate our business relationship with the largest of these customers,
representing 56.3% and 77% of our revenues in 2015 and 2014, respectively. We have fundamentally shifted our business model to
focus on Software as a Service (SaaS) product offerings. We have not yet proven that we can develop and maintain a diversified
customer base of customers who will subscribe to our SaaS – centric products and services. If we are unable to establish,
maintain, grow or replace our relationships with customers and develop a diversified customer base, our revenues may fluctuate
and our growth may be limited.
Our Expansion into New Products, Services, Technologies,
and Geographic Regions Subjects Us to Additional Business, Legal, Financial, and Competitive Risks
We may have limited or no experience in
our newer market segments, and our customers may not adopt our new offerings. These offerings may present new and difficult technology
challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other
quality issues. In addition, profitability, if any, in our newer activities may be lower than in our older activities, and we may
not be successful enough in these newer activities to recoup our investments in them. If any of this were to occur, it could damage
our reputation, limit our growth, and negatively affect our operating results.
We Face Risks Related to System Interruption and Lack
of Redundancy
We experience occasional system interruptions
and delays that make our websites and services unavailable or slow to respond and prevent us from efficiently providing services
to third parties, which may reduce our net sales and the attractiveness of our products and services. If we are unable to continually
add software and hardware, effectively upgrade our systems and network infrastructure, and take other steps to improve the efficiency
of our systems, it could cause system interruptions or delays and adversely affect our operating results.
Our computer and communications systems
and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war
or terrorism, acts of God, computer viruses, physical or electronic break-ins, and similar events or disruptions. Any of these
events could cause system interruption, delays, and loss of critical data, and could prevent us from providing services, which
could make our product and service offerings less attractive and subject us to liability. Our systems are not fully redundant and
our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage to compensate for
any related losses. Any of these events could damage our reputation and be expensive to remedy.
Government Regulation Is Evolving and Unfavorable Changes
Could Harm Our Business
We are subject to general business regulations
and laws, as well as regulations and laws specifically governing the Internet, e-commerce, electronic devices, and other services.
Existing and future laws and regulations may impede our growth. These regulations and laws may cover taxation, privacy, data protection,
pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption,
environmental regulation, electronic contracts and other communications, competition, consumer protection, web services, the provision
of online payment services, information reporting requirements, unencumbered Internet access to our services, the design and operation
of websites, the characteristics and quality of products and services, and the commercial operation of unmanned aircraft systems.
It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet,
e-commerce, digital content, and web services. Unfavorable regulations and laws could diminish the demand for our products and
services and increase our cost of doing business.
We Could Be Subject to Additional Sales Tax or Other Indirect
Tax Liabilities
U.S. Supreme Court decisions restrict the
imposition of obligations to collect state and local sales taxes with respect to remote sales. However, an increasing number of
states have considered or adopted laws or administrative practices that attempt to impose obligations on out-of-state businesses
to collect taxes on their behalf. A successful assertion by one or more states or foreign countries requiring us to collect taxes
where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.
We May be Subject to Risks Related to Government Contracts
and Related Procurement Regulations
Our contracts with U.S., as well as state,
local, and foreign, government entities are subject to various procurement regulations and other requirements relating to their
formation, administration, and performance. We may be subject to audits and investigations relating to our government contracts,
and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of
contract, refunding or suspending of payments, forfeiture of profits, payment of fines, and suspension or debarment from future
government business. In addition, such contracts may provide for termination by the government at any time, without cause.
If we do not successfully develop our planned products
and services in a cost-effective manner to customer demand in the rapidly evolving market for next-generation Internet-based applications
and services, our business may fail.
The market for next-generation Internet-based
applications and services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs,
and frequent new service and product introductions. Our future success will depend, in part, on our ability to use new technologies
effectively, to continue to develop our technical expertise and proprietary technology, to enhance our existing products and services,
and to develop new products and services that meet changing customer needs on a timely and cost-effective basis. We may not
be able to adapt quickly enough to changing technology, customer requirements and industry standards. If we fail to use new
technologies effectively, to develop our technical expertise and new products and services, or to enhance existing products and
services in a timely basis, either internally or through arrangements with third parties, our product and service offerings may
fail to meet customer needs, which would adversely affect our revenues and prospects for growth.
In addition, if we are unable to,
for technological, legal, financial or other reasons, adapt in a timely manner to changing market conditions or customer requirements,
we could lose customers, strategic alliances and market share. Sudden changes in user and customer requirements and preferences,
the frequent introduction of new products and services embodying new technologies and the emergence of new industry standards and
practices could render our existing products, services and systems obsolete. The emerging nature of products and services
in the technology and communications industry and their rapid evolution will require that we continually improve the performance,
features and reliability of our products and services. Our survival and success will depend, in part, on our ability to:
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design, develop, launch and/or license our planned products, services
and technologies that address the increasingly sophisticated and varied needs of our prospective customers; and
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respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
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The development of our planned products
and services and other patented technology involves significant technological and business risks and requires substantial expenditures
and lead-time. We may be unable to use new technologies effectively. Updating our technology internally and licensing
new technology from third parties may also require us to incur significant additional expenditures.
If our products and services do not gain market acceptance,
we may not be able to fund future operations.
A number of factors may affect the market
acceptance of our products or services or any other products or services we develop or acquire, including, among others:
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the price of our products or services relative to other competitive
products;
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the perception by users of the effectiveness of our products and services;
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our ability to fund our sales and marketing efforts; and
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the effectiveness of our sales and marketing efforts.
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If our products and services do not gain
market acceptance, we may not be able to fund future operations, including the development of new products and services and/or
our sales and marketing efforts for our current products and services, which inability would have a material adverse effect on
our business, financial condition and operating results.
Our products and services are highly technical and may
contain undetected errors, which could cause harm to our reputation and adversely affect our business.
Our products and services are highly technical
and complex and, when deployed, may contain errors or defects. Despite testing, some errors in our products and services
may only be discovered after they have been installed and used by customers. Any errors or defects discovered in our products
and services after commercial release could result in failure to achieve market acceptance, loss of revenue or delay in revenue
recognition, loss of customers, and increased service and warranty cost, any of which could adversely affect our business, operating
results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty.
The performance of our products and services could have unforeseen or unknown adverse effects on the networks over which they are
delivered as well as on third-party applications and services that utilize our products and services, which could result in legal
claims against us, harming our business. Furthermore, we expect to provide implementation, consulting and other technical
services in connection with the implementation and ongoing maintenance of our products and services, which typically involves working
with sophisticated software, computing and communications systems. We expect that our contracts with customers will contain
provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless
of its merit, is costly and may divert our management’s attention and adversely affect the market’s perception of us
and our products and services. In addition, if our business liability insurance coverage proves inadequate or future coverage
is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.
Malfunctions of third-party communications infrastructure,
hardware and software expose us to a variety of risks we cannot control.
Our business will depend upon the
capacity, reliability and security of the infrastructure owned by third parties over which our product offerings would be deployed.
We have no control over the operation, quality or maintenance of a significant portion of that infrastructure or whether or not
those third parties will upgrade or improve their equipment. We do depend on these companies to maintain the operational
integrity of our integrated connections. If one or more of these companies is unable or unwilling to supply or expand its
levels of service in the future, our operations could be adversely impacted. Also, to the extent the number of users of networks
utilizing our future products and services suddenly increases, the technology platform and secure hosting services which will be
required to accommodate a higher volume of traffic may result in slower response times or service interruptions. System interruptions
or increases in response time could result in a loss of potential or existing users and, if sustained or repeated, could reduce
the appeal of the networks to users. In addition, users depend on real-time communications; outages caused by increased traffic
could result in delays and system failures. These types of occurrences could cause users to perceive that our products and
services do not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic partners
and customers.
System failure or interruption or our failure to meet
increasing demands on our systems could harm our business.
The success of our product and service
offerings will depend on the uninterrupted operation of various systems, secure data centers, and other computer and communication
networks that we use or establish. To the extent the number of users of networks utilizing our future products and services
suddenly increases, the technology platform and hosting services which will be required to accommodate a higher volume of traffic
may result in slower response times, service interruptions or delays or system failures. The deployment of our products,
services, systems and operations will also be vulnerable to damage or interruption from:
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power loss, transmission cable cuts and other telecommunications failures;
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damage or interruption caused by fire, earthquake and other natural
disasters;
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computer viruses or software defects; and
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physical or electronic break-ins, sabotage, intentional acts of vandalism,
terrorist attacks and other events beyond our control.
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System interruptions or failures and increases
or delays in response time could result in a loss of potential or existing users and, if sustained or repeated, could reduce the
appeal of our products and services to users. These types of occurrences could cause users to perceive that our products
and services do not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic
partners and customers.
Our ability to sell our solutions will be dependent on
the quality of our technical support and our failure to deliver high-quality technical support services could have a material adverse
effect on our sales and results of operations.
If we do not effectively assist our
customers in deploying our products and services, succeed in helping our customers quickly resolve post-deployment issues and provide
effective ongoing support, or if potential customers perceive that we may not be able to successfully deliver the foregoing, our
ability to sell our products and services would be adversely affected, and our reputation with potential customers could be harmed.
In addition, if we expand our operations internationally, our technical support team will face additional challenges, including
those associated with delivering support, training and documentation in languages other than the English language. As a result,
our failure to deliver and maintain high-quality technical support services to our customers could result in customers choosing
to use our competitors’ products or services in the future.
We will need to recruit and retain additional qualified
personnel to successfully grow our business.
Our future success will depend in
part on our ability to attract and retain qualified operations, marketing and sales personnel as well as technical personnel.
Inability to attract and retain such personnel could adversely affect our business. Competition for technical, sales, marketing
and executive personnel is intense, particularly in the technology and Internet sectors. We cannot assure you that we will
be able to attract or retain such personnel.
Growth of internal operations and business may strain
our financial resources.
We may need to significantly expand
the scope of our operating and financial systems in order to build our business. Our growth rate may place a significant
strain on our financial resources for a number of reasons, including, but not limited to, the following:
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the need for continued development of our financial and information
management systems;
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the need to manage relationships with future licensees, resellers,
distributors and strategic partners;
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the need to hire and retain skilled management, technical and other
personnel necessary to support and manage our business; and
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the need to train and manage our employee base.
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The addition of products and services and
the attention they demand, may also strain our management resources.
We do not expect to pay any dividends for the foreseeable
future, which will affect the extent to which our investors realize any future gains on their investment.
We do not anticipate that we will
pay any dividends to holders of our convertible preferred and common stock in the foreseeable future. Accordingly, investors
must rely the ability to convert preferred stock to common stock and on sales of their common stock after price appreciation, which
may never occur, as the only way to realize any future gains on their investment.
We previously identified material weaknesses in our internal
control over financial reporting, which resulted in a restatement of our previously issued quarterly financial statements during
2014. If our remedial measures were insufficient to address the material weaknesses, or if additional material weaknesses or significant
deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial
statements may contain errors and we could be required to further restate our financial results, which could adversely affect our
stock price.
In 2015, we concluded that there were material
weaknesses in our internal control over financial reporting, as we did not maintain effective controls over the application of
accounting principles generally accepted in the United States (“GAAP”) related to revenue recognition for certain non-monetary
transactions. Specifically, the members of our management team with the requisite level of accounting knowledge, experience and
training commensurate with our financial reporting requirements did not analyze certain accounting transactions at the level of
detail required to ensure the proper application of GAAP in certain circumstances. Errors in the application of the accounting
principles and errors which impacted revenues recognition were related to our failure to maintain effective internal controls over
the accounting for revenue recognition. Our quarterly reports on Form 10-Q for the periods ended March 31, June 30
and September 30, 2014 were amended to reflect the restatement of our financial statements for the restated periods and
the change in management’s conclusion regarding the effectiveness of our disclosure controls and procedures and internal
control over financial reporting.
The Company has taken steps to remediate
the weaknesses described above. Multiple levels of supervision have been implemented and the firm has improved cross reconciliations
of internal parties’ actions and approvals. Singular levels of approval, supervision and processing have been eliminated.
All contracts are thoroughly reviewed by management and at certain levels require Board approval. The firm no longer engages in
non-monetary transactions related to Intellectual Property. All transactions are representative of cash contracts in the form of
Subscription and Services Agreements. Revenue is recognized by following stringent guidelines which include the appropriate application
of journal entries in sales, deferred revenue and accounts receivable in the General Ledger. Revenue is recognized as a portion
of the contract term as services are delivered, and deferred revenue is recorded, only upon the receipt of cash. Timing and accounts
affected by the respective journal entry are triggered when payment is received and applied to invoices in accounts receivable.
The remediation steps may be insufficient
to prevent future restatements or delays in financial reporting. Restatements or delays in filing the requisite materials
with the SEC could reoccur and may impact our ability to be allowed to trade on various trading platforms. Such limitation may
impact the trading price of our shares.
Risks Related to the Market for
Our Common Stock
Our stock price may be volatile, and purchasers of our
common stock could incur substantial losses.
Our common stock started being listed on the OTCQB and the OTC Bulletin Board effective April 15, 2013
under the symbol “AEYE.” Beginning on April 16, 2015, our common shares were quoted on the OTC Pink marketplace
due to our inability to timely file certain documents with the SEC. We resumed trading on the OTCQB effective July 23, 2015.
As a result of this volatility, investors
may not be able to sell their common stock. The market price for our common stock may be influenced by many factors, including,
but not limited to:
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regulatory developments in the United States and any foreign countries
where we may operate;
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the recruitment or departure of key personnel;
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quarterly or annual variations in our financial results or those of
companies that are perceived to be similar to us;
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market conditions in the industries in which we compete and issuance
of new or changed securities;
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analysts’ reports or recommendations;
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the failure of securities analysts to cover our common stock or changes
in financial estimates by analysts;
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the inability to meet the financial estimates of analysts who follow
our common stock, if any;
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the issuance of any additional securities by us;
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investor perception of us and of the industry in which we compete;
and
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general economic, political and market conditions.
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Trading on the OTCQB and OTC Bulletin Board may be volatile
and sporadic, which could depress the market price of our common shares and make it difficult for our stockholders to resell their
shares.
Trading in shares quoted on the OTCQB and
OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little
to do with our operations or business prospects. This volatility could depress the market price of shares of our common stock for
reasons unrelated to operating performance. Moreover, the OTCQB and OTC Bulletin Board are not stock exchanges, and trading of
securities on the OTCQB and OTC Bulletin Board are often more sporadic than the trading of securities listed on a quotation system
like NASDAQ or a stock exchange like NYSE MKT. Accordingly, stockholders may have difficulty reselling shares of our common stock.
A substantial number of shares of our common stock may
be sold into the market at any time. This could cause the market price of our common stock to drop significantly, even if
our business is doing well.
Sales of a substantial number of shares
of our common stock, or the perception in the market that the holders of a large number of shares intend to sell shares, could
reduce the market price of our common stock.
Our stock is a penny stock; trading of shares of our common
stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy and sell
our shares.
Our stock is a penny stock. The SEC
has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price
(as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities
are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons
other than established customers and “accredited investors.” The term “accredited investor” refers generally
to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC,
which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer
orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for the shares that are subject to these penny stock rules.
Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the
penny stock rules discourage investor interest in and limit the marketability of our common shares.
FINRA sales practice requirements may also limit a stockholder’s
ability to buy and sell shares of our common stock.
In addition to the “penny stock”
rules promulgated by the SEC, the Financial Industry Regulatory Authority, or the FINRA, has adopted rules that require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for at least some brokerage customers. The FINRA requirements make it more difficult
for broker-dealers to recommend that their customers buy shares of our common stock, which may limit your ability to buy and sell
shares of our common stock.
When we issue additional shares in the future, it will
likely result in the dilution of our existing stockholders.
Our certificate of incorporation authorizes
the issuance of up to 250,000,000 shares of common stock with a $0.00001 par value and 10,000,000 preferred shares with a par value
of $0.00001, of which 81,467,154 common shares were issued and outstanding as of December 31, 2015 and 175,000 shares of Series A
Convertible Preferred Stock (convertible into 9,977,195 shares of common stock) were issued and outstanding as of December 31,
2015. From time to time we may increase the number of shares available for issuance in connection with our equity compensation
plans. Our board of directors may fix and determine the designations, rights, preferences or other variations of each class or
series within each class of preferred stock and may choose to issue some or all of such shares to provide additional financing
or acquire more businesses in the future.
Moreover, as of December 31, 2015 we
had warrants and options to purchase an aggregate of 57,036,523 shares of our common stock, the exercise of which would further
increase the number of outstanding shares. The issuance of any shares for acquisition, licensing or financing efforts, upon
conversion of any preferred stock or exercise of warrants and options, pursuant to our equity compensation plans, or otherwise
may result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such
additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current stockholders.
Sales of a substantial number of shares of our common
stock into the public market may result in significant downward pressure on the price of our common stock and could affect your
ability to realize the current trading price of our common stock.
Sales of a substantial number of shares
of our common stock in the public market could cause a reduction in the market price of our common stock. To the extent stockholders
sell shares of common stock, the price of our common stock may decrease due to the additional shares of common stock in the market.
Any significant downward pressure
on the price of our common stock as stockholders sell their shares could encourage short sales of our common stock. Any such short
sales could place further downward pressure on the price of our common stock.
Risks Relating to Our Charter Documents
and Capital Structure
We are close to being controlled by a small number of
“insider” stockholders.
Our directors, executive officers and other
beneficial owners, currently beneficially own 63,913,903 common shares including warrants and options which is approximately 78.21%
of our outstanding 81,717,154 common shares. The holdings of our directors, executive officers and other beneficial owners represent
46.1% on a fully diluted basis. Accordingly, through their collective ownership of our outstanding common stock, if they act together,
will be close to controlling the voting of our shares at all meetings of stockholders and, because the common stock does not have
cumulative voting rights, will determine the outcome of the election of all of our directors and determining corporate and stockholder
action on other matters.
Provisions of our certificate of incorporation and by-laws
could discourage potential acquisition proposals and could deter or prevent a change in control.
Some provisions in our certificate
of incorporation and by-laws, as well as statutes, may have the effect of delaying, deferring or preventing a change in control.
These provisions, including those providing for the possible issuance of shares of our preferred stock, which may be divided
into series and with the preferences, limitations and relative rights to be determined by our board of directors, and the right
of the board of directors to amend the by-laws, may make it more difficult for other persons, without the approval of our board
of directors, to make a tender offer or otherwise acquire a substantial number of shares of our common stock or to launch other
takeover attempts that a stockholder might consider to be in his or her best interest. These provisions could limit the price
that some investors might be willing to pay in the future for shares of our common stock.
Delaware law may delay or prevent takeover attempts by
third parties and therefore inhibit our stockholders from realizing a premium on their stock.
We are subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, or the DGCL. This section prevents any stockholder who owns 15% or
more of our outstanding common stock from engaging in certain business combinations with us for a period of three years following
the time that the stockholder acquired such stock ownership unless certain approvals were or are obtained from our board of directors
or the holders of 66 2/3% of our outstanding common stock (excluding the shares of our common stock owned by the 15% or more stockholder).
Our board of directors can use these and other provisions to discourage, delay or prevent a change in the control of our company
or a change in our management. Any delay or prevention of a change of control transaction or a change in our board of directors
or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive
a substantial premium over the then current market price for their shares. These provisions could also limit the price that
investors might be willing to pay for shares of our common stock.
Failure to manage growth effectively could adversely affect
our business, results of operations and financial condition.
The success of our future operating
activities will depend upon our ability to expand our support system to meet the demands of our growing business. Any failure by
our management to effectively anticipate, implement, and manage changes required to sustain our growth would have a material adverse
effect on our business, financial condition, and results of operations. We cannot assure you that we will be able to successfully
operate acquired businesses, become profitable in the future, or effectively manage any other change.
The elimination of monetary liability against our directors,
officers and employees under Delaware law and the existence of indemnification rights to our directors, officers and employees
may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our by-laws contain specific provisions
that eliminate the liability of our directors for monetary damages to our company and stockholders, and permit indemnification
of our directors and officers to the extent provided by Delaware law. We may also have contractual indemnification obligations
under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable
to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors
and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders
against our directors and officers even though such actions, if successful, might otherwise benefit our company and stockholders.
Item 1B. Unresolved Staff Comments
As a “smaller reporting company,”
we are not required to provide the information required by this Item.
Item 2. Properties
Our principal executive offices are located
at 5210 E. Williams Circle, Suite 750, Tucson, Arizona 85711, consisting of approximately 2,362 square feet as of December 31,
2015. The Company’s principal executive office is leased for an aggregate amount of $4,724 per month. We also have offices
in Atlanta at 1855 Piedmont Road, Suite 200, Marietta, Georgia leased for an aggregate of $2,763 per month as of December
31, 2015. The Company’s total rent expense was approximately $314,485 and $302,230 under office leases for the years ended
December 31, 2015 and 2014, respectively. During 2015, offices located in New York were sublet, resulting in a savings of
$21,135 per month. We closed the office in Washington D.C., saving $1,280 per month and the Principal Executive office was relocated
and downsized with a monthly reduction in rent of $7,146. Beginning November 1, 2015, we subleased an office from a company controlled
by our Executive Chairman in Scottsdale, AZ for $500 per month.
We believe our current premises are adequate
for our current operations although we may require additional premises in the foreseeable future.
Item 3. Legal Proceedings
In April 2015, two shareholder class
action lawsuits were filed against us and our former officer Nathaniel Bradley and former officer Edward O’Donnell in the
U.S. District Court for the District of Arizona. The plaintiffs allege various causes of action against the defendants arising
from our announcement that our previously issued financial results for the first three quarters of 2014 and the guidance for the
fourth quarter of 2014 and the full year of 2014 could no longer be relied upon. The complaints seek, among other relief,
compensatory damages and plaintiff’s counsel’s fees and experts’ fees. The Court has appointed a lead plaintiff
and lead counsel. We have responded to the complaints and also filed a motion to dismiss. We believe that the lawsuits have no
merit and intend to mount a vigorous defense. Given the current stage of the proceedings in this case, our management currently
cannot assess the probability of losses, or reasonably estimate the range of losses, related to these matters. As of December 31,
2015, we have paid the deductible pursuant to the D&O insurance policy, in the amount of $100,000 regarding this matter.
We may become involved in various other
routine disputes and allegations incidental to our business operations. While it is not possible to determine the ultimate disposition
of these matters, our management believes that the resolution of any such matters, should they arise, is not likely to have a material
adverse effect on our financial position or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following information is as of December
31, 2015 with respect to those persons who are serving as our directors and executive officers.
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Age
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Director/Position
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Dr. Carr Bettis
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52
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Executive Chairman/Chairman of the Board, and Director
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Todd Bankofier
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55
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Chief Executive Officer
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Sean Bradley
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35
|
|
President, Chief Technology Officer, and Secretary
|
|
Anthony Coelho
|
|
73
|
|
Director
|
|
Christine Griffin
|
|
60
|
|
Director
|
|
Ernest Purcell
|
|
64
|
|
Director
|
|
Alexandre Zyngier
|
|
46
|
|
Director
|
The following is a brief account of the education
and business experience of each director and executive officer during at least the past five years, indicating each person’s
principal occupation during the period, and the name and principal business of the organization by which he was employed.
Dr. Carr Bettis
. Dr. Bettis
has served as a director of ours since December 2012, and previously served as a director of ours from July 2007 to April 2010.
Dr. Bettis has served as Executive Chairman/Chairman of the Board since March 2015. Dr. Bettis founded and
has been the Chief Architect of numerous financial technology innovations and businesses over the last 15 years that have been
acquired by Merrill Lynch, Thomson Financial, Primark/Disclosure and Advanced Equities/Greenbook Financial. From 1996 to 2011,
Dr. Bettis was the Chairman and Founder of Gradient Analytics, one of the largest independent equity research firms in the
United States. He has served as Chairman and Co-Founder of Verus Analytics, a quantitative analytics and financial technology
firm since 1996. He also serves on the board of directors of iMemories, an Arizona-founded technology company. Since 2007, he has
also managed his family’s private equity portfolio via his firm, Fathom Lab. Dr. Bettis is a former tenured professor
and maintains a clinical-affiliation with Arizona State University as Research Professor of Finance at the W.P. Carey School of
Business. He is frequently cited in national and international financial media. His research has been published in academic
and professional journals such as the Journal of Financial Economics, Review of Financial Studies, Journal of Financial and Quantitative
Analysis, and the Financial Analyst Journal. Dr. Bettis holds undergraduate degrees in finance and accounting, and received
his Ph.D. from Indiana University in 1992. We believe that Dr. Bettis’ extensive education and background in finance
makes him qualified to serve as our Executive Chairman/Chairman of the Board and as a director.
Todd
Bankofier.
Mr. Bankofier was principal
in Fairmont Capital Group (FCG) since 2008, Mr. Bankofier was responsible for day-to-day oversight of multiple asset holdings,
including strategic planning, revenue generation, technology evolution, operational effectiveness and public relations for all
FCG entities.
Mr. Bankofier served as General Manager of Ensynch,
which was at the time one of Arizona’s largest Information Technology services companies. He was President and CEO of the
Arizona Technology Council (ATC) from 2002 to 2006. Before joining the ATC, he spent four years as Vice President of National Sales
for XO Communications, a national telecommunications company, where he managed a national sales team to four years of record sales
growth for that company. Mr. Bankofier also served in Washington, D.C. for four years as a lobbyist for the Department of Energy,
and served as Chief of Staff for Maricopa County Supervisor, Jim Bruner. He serves on the Advisory Board of Mutual of Omaha Bank,
and he has served on the Arizona Governor’s Council for Innovation and Technology. He received a gubernatorial appointment
to the State Board of Education (1998-2002). We believe that Mr. Bankofiers’ extensive experience in leaderships roles
in technology companies makes him qualified to serve as our Chief Executive Officer.
Sean Bradley
. Mr. Bradley
has been involved with us from our founding in 2005 to the present and has served as Secretary since April 2010, as Vice President
from April 2010 to April 2015, as a director from August 2012 to June 2014, and as Chief Technology Officer
since August 2012, and as President since April 2015. Mr. Bradley has co-founded several technology companies,
including Kino Digital, LLC, and Kino Communications, LLC, from 1999-2005. Over the past ten years, he has led an international
team of software developers, has produced global webcasting technologies, and planned, designed and managed the fulfillment of
intellectual property assets, including the next generation mobile marketing solutions for industry leading Hipcricket. In the
past, Mr. Bradley was chief architect of AdLife, BoomBox® Video and Audio Platforms for Augme Technologies, Inc.
Mr. Bradley is proficient in several programming and web development languages and has engineered online communications systems
for IBM, General Dynamics, Avnet and many others. In 2005, he was recognized by Arizona State’s WP Carey School of Business
as a leader in his field for work he completed for the Arizona Department of Health and Human Services.
Mr. Bradley is a former managing member
of Bradley Brothers, LLC, an Arizona-based investment company. We believe that Mr. Bradley’s extensive education and
background in business and technology make him qualified to serve as our President, Chief Technology Officer and Secretary. In
2003 Mr. Bradley obtained his BA from Arizona International College at the University of Arizona, graduating summa cum laude
and with highest academic distinction for all eight undergraduate semesters.
Anthony Coelho
. Mr. Coelho has served as a director since June 2014. Mr. Coelho was a member of the U.S. House
of Representatives from 1978 to 1989,
where
he authored the Americans With Disabilities Act (ADA). After leaving Congress, he joined Wertheim Schroder & Company,
an investment banking firm in New York and became President and CEO of Wertheim Schroder Financial Services from 1990 to 1995.
From 1995 to 1997, he served as Chairman and CEO of an education and training technology company that he established and subsequently
sold. In 1998, President Clinton appointed him as the US Commissioner General for the World’s Fair in Lisbon Portugal. He
served as general chairman of the presidential campaign of former Vice President Al Gore from April 1999 until June 2000.
Since 1997, Mr. Coelho has worked independently as a business and political consultant. Mr. Coelho also served as Chairman
of the President’s Committee on Employment of People with Disabilities from 1994 to 2001. He previously served as Chairman
of the Board of the Epilepsy Foundation. Mr. Coelho has served on a number of corporate boards. In the last five years he
has served on the boards of CepTor Corporation, Cyberonics, Inc., Stem Cell Innovation, Inc., Universal Access Global
Holdings, Inc, and since 1991, he has been a member of the board of Service Corporation International, a publicly traded company,
and since 2001, he has been a member of the board of Warren Resources, Inc., a publicly traded company. Mr. Coelho earned
a Bachelor of Arts degree in Political Science from Loyola Marymount University in 1964. We believe that Mr. Coelho’s
political acumen and contacts as well as his extensive executive, financial and business experience makes him qualified to serve
as a director.
Christine
Griffin
.
Ms. Griffin has served as a director
since November 2015.
Since 2013, Christine Griffin has served as
the Executive Director of the Disability Law Center, a position that she held previously from 1996 to 2005. Ms. Griffin also served
as the Assistant Secretary for Disability Policies and Programs for the Massachusetts Executive Office of Health and Human Services. As
such, she was responsible for oversight of the Department of Developmental Services, the Massachusetts Rehabilitation Commission,
the Massachusetts Commission for the Blind, the Massachusetts Commission for the Deaf and Hard of Hearing, and the Soldiers' Homes
in Chelsea and Holyoke. Additionally, she had cross-Secretariat responsibility for disability-related policies and programs. Ms.
Griffin has an extensive history of work involving disability across public and private sectors. As Deputy Director of the U.S.
Office of Personnel Management, she was responsible for federal agencies' implementation of President Obama's Executive Order on
Increasing Employment of Individuals with Disabilities in the Federal Workforce. Ms. Griffin also planned and implemented the first
federal hiring event for people with disabilities and oversaw the creation of a newly established Government-wide Diversity and
Inclusion Office.
As a Commissioner on the Equal Employment Opportunity
Commission, she was responsible for the development of enforcement policies, and she planned and presided over public EEOC hearings
and investigations of federal employee complaints. She also established the LEAD (Leadership for Employment of Americans with Disabilities)
Initiative, a national outreach and education campaign to address the declining number of federal employees with severe disabilities.
Ms. Griffin began her legal career as a Skadden Fellow at the Disability
Law Center, where she provided outreach, training and representation on ADA issues to un-served and underserved communities within
the disabled community in Massachusetts.
With a history of providing
capable leadership involving a range of disability policy issues, Ms. Griffin is currently Chair of the Board of the American Association
of People with Disabilities (AAPD) and a member of the Massachusetts Developmental Disabilities Council.
Ms.
Griffin, who holds a law degree from Boston College and earned her undergraduate degree from the Massachusetts Maritime Academy,
also served on active duty in the United States Army from 1974 until 1977.
We
believe that Mrs. Griffin’s extensive education, private enterprise, public service and extensive background in accessibility
related solutions makes her qualified to serve as a director.
Ernest Purcell
. Mr. Purcell
has served as a director of ours since March 2014. Mr. Purcell has more than two decades of experience in the financial
services and advisory industries and has been involved in providing fairness and solvency opinions on numerous U.S. and European
transactions. He has technical expertise in financial due diligence, strategic business valuation, financial restructurings and
divestitures. Since 1997, Mr. Purcell has been employed by Houlihan Lokey, Inc., where he is currently a Senior
Managing Director, a member of the Board of Directors of their European and Asian subsidiaries, and the Head of International Financial
Advisory Services. Houlihan Lokey is an international investment bank with expertise in mergers and acquisitions, capital markets,
financial restructuring, and valuation. The firm serves corporations, institutions, and governments worldwide with offices in the
United States, Europe, and Asia. Houlihan Lokey is ranked as the No. 1 global restructuring advisor, the No. 1 M&A
fairness opinion advisor for U.S. transactions over the past 10 years, and the No. 1 M&A advisor for U.S. transactions
under $3 billion, according to Thomson Reuters. Mr. Purcell is based in Houlihan Lokey’s Miami office, having recently
returned to the U.S. after serving more than six years in the London office. With significant experience in the valuation
of securitized vehicles and structured investment vehicles, Mr. Purcell has advised numerous hedge fund and private equity
sponsors on the valuation of their portfolio assets. He has structured, negotiated, and closed complex financial and capital transactions
in many industries, including transportation, financial services, telecommunications, energy, aviation, consumer products and industrial
products. From 1989 to 1996, Mr. Purcell served in a number of positions with Valuemetrics, Inc. / VM Equity Partners,
where he specialized in the valuation of publicly owned and privately held companies, strategic financial planning, and bankruptcy
analysis. Mr. Purcell earned bachelor’s degree in Economics and Finance from the University of Florida in 1973
and earned his MBA, with concentrations in Finance and Statistics, from the University of Chicago. He is a member of the Institute
of Directors, British American Business and the Corporate Development Association. He is also a member of the Valuation Special
Interest Group of the Institute of Chartered Financial Accountants in England and Wales, the Society of Share and Business Valuers,
and the Business Valuation Association. We believe that Mr. Purcell’s extensive education and background in finance
makes him qualified to serve as a director.
Alexandre
Zyngier
.
Mr. Zyngier has served as a director
since September 2015. Mr. Zyngier founded Batuta Advisors in 2013 to pursue high return investment opportunities in the distressed
and turnaround sectors. Mr. Zyngier has over 20 years of investment, strategy, and operating experience. He is currently
a director of GT Advanced Technologies and Atari SA. Mr. Zyngier has worked as a Portfolio Manager, investing in public and
private opportunities, at Alden Global Capital, Goldman Sachs & Co. and Deutsche Bank Co. He was also a strategy consultant
at McKinsey & Company and a technical brand manager at Procter & Gamble. Mr. Zyngier holds an MBA in Finance and
Accounting from the University of Chicago and a BSc. in Chemical Engineering from UNICAMP in Brazil. We believe that Mr. Zyngier’s
extensive education and background in finance and strategy makes him qualified to serve as a director.
All of our directors hold office until the next
annual meeting of the stockholders or until their successors have been elected and qualified. Our officers are appointed by our
board of directors and hold office until their death, resignation or removal from office.
Family Relationships
There are no family relationships among our
directors or executive officers.
Code of Business Conduct and Ethics
The Company maintains a Code of Business Conduct
and Ethics applicable to all directors, officers and other employees of the Company. The Code of Business Conduct and Ethics is
available without charge upon request in writing to AudioEye, Inc. at 5210 E. Williams Circle, Suite 750, Tucson, AZ 85711 Attention:
Operations.
Item 11. Executive Compensation
The table below summarizes the compensation
paid to the following persons:
(a) our principal executive officer;
(b) each of our two most highly compensated
executive officers who were serving as executive officers at the end of the year ended
December 31, 2015; and
(c) up to two additional individuals for whom disclosure
would have been provided under (b) but for the fact that the individual was
not serving as our executive officer at the end of the years ended
December 31, 2015, who we will collectively refer to as the named executive officers of our company, are set out in the following
summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive
officer, whose total compensation did not exceed $100,000 for the respective fiscal year:
SUMMARY
COMPENSATION TABLE
|
|
|
|
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|
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|
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Non-Equity
|
|
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Nonqualified
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
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Stock
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Option/Warrant
|
|
|
Incentive Plan
|
|
|
Deferred
|
|
|
All Other
|
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|
|
Name and Principal
|
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|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Position
|
|
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Earnings
|
|
|
($)
|
|
|
($)
|
|
Dr. Carr Bettis
|
|
|
|
|
2015
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
200,000
|
(1)
|
|
$
|
253,563
|
(2)
|
|
$
|
72,944
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
526,507
|
|
Executive Chairman,
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chairman and Director
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd Bankofier
|
|
|
|
|
2015
|
|
|
$
|
18,220
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
14,359
|
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
32,579
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sean Bradley
|
|
|
|
|
2015
|
|
|
$
|
143,699
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
143,699
|
|
President, Chief Technology
|
|
|
|
|
2014
|
|
|
$
|
207,816
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
207,816
|
|
Officer, Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nathaniel Bradley (Previous)
|
|
(5)
|
|
|
2015
|
|
|
$
|
127,981
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
127,981
|
|
Ex-Chief Executive
|
|
|
|
|
2014
|
|
|
$
|
227,525
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
227,525
|
|
Officer, and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Crawford (Previous)
|
|
(6)
|
|
|
2015
|
|
|
$
|
46,903
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
20,000
|
(7)
|
|
$
|
66,903
|
|
Ex-Chief Operating
|
|
|
|
|
2014
|
|
|
$
|
183,150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
21,514
|
(8)
|
|
$
|
204,664
|
|
Officer, Treasurer and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Arena (Previous)
|
|
(9)
|
|
|
2015
|
|
|
$
|
67,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
267,000
|
(10)
|
|
$
|
334,600
|
|
Ex-Executive Chairman,
|
|
|
|
|
2014
|
|
|
$
|
310,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
303,562
|
(17)
|
|
|
-
|
|
|
|
-
|
|
|
|
990,000
|
(11)
|
|
$
|
1,603,562
|
|
Chairman of the Board
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward O Donnell (Previous)
|
|
(12)
|
|
|
2015
|
|
|
$
|
81,855
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
81,855
|
|
Ex-Chief Financial Officer
|
|
|
|
|
2014
|
|
|
$
|
160,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
95,604
|
(13)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
255,604
|
|
|
(1)
|
Dr. Carr Bettis was granted 1,250,000 shares on June 2, 2015 with a total market value of
$200,000.
|
|
(2)
|
Dr. Carr Bettis was granted 2,000,000 warrants on June 2, 2015 with a total market value of
$239,007 and granted 500,000 options and 250,000 options on October 26, 2015 with a market value of $14,556.
|
|
(3)
|
Dr. Carr Bettis was entitled to $87,500 in compensation for
the period July 1 to December 31, 2015. He has been granted options and warrants with a value of $14,566 for that period. The
difference of $72,944 is a liability of the Company.
|
|
(4)
|
Todd Bankofier, in his capacity as Advisory Board member
was granted 150,000 options on June 2, 2015 with a total market value of $14,359.
|
|
(5)
|
Nathaniel Bradley resigned as Chief Executive Officer
and President Effective April 24, 2015. Effective August 27. 2015 Mr. Bradley resigned from his board position and his position
as Chief Innovation Officer.
|
|
(6)
|
James Crawford resigned as Chief Operating Officer and
Treasurer effective April 24, 2015.
|
|
(7)
|
James Crawford provided consulting services via Crawdad,
LLC totaling $20,000.
|
|
(8)
|
James Crawford was granted 53,036 warrants with a value
of $21,514.
|
|
(9)
|
Paul Arena resigned as Executive Chairman/Chairman of
the Board and a member of our board of directors
|
|
(10)
|
Paul Arena provided consulting services via AIM Group,
LLC totaling $267,000.
|
|
(11)
|
Paul Arena was granted 1,500,000 options on January 27,
2014, with a total value of 303,562
|
|
(12)
|
Edward O’Donnell resigned from his position as
our Chief Financial Officer. Effective March 29, 2015.
|
|
(13)
|
Edward O Donnell was granted 330,000 options on March
24, 2014 with a total value of $95,604.
|
Director Compensation
We have no formal plan for compensating our
directors for their service in their capacity as directors and have not paid any director’s fees or other cash compensation
for services rendered as a director since our inception. Although no director received and or/accrued any compensation specifically
related to services as a director, directors may receive options at the discretion of our board of directors or a committee, which
may be established in the future. Edward Withrow III, one of our former directors, was granted options to purchase 225,000
shares on December 19, 2012 as remuneration for services not related to his service as a director. The options have an exercise
price of $0.25 per share with an aggregate fair market value of $54,903. On August 20, 2013, we granted options to purchase
200,000 shares to each of Craig Columbus (a former director of ours), Dr. Carr Bettis and Edward Withrow III (a former director).
The options have an exercise price of $0.50 per share and a term of five years with an aggregate fair market of $130,591.
In connection with the election of Ernest Purcell to our board, Mr. Purcell was granted five year options to purchase up to
250,000 shares of our common stock at an exercise price of $0.40 per share with an aggregate fair market value of $37,805.
In connection with the election of Anthony Coelho
to our board, Mr. Coelho was granted five-year options to purchase up to 250,000 shares of our common stock at an exercise
price of $0.35 per share with an aggregate fair market value of $44,503. In connection with the election of Matthew Mellon
II (a former director of ours) to our board, Mr. Mellon was granted five-year options to purchase up to 250,000 shares of
our common stock at an exercise price of $0.65 per share with an aggregate fair market value of $101,248. Mr. Mellon returned
these options to our company when he resigned in April 2015.
In June 2015, our board of directors granted
to Dr. Carr Bettis in connection with his service as Executive Chairman/Chairman of the Board 1,250,000 shares of our common
stock and five-year warrants to purchase up to 2,000,000 shares of our common stock at an exercise price of $0.16 per share with
an aggregate fair market value of $328,309. In June 2015, our board of directors granted to Ernest Purcell in connection
with his service as Chairman of the Audit Committee 800,000 shares of our common stock and five-year warrants to purchase
up to 1,000,000 shares of our common stock at an exercise price of $0.16 per share with an aggregate fair market value of $190,608.
In October 2015, our board of directors granted to Anthony Coelho and to Ernest Purcell each five-year
options to purchase up to 750,000 shares of common stock at exercise price of $0.041, each with an aggregate fair value of $18.952.
In connection with the election of Alexandre Zyngier to our board, and pursuant to his role as Compensation Committee Chairman,
our board granted Mr. Zyngier 750,000 five-year options with an exercise price of $0.041 per share was an aggregate fair value
of $18,952.
In
connection with the election of Christine Griffin to our board, in November 2015, our board granted Ms. Griffin 500,000 five-year
options with an exercise $0.049 per share was an aggregate fair value of $15,150.
Employment Contracts with Executive Officers
Our objective is to align the compensation of
our senior executives with long term value creation for our stockholders. As such, we use certain performance goals to determine
the number of shares that they are eligible to receive each year.
Dr. Carr Bettis
.
Pursuant to
an Executive Employment Agreement dated as of July 1, 2015, Dr. Carr Bettis was employed as our Executive Chairman. The
term of the Executive Employment Agreement is one year commencing July 1, 2015, terminable at will by either us or Dr. Bettis
and subject to extension upon mutual agreement. He is to receive a base annual compensation of $175,000 during the
employment period, paid at the end of every calendar quarter in the form of options to purchase shares of our common
stock. The number of options to be issued for each quarterly period will be determined by means of a Black Scholes
valuation whereby the number of options issued would have a value at the time of issuance equal to the dollar value of Dr.
Bettis’ base salary for each calendar quarter. He is entitled to receive bonuses at the sole discretion of our
board of directors or the compensation committee. Dr. Bettis is also entitled to equity awards under our incentive
compensation plans. In November, 2015 the board and Dr. Bettis agreed that Dr. Bettis equity awards would be limited to
750,000 options or warrants per quarter and the balance of his compensation would be paid to Dr. Bettis in a form mutually
agreeable to Dr. Bettis and the board. On December 22, 2015, subject to shareholder approval of the 2016 Incentive
Compensation Plan the compensation committee of the board approved a performance option agreement for Dr. Bettis. The number
of shares that vest under the performance options are determined based upon the company’s and Dr. Bettis (as
applicable) performance compared to performance goals described below. The compensation committee established a target
number of shares of 2,000,000 options whereby to each option will vest only upon: (a) satisfaction of a share price condition
described below; and (b) 100% achievement of the performance goals by the company and Dr. Bettis, as applicable. Subject to
the share price condition, 50% of the target award will be earned by Dr. Bettis at the 85% achievement level, and he can earn
up to 150% of the target award at the 125% achievement level. Vesting shall be determined based upon performance measures at
the end of each calendar year of 2016 and 2017, with 50% of each target award and performance increase subject to vesting
during each performance period. Dr. Bettis shall have the opportunity to achieve full vesting of 100% of the target award and
performance increase if there is a shortfall in the first performance period but cumulative performance goals are achieved
for the two-year period ending on the measurement date at the end of the second performance period. The number of vested
performance options shall be determined for a performance period by reference to the company's actual achievement against the
following performance objectives: (a) Targeted cash contract bookings (as to 33.33%); (b) Targeted net operating cash flow
(as to 33.33%); (c) Board defined operations goals (as to 33.33%) for a performance period. And, vesting shall only occur if
the closing share price of the company’s common stock on each of the 20 trading days before and including the end of a
performance period is not less than $0.20 per share (as adjusted for stock splits, combinations, recapitalization and the
like). The company’s board or committee shall in its sole discretion establish goals as to specific matters and amounts
with respect to a performance period. The performance options shall have a term of five years from the date of grant and the
exercise price shall be determined by using a 10-day average closing price of the company’s common stock over the ten
(10) trading days beginning on January 4, 2016, which the committee has determined to be and the Board agrees is an amount
that is not less than the fair market value of a share of the common stock of the company on such date.
Todd Bankofier
. Pursuant to an
Executive Employment Agreement dated as of November 10, 2015 Mr. Bankofier was employed as our Chief Executive Officer. The
term of the Executive Employment Agreement is one year commencing November 10, 2015 and subject to extension upon mutual agreement.
He is to receive a base annual salary of $125,000. Mr. Bankofier is also entitled to equity awards under our incentive compensation
plan. On December 22, 2015, subject to shareholder approval of the 2016 Incentive Compensation Plan the compensation committee
of the board approved a performance option agreement for Mr. Bankofier. The number of shares that vest under the performance options
are determined based upon the company’s and Mr. Bankofier (as applicable) performance compared to performance goals described
below. The compensation committee established a target number of shares of 2,000,000 options whereby to each option will vest only
upon: (a) satisfaction of a share price condition described below; and (b) 100% achievement of the performance goals by the company
and Mr. Bankofier, as applicable. Subject to the share price condition, 50% of the target award will be earned by Mr. Bankofier
at the 85% achievement level, and he can earn up to 150% of the target award at the 125% achievement level. Vesting shall be determined
based upon performance measures at the end of each calendar year of 2016 and 2017, with 50% of each target award and performance
increase subject to vesting during each performance period. Mr. Bankofier shall have the opportunity to achieve full vesting of
100% of the target award and performance increase if there is a shortfall in the first performance period but cumulative performance
goals are achieved for the two-year period ending on the measurement date at the end of the second performance period. The number
of vested performance options shall be determined for a performance period by reference to the company's actual achievement against
the following performance objectives: (a) Targeted cash contract bookings (as to 33.33%); (b) Targeted net operating cash flow
(as to 33.33%); (c) Board defined operations goals (as to 33.33%) for a performance period. And, vesting shall only occur if the
closing share price of the company’s common stock on each of the 20 trading days before and including the end of a performance
period is not less than $0.20 per share (as adjusted for stock splits, combinations, recapitalization and the like). The company’s
board or committee shall in its sole discretion establish goals as to specific matters and amounts with respect to a performance
period. The performance options shall have a term of five years from the date of grant and the exercise price shall be determined
by using a 10-day average closing price of the company’s common stock over the ten (10) trading days beginning on January
4, 2016, which the committee has determined to be and the Board agrees is an amount that is not less than the fair market value
of a share of the common stock of the company on such date.
On August 7, 2013, we entered into agreements
with the following executive officers:
Sean Bradley
. Pursuant to an Executive
Employment Agreement, Sean Bradley was employed as our 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 our board of
directors or the compensation committee. Mr. Bradley is also entitled to equity awards under the AudioEye, Inc.
2012 Incentive Compensation Plan, the AudioEye, Inc. 2013 Incentive Compensation Plan and the AudioEye, Inc. 2014 Incentive
Compensation Plan. In connection with entry into the Executive Employment Agreement, we and Mr. Bradley terminated the existing
employment agreement, dated April 1, 2010, between us and Mr. Bradley effective as of August 7, 2013.
Pursuant to a Performance Share Unit Agreement,
Mr. Bradley was granted an award of an aggregate of 200,000 PSUs at target value of established goals. 37.5% of these
awards are tied to targeted revenue goals of approximately $1.7 million, $8.0 million and $22 million over the years ended March 31,
2014, March 31, 2015 and March 31, 2016, respectively. 37.5% of these awards are tied to a project plan deliverable schedule
and related project budget, and 25% are tied to discretionary goals. The award will pay above or below the target number
of shares based on performance. In order to receive any shares the threshold value of goals is 75% of the target, which will
payout at 100,000 shares. The maximum share payout is 300,000 shares if 125% of performance targets are met. We use
interpolation to determine share payouts if the performance metric values achieved are between the threshold, target and maximum
goal levels. Pursuant to the first year goals, in 2014 Mr. Sean Bradley was granted 93,750 shares. In the third quarter of 2015
management determined that was highly improbably that any of the 2015 or 2016 performance period targets would be met.
Effective April 24, 2015, our board of
directors appointed Sean Bradley to serve as President of our company as well as continuing as Chief Technology Officer and Secretary.
Effective May 1, 2015, Mr. Bradley agreed to reduce his annual base salary to $150,000. Effective October 1, 2015
the board and Mr. Bradley agreed that in lieu of cash Mr. Bradley would receive up to $6,250 per quarter in compensation in the
form of market value of options or warrants. On December 22, 2015, subject to shareholder approval of the 2016 Incentive Compensation
Plan the compensation committee of the board approved a performance option agreement for Mr. Bradley. The number of shares that
vest under the performance options are determined based upon the company’s and Mr. Bradley’s (as applicable) performance
compared to performance goals described below. The compensation committee established a target number of shares of 1,500,000 options
whereby to each option will vest only upon: (a) satisfaction of a share price condition described below; and (b) 100% achievement
of the performance goals by the company and Mr. Bradley, as applicable. Subject to the share price condition, 50% of the target
award will be earned by Mr. Bradley at the 85% achievement level, and he can earn up to 150% of the target award at the 125% achievement
level. Vesting shall be determined based upon performance measures at the end of each calendar year of 2016 and 2017, with 50%
of each target award and performance increase subject to vesting during each performance period. Mr. Bradley shall have the opportunity
to achieve full vesting of 100% of the target award and performance increase if there is a shortfall in the first performance period
but cumulative performance goals are achieved for the two-year period ending on the measurement date at the end of the second performance
period. The number of vested performance options shall be determined for a performance period by reference to the company's actual
achievement against the following performance objectives: (a) Targeted cash contract bookings (as to 33.33%); (b) Targeted net
operating cash flow (as to 33.33%); (c) Board defined operations goals (as to 33.33%) for a performance period. And, vesting shall
only occur if the closing share price of the company’s common stock on each of the 20 trading days before and including the
end of a performance period is not less than $0.20 per share (as adjusted for stock splits, combinations, recapitalization and
the like). The company’s board or committee shall in its sole discretion establish goals as to specific matters and amounts
with respect to a performance period. The performance options shall have a term of five years from the date of grant and the exercise
price shall be determined by using a 10-day average closing price of the company’s common stock over the ten (10) trading
days beginning on January 4, 2016, which the committee has determined to be and the Board agrees is an amount that is not less
than the fair market value of a share of the common stock of the company on such date.
Nathaniel Bradley
(previous executive).
Pursuant to an Executive Employment Agreement, Nathaniel Bradley was employed as our 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 our board of directors or the compensation committee. Mr. Bradley is also entitled to equity awards
under the AudioEye, Inc. 2012 Incentive Compensation Plan, the AudioEye, Inc. 2013 Incentive Compensation Plan and the
AudioEye, Inc. 2014 Incentive Compensation Plan. Pursuant to the first year goals, in 2014 Mr. Nathaniel Bradley was granted
83,333 shares. In connection with entry into the Executive Employment Agreement, we and Mr. Bradley terminated the existing
employment agreement, dated April 1, 2010, between us and Mr. Bradley effective as of August 7, 2013.
Pursuant to a Performance Share Unit Agreement,
Mr. Bradley was granted an award of an aggregate of 200,000 Performance Share Units (“PSUs”) at target value of
established goals. Each PSU represented the right to receive one share of our common stock. 37.5% of these awards are tied
to targeted revenue goals of approximately $1.7 million, $8.0 million and $22 million over the years ended March 31, 2014,
March 31, 2015 and March 31, 2016, respectively. 37.5% of these awards are tied to targeted cash flow goals over the
three years, and 25% are tied to discretionary goals. The award would pay above or below the target number of shares based
on performance. In order to receive any shares the threshold value of goals is 75% of the target, which would payout at 100,000
shares. The maximum share payout was 400,000 shares if 125% of performance targets are met. We would use interpolation
to determine share payouts if the performance metric values achieved are between the threshold, target and maximum goal levels.
In the third quarter of 2015 management determined that was highly improbably that any of the 2015 or 2016 performance period targets
would be met.
Effective April 24, 2015, Nathaniel Bradley
resigned as Chief Executive Officer and President of our company. Effective with his resignation as Chief Executive Officer
and President, our board of directors appointed Mr. Bradley to serve as Founder and Chief Innovation Officer as well as Treasurer
of our company. Effective May 1, 2015, Mr. Bradley agreed to reduce his annual base salary to $125,000. Effective August
27, 2015 Mr. Bradley resigned from his position as Chief Innovation Officer and member of the board.
James Crawford
(previous executive).
Pursuant to an Executive Employment Agreement, James Crawford was employed as our 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 our board of directors or the compensation committee. Mr. Crawford is also entitled to equity awards
under the AudioEye, Inc. 2012 Incentive Compensation Plan, the AudioEye, Inc. 2013 Incentive Compensation Plan and the
AudioEye, Inc. 2014 Incentive Compensation Plan.
Pursuant to a Performance Share Unit Agreement,
Mr. Crawford was granted an award of an aggregate of 200,000 PSUs at target value of established goals. 75% of these
awards are tied to targeted revenue goals of approximately $1.7 million, $8.0 million and $22 million over the years ended March 31,
2014, March 31, 2015 and March 31, 2016, respectively and 25% were tied to discretionary goals. The award would
pay above or below the target number of shares based on performance. In order to receive any shares the threshold value of
goals was 75% of the target, which would payout at 100,000 shares. The maximum share payout was 300,000 shares if 125% of
performance targets were met. We would use interpolation to determine share payouts if the performance metric values achieved
were between the threshold, target and maximum goal levels. Pursuant to the first year goals, Mr. Crawford was granted 91,667 shares.
In the third quarter of 2015 management determined that was highly improbably that any of the 2015 or 2016 performance period targets
would be met.
Effective April 24, 2015, James Crawford
resigned as Chief Operating Officer and Treasurer of our company.
Also on April 24, 2015, we and Crawdad,
LLC. (“Crawdad”), a limited liability company wholly owned by Mr. Crawford, entered into a Consulting Agreement
pursuant to which Crawdad, through Mr. Crawford, is to provide certain consulting services to us for a period of 12 months
for a consulting fee of $5,000 per month.
The consulting agreement with Crawdad was terminated
by mutual agreement on December 31, 2015.
Edward O’Donnell (previous executive)
.
Pursuant to an Executive Employment Agreement, Mr. O’Donnell was employed as our Chief Financial Officer. The
term of the Executive Employment Agreement was two years commencing August 7, 2013, subject to extension upon mutual agreement.
He was to receive a base annual salary of $165,000 during the employment period. He was entitled to receive bonuses at the
sole discretion of our board of directors or the compensation committee. Mr. O’Donnell was also entitled to equity
awards under our incentive compensation plan.
Effective March 29, 2015, Edward O’Donnell
resigned from his position as our Chief Financial Officer.
Constantine Potamianos (previous executive)
.
Pursuant to an Executive Employment Agreement, Constantine Potamianos was employed as our Chief Legal Officer and General Counsel.
The term of the Executive Employment Agreement was two years commencing August 7, 2013, subject to extension upon mutual agreement.
He received a base annual salary of $150,000 during the employment period. He was entitled to receive bonuses at the sole
discretion of our board of directors or the compensation committee. Mr. Potamianos was also entitled to equity awards
under the AudioEye, Inc. 2012 Incentive Compensation Plan, the AudioEye, Inc. 2013 Incentive Compensation Plan and the
AudioEye, Inc. 2014 Incentive Compensation Plan.
On August 7, 2015 Constantine Potamianos employment
contract expired.
Paul Arena (previous executive)
.
On January 27, 2014, we entered into agreements with Paul Arena. Under an Executive Employment Agreement dated as of
January 27, 2014, Mr. Arena had direct responsibility working in conjunction with our 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 was two years. Mr. Arena’s base salary was $275,000 per
year. Mr. Arena received a signing bonus of $35,000 and was 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 our board of directors or compensation
committee. Mr. Arena had been granted five year warrants to purchase 250,000 shares of our 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 Executive Employment Agreement. Pursuant to a separate Performance Share Unit Agreement dated as of January 27,
2014, we granted to Mr. Arena an award of up to 3,000,000 PSUs. Each PSU represented the right to receive one share
of common stock. The number of PSUs that Mr. Arena actually earned would have been determined by the level of achievement
of the performance goals set forth in the Performance Share Unit Agreement. Mr. Arena was granted an award of an aggregate
of 1,500,000 PSUs at target value of established goals. 35% of these awards were tied to targeted revenue goals over the
years ended January 31, 2015 and January 31, 2016. 35% of these awards were tied to targeted cash flow goals over the
years, and 30% are tied to discretionary goals. The award would pay above or below the target number of shares based on performance.
In order to receive any shares the threshold value of goals is 75% of the target, which would payout at 1,000,000 shares.
The maximum share payout was 3,000,000 shares if 125% of performance targets were met. We would have used interpolation to
determine share payouts if the performance metric values achieved were between the threshold, target and maximum goal levels. Even
though in the third quarter of 2015 management determined that was highly improbably that any of the 2015 or 2016 performance period
targets would be met, this determination was preempted by the Separation and Release Agreement (the “Separation Agreement”)
discussed below.
On March 5, 2015, we and Paul Arena entered
into a Separation Agreement) pursuant to which Mr. Arena resigned as Executive Chairman/Chairman of the Board and a member
of our board of directors. Under the Separation Agreement, we and Mr. Arena agreed that, pursuant to his Stock Option Agreement
with us, options to purchase 500,000 common shares were vested, options to purchase an additional 500,000 shares (the “Second
Tranche”) vested and options to purchase 500,000 shares were forfeited. Fifty percent of the options under the Second Tranche
were subject to certain clawback provisions as set forth in the Separation Agreement and were clawed back due to the restatement
of financial information for 2014. Additionally, Mr. Arena was granted 500,000 shares of our restricted common stock (the
“Restricted Shares”) with 250,000 shares to be deposited in escrow to cover the clawback rights of our company. The
Restricted Shares were clawed back due to the restatement of financial information for 2014. The Restricted Shares were being issued
to Mr. Arena in lieu of any issuances which may be due him under his Performance Share Unit Agreement. The Restricted Shares
and shares issuable pursuant to options described above were subject to a Lock-up/Leakage Agreement under which Mr. Arena
is limited to a cap of $50,000 in gross proceeds from the sale of such shares in any month.
Also on March 5, 2015, we and AIM Group, Inc.
(“AIM”), a corporation wholly owned by Mr. Arena, entered into a Consulting Agreement (the “Consulting Agreement”)
pursuant to which AIM, through Mr. Arena, is to provide certain consulting services to us for a period of one year. Under
the Consulting Agreement, AIM received a one-time net payment of $267,000.
AudioEye, Inc. 2012 Incentive Compensation Plan, AudioEye, Inc.
2013 Incentive Compensation Plan, AudioEye, Inc. 2014 Incentive Compensation Plan, AudioEye, Inc. 2015 Incentive Compensation
Plan, and AudioEye, Inc. 2015 Incentive Compensation Plan
On December 19, 2012, our board of directors
and holders of a majority of our outstanding shares of common stock adopted and approved the AudioEye, Inc. 2012 Incentive
Compensation Plan (the “2012 Plan”); on August 20, 2013, our board of directors and holders of a majority of our
outstanding shares of common stock adopted and approved the AudioEye, Inc. 2013 Incentive Compensation Plan (the “2013
Plan”); on January 27, 2014, our board of directors adopted and approved and on March 5, 2014 holders of a majority
of our outstanding shares of common stock adopted and approved the AudioEye, Inc. 2014 Incentive Compensation Plan (the “2014
Plan”); and on September 5, 2014, our board of directors adopted and approved and, on September 10, 2014, holders
of a majority of our outstanding shares of common stock adopted and approved the AudioEye, Inc. 2015 Incentive Compensation
Plan (the (“2015 Plan”, and together with the 2014 Plan, 2013 Plan and the 2012 Plan, the “Plans”).
Our board of directors has approved a 2016 Incentive Compensation Plan that is still subject to approval by the majority of shareholders.
The purpose of the Plans is to assist us in attracting, motivating, retaining and rewarding high-quality executives and other employees,
officers, directors, consultants and other persons who provide services to us. The following summary of the Plans is qualified
in its entirety by the specific language of the Plans.
Administration
. The Plans are to be administered
by a committee elected by the board of directors, provided, however, that except as otherwise expressly provided in the Plans,
the board of directors may exercise any power or authority granted to the committee upon formation under the Plans. Subject
to the terms of the Plans, the committee is authorized to select eligible persons to receive awards, determine the type, number
and other terms and conditions of, and all other matters relating to, awards, prescribe award agreements (which need not be identical
for each participant), and the rules and regulations for the administration of the Plans, construe and interpret the Plans
and award agreements, and correct defects, supply omissions or reconcile inconsistencies in them, and make all other decisions
and determinations as the committee may deem necessary or advisable for the administration of the Plans.
Eligibility
. The persons eligible to
receive awards under the Plans are the officers, directors, employees, consultants and other persons who provide services to us.
An employee on leave of absence may be considered as still in the employ of ours for purposes of eligibility for participation
in the Plans.
Types of Awards
. The Plans provide for
the issuance of stock options, performance stock units, stock appreciation rights, or SARs, restricted stock, deferred stock, warrants,
dividend equivalents, bonus stock and awards in lieu of cash compensation, other stock-based awards and performance awards.
Performance awards may be based on the achievement of specified business or personal criteria or goals, as determined by the committee.
Shares Available for Awards; Annual Per Person
Limitations
. The total number of shares of common stock that may be subject to the granting of awards under each of the Plans
at any time during the term of each of the Plans is equal to 5,000,000 shares. This limit will be increased by the number of shares
with respect to which awards previously granted under the Plans that are forfeited, expire or otherwise terminate without issuance
of shares, or that are settled for cash or otherwise do not result in the issuance of shares, and the number of shares that are
tendered (either actually or by attestation) or withheld upon exercise of an award to pay the exercise price or any tax withholding
requirements.
The Plans impose individual limitations
on the amount of certain awards. Under these limitations, during any fiscal year of ours, the number of options, stock appreciation
rights, shares of restricted stock, shares of deferred stock, performance shares and other stock based-awards granted to any one
participant under the Plans may not exceed 500,000 shares, subject to adjustment in certain circumstances. The maximum amount that
may be paid out as performance units in any 12-month performance period is $250,000, and the maximum amount that may be paid out
as performance units in any performance period greater than 12 months is $500,000.
The board of directors is authorized to
adjust the limitations described in the two preceding paragraphs. The board of directors is also authorized to adjust performance
conditions and other terms of awards in response to these kinds of events or in response to changes in applicable laws, regulations
or accounting principles.
Stock Options and Stock Appreciation
Rights
. The board of directors is authorized to grant stock options, including both incentive stock options, or ISOs, which
can result in potentially favorable tax treatment to the participant, and non-qualified stock options, and stock appreciation rights
entitling the participant to receive the amount by which the fair market value of a share of common stock on the date of exercise
exceeds the grant price of the stock appreciation right. The exercise price per share subject to an option and the grant price
of a stock appreciation rights are determined by the board of directors, but in the case of an ISO must not be less than the fair
market value of a share of common stock on the date of grant. For purposes of the Plans, the term “fair market value”
means the fair market value of common stock, awards or other property as determined by the board of directors or under procedures
established by the committee upon formation. The maximum term of each option or stock appreciation right, the times at which
each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of unexercised options or stock
appreciation rights at or following termination of employment generally are fixed by the committee, except that no option or stock
appreciation right may have a term exceeding ten years.
Restricted and Deferred Stock
. The
board of directors is authorized to grant restricted stock and deferred stock. Restricted stock is a grant of shares of common
stock which may not be sold or disposed of, and which may be forfeited in the event of certain terminations of employment, prior
to the end of a restricted period specified by the committee. A participant granted restricted stock generally has all of the rights
of a stockholder of ours, unless otherwise determined by the board of directors. An award of deferred stock confers upon a participant
the right to receive shares of common stock at the end of a specified deferral period, subject to possible forfeiture of the award
in the event of certain terminations of employment prior to the end of a specified restricted period. Prior to settlement, an award
of deferred stock carries no voting or dividend rights or other rights associated with share ownership, although dividend equivalents
may be granted, as discussed below.
Dividend Equivalents
. The board of
directors is authorized to grant dividend equivalents conferring on participants the right to receive, currently or on a deferred
basis, cash, shares of common stock, other awards or other property equal in value to dividends paid on a specific number of shares
of common stock or other periodic payments. Dividend equivalents may be granted alone or in connection with another award, may
be paid currently or on a deferred basis and, if deferred, may be deemed to have been reinvested in additional shares of common
stock, awards or otherwise as specified by the board of directors.
Bonus Stock and Awards in Lieu of Cash
Obligations
. The board of directors is authorized to grant shares of common stock as a bonus free of restrictions, or to grant
shares of common stock or other awards in lieu of our obligations to pay cash under the Plans or other plans or compensatory arrangements,
subject to such terms as the board of directors may specify.
Other Stock Based Awards
. The board
of directors is authorized to grant awards that are denominated or payable in, valued by reference to, or otherwise based on or
related to shares of common stock. The board of directors determines the terms and conditions of such awards.
Performance Awards
. The board of
directors is authorized to grant performance awards to participants on terms and conditions established by the board of directors.
Performance awards may be settled by delivery of cash, shares or other property, or any combination thereof, as determined by the
board of directors. Performance awards granted to persons whom the committee expects will, for the year in which a deduction arises,
be “covered employees” (as defined below) will, if and to the extent intended by the board of directors, be subject
to provisions that should qualify such awards as “performance based compensation” not subject to the limitation on
tax deductibility by us under Internal Revenue Code Section 162(m).
The board of directors may, in its discretion,
determine that the amount payable as a performance award will be reduced from the amount of any potential award.
Other Terms of Awards
. Awards may
be settled in the form of cash, shares of common stock, other awards or other property, in the discretion of the board of directors.
The board of directors may require or permit participants to defer the settlement of all or part of an award in accordance with
such terms and conditions as the committee may establish, including payment or crediting of interest or dividend equivalents on
deferred amounts, and the crediting of earnings, gains and losses based on deemed investment of deferred amounts in specified investment
vehicles. The board of directors is authorized to place cash, shares of common stock or other property in trusts or make other
arrangements to provide for payment of our obligations under the Plan.
Awards under the Plans are generally granted
without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from
the exercise), except to the extent required by law. The committee may, however, grant awards in exchange for other awards under
the Plan, awards under other company plans or other rights to payment from us, and may grant awards in addition to and in tandem
with such other awards, rights or other awards.
Acceleration of Vesting; Change in Control
.
The board of directors may, in its discretion, accelerate the exercisability, the lapsing of restrictions or the expiration of
deferral or vesting periods of any award, and such accelerated exercisability, lapse, expiration and if so provided in the award
agreement or otherwise determined by the committee, vesting will occur automatically in the case of a “change in control”
of our company, as defined in the Plans (including the cash settlement of stock appreciation rights which may be exercisable in
the event of a change in control). In addition, the board of directors may provide in an award agreement that the performance goals
relating to any performance award will be deemed to have been met upon the occurrence of any “change in control.”
Amendment and Termination
. The board
of directors may amend, alter, suspend, discontinue or terminate the Plans or upon formation determine the committee’s authority
to grant awards without further stockholder approval, except stockholder approval must be obtained for any amendment or alteration
if such approval is required by law or regulation or under the rules of any stock exchange or quotation system on which shares
of common stock are then listed or quoted. Thus, stockholder approval may not necessarily be required for every amendment to the
Plans, which might increase the cost of the Plans or alter the eligibility of persons to receive awards. Stockholder approval
will not be deemed to be required under laws or regulations, such as those relating to ISOs, that condition favorable treatment
of participants on such approval, although the board of directors may, in its discretion, seek stockholder approval in any circumstance
in which it deems such approval advisable. The Plans will terminate at the earliest of (a) such time as no shares of common
stock remain available for issuance under the Plans, (b) termination of the applicable Plan by the board of directors, or
(c) the tenth anniversary of the effective date of the applicable Plan. Awards outstanding upon expiration of the applicable
Plan will remain in effect until they have been exercised or terminated, or have expired.
INCENTIVE COMPENSATION PLAN
Grants of Plan-Based Awards
The following table sets forth information
regarding grants of plan-based awards to each of our named executive officers at December 31, 2015.
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
All Other
|
|
|
Option/Warrant
|
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
|
Stock
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
Awards:
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
under Equity
|
|
|
Number of
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Grant Date Fair
|
|
|
|
|
|
Incentive
|
|
|
Shares of
|
|
|
Underlying
|
|
|
of Option
|
|
|
Value of Stock
|
|
|
|
|
|
Plan Awards
|
|
|
Stock or
|
|
|
Options
|
|
|
Awards
|
|
|
and Option
|
|
Name
|
|
Grant
Date
|
|
(1)
Target ($)
|
|
|
Units
(#)
|
|
|
(#)(1)
|
|
|
($/Share)
|
|
|
Awards
($)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Carr Bettis
|
|
6/2/2015
|
|
|
-
|
|
|
|
1,250,000
|
|
|
|
-
|
|
|
$
|
0.16
|
|
|
$
|
200,000
|
|
|
|
6/2/2015
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
$
|
0.16
|
|
|
$
|
239,007
|
|
|
|
10/26/2015
|
|
|
-
|
|
|
|
-
|
|
|
|
750,000
|
|
|
$
|
0.041
|
|
|
$
|
14,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd Bankofier
|
|
6/2/2015
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
$
|
0.16
|
|
|
$
|
14,359
|
|
|
(1)
|
The amounts in the column under “All Other Option
Awards” represent shares underlying options awarded. Dr. Carr Bettis awards are immediate vesting and all others vest over
time.
|
|
(2)
|
The amounts in the column under “Grant Date Fair
Value of Option Awards” represent the fair value of the awards on the date of grant, as computed in accordance with Financial
Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation.
|
Outstanding Equity Awards
The following table sets forth certain information
concerning unexercised stock options for each of our named executive officers at December 31, 2015:
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
securities
|
|
|
securities
|
|
|
|
|
|
|
|
shares or
|
|
|
Market value
|
|
|
|
underlying
|
|
|
underlying
|
|
|
Option/
|
|
|
|
|
units of
|
|
|
of shares or
|
|
|
|
unexercised
|
|
|
unexercised
|
|
|
Warrant
|
|
|
Option/Warrant
|
|
stock that
|
|
|
units of stock
|
|
Named Executive
|
|
options/warrants (#)
|
|
|
options/warrants (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
have not
|
|
|
that have not
|
|
Officer
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date
|
|
vested (#)
|
|
|
vested ($)
|
|
Dr. Carr Bettis
|
|
|
200,000
|
(1)
|
|
|
-
|
|
|
$
|
0.5
|
|
|
8/20/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
178,125
|
(1)
|
|
|
121,875
|
|
|
$
|
0.45
|
|
|
3/24/2019
|
|
|
-
|
|
|
|
-
|
|
|
|
|
46,875
|
(2)
|
|
|
-
|
|
|
$
|
0.6
|
|
|
12/31/2019
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2,000,000
|
(3)
|
|
|
-
|
|
|
$
|
0.16
|
|
|
6/2/2020
|
|
|
-
|
|
|
|
-
|
|
|
|
|
750,000
|
(4)
|
|
|
-
|
|
|
$
|
0.041
|
|
|
10/26/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd Bankofier
|
|
|
100,000
|
(5)
|
|
|
50,000
|
|
|
$
|
0.016
|
|
|
6/2/2020
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sean Bradley
|
|
|
93,750
|
|
|
|
-
|
|
|
$
|
0.25
|
|
|
12/18/2017
|
|
|
-
|
|
|
|
-
|
|
|
|
|
994,616
|
(6)
|
|
|
248,654
|
|
|
$
|
0.25
|
|
|
3/19/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
28,333
|
(7)
|
|
|
-
|
|
|
$
|
0.5
|
|
|
6/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
67,033
|
(8)
|
|
|
-
|
|
|
$
|
0.39
|
|
|
9/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
3,200
|
(9)
|
|
|
-
|
|
|
$
|
0.4
|
|
|
11/12/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
25,000
|
(10)
|
|
|
-
|
|
|
$
|
0.5
|
|
|
11/13/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
473,333
|
(12)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nathaniel Bradley
(previous)
(16)
|
|
|
1,130,770
|
(6)
|
|
|
-
|
|
|
$
|
0.25
|
|
|
3/19/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
32,500
|
(7)
|
|
|
-
|
|
|
$
|
0.5
|
|
|
6/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
103,128
|
(8)
|
|
|
-
|
|
|
$
|
0.39
|
|
|
9/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
6,667
|
(9)
|
|
|
-
|
|
|
$
|
0.4
|
|
|
11/12/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
25,000
|
(10)
|
|
|
-
|
|
|
$
|
0.5
|
|
|
11/13/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
21,773
|
(11)
|
|
|
-
|
|
|
$
|
0.4
|
|
|
11/22-12/10/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
473,334
|
(12)
|
|
|
-
|
|
|
|
-
|
|
|
12/23/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Crawford
(previous)
(17)
|
|
|
309,729
|
(6)
|
|
|
-
|
|
|
$
|
0.25
|
|
|
12/18/2017
|
|
|
-
|
|
|
|
-
|
|
|
|
|
38,333
|
(7)
|
|
|
-
|
|
|
$
|
0.5
|
|
|
6/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
95,394
|
(8)
|
|
|
-
|
|
|
$
|
0.39
|
|
|
9/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
3,200
|
(9)
|
|
|
-
|
|
|
$
|
0.4
|
|
|
11/12/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
53,036
|
(13)
|
|
|
-
|
|
|
$
|
0.7
|
|
|
8/25/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
213,333
|
(14)
|
|
|
-
|
|
|
$
|
0.4
|
|
|
12/23/2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward O Donnell
(previous)
(18)
|
|
|
75,000
|
|
|
|
75,000
|
|
|
$
|
0.39
|
|
|
7/28/2018
|
|
|
75,000
|
|
|
$
|
12,000
|
|
|
|
|
28,360
|
(7)
|
|
|
-
|
|
|
$
|
0.39
|
|
|
9/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Arena
(previous)
(19)
|
|
|
750,000
|
|
|
|
-
|
|
|
$
|
0.40
|
|
|
3/27/17
|
|
|
-
|
|
|
|
-
|
|
|
|
|
250,000
|
(15)
|
|
|
-
|
|
|
|
-
|
|
|
12/23/2018
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Dr. Carr Bettis was granted 200,000 options on August
20, 2013 and 300,000 options on March 24, 2014 as an independent director.
|
|
(2)
|
Dr. Carr Bettis was granted 46,875 warrants on December
31, 2014 as part of his participation in a private placement.
|
|
(3)
|
Dr. Carr Bettis was granted 2,000,000 warrants on June
2, 2015 in his capacity as Executive Chairman before his employment agreement.
|
|
(4)
|
Dr. Carr Bettis was granted 500,000 options and 250,000
warrants on October 26, 2015 pursuant to his July 1, 2015 employment agreement.
|
|
(5)
|
Todd Bankofier was granted 150,000 options on June 2,
2015 in his capacity as advisory board member.
|
|
(6)
|
Warrants to purchase up to an aggregate of 3,652,672
shares of common stock were issued to Sean Bradley, Nathan Bradley and James Crawford in the same amount as the related party
payables forgiven. 720,249 were forfeited.
|
|
(7)
|
Warrants to purchase up to 99,166 shares of common stock
were granted to Sean Bradley, Nathan Bradley and James Crawford in consideration for the release of related party payables.
|
|
(8)
|
Warrants to purchase up to 293,915 shares of common stock
were granted to Sean Bradley, Nathan Bradley, James Crawford and Edward O’Donnell for the release of related party payables.
|
|
(9)
|
Warrants to purchase up to 9,867 shares of common stock
were granted to Sean Bradley and Nathan Bradley in consideration for the release of related party payables.
|
|
(10)
|
Warrants to purchase up to 50,000 shares of common stock
were granted to Bradley Brothers, LLC which at December 31, 2015 was an equally owned entity with beneficial owners Sean Bradley
and Nathan Bradley for release of related party payables.
|
|
(11)
|
Warrants to purchase up to 21,773 shares of common stock
were granted to Nathan Bradley for release of related party payables.
|
|
(12)
|
Warrants to purchase up to 946,667 shares of common stock
were granted to Bradley Brothers, LLC which at December 31, 2015 was an equally owned entity with beneficial owners Sean Bradley
and Nathan Bradley in connection with their investment in a private placement. Sean Bradley no longer has an interest in Bradley
Brothers, LLC.
|
|
(13)
|
Warrants to purchase up to 53,036 shares of common stock
were granted to James Crawford for release of related party payables.
|
|
(14)
|
Warrants to purchase up to 213,336 shares of common stock
were granted to James Crawford for release of related party payables.
|
|
(15)
|
Warrants associated with his participation in a private
placement on December 23, 2013.
|
|
(16)
|
Effective April 24, 2015, Nathaniel Bradley resigned
as Chief Executive Officer and President of our company. Effective August 27. 2015, Nathan Bradley resigned as Chief Innovation
Officer and as a member of the board of directors of our Company.
|
|
(17)
|
Effective April 24, 2015, James Crawford resigned
as Chief Operating Officer and Treasurer of our Company.
|
|
(18)
|
Edward O’Donnell resigned from his position as
our Chief Financial Officer effective March 29, 2015.
|
|
(19)
|
Paul Arena and the Company on March 5, 2015, entered
into a Separation and Release Agreement.
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
securities
|
|
|
securities
|
|
|
|
|
|
|
|
|
underlying
|
|
|
underlying
|
|
|
|
|
|
|
|
|
unexercised
|
|
|
unexercised
|
|
|
Option
|
|
|
Option
|
Named Executive
|
|
options (#)
|
|
|
options (#)
|
|
|
Exercise
|
|
|
Expiration
|
Officer
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Carr Bettis (3)
|
|
|
200,000
|
(1)
|
|
|
-
|
|
|
$
|
0.5
|
|
|
8/20/2016
|
|
|
|
178,125
|
(1)
|
|
|
121,875
|
|
|
$
|
0.45
|
|
|
3/24/2019
|
|
|
|
500,000
|
(2)
|
|
|
-
|
|
|
$
|
0.041
|
|
|
10/26/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd Bankofier
|
|
|
150,000
|
(4)
|
|
|
50,000
|
|
|
$
|
0.016
|
|
|
6/2/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sean Bradley
|
|
|
93,750
|
|
|
|
-
|
|
|
$
|
0.25
|
|
|
12/18/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Crawford
(previous)
(5)
|
|
|
318,750
|
|
|
|
-
|
|
|
$
|
0.25
|
|
|
12/18/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward O Donnell
(previous)
(6)
|
|
|
75,000
|
|
|
|
75,000
|
|
|
$
|
0.39
|
|
|
7/28/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Arena
(previous)
(7)
|
|
|
750,000
|
|
|
|
-
|
|
|
$
|
0.40
|
|
|
3/27/2017
|
|
(1)
|
Dr. Carr Bettis was granted 200,000 options on August 20, 2013 and 300,000 options on March 24, 2014 as an independent director.
|
|
(2)
|
Dr. Carr Bettis was granted 500,000 options on October 26, 2015 pursuant to his July 1, 2015 employment agreement.
|
|
(3)
|
Dr. Carr Bettis as Executive Chairman, before his employment agreement received 2,000,000 options.
|
|
(4)
|
Todd Bankofier was granted 150,000 options on June 2,
2015 in his capacity as advisory board member.
|
|
(5)
|
Effective April 24, 2015, James Crawford resigned
as Chief Operating Officer and Treasurer of our Company. Vesting was accelerated as part of the severance and release agreement
|
|
(6)
|
Edward O’Donnell resigned from his position as our Chief Financial Officer effective March 29, 2015. Vesting on
half of this award was accelerated as part of the severance and release agreement.
|
|
(7)
|
Paul Arena and the Company on March 5, 2015, entered into a Separation and Release Agreement. Vesting was accelerated
on part of this award as part of the severance and release agreement.
|
Change in Control
There are no arrangements currently in effect,
which may result in our “change in control,” as that term is defined by the provisions of Item 403(c) of Regulation S-K.
Equity Compensation Plan Information
The following table gives the information
about common stock that may be issued upon exercise of options, warrants and rights under all of our equity compensation plans
as of December 31, 2015:
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining available for
|
|
|
|
(a)
|
|
|
(b)
|
|
|
future issuance under
|
|
|
|
Number of securities to
|
|
|
Weighted-average
|
|
|
equity compensation
|
|
|
|
be issued upon exercise
|
|
|
exercise price of
|
|
|
plans (excluding
|
|
|
|
of outstanding options,
|
|
|
outstanding options,
|
|
|
securities reflected in
|
|
Plan Category
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
column (a))
|
|
Equity compensation plans approved by security holders
|
|
|
14,759,914
|
|
|
$
|
0.30
|
|
|
|
5,240,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,759,914
|
|
|
|
-
|
|
|
|
5,240,086
|
|
Item 12. Security Ownership of Certain Beneficial Owners,
Management and Related Stockholder Matters
The following table sets forth information
regarding the beneficial ownership of our common stock as of March 21, 2016 by:
|
·
|
each person known by us to be the beneficial owner of more than 5%
of our outstanding shares of common stock;
|
|
·
|
each of our named executive officers and directors; and
|
|
·
|
all of our officers and directors as a group.
|
Unless otherwise indicated, we believe that
all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned
by them.
For purposes of this table, “beneficial
ownership” is determined in accordance with Rule 13d-3(d) promulgated by the Securities Exchange Act pursuant to
which a person is deemed to have beneficial ownership of any shares of common stock that such stockholder has the right to acquire
within 60 days of March 21, 2016. Unless otherwise noted, each person or group identified possesses sole voting and investment
power with respect to the shares, subject to community property laws where applicable. The inclusion of any securities in
the
following table does not constitute an admission of beneficial ownership by the persons
named below.
|
|
|
|
|
Approximate
|
|
|
|
|
|
Approximate
|
|
|
Amount of
|
|
|
Approximate
|
|
|
|
Amount of
|
|
|
Percentage of
|
|
|
Amount of
|
|
|
Percentage of
|
|
|
Beneficial Ownership
|
|
|
Percentage of
|
|
|
|
Beneficial Ownership
|
|
|
Outstanding
|
|
|
Beneficial Ownership
|
|
|
Outstanding
|
|
|
Convertible Debt
|
|
|
Outstanding
|
|
Name of Beneficial Owner
(1)
|
|
Common
Stock
|
|
|
Common
Stock (2)
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock (3)
|
|
|
Via
Warrants (4)
|
|
|
Convertible
Debt (4)
|
|
Dr. C. Bettis (5)
|
|
|
14,459,935
|
(6)
|
|
|
15.77
|
%
|
|
|
10,000
|
|
|
|
5.71
|
%
|
|
|
-
|
|
|
|
-
|
|
T. Bankofier
|
|
|
150,000
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
S. Bradley
|
|
|
8,348,940
|
(8)
|
|
|
9.11
|
%
|
|
|
4,107
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
|
D. Moradi (9)(10)
|
|
|
20,346,883
|
(10)
|
|
|
22.19
|
%
|
|
|
50,000
|
|
|
|
28.57
|
%
|
|
|
14,750,000
|
|
|
|
59.00
|
%
|
A. Coelho (11)
|
|
|
718,750
|
(12)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
C. Griffin (13)
|
|
|
312,500
|
(14)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
E. Purcell (15)(16)
|
|
|
7,373,544
|
|
|
|
8.04
|
%
|
|
|
10,000
|
|
|
|
5.71
|
%
|
|
|
-
|
|
|
|
-
|
|
A. Zyngier (17)(18)
|
|
|
1,738,875
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
500,000
|
|
|
|
2.00
|
%
|
N. Bradley (19)(20)
|
|
|
10,734,601
|
|
|
|
11.71
|
%
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
M. Shrkeli (21)
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
28.57
|
|
|
|
2,000,000
|
|
|
|
8.00
|
%
|
Riverloft Capital (22)
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
8.57
|
|
|
|
-
|
|
|
|
-
|
|
KTK Capital (23)
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
5.71
|
|
|
|
2,000,000
|
|
|
|
8.00
|
%
|
All directors, executive officers and beneficial owners as a group
(12 individuals)
|
|
|
63,913,903
|
|
|
|
78.21
|
%
|
|
|
149,107
|
|
|
|
82.86
|
%
|
|
|
19,250,000
|
|
|
|
61.00
|
%
|
|
(1)
|
Unless otherwise indicated, the business address of each
of the individuals is 5210 E. Williams Circle, Suite 750, Tucson, Arizona 85711.
|
|
(2)
|
Based on 81,717,154 shares of our common stock issued
and outstanding as of March 21, 2016. Not included in the calculation of the percentages above, the company also has also has
14,759,914 options and 42,276,609 warrants outstanding.
|
|
(3)
|
Based on 175,000 preferred shares convertible into 9,977,195
shares of common stock.
|
|
(4)
|
Based on 25,000,000 warrants associated with the issuance
of $2,500,000 convertible debt in November, 2015.
|
|
(5)
|
Dr. Bettis business address is c/o Fathom Lab LLC,
16211 N. Scottsdale Rd, Suite A6A-628, Scottsdale, AZ 85254.
|
|
(6)
|
Dr. Bettis is the Managing Member of CSB IV US Holdings,
LLC, the record owner of 10,654,406 shares, including 5,925,000 shares purchased in three private transactions. Dr. Bettis
is also co-trustee of the J. Carr & Stephanie V. Bettis Revocable Trust, the record owner of 564,803 shares and warrants
to purchase up to 46,875 shares. Includes 210,000 shares in two discretionary accounts of Dr. Bettis. Includes
stock options to purchase up to 1,000,000 shares. Includes warrants to purchase up to 2,500,000 shares. Includes 10,000
shares of Series A Convertible Preferred Stock convertible into 570,125 common shares held by the J. Carr & Stephanie V. Bettis
Revocable Trust.
|
|
(7)
|
Consists of vested stock options to purchase up to 150,000
shares.
|
|
(8)
|
Includes 6,644,700 shares originally held by Bradley
Brothers, LLC. Includes warrants to purchase up to 1,590,490 shares and stock options to purchase up to 93,750 shares, plus options
to purchase up to 150,000 granted in lieu of salary. Includes 4,107 shares of Series A Convertible Preferred Stock convertible
into 234,151 common shares.
|
|
(9)
|
Mr. Moradi’s business address is c/o Anthion
Management LLC, 379 West Broadway, New York, New York 10012.
|
|
(10)
|
Mr. Moradi and his business Anthion Management,
LLC holds 17,496,256 common shares. In connection with investment in our common equity private placements they hold warrants to
purchase up to 2,839,583 shares. The warrants contain a provision restricting their exercise if after giving effect to such exercise,
Mr. Moradi would beneficially own in excess of 9.99% of our shares outstanding except as otherwise provided in the warrants.
Includes 50,000 shares of Series A Convertible Preferred Stock convertible into 2,850,627 common shares held by Anthion Management,
LLC.
|
|
(11)
|
Mr. Coelho’s business address is 51 Baltimore
Ave, #2, Rehoboth Beach, DE 19971.
|
|
(12)
|
Consists of vested stock options to purchase up to 718,750
shares.
|
|
(13)
|
Ms. Griffin’s business address is 11 Beacon Street,
Suite 925, Boston, MA 02108
|
|
(14)
|
Consists of vested stock options to purchase up to 312,500
shares.
|
|
(15)
|
Mr. Purcell’s business address is c/o Houlihan
Lokey, Inc., 1395 Brickell Avenue, Suite 1130, Miami, FL 33131.
|
|
(16)
|
Consists of 5,654,794 commons stock, including 2,000,000
shares purchased in two private transactions. Includes vested stock options to purchase up to 718,750 shares and warrants to purchase
up to 1,000,000 shares. In addition, 10,000 shares of Series A Convertible Preferred Stock convertible into 570,125 common shares.
|
|
(17)
|
Mr. Zyngier’s business address is 475 Park Avenue
South, Floor 12, New York, NY 10016
|
(18)
|
Consists of vested stock options to purchase up to 468,750 shares and 500,000 warrants from his 2% interest in convertible debt
. Includes 10,000 shares of Series A Convertible Preferred Stock convertible into 570,125 common shares held by the Equity Trust Custodian FBO Alexandre Zyngier IRA. Includes 200,000 warrants held by affiliate Research Agency, Inc. for services performed in 2013.
|
|
(19)
|
Former director and executive of the Company, Nathan
Bradley’s business address is 504 W. 29th Street Tucson, AZ 85713
|
|
(20)
|
Includes 6,644,700 shares held by Bradley Brothers, LLCand
warrants to purchase up to 996,667 shares. Includes 711,764 shares held by Bradley Lecrone Investment Group, LP and 993,430 shares
held by Lecrone Bradley Asset Management. Includes 216,825 shares and 1,294,798 warrants held by Nathan Bradley. Does not include
5,186,860 shares issued on December 20, 2012 related to the conversion of our debt owed to Nathaniel Bradley. The conversion
shares were issued to Mr. Bradley’s designees. Mr. Bradley has no investment or voting power over said shares
and is not deemed to be the beneficial owner thereof.
|
|
(21)
|
Mr. Shrkeli’s business address is 245 E. 40th Street,
Apt 18H, New York, NY 10016
|
|
(22)
|
Riverloft Capital’s business address is 300 W 41
Street, Suite 201A, Miami Beach, FL 33140
|
|
(23)
|
KTK Capital’s business address is 100 South Pointe
Drive #1501, Miami Beach, FL 33139
|
Item 13. Certain Relationships and Related Transactions and
Director Independence
Other than employment agreements with our
executive officers and other payments made to our executive officers, all as described above under the section entitled “Management
- Executive Compensation,” and compensation paid to our directors as described above under the section entitled “Management
- Director Compensation,” there have been no transactions in which the amount involved exceeds $120,000 in which any of our
directors, executive officers or beneficial holders of more than 5% of the outstanding shares of our common stock, or any of their
respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest.
The following Directors are independent:
Item 14:
Principal Accounting Fees and Services
The firm of MaloneBailey, LLP acts as our
independent registered public accounting firm. The aggregate fees billed or to be billed for the most recently completed fiscal
year ended December 31, 2015 and for fiscal year ended December 31, 2014 for professional services rendered by the principal
accountant for the audit of our annual financial statements and review of the financial statements included in our financial reports
on Form S-1, Form 10-Qs in the future and services that are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for these fiscal periods were as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Audit Fees
|
|
$
|
98,647
|
|
|
$
|
48,300
|
|
All Other Fees
|
|
$
|
272,783
|
|
|
$
|
7,800
|
|
Total
|
|
$
|
371,430
|
|
|
$
|
56,100
|
|
Audit and Other fees increased in 2015
due to the restatement of the 2014 first, second and third quarterly financial statements together with the amounts paid to contract
a temporary CFO to compile the restatements, the 2014 10-K, and the quarterly 2015 financial statement. Multiple levels of supervision
have been implemented and the firm has improved cross reconciliations of internal parties’ actions and approvals. Singular
levels of approval, supervision and processing have been eliminated. All contracts are thoroughly reviewed by management and at
certain levels require Board approval. The firm no longer engages in non-monetary transactions related to Intellectual Property.
All transactions are representative of cash contracts in the form of Subscription and Services Agreements.
Our board of directors pre-approves all
services provided by our independent auditors. All of the above services and fees were reviewed and approved by our board of directors
either before or after the respective services were rendered.
Our board of directors has considered the
nature and amount of fees billed by our independent auditors and believes that the provision of services for activities unrelated
to the audit, is compatible with maintaining our independent auditors’ independence.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: OVERVIEW AND GOING CONCERN
Organization and Business
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
six issued patents in the United States, a notice of allowance from the U.S. Patent and Trademark Office for a seventh patent,
and two 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.
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.
Going Concern
As of December 31, 2015, the Company had working capital of $913,741 but the Company used net cash in operations
of $5,474,454 during the twelve months ended December 31, 2015. In addition, the Company has incurred net losses since inception.
Even with a greater focus on cash revenue generation and the ongoing cost reductions, the conditions described above, raise substantial
doubt about the Company’s ability to continue as a going concern.
While the Company has been successful in raising capital in the past, there is no assurance that it will be
successful at raising additional capital in the future. Additionally, if the Company’s plans are not achieved and/or if significant
unanticipated events occur, the Company may have to further modify its business plan.
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 years ended December 31, 2015
and 2014, Empire had no activity. Empire had no assets or liabilities as of December 31, 2015 and December 31,
2014.
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.
Capitalization of Software Development Costs
The Company expenses development costs for
research and development until such time as the software became technologically feasible. The Company’s software became
technologically feasible at the end of 2013. The software development was substantially completed by the end of August,
2014. The Company further determined that the life of the capitalized software development costs is three years. Further
enhancements and Patentable improvements were developed in 2015 and are ongoing. New patents have been filed and are pending as
discussed more fully in the Business Description.
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, 2015 and 2014 research and technology expenses totaled
$375,817 and $610,329 respectively.
Revenue Recognition
Revenue is recognized when all applicable recognition
criteria have been met, which generally include (a) persuasive evidence of an existing arrangement; (b) fixed or determinable
price; (c) delivery has occurred or service has been rendered; and (d) collectability of the sales price is reasonably
assured. For software and technology development contracts the Company recognizes revenues on a percentage of completion method
based upon several factors including but not limited to (a) estimate of total hours and milestones to complete; (b) total
hours completed; (c) delivery of services rendered; (d) change in estimates; and (e) collectability of the contract.
The Company had two major customers including
their affiliates which generated approximately 67.5% (56.3% and 11.2%) and 87% (77% and 10%) of its revenue in the fiscal years
ended December 31, 2015 and 2014, respectively.
Certain Software as a Service (SaaS) and website
hosting contracts are prepared and invoiced on an annual basis. Any funds received for hosting services not provided yet are held
in deferred revenue, and are recorded as revenue is earned.
Billings in Excess of Revenues
The Company applies percentage of completion
accounting to long term contracts. Revenue is recognized as a portion of the contract term as services are delivered, and differed
revenue is recorded, only upon the receipt of cash. Timing and accounts affected by the respective journal entry are triggered
when payment is received and applied to invoices in accounts receivable. There were no long-term contracts in process as of December
31, 2015.
Fiscal Year End
The Company has a fiscal year ending on December 31.
Cash and Cash Equivalents
The Company considers cash in savings accounts to be cash equivalents. The Company considers any short-term,
highly liquid investments with maturities of three months or less as cash and cash equivalents.
Marketable Securities
The Company has elected the fair value option
under ASC 825 for its marketable securities. Marketable securities are classified as available for sale 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.
Non-marketable Securities
From time to time, the Company invests in the
securities of other entities where there exists no active market for the securities held. Non-marketable securities are
recorded at the cost of the investment.
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 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 $19,675 as of December 31, 2015 and 2014, 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 Assets
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 at December 31, 2015 and 2014 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.
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, 2015 and 2014, 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.
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.
In October and November 2015, the Company issued
warrants with an exercise price of $0.10 in connection with a convertible debt instruments. The five year warrants also contain
a provision that the warrant exercise price will automatically be adjusted for any common stock equity issuances at less than
$0.10 per share. The Company determined that the warrants were not afforded equity classification because the warrants are not
considered to be indexed to the Company’s own stock due to the anti-dilution provision. Accordingly, the warrants are treated
as a derivative liability and are carried at fair value. The notes are not yet convertible, but the notes with any accrued interest
automatically convert on the event of an equity capital raise of at least $2.0 million.
The Company estimated the fair value of these
derivative warrants at initial issuance and again at each balance sheet date. The changes in fair value are recognized in earnings
in the statement of operations under the caption “unrealized gain/(loss) – derivative liability” until such
time as the derivative warrants are exercised or expire. The Company used the Black-Scholes Option Pricing model to estimate the
fair value of the dates of issuance, the price of the Company stock ranged $0.031 to $0.058, volatility was estimated to be 102%,
the risk free rate ranged 1.14% to 1.75% and the remaining term was 5 years. At December 31, 2015, the price of the Company stock
was 0.0306, volatility was estimated to be 102%, the risk free rate ranged 1.14% to 1.75% and the remaining term ranged from 4.77
to 4.85 years. As of December 31, 2015, the fair value of the warrants was determined to be $439,361, resulting in an unrealized
gain on the change in the fair value of this derivative liability of $187,932 for the year ended December 31, 2015.
The following are the Company’s assets
and liabilities, measured at fair value on a recurring basis, as of December 31, 2015 and 2014:
|
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Hierarchy
|
Assets
|
|
|
|
|
|
|
Marketable securities, December 31, 2015
|
|
$
|
3,600
|
|
|
Level 1
|
Marketable securities, December 31, 2014
|
|
$
|
13,800
|
|
|
Level 1
|
|
|
|
|
|
|
|
Liabiilities
|
|
|
|
|
|
|
Derivative Liability , At Issuance
|
|
$
|
627,293
|
|
|
Level 3
|
Derivative Liability , December 31, 2015
|
|
$
|
439,361
|
|
|
Level 3
|
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 other than noted.
The FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset.
Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective
application and represents a change in accounting principle. The update is effective for fiscal years beginning after December
15, 2015. The standard has been applied to our debt issuance from October and November 2015 and is reflected in our financial
statements beginning with the period ending December 31, 2015
Effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years, the FASB issued ASU 2016-01 amendments, which among other things:
|
•
|
Requires equity investments (except those accounted for
under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with
changes in fair value recognized in net income.
|
|
|
|
|
•
|
Requires public business entities to use the exit price
notion when measuring the fair value of financial instruments for disclosure purposes.
|
|
|
|
|
•
|
Requires separate presentation of financial assets and
financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables).
|
|
|
|
|
•
|
Eliminates the requirement for public business entities
to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial
instruments measured at amortized cost.
|
The Company does not expect the adoption of
this update will have a material impact on its consolidated financial statements.
NOTE 3: MARKETABLE AND NON-MARKETABLE SECURITIES
During 2014, the Company converted $60,000
of accounts receivable initially for a convertible note from Ecologic Transportation. Ecologic Transportation is affiliated
with a former director of the Company. The note was convertible into 600,000 shares of Ecologic Transportation common stock.
Subsequently, Ecologic Transportation merged into Peartrack Security Systems, Inc. As of December 31, 2014, the Company
held 60,000 shares in Peartrack Security Systems, Inc. The fair value of the investment on the date of conversion was $24,000
and as of December 31, 2014 was $13,800. This resulted in a loss on the conversion date of the accounts receivable of $36,000
in 2014, and a further unrealized loss of $10,200 at December 31, 2014. At December 31, 2015, a reduction in value to $3,600 of
the security resulted in an unrealized loss of $10,200.
During 2014, the Company entered into a licensing
transaction where it received 1,200,000 shares of Beta Music Group. This investment was deemed to be an investment in nonmarketable
securities and the shares were recorded at cost of $-0-. As of December 31, 2014, the Company continues to hold 1,200,000
shares of Beta Music Group.
During 2014, the Company invested $50,000 in
Cannonball Red in return for 97,500 shares with the expressed purpose of achieving new customers. Cannonball Red is affiliated
with a related party. The Company recorded the investment at cost of $50,000 and the investment was determined to be nonmarketable
securities. Subsequent to the investment in 2014, the Company and Cannonball Red entered into an agreement where upon Cannonball
Red would repurchase the investment for $60,000 at an agreed upon future date. The parties have not agreed upon such date.
As of December 31, 2015 and 2014, the Company held 97,500 shares of Cannonball Red, and Cannonball Red does not have the resources
to repurchase the securities.
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Computers and peripherals
|
|
$
|
25,478
|
|
|
$
|
25,478
|
|
Accumulated deprecation
|
|
|
(25,478
|
)
|
|
|
(24,827
|
)
|
Property, plant and equipment, net
|
|
$
|
-
|
|
|
$
|
651
|
|
Depreciation expense totaled $651 and $3,196
for the years ended December 31, 2015 and 2014, respectively.
NOTE 5: INTANGIBLE ASSETS
For the year ended December 31, 2015 and 2014,
the Company invested in Patents in the amounts of $43,689 and $48,037 respectively.
Prior to December 31, 2015, patents, technology
and other intangibles with contractual terms were generally amortized over their estimated useful lives of ten years. When certain
events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable
lives may be adjusted.
For the year ended December 31, 2015 and 2014,
the Company invested in software development in the amounts of $233,442 and $388,125, respectively. Software development costs
are amortized over their estimated useful life of three years.
Prior to any impairment adjustment, intangible
assets consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Patents
|
|
$
|
3,655,070
|
|
|
$
|
3,611,380
|
|
Capitalized software development
|
|
|
621,567
|
|
|
|
388,125
|
|
Accumulated amortization
|
|
|
(1,435,781
|
)
|
|
|
(902,212
|
)
|
Intangible assets, net
|
|
$
|
2,840,856
|
|
|
$
|
3,097,293
|
|
Amortization expense for patents totaled $361,133
and $346,690 for the years ended December 31, 2015 and 2014, respectively. Amortization expense for software development totaled
$172,436 and $66,123 for the years ended December 31, 2015 and 2014, respectively.
Total amortization expense totaled $533,569
and $412,813 for the year ended December 31, 2015 and 2014, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
Dr. Carr Bettis, Executive Chairman and Chairman of Board of
Directors
As of December 31, 2015, the Company owed Dr. Bettis $72,944 in accrued salary. In addition,
AudioEye sub-leases an office for the Company’s CEO Todd Bankofier from Verus Analytics, Inc, a company in which Dr. Bettis
has a controlling interest in. The sub-lease amount is $500 per month totaling $1,000 in 2015. The amount of $1,000 in Rent Payable
is included inside Accounts Payable within the Balance Sheet.
Sean Bradley, President, Chief Technology Officer, and Secretary
As of December 31, 2015 and 2014, the
Company owed Sean Bradley $6,250 and -0- in accrued salary.
David Moradi, a Material Shareholder, on a fully diluted basis
As of December 31, 2015 the Company owed
David Moradi $70,000 in principal and $4,280 in accrued interest.
Former officer James Crawford, former Chief Operating Officer,
Treasurer and Director
During 2014, the Company awarded 53,036 warrants
in lieu of cash compensation valued at $21,514.
Former Officer, Nathaniel Bradley, Founder, Former, CEO, Chief
Innovation Officer, Treasurer and Director
As of December 31, 2012, the Company had
an outstanding related party loan to Nathaniel Bradley totaling $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 746,667
of the Company’s common stock along with a warrant to purchase 746,667 shares of the Company’s common stock. The warrant
shall vest immediately with a strike price of $0.40 and expire in 2018. As of December 31, 2013, related party loans due
to Nathaniel Bradley totaled $35,000. This amount was repaid by the Company in 2014.
As of December 31, 2015 and 2014, the
Company owed $-0- and $0 to Mr. Bradley.
Others
The Company holds 60,000 shares in Peartrack
Security Systems, formerly Ecologic Transportation, as of December 31, 2014 resulting from the conversion of a $60,000 accounts
receivable balance in 2014. Peartrack Security Systems is an entity whose Executive Chairman was former Company director, Edward
Withrow III. In 2014, the Company invested $50,000 in Cannonball Red in return for 97,500 shares held as of December 31, 2014.
Former CEO, Chief Innovation Officer and director Nathan Bradley had a material interest in Cannonball Red at the time of the
transaction.
In summary, as of December 31, 2015 and
2014, the total balances of related party payable were $153,474 and $228,983 (see Note 8), respectively.
As of December 31, 2015 and 2014, there
were outstanding receivables of $-0-, and $10,000 respectively, for services performed for related parties.
For the year ended December 31, 2015 and
2014, there were revenues earned of $-0- and $6,500, respectively, for services performed for related parties. The related
parties are family members of certain officers of the Company.
NOTE 7: NOTES PAYABLE
As at December 31, 2015 and 2014, the
Company has current and long term notes payable of $24,000 and $1,923,499, and $24,000 and $51,800, respectively as shown in the
table below.
Notes and loans payable
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Short Term
|
|
|
|
|
|
|
|
|
Maryland TEDCO
|
|
$
|
24,000
|
|
|
$
|
24,000
|
|
Total
|
|
$
|
24,000
|
|
|
$
|
24,000
|
|
Long Term
|
|
|
|
|
|
|
|
|
Convertible Secured Note (net of unamortized discounts of $600,301 and $0)
|
|
|
1,899,699
|
|
|
|
-
|
|
Maryland TEDCO
|
|
$
|
23,800
|
|
|
$
|
51,800
|
|
Total
|
|
$
|
1,923,499
|
|
|
$
|
51,800
|
|
As of December 31, 2012, the Company had an outstanding loan to a third party in the amount of $74,900,
which was originally issued during 2006 as part of an Investment Agreement. The loan was unsecured and bore interest at 25%
per year for four years. The Company had accrued interest of $74,900, which was included in accounts payable and accrued expenses
on the consolidated balance sheets. The note was in default until October 24, 2011, at which time the Company entered
into a Termination and Release Agreement (“Release”) with the third party. The terms of the Release, among other
things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the third-party
in the combined amount of principal and accrued interest to date, for a total principal amount of $149,800. The note is interest
free, and is payable in monthly installments of $2,000 beginning November 1, 2011. As of December 31, 2015
and 2014, the principal amount owing was $47,800 and $75,800, respectively, of which $24,000 and $24,000, respectively, has been
recorded as the current portion of the note, and $23,800 and $51,800, respectively, as the long-term portion of the note. The Company
has paid $28,000 and $28,000 in monthly installments for the year ended December 31, 2015 and 2014, 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, 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, such discount amortized in 2014. As of December 31,
2014, the note has a balance of $-0-.
On October 9, 2015 (the
“Initial Closing Date”), AudioEye, Inc. (the “Company”) entered into a Note and Warrant Purchase Agreement
(the “Purchase Agreement”) with certain investors (the “Investors”) for the issuance and sale of convertible
promissory notes in an aggregate principal amount of up to $3,750,000 (the “Notes”) and warrants (the “Warrants”)
to purchase up to an aggregate of 37,500,000 shares of common stock of the Company (the “Common Stock”) (the “Transaction”).
Notes representing up to $2,500,000 in aggregate principal, and Warrants exercisable for up to 25,000,000 shares of Common Stock
in the aggregate, may be issued and sold at one or more closings during the 30-day period immediately following the Initial Closing
Date. The maximum of $2,500,000 in aggregate principal was sold as of November 8, 2015. In addition, upon the election of any
Investor within the three-year period immediately following the Initial Closing Date, any Investor may purchase an additional
Note in the principal amount equal to 50% of the principal amount of the Notes purchased by such Investor at previous closings
(the “Option Principal Amount”) and an additional Warrant with an aggregate exercise price equal to such Investor’s
Option Principal Amount. The Notes mature three years from the date of issuance (the “Maturity Date”) and, until the
Notes are repaid or converted into shares of the Company’s equity securities (“Equity Securities”), accrue payable-in-kind
interest at the rate of 10% per annum.
If the Company sells Equity
Securities in a single transaction or series of related transactions for cash of at least $2,000,000 (excluding the conversion
of the Notes and excluding the shares of Common Stock to be issued upon exercise of the Warrants) on or before the Maturity Date
(the “Equity Financing”), all of the unpaid principal on the Notes plus accrued interest shall be automatically converted
at the closing of the Equity Financing into a number of shares of the same class or series of Equity Securities as are issued
and sold by the Company in such Equity Financing (or a class or series of Equity Securities identical in all respects to and ranking
pari passu with the class or series of Equity Securities issued and sold in such Equity Financing) as is determined by dividing
(i) the principal and accrued and unpaid interest amount of the Notes by (ii) 60% of the price per share at which such Equity
Securities are issued and sold in such Equity Financing. The Notes, if not converted, shall be due and payable in full on the
Maturity Date. The Notes contain customary events of default provisions. In connection with the issuance of the Notes, on October
9, 2015, the Company entered into a Security Agreement with the Investors (the “Security Agreement”) pursuant to which
the Company granted a security interest in all of its assets to the Investors as collateral for the Company’s obligations
under the Notes. The Warrants are exercisable at $0.10 per share and expire 60 months following the date of issuance. The Warrants
are subject to anti-dilution protection, subject to certain customary exceptions.
During 2015, the Company
issued notes under this offering totaling $2,500,000. The fair value of the warrants issued in connection with the notes was determined
to be $627,293 (see Note 2) and was recognized as a discount to the debt being amortized to interest expense over the life of
the loans. During 2015, aggregate amortization of $26,992 was recognized against the discount.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Our principal executive offices are located
at 5210 E. Williams Circle, Suite 750, Tucson, Arizona 85711, consisting of approximately 2,362 square feet as of December 31,
2015. The Company’s principal executive office is leased for an aggregate amount of $4,724 per month. We also have
offices in Atlanta at 1855 Piedmont Road, Suite 200, Marietta, Georgia leased for an aggregate of $2,763 per month as of
December 31, 2015. The Company’s total rent expense was approximately $314,485 and $302,230 under office leases for the
years ended December 31, 2015 and 2014, respectively. During 2015, offices located in New York were sublet, resulting in
a savings of $21,135 per month. We closed the office in Washington D.C., saving $1,280 per month and the Principal Executive office
was relocated and downsized with a monthly reduction in rent of $7,146. Beginning November 1, 2015, we subleased an office from
a company controlled by our Executive Chairman in Scottsdale, AZ for $500 per month.
On August 7, 2013, the Company entered
into agreements with the following five executive officers. Of these only Sean Bradley was employed by the Company on December
31, 2015:
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.
In April 2015, two shareholder class action lawsuits were filed against us and our former officer Nathaniel Bradley and former
officer Edward O’Donnell in the U.S. District Court for the District of Arizona. The plaintiffs allege various causes
of action against the defendants arising from our announcement that our previously issued financial results for the first
three quarters of 2014 and the guidance for the fourth quarter of 2014 and the full year of 2014 could no longer be relied
upon. The complaints seek, among other relief, compensatory damages and plaintiff’s counsel’s fees and experts’
fees. The Court has appointed a lead plaintiff and lead counsel. We have responded to the complaints and also filed a motion
to dismiss. We believe that the lawsuits have no merit and intend to mount a vigorous defense. Given the current stage of
the proceedings in this case, our management currently cannot assess the probability of losses, or reasonably estimate the
range of losses, related to these matters. As of December 31, 2015, we have paid the deductible pursuant to the D&O insurance
policy, in the amount of $100,000 regarding this matter.
Effective April 24, 2015, Nathaniel Bradley
resigned as Chief Executive Officer and President of the Company. Effective with his resignation as Chief Executive Officer
and President, the Company’s board of directors appointed Mr. Bradley to serve as Founder and Chief Innovation Officer
as well as Treasurer of the Company. Effective May 1, 2015, Mr. Bradley agreed to reduce his annual base salary to $125,000.
Effective August 27, 2015 Mr. Bradley resigned
from his position as Chief Innovation Officer and member of the board of directors.
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 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.
Effective April 24, 2015, the Company’s
board of directors appointed Sean Bradley to serve as President of the Company as well as continuing as Chief Technology Officer
and Secretary. Effective May 1, 2015, Mr. Bradley agreed to reduce his annual base salary to $150,000. October 1, 2015
the board and Mr. Bradley agreed that in lieu of cash Mr. Bradley would receive up to $6,250 per quarter in compensation in the
form of market value of options or warrants. On December 22, 2015, subject to shareholder approval of the 2016 Incentive Compensation
Plan the compensation committee of the board approved a performance option agreement for Mr. Bradley. The number of shares that
vest under the performance options are determined based upon the company’s and Mr. Bradley’s (as applicable) performance
compared to performance goals described below. The compensation committee established a target number of shares of 1,500,000 options
whereby to each option will vest only upon: (a) satisfaction of a share price condition described below; and (b) 100% achievement
of the performance goals by the company and Mr. Bradley, as applicable. Subject to the share price condition, 50% of the target
award will be earned by Mr. Bradley at the 85% achievement level, and he can earn up to 150% of the target award at the 125% achievement
level. Vesting shall be determined based upon performance measures at the end of each calendar year of 2016 and 2017, with 50%
of each target award and performance increase subject to vesting during each performance period. Mr. Bradley shall have the opportunity
to achieve full vesting of 100% of the target award and performance increase if there is a shortfall in the first performance
period but cumulative performance goals are achieved for the two-year period ending on the measurement date at the end of the
second performance period. The number of vested performance options shall be determined for a performance period by reference
to the company's actual achievement against the following performance objectives: (a) Targeted cash contract bookings (as to 33.33%);
(b) Targeted net operating cash flow (as to 33.33%); (c) Board defined operations goals (as to 33.33%) for a performance period.
And, vesting shall only occur if the closing share price of the company’s common stock on each of the 20 trading days before
and including the end of a performance period is not less than $0.20 per share (as adjusted for stock splits, combinations, recapitalization
and the like). The company’s board or committee shall in its sole discretion establish goals as to specific matters and
amounts with respect to a performance period. The performance options shall have a term of five years from the date of grant and
the exercise price shall be determined by using a 10-day average closing price of the company’s common stock over the ten
(10) trading days beginning on January 4, 2016, which the committee has determined to be and the Board agrees is an amount that
is not less than the fair market value of a share of the common stock of the company on such date.
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 Company’s incentive compensation plans.
Effective April 24, 2015, James Crawford
resigned as Chief Operating Officer and Treasurer of the Company.
Also on April 24, 2015, the Company and
Crawdad, LLC. (“Crawdad”), a limited liability company wholly owned by Mr. Crawford, entered into a Consulting
Agreement pursuant to which Crawdad, through Mr. Crawford, is to provide certain consulting services to the Company for a
period of 12 months for a consulting fee of $5,000 per month.
The consulting agreement with Crawdad was terminated
by mutual agreement on December 31, 2015.
Edward O’Donnell
. Pursuant to
an Executive Employment Agreement, Mr. O’Donnell was employed as our Chief Financial Officer. The term of the
Executive Employment Agreement was two years commencing August 7, 2013, subject to extension upon mutual agreement.
He was to receive a base annual salary of $165,000 during the employment period. He was entitled to receive bonuses at the
sole discretion of our board of directors or the compensation committee. Mr. O’Donnell was also entitled to equity
awards under our incentive compensation plan.
Effective March 29, 2015, Edward O’Donnell
resigned from his position as our Chief Financial Officer.
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 was to receive a base annual salary of $150,000 during the employment period. He was entitled
to receive bonuses at the sole discretion of the Company’s board of directors or the compensation committee. Mr. Potamianos
was also entitled to equity awards under the Company’s incentive compensation plan.
On August 7, 2015 Constantine Potamianos employment
contract expired.
Paul Arena
. On January 27, 2014,
the Company entered into agreements with Paul Arena. Under an Executive Employment Agreement dated as of January 27,
2014, Mr. Arena had 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 was two years. Mr. Arena’s base salary was $275,000 per
year. Mr. Arena received 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 our board of directors or compensation
committee. Mr. Arena was granted five year warrants to purchase 250,000 shares of our 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 Executive Employment Agreement. Pursuant to a separate Performance Share Unit Agreement dated as of January 27,
2014, 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 earned was to be determined by the level of achievement
of the performance goals set forth in the Performance Share Unit Agreement. Mr. Arena was granted an award of an aggregate
of 1,500,000 PSUs at target value of established goals. 35% of these awards were tied to targeted revenue goals over the
years ended January 31, 2015 and January 31, 2016. 35% of these awards were tied to targeted cash flow goals over the
years, and 30% were tied to discretionary goals. The award was to pay above or below the target number of shares based on
performance. In order to receive any shares the threshold value of goals was 75% of the target, which would have had a payout
at 1,000,000 shares. The maximum share payout was 3,000,000 shares if 125% of performance targets were met. The Company
would have used interpolation to determine share payouts if the performance metric values achieved are between the thresholds,
target and maximum goal levels.
On March 5, 2015, the Company and Paul
Arena entered into a Separation and Release Agreement (the “Separation Agreement”) pursuant to which Mr. Arena
resigned as Executive Chairman/Chairman of the Board and a member of the Board of Directors. Under the Separation Agreement, the
Company and Mr. Arena agreed that, pursuant to his Stock Option Agreement with the Company, options to purchase 500,000 common
shares have been vested, options to purchase an additional 500,000 shares (the “Second Tranche”) are vested and options
to purchase 500,000 shares will be forfeited. Fifty percent of the options under the Second Tranche are subject to certain clawback
provisions as set forth in the Separation Agreement. Additionally, Mr. Arena was being granted 500,000 shares of the Company’s
restricted Common Stock (the “Restricted Shares”) with 250,000 shares being deposited in escrow to cover the clawback
rights of the Company. The Restricted Shares are being issued to Mr. Arena in lieu of any issuances which may be due him
under his Performance Share Unit Agreement. The Restricted Shares and shares issuable pursuant to options described above are
subject to a Lock-up/Leakage Agreement under which Mr. Arena is limited to a cap of $50,000 in gross proceeds from the sale
of such shares in any month.
Also on March 5, 2015, the Company and
AIM Group, Inc. (“AIM”), a corporation wholly owned by Mr. Arena, entered into a Consulting Agreement (the
“Consulting Agreement”) pursuant to which AIM, through Mr. Arena, is to provide certain consulting services to
the Company for a period of one year. Under the Consulting Agreement, AIM was to receive a one-time net payment of $267,000.
The Company filed the Separation Agreement as an exhibit to an 8-K filing. The Separation and Release Agreement specified that
Mr. Arena is to receive a fee of $425,000 as well as other consideration valued at $54,892, for total consideration of $479,892.
$250,909 was paid to Mr. Arena by the Company during 2014. As of December 31, 2015 and 2014, the Company recorded a payable to
Mr. Arena of $0 and $228,983 respectively.
Dr. Carr Bettis
.
Pursuant
to an Executive Employment Agreement dated as of July 1, 2015, Dr. Carr Bettis was employed as our Executive Chairman.
The term of the Executive Employment Agreement is one year commencing July 1, 2015, terminable at will by either us or Dr.
Bettis and subject to extension upon mutual agreement. He is to receive a base annual compensation of $175,000 during
the employment period, paid at the end of every calendar quarter in the form of options to purchase shares of our common
stock. The number of options to be issued for each quarterly period will be determined by means of a Black Scholes
valuation whereby the number of options issued would have a value at the time of issuance equal to the dollar value of Dr.
Bettis’ base salary for each calendar quarter. He is entitled to receive bonuses at the sole discretion of our
board of directors or the compensation committee. Dr. Bettis is also entitled to equity awards under our incentive
compensation plans. In November, 2015 the board and Dr. Bettis agreed that Dr. Bettis equity awards would be limited to
750,000 options or warrants per quarter and the balance of his compensation would be paid to Dr. Bettis in a form mutually
agreeable to Dr. Bettis and the board. On December 22, 2015, subject to shareholder approval of the 2016 Incentive
Compensation Plan the compensation committee of the board approved a performance option agreement for Dr. Bettis. The number
of shares that vest under the performance options are determined based upon the company’s and Dr. Bettis (as
applicable) performance compared to performance goals described below. The compensation committee established a target number
of shares of 2,000,000 options whereby to each option will vest only upon: (a) satisfaction of a share price
condition described below; and (b) 100% achievement of the performance goals by the company and Dr. Bettis, as applicable.
Subject to the share price condition, 50% of the target award will be earned by Dr. Bettis at the 85% achievement level, and
he can earn up to 150% of the target award at the 125% achievement level. Vesting shall be determined based upon performance
measures at the end of each calendar year of 2016 and 2017, with 50% of each target award and performance increase subject to
vesting during each performance period. Dr. Bettis shall have the opportunity to achieve full vesting of 100% of the target
award and performance increase if there is a shortfall in the first performance period but cumulative performance goals are
achieved for the two-year period ending on the measurement date at the end of the second performance period. The number of
vested performance options shall be determined for a performance period by reference to the company's actual achievement
against the following performance objectives: (a) Targeted cash contract bookings (as to 33.33%); (b) Targeted net operating
cash flow (as to 33.33%); (c) Board defined operations goals (as to 33.33%) for a performance period. And, vesting shall only
occur if the closing share price of the company’s common stock on each of the 20 trading days before and including the
end of a performance period is not less than $0.20 per share (as adjusted for stock splits, combinations, recapitalization
and the like). The company’s board or committee shall in its sole discretion establish goals as to specific matters and
amounts with respect to a performance period. The performance options shall have a term of five years from the date of grant
and the exercise price shall be determined by using a 10-day average closing price of the company’s common stock over
the ten (10) trading days beginning on January 4, 2016, which the committee has determined to be and the Board agrees is an
amount that is not less than the fair market value of a share of the common stock of the company on such date.
Todd Bankofier
. Pursuant to an Executive
Employment Agreement dated as of November 10, 2015 Mr. Bankofier was employed as our Chief Executive Officer. The term of
the Executive Employment Agreement is one year commencing November 10, 2015 and subject to extension upon mutual agreement.
He is to receive a base annual salary of $125,000. Mr. Bankofier is also entitled to equity awards under our incentive compensation
plan. On December 22, 2015, subject to shareholder approval of the 2016 Incentive Compensation Plan the compensation committee
of the board approved a performance option agreement for Mr. Bankofier. The number of shares that vest under the performance options
are determined based upon the company’s and Mr. Bankofier (as applicable) performance compared to performance goals described
below. The compensation committee established a target number of shares of 2,000,000 options whereby to each option will vest
only upon: (a) satisfaction of a share price condition described below; and (b) 100% achievement of the performance goals by the
company and Mr. Bankofier, as applicable. Subject to the share price condition, 50% of the target award will be earned by Mr.
Bankofier at the 85% achievement level, and he can earn up to 150% of the target award at the 125% achievement level. Vesting
shall be determined based upon performance measures at the end of each calendar year of 2016 and 2017, with 50% of each target
award and performance increase subject to vesting during each performance period. Mr. Bankofier shall have the opportunity to
achieve full vesting of 100% of the target award and performance increase if there is a shortfall in the first performance period
but cumulative performance goals are achieved for the two-year period ending on the measurement date at the end of the second
performance period. The number of vested performance options shall be determined for a performance period by reference to the
company's actual achievement against the following performance objectives: (a) Targeted cash contract bookings (as to 33.33%);
(b) Targeted net operating cash flow (as to 33.33%); (c) Board defined operations goals (as to 33.33%) for a performance period.
And, vesting shall only occur if the closing share price of the company’s common stock on each of the 20 trading days before
and including the end of a performance period is not less than $0.20 per share (as adjusted for stock splits, combinations, recapitalization
and the like). The company’s board or committee shall in its sole discretion establish goals as to specific matters and
amounts with respect to a performance period. The performance options shall have a term of five years from the date of grant and
the exercise price shall be determined by using a 10-day average closing price of the company’s common stock over the ten
(10) trading days beginning on January 4, 2016, which the committee has determined to be and the Board agrees is an amount that
is not less than the fair market value of a share of the common stock of the company on such date.
NOTE 9: STOCKHOLDERS’ EQUITY
As of December 31, 2015 and December 31,
2014, the Company had 81,717,154 and 77,817,861 shares of common stock issued and outstanding, respectively, and the company had
175,000 shares of Series A Convertible Preferred Stock, issued at $10 per share, paying a 5% cumulative annual dividend and convertible
at 0.1754 per share of common stock.
On January 30, 2014, the Company sold
an aggregate of 666,667 units to two accredited investors for gross proceeds of $200,000 in the second closing of a private placement
(the “Second Private Placement”). Placement fees of $18,463 were paid and the Company received net proceeds
of $181,537. The units in the Second Private Placement consisted of 666,667 shares of the Company’s common stock and warrants
to purchase an additional 666,667 shares of the Company’s common stock. The warrants in the Second Private Placement
have a term of five years and an exercise price of $0.40 per share.
On February 3, 2014, the Company issued
44,307 shares of common stock valued at $13,292 and a five-year warrant to purchase 44,307 shares of common stock with a strike
price of $0.40 for services. The Company used the Black-Scholes option pricing model to estimate the fair value of the warrants
with a volatility of 100% and a risk free rate of 1.44% resulting in a fair value of $8,186, which was completely expensed in
the current period. The warrant was issued to compensate for consulting services provided by a third-party. The shares were valued
at the market price of the respective date of issuance.
On March 27, 2014, the Company filed a
Certificate of Amendment to the Certificate of Incorporation increasing the authorized number of shares of Company common stock
to 250,000,000 from 100,000,000.
On March 28, 2014, the Company issued
49,496 shares of common stock pursuant to the cashless exercise of 100,000 options.
From January 1, 2014 through March 31,
2014, the Company also issued 100,000 shares of common stock for services valued at $28,500 with no future period amortization
and 1,300,000 shares of common stock pursuant to exercise of warrants for total proceeds of $13,000. The shares were valued at
the market price of the respective date of issuance.
On June 30, 2014, the Company sold an
aggregate of 2,766,667 units to three accredited investors for gross proceeds of $830,000 in the third closing of a private placement
(the “Third Private Placement”). Placement fees of $55,848 were paid and the Company received net proceeds of $774,152.
The units in the Third Private Placement consisted of 2,766,667 shares of the Company’s common stock and warrants to purchase
an additional 2,766,667 shares of the Company’s common stock. The warrants have a term of five years and an exercise
price of $0.40 per share.
From April 1, 2014 through June 30,
2014, the Company also issued 1,071,916 shares of common stock for services for an expense of $354,835 with no future period amortization.
Additionally, the Company issued 17,870 shares of common stock pursuant to the cashless exercise of 50,000 warrants.
In July 2014, the Company offered holders
of a series of its warrants, including the warrants issued in the Second Private Placement and the Third Private Placement, the
opportunity to exercise their warrants for a 10% discount to the stated exercise price in exchange for their agreement to exercise
their warrants in full and for cash on or before July 31, 2014. Under the warrant exercise offer, in July 2014 the Company
issued 10,027,002 shares of common stock pursuant to exercise of warrants for gross proceeds of $3,632,801 and net proceeds of
$3,501,521 after investment banking fees of $131,280.
On July 17, 2014, the Company issued 34,459
shares of common stock pursuant to the cashless exercise of 75,000 common stock options.
From July 1, 2014 through September 30,
2014, the Company also issued 515,000 shares of common stock for services valued at $382,300 with no future period amortization.
In September 2014, the Company issued
20,000 shares of common stock pursuant to the exercise of 20,000 warrants at a strike price of $0.50 for proceeds of $10,000.
On September 30, 2014, the Company sold
an aggregate of 700,000 units to two accredited investors for gross proceeds of $350,000 in the closing of a private placement
(the “Summer 2014 Private Placement”). The units in the Summer 2014 Private Placement consisted of 700,000 shares
of the Company’s common stock and warrants to purchase ¼ of a share for every common share purchased or an additional
175,000 shares of the Company’s common stock. The warrants have a term of five years and an exercise price of $0.60
per share.
On October 10, 2014, November 12,
2014 and December 11, 2014 the Company issued an aggregate of 195,000 shares of common stock for services rendered valued
at $119,500.
On November 25, 2014, 9,115 common shares
were issued in a cashless options exercise of 30,000 options.
On November 18, 2014, 4,375 common shares
were issued in a cashless warrants exercise of 20,000 warrants.
On December 15, 2014, 37,314 common shares
were issued services rendered valued at $19,888.
On December 15, 2014, 331,804 common shares
were issued in a warrants exercise for cash proceeds of $119,449.
On December 31, 2014, the Company sold
an aggregate of 6,687,500 units to ten accredited investors for gross proceeds of $2,675,000 in the closing of a private placement
(the “December 2014 Private Placement”), net of $123,000 in fees for net proceeds of $2,552,000. $1,175,000 of
the private placement was recorded as a Subscription Receivable as of December 21, 2014. Such subscription receivable was
collected in 2015. The aggregate units in the December 2014 Private Placement consisted of 6,687,500 shares of the
Company’s common stock and warrants to purchase 37.5% of a share for every common share purchased or an additional 2,507,813
shares of the Company’s common stock. The warrants have a term of five years and an exercise price of $0.60 per share.
On January 15, 2015, the Company sold
an additional 812,500 units under the December 2014 Private Placement to one institutional investor for gross proceeds of
$325,000 with no commission payable. Each unit in the December 2014 Private Placement consisted of one share of the Company’s
common stock and warrants to purchase 0.375 share for every common share purchased (304,688 warrants were issued). The warrants
have a term of five years and an exercise price of $0.60 per share.
On March 5, 2015, Paul Arena resigned as Chairman of the Board of Directors and Executive Chairman and
was designated by AIM Group, Inc. as a consultant to the Company for the term of one year. The consulting agreement includes
a fee of $425,000, which is offset by prior payments of $158,000 for a net amount of $267,000. In a separation agreement executed
on March 5, 2015, the Company agreed to pay COBRA for Mr. Arena for a period of eighteen months. Mr. Arena also
agreed to assume all obligations under an existing apartment lease in New York City under the remainder of the lease term and return
$48,000 security deposit paid by the company, $6,250 or half of the final month’s rent of $12,500 and receive a 1099 not
to exceed $20,000 representing the fair value of furniture in the apartment. In regard to the option agreement of 1,500,000 warrants
dated January 27, 2014, the Company and Mr. Arena agree the 500,000 warrants are vested, 500,000 are subject to mutually
agreed upon provisions and 500,000 warrants are forfeited. On March 5, 2015, the Company and Mr. Arena agree to the issuance
of 500,000 restricted common shares in lieu of an issuances related to the January 27, 2014 issuance of 3,000,000 PSUs. The
agreement calls for the immediate release for 250,000 common shares (valued at $117,500 and recognized during 2015), or 50% and
up to 250,000 common shares or 50% be held in escrow until April 1, 2016 or until the Company’s 2015 audited financials
are final. The restricted common stock shall be subject to a Lock-up/Leak-out agreement.
Commencing on May 1, 2015, the Company
sold an aggregate of 175,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) to 12 accredited
investors at a purchase price of $10.00 per share (the “Purchase Price”) for proceeds of $1,750,000 in a private placement.
Each share of the Preferred Stock may be converted into shares of common stock of the Company by dividing the Purchase Price plus
any accumulated dividends with respect to such share by an initial conversion price of $0.1754 (subject to adjustment for stock
splits, stock dividends and similar actions). The Company may redeem the Preferred Stock at any time for an amount equal
to $12.50 plus accumulated dividends. The Preferred Stock will bear a dividend of 5% of the purchase price when, as and
if declared by the Board of Directors of the Company. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30
and determined it contained a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined
to be $594,641. The beneficial conversion feature was fully amortized and recorded as a deemed dividend. Aggregate cumulative
dividends earned during the year ended December 31, 2015 totaled $58,733.
On June 2, 2015, the Company granted
1,250,000 shares of common stock valued at $200,000 and five-year warrants to purchase up to 2,000,000 shares of common stock at
an exercise price of $0.16 per share for services.
On June 2, 2015, the Company granted
800,000 shares of common stock valued at $128,000 and five-year warrants to purchase up to 1,000,000 shares of common stock at
an exercise price of $0.16 per share for services.
On October 26, 2015, the Company agreed with
its consultant to issue 41,667 warrants in lieu of 41,667 in stock each month, effective August 15, 2015. Total of 208,332 warrants
were issued as of December 31, 2015 of which 124,998 were issued for the return and cancellation of 124,998 previously issued
common shares.
In addition to the 2,300,000 common shares described above, during the year ended December 31, 2015, the Company
issued an additional
801,936 common
shares for services under consulting and referral agreements valued at $236,626 and 109,855 common shares in connection with a
warrant exercise for total proceeds of $43,941
.
On October 9, 2015 the
Company entered into a Note and Warrant Purchase Agreement with accredited investors for the sale of convertible promissory notes
in an aggregate principal amount of up to $3.75 million and warrants to purchase up to an aggregate of 37.50 million shares of
common stock of the Company. The Company issued notes representing $2.5 million in aggregate principal, and five year warrants
exercisable for up to 25.0 million shares of common stock in the aggregate. In addition, upon the election of any investor on
or before October 9, 2018, any Investor may purchase an additional note in the principal amount equal to 50% of the principal
amount of the Notes purchased by such Investor at previous closings (the “Option Principal Amount”) and an additional
warrant with an aggregate exercise price equal to such Investor’s Option Principal Amount. The notes mature three years
from the date of issuance and, until the notes are repaid or converted into shares of the Company’s equity securities, accrue
payable-in-kind interest at the rate of 10% per annum.
The notes plus accrued
interest will be automatically converted into equity securities if the Company sells equity securities in a single transaction
or series of related transactions for cash of at least $2.0 million. At the closing of the equity financing, the notes plus accrued
interest will convert into a number of shares of the same class or series of equity securities as are issued and sold by the Company
at 60% of the price per share at which the equity securities are issued and sold in the equity financing. The notes, if not converted,
shall be due and payable in full on the maturity date. The notes contain customary events of default provisions. The Company entered
into a security agreement with the Investors pursuant to which the Company granted a security interest in all of its assets to
the investors as collateral for the Company’s obligations under the notes. The Warrants are exercisable at $0.10 per share
and expire 60 months following the date of issuance.
During the years ended December 31, 2015
and 2014, $1,075,749 and $1,844,009 were recognized as stock option, warrant and PSU expenses. See notes 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:
|
|
December 31,
|
|
|
December 31,
|
|
Deferred tax assets:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
6,373,434
|
|
|
$
|
4,983,000
|
|
Less valuation allowance
|
|
|
(6,373,434
|
)
|
|
|
(4,983,000
|
)
|
Net deferred tax asset
|
|
$
|
0
|
|
|
$
|
0
|
|
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 carry forward was $18,745,343and $14,657,000 as of December 31,
2015 and 2014, respectively and will start to expire in 2029.
NOTE 11: OPTIONS
As at December 31, 2015 and 2014, the
Company has 14,759,914 and 11,434,350 options issued and outstanding.
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at December 31, 2013
|
|
|
4,485,250
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,549,100
|
|
|
|
0.52
|
|
Exercised
|
|
|
205,000
|
|
|
|
0.34
|
|
Forfeited
|
|
|
395,000
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
11,434,350
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,278,880
|
|
|
|
0.16
|
|
Exercised
|
|
|
-
|
|
|
|
0.00
|
|
Forfeited
|
|
|
4,953,316
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
14,759,914
|
|
|
$
|
0.30
|
|
As of December 31, 2015 and 2014, the
outstanding options had a weighted average remaining term and intrinsic value of 3.61 and 4.30 years and $-0- and $283,408, respectively.
Outstanding and Exercisable Options - 2015
Average
Exercise Price
|
|
|
Number of
Shares
|
|
|
Remaining
Average
Contractual
Life
(in years)
|
|
|
Exercise
Price
times
number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Intrinsic
Value
|
|
$
|
0.42
|
|
|
|
8,374,294
|
|
|
|
0.91
|
|
|
$
|
2,854,392
|
|
|
$
|
0.34
|
|
|
$
|
235,330
|
|
Outstanding and Exercisable Options - 2014
Average
Exercise Price
|
|
|
Number of
Shares
|
|
|
Remaining
Average
Contractual
Life
(in years)
|
|
|
Exercise
Price
times
number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Intrinsic
Value
|
|
$
|
0.40
|
|
|
|
5,635,250
|
|
|
|
3.79
|
|
|
$
|
2,246,313
|
|
|
$
|
0.47
|
|
|
$
|
460,941
|
|
The options were valued using the Black-Scholes
pricing model. Significant assumptions used in the valuation include expected term of 1.42 through 3.26 years, expected volatility
of 100% through 250%, date of issue risk free interest rates of 0.39% to 1.83% and expected dividend yield of 0%. The expensed
amount for options for the years ended December 31, 2015 and 2014 was determined to be $823,478 and $1,445,992, respectively.
The outstanding unamortized stock compensation expense related to options was $406,157 (which will be recognized through December
2018) and $1,220,410 as of December 31, 2015 and 2014, respectively.
NOTE 12: WARRANTS
Below is a table summarizing the Company’s
outstanding warrants as of December 31, 2014 and December 31, 2015:
|
|
Number of
|
|
|
Wtd Avg.
|
|
|
Wtd Avg.
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Value
|
|
Outstanding at December 31, 2013
|
|
|
18,770,591
|
|
|
|
0.35
|
|
|
|
4.62
|
|
|
$
|
416,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9,506,205
|
|
|
|
0.51
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
11,748,807
|
|
|
|
0.36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
16,527,989
|
|
|
|
0.46
|
|
|
|
3.69
|
|
|
$
|
309,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
28,913,020
|
|
|
|
0.11
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
109,855
|
|
|
|
0.40
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
3,054,545
|
|
|
|
0.43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
42,276,609
|
|
|
|
0.22
|
|
|
|
4.15
|
|
|
$
|
1,167
|
|
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% - 102%, risk free interest rate of 0.29% to 1.71%, and expected dividend yield of 0%.
For the years ended December 31, 2015
and 2014, the Company has incurred warrants based expense of $510,436 and $131,517. The outstanding unamortized stock compensation
expense related to warrants was $106,852 (which will be recognized through March 2018) and $207,190 as of December 31, 2015 and
2014, respectively.
NOTE 13: PERFORMANCE SHARE UNITS
On April 1, 2013, the Company entered into
a Performance Share Unit Agreement under the AudioEye, Inc. 2013 Incentive Compensation Plan with Nathaniel Bradley, the Company’s
CEO; Mr. Sean Bradley, the Company’s Chief Technology Officer; and Mr. James Crawford, the Company’s Chief Operating
Officer. Mr. Nathaniel Bradley was granted an award of up to an aggregate of 400,000 Performance Share Units (“PSU’s”);
Mr. Sean Bradley was granted an award of up to an aggregate of 300,000 PSU’s; and Mr. Crawford was granted an award of up
to an aggregate of 300,000 PSU’s.
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”). On
March 5, 2015, Paul Arena resigned as Chairman of the Board of Directors and Executive Chairman and was designated by AIM
Group, Inc. as a consultant to the Company for the term of one year. On March 5, 2015, the Company and Mr. Arena,
pursuant to a Separation and Release Agreement, agreed to the issuance of 500,000 restricted common shares in lieu of the January 27,
2014 issuance of 3,000,000 PSUs.
In September, 2014 three members of the management
team were awarded a total of 500,000 PSU’s with a one-year performance period. None of these awards were earned.
Below is a table summarizing the Company’s
outstanding performance share units as of December 31, 2015 and December 31, 2014:
|
|
Number of
|
|
|
Wtd Avg.
|
|
|
Remaining
|
|
|
|
PSUs
|
|
|
Grant Price
|
|
|
Term
|
|
Outstanding at December 31, 2014
|
|
|
4,500,000
|
|
|
$
|
0.40
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
4,500,000
|
|
|
|
0.33
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2015
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
For the years ended December 31, 2015 and 2014, the Company has incurred performance share unit-based (recovery)
expense of $(258,165) and $266,500, respectively. The negative expense in the twelve months ended December 31, 2015 is a result
of management assessment that none of the remaining performance unit vesting conditions for the remaining performance units will
be met, and therefore none will be earned resulting in a reversal of expense previously recorded. The total stock compensation
expense related to the options, warrants and performance stock units to be amortized through December 31, 2018 is $513,003 as of
December 31, 2015.
NOTE 14: CONCENTRATIONS
The Company had two major customers including
their affiliates which generated approximately 58% (56.3% and 1.7%) and 87% (77% and 10%) of its revenue in the fiscal years ended
December 31, 2015 and 2014, respectively. Both customer terminated the contracts with the Company as of December 31,
2015.
NOTE 15: SUBSEQUENT EVENTS
On February 12, 2016, the Company modified
the employment agreement for Sean Bradley to limit the number of option awards he can receive in lieu of $6,250 cash per quarter
to 150,000 options per quarter.
On February 12, 2016, the Company awarded 500,000
warrants to Dr. Carr Bettis as incremental awards to further reduce the Company’s liability to him for his annual compensation.
The exercise price is determined using the 10-day average closing price beginning with the closing price on Feb 16, 2016.
On March 18, 2016, the company successfully
filed a patent application with the U.S. Patent and Trademark Office (PTO):
|
No.
|
I.D.
|
Status
|
Title
|
|
|
|
|
|
|
10
|
US25245897
|
Pending
|
Modular Systems For Selectively Enabling Cloud-Based
Assistive Technologies
|