As filed with the Securities and Exchange Commission on October 1, 2012
 File No. 333-177463


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM S-1/A
(Amendment No. 5)
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
AudioEye, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
6794
(Primary Standard Industrial
Classification Code Number)
20-2939845
 (I.R.S.  Employer
Identification No.)
     
9070 S. Rita Road, Suite 1450
Tucson, Arizona 85747
(866) 331-5324
 
(Address, including zip code and telephone number, including
area code, of registrant’s principal executive offices)
 
Nathaniel T. Bradley
9070 S. Rita Road, Suite 1450
Tucson, Arizona 85747
(866) 331-5324
(Name, address, including zip code and telephone number,
including area code, of agent for service)
 
Copies to:
David L. Ficksman
TroyGould PC
1801 Century Park East, Suite 1600
Los Angeles, California 90067
 
Approximate date of commencement of proposed sale to public :  Approximate date of commencement of proposed sale to the public: As soon as practicable after the registration statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box: þ
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and   “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company þ
 
 
 
 


 
 
CALCULATION OF REGISTRATION FEE
Title of each Class of Security being registered
Amount to be
Registered
(1)
Proposed Maximum
Offering Price
Per Security
Proposed Maximum
Aggregate
Offering Price (2)
Amount of
Registration Fee
(3)
Shares of Common Stock, $0.00001 par value
1,500,259
$0.00001
$15.00
$7.00

(1)
This registration statement relates to shares of common stock, par value $0.0 00 01 per share, of AudioEye, Inc., which will be distributed pursuant to a spin-off transaction to holders of common stock of CMG Holdings Group, Inc. The amount of the Registrant’s common stock to be registered is 1,500, 259 shares of common stock. To the extent additional shares of common stock may be issued or become issuable as a result of a stock split, stock dividend, or similar transaction involving the common stock while this registration statement is in effect, this registration statement hereby is deemed to cover all such additional shares of common stock in accordance with Rule 416 under the Securities Act of 1933.

(2)
Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(f)(2) under the Securities Act, based on the book value of the common stock as of June 30, 2012 , the most recent practicable date.

(3)
Previously paid.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

 
 
EXPLANATORY NOTE
 
AudioEye, Inc. (“AE”), a former wholly - owned subsidiary of CMG Holdings Group, Inc. (“CMGO”), has filed this registration statement on Form S-1 to register shares of its common stock, $0. 00 001  per share, which will be distributed on a pro rata basis to shareholders of CMGO.  In connection with a Master Agreement dated as of June 22, 2011 as amended (the “Master Agreement”) between CMGO and AudioEye Acquisition Corp oration (“AEAC”), effective August 15, 2012, AEAC received from CMGO shares of the common stock of AE representing 80% of the capital stock of AE. Under the Master Agreement, CMGO is required to distribute to its stockholders in the form of a dividend 5% of the outstanding capital stock of AE
 
 
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The information in the prospectus is not complete and may be changed. AudioEye , Inc. may not distribute the securities offered by the prospectus until this registration statement is effective with the U.S. Securities and Exchange Commission. The prospectus is not an offer to sell these securities and AudioEye , Inc. is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
TABLE OF CONTENTS
 
     
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   
     
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SUMMARY
 
This summary highlights selected information contained in this prospectus and may not contain all of the information that is important to you.  This summary is not intended to be complete and reference is made to, and this summary is qualified in its entirety by, the more detailed information contained or incorporated by reference in this prospectus.
 
AudioEye, Inc.
 
AudioEye, Inc. (“AE”) focuses on working to improve the mobility, usability and accessibility of all internet-based content through the development, sale, licensing and use of its proprietary voice driven technologies. AE offers its solutions in four distinct product/operating groups:
 
 
·
Audio Internet™
     
 
·
AudioEye™ Mobile
     
 
·
AudioEye™ Advertising
     
 
·
AudioEye™ Technology Licensing
 
AE’s patented technology is designed to expand the functionality of the voice-controlled browser. AE believes that existing voice recognition and artificial intelligence engines only provide a partial solution, allowing users to get an “answer” to a specific question. AE’s technology is designed to enable a third aspect to a user’s internet experience  – delivering audio menus that allow users to choose among multiple responses and navigate the internet via keypad or voice just as they would with familiar mouse/icon or gestural interfaces. AE’s technology platform, when connected to voice recognition and artificial intelligence engines, provides an expanded internet experience complete with voice navigation and voice driven transactions.
 
The product development and deployment of AE’s flagship products – Audio Internet, AudioEye Advertising and AudioEye Mobile – are focused on the automated creation of alternative versions of popular websites that can be both accessed and navigated by sound. Audio Internet is a technology that utilizes the AE patented architecture to deliver an exact mirror image of a visual website or mobile website in an audio format that can be navigated, utilized, interacted with, and transacted from without the use of a monitor, mouse or gestural forms of user input. The conversion of social media sites and other dynamic e-commerce and e-learning sites have been another focal point of AE’s development effort. AE’s sales and marketing effort is organized within clear targeted verticals including but not limited to e-commerce, social media, news and entertainment publishers, corporate sites, products sites, mobile marketing campaigns, advertising, and promotional websites.
 
AE has developed scalable automated service delivery through its patented technology platform. Further, AE has developed a sales and distribution strategy within the U.S. corporate market and has focused its effort on developing a software application interface (API) of its patented cloud-based software as a service (SaaS) platform.  AE’s management believes that the opportunity in the private sector corporate market is considerable but that the domestic public sector government market – federal as well as state and local governments – is also a compelling market opportunity for AE.  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) to be compliant and have accessibility to Americans with disabilities. As a result, AE’s management believes that providing accessibility services for these websites is a significant market opportunity for AE.
 
AE was formed as a Delaware corporation on May 20, 2005. On March 31, 2010, CMGO Holdings Group, Inc. (“CMGO”) acquired AE.   During its tenure as a wholly-owned subsidiary of CMGO, AE continued to expand its patent portfolio to protect its proprietary internet content publication and distribution technology. This
 
 
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technology enables the automated conversion of any internet or mobile media source into accessible formats that allow for real-time distribution and voice enabled navigation to end users on any internet connected device.  AE’s business strategy includes technology licensing of AE intellectual property within specific market verticals including but not limited to corporate, ecommerce, e-learning, behavioral healthcare and government enterprise applications.  On June 22, 2011, following CMGO’s board of directors having concluded that separating a significant portion of AE from the remainder of CMGO was in the best interests of CMGO and its stockholders, CMGO entered into a Master Agreement with AudioEye Acquisition Corporation (“AEAC”) pursuant to which: (i) the stockholders of AEAC would acquire from the CMGO 80% of the capital stock of AE (the “Separation”) and (ii) CMGO will distribute to its stockholders, in the form of a dividend, 5% of the capital stock of AE (the “Spin-off”). On August 15, 2012, AE, CMGO and AEAC completed the Separation.
 
AE is currently headquartered at the University of Arizona Science and Technology Park in Tucson, Arizona and maintains business development office in Chicago, Illinois. AE’s principal executive offices are located at 9070 Rita Road, Suite 1450, Tucson, Arizona 85747, and its telephone number is (866) 331-5324.
 
Risks Relating to AE’s Business
 
 
·
AE’s revenue and collections may be materially adversely affected by the economic downturn.
     
 
·
AE has a limited operating history and its future performance is uncertain.
     
 
·
AE needs additional funds to implement its business plan.
     
 
·
AE’s financial condition may adversely affect its ability to continue as a going concern following the separation of AE from CMGO as described below.
 
These and other risks relating to the business of AE are discussed in greater detail under the caption “Risk Factors.” You should read and consider all of these risks carefully.
 
Overview of the Separation
 
Effective as of August 15, 2012, pursuant to the Separation, CMGO transferred to AEAC shares of AE common stock representing 80% of AE’s outstanding capital stock.
 
CMGO’s board of directors had concluded that separating a significant portion of AE from the remainder of CMGO was in the best interests of CMGO and its shareholders.  In connection with the purchase of AE by CMGO in March 2010, the former stockholders of AE retained rights (the “Rights”) to receive cash from the exploitation of AE’s technology. These Rights consisted of 50% of any cash received from income earned, settlements or judgments directly resulting from AE’s patent strategy, net of any direct costs or tax implications incurred in payment of the patent strategy.  Additionally, the holders of the Rights were entitled to a share of AE’s net income for 2010, 2011, 2012 and 2013 based on a specified formula.  The holders of the Rights have contributed the Rights to AEAC in exchange for shares of AEAC.  CMGO also had issued Senior Secured Notes (the “Senior Notes”) in an aggregate principal amount of $1,075,000 which CMGO was unable to service.  The Senior Notes were secured by all of the assets of CMGO, including AE.  There was a significant risk that unless the Senior Notes were kept current and serviced, the holders of the Senior Notes would foreclose and take possession of AE or its assets.  Accordingly, the existence of the Rights and the obligations under the Senior Notes had made it difficult for CMGO to finance its business plan including exploiting AE’s technology.  Pursuant to the Master Agreement , as amended , between CMGO and AEAC, AEAC was required to arrange for the release of CMGO under the Senior Notes , which it accomplished through the payment to the holders of the Senior Notes of an aggregate 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 for the benefit of the holders of the Senior Notes.  In connection with the release of CMGO under the Senior Notes, effective August 15, 2012, CMGO completed the Separation.  It is contemplated that AEAC will distribute to its stockholder s all of the shares of AE Common Stock which it owns (the “AEAC Distribution”).
 
 
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The directors of AEAC and CMGO believe d that the Separation would :
 
 
·
improve strategic planning, increase management focus and streamline decision-making by providing the flexibility to implement the unique strategic plans of AE and CMGO , and to respond more effectively to different financial needs of each company and the changing economic environment.
     
 
·
allow AE and CMGO to adopt the capital structure, investment policy and dividend policy best suited to each business’ financial profile and business needs.
     
 
·
eliminate the financial overhang to AE from the existence of the Rights.
 
Finally, CMGO had been unable or unwilling to fund AE’s operations and its negative cash flows.  Prior to the Separation, AE had been funded by AE’s President, Nathaniel T. Bradley, through a series of loans evidenced by promissory notes (the “Funding Notes”) currently in the aggregate principal amount of $ 1,245,840 .
 
The CMGO board of directors had considered a number of potentially negative factors in evaluating the Separation, including risks relating to the creation of a new public company and possible increased costs and one-time separation costs, but concluded that the potential benefits of the Separation outweighed these factors.  For more information, see the section entitled “Risk Factors” included elsewhere in this prospectus.
 
Relationship Between CMGO and AE After the Separation
 
Pursuant to the Master Agreement, CMGO is required to distribute to its stockholder s as a dividend on a pro rata basis 5% of the outstanding shares of AE’s capital stock as of the date of the Separation, and will retain 15% of the outstanding capital stock of AE as of the date of the Separation after giving effect to the Spin-off.  Pursuant to a Royalty Agreement, for a period of five years, AE will pay to CMGO 10% of cash received from income earned or settlements on judgments directly resulting from AE’s patent enforcement and licensing strategy, whether received by AE on any of its affiliates, net in either case of any direct costs or tax implications incurred in pursuit of such strategy as they relate to the patents described in the Master Agreement.  Additionally, AE has 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 AE after the Separation from all business, clients or other sources of revenue procured by CMGO or its employees, officers or subsidiaries and directed to AE and 10% of net revenues obtained from a specified customer.  Within 90 days of the date of the Separation, AE is required to deliver to CMGO 0.05% of AE’s capital stock outstanding as of the date of Separation as an initial services fee.
 
Manner of Effecting the Spin-off
 
In the Spin-off, CMGO stockholders as of the record date for the Spin-off will receive shares of AE common stock on a pro rata basis based on shares of CMGO common stock each such stockholder owns on such record date.
 
Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209, 303-282-4800, will serve as the distribution agent for the Spin-off.  On the distribution date for the Spin-off, CMGO’s transfer agent will electronically issue shares of AE common stock to holders of CMGO common stock who hold such shares on the record date for the Spin-off, or to such stockholders’ bank, broker or other nominee on such stockholders’ behalf by way of direct registration in book-entry form.  As soon as practicable after the distribution date for the Spin-off, an account statement will be mailed to each holder of CMGO common stock who holds such shares on the record date, stating the number of shares of AE common stock received by such stockholder in the Spin-off.
 
 
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Management of AE
 
The Chief Executive Officer and President of AE is Nathaniel T. Bradley , currently also Chief Executive Officer and President of AE AC .  The remaining AE management team, including Sean Bradley, Chief Technology Officer, James Crawford, Chief Operating Officer, and Constantine S. Potamianos, Chief Legal Officer and General Counsel, will continue to be the management team of AE.  See “Management of AE.”
 
Interests of Certain Persons in the Separation
 
As of the date of this prospectus, executive officers of AE who own shares of CMGO common stock as of the record date for the Spin-off will receive a distribution of shares of AE common stock on the same basis as other CMGO stockholders.  Certain executive officers of AE are the majority stockholder s of AEAC and will receive shares of AE pursuant to the Spin-off.  After the Spin-off and the AEAC Distribution, the related party ownership of AE will consist of Nathaniel T. Bradley , Sean Bradley, James Crawford and Edward W. Withrow III, collectively owning approximately 42.5 % of AE’s common stock.  See “Security Ownership of Certain Beneficial Owners and Management.”
 
Market for AE Common Stock
 
There is no current public market for AE common stock.  Upon completion of the Spin-off, it is expected that at some date AE common stock will trade on the OTCQB, OTC Bulletin Board or the new BX Venture Market operated by NASDAQ although no assurance can be given that such trading will take place or the date thereof.
 
As of August 17, 2012 , AE had 30,005,185 shares of common stock outstanding.  No shares of preferred stock of AE are outstanding.  Immediately following the Spin-off, it is expected that AE will have approximately 210 holders of record of shares of its common stock based on the number of holders of record of shares of CMGO common stock on September 21, 2012 .
 
U.S. Federal Income Tax Consequences of the Spin-off
 
CMGO believes that the Spin-off will give rise to taxable events.  The distribution of the AE shares will be treated as a taxable distribution in an amount equal to the sum of the fair market value of AE shares on the distribution date and any cash received in lieu of fractional shares.  This sum will be treated as a taxable dividend to the extent of any current year earnings and profits of CMGO, including gain resulting from both the distribution and the exchange of AE shares for shares of AEAC, with any excess treated as a non-taxable return of capital to the extent of a CMGO holder’s tax basis in CMGO common stock and any remaining excess treated as capital gain.  For more information, see “Material U.S. Federal Income Tax Consequences,” included elsewhere in this prospectus.
 
Distribution and Dividend Policy
 
AE does not anticipate paying dividends on its common stock in the foreseeable future.  AE anticipates that the agreements governing indebtedness it will incur will restrict AE’s ability to pay dividends or make distributions to its stockholders.  Any future determination to pay dividends will be at the discretion of the board of directors of AE and will depend on the financial position, results of operations, cash flows, capital requirements, debt covenants, applicable law and other factors as the board of directors of AE deems relevant.  See “Distribution and Dividend Policy.”
 
 
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RISK FACTORS
 
The following represent certain risks related to AE.  The risks and uncertainties described below are not the only ones facing AE.  If any of the following risks actually are realized, AE’s business, financial position or results of operations could be materially adversely affected, the value of AE common stock could decline and you could lose all or part of your investment.
 
Risks Related to the Separation
 
The historical and pro forma financial information included in this prospectus does not purport to be indicative of the results AE would have achieved as a separate, publicly traded company and may not be a reliable indicator of future results.
 
 
·
Prior to March 31,  2010, the business of AE was operated as a privately held stand-alone company until its acquisition by CMGO on that date, at which time AE’s operations were consolidated into CMGO as part of one publicly traded corporate organization;
     
 
·
Significant changes may occur in the cost structure, financing and business operations as a result of AE operating as a stand-alone company pursuant to the Separation. These changes may result in increased costs associated with reduced economies of scale, stand-alone costs for services currently provided and the legal, accounting, compliance and other costs associated with being a public company.
 
The pro forma financial information included in this prospectus includes adjustments based upon available information believed to be reasonable to reflect these factors.  However, the assumptions may change and actual results may differ.  In addition, the pro forma financial information does not include adjustments for estimated general and administrative expenses.
 
The Separation could give rise to liabilities, disputes, increased costs or other unfavorable effects that may not have otherwise arisen, which could have a material adverse effect on the business, financial position or results of operations of AE.
 
The agreements entered into in connection with the Separation, including the Services Agreement and the Royalty Agreement, have been negotiated in the context of AE’s separation from CMGO while AE was still a part of CMGO.  Accordingly, these agreements may not reflect terms that may have been obtained from unaffiliated third parties.  AE may have received better terms under similar agreements from third parties.
 
After the Separation, AE may be unable to make the changes necessary to operate effectively as a separate public entity.
 
As a consequence of the Separation, CMGO has no obligation to provide financial, operational or organizational assistance to AE.  Following the Spin-off, as a separate public entity, AE will be subject to, and responsible for, regulatory compliance, including periodic public filings with the SEC, as well as generally applicable tax and accounting rules.  AE may be unable to successfully implement the changes necessary to operate as an independent public entity.
 
AE expects to incur increased costs relating to operating as an independent company that could adversely affect its cash flow and results of operations.
 
AE expects that the obligations of being a public company, including substantial public reporting and related auditor fees and obligations will require new expenditures, place new demands on AE management and may require the hiring of additional personnel.  AE may need to implement additional systems that require new expenditures in order to adequately function as a public company.  Such expenditures could adversely affect AE’s business, financial condition and plan of operations.
 
 
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Risks Relating to AE’s Business and Industry
 
AE is dependent on certain members of its management and technical team.
 
Investors in AE common stock must rely upon the ability, expertise, judgment and discretion of its management and the success of its technical team in exploiting its technology.  AE’s performance and success are dependent, in part, upon key members of AE's management and technical team, including Nathaniel T. Bradley , Chief Executive Officer, Sean Bradley, Chief Technical Officer, and James Crawford, Chief Operating Officer . The departure of such key persons could be detrimental to AE’s future success.  A significant percentage of AE’s common stock of will be held by members of AE’s management.  There can be no assurance that AE’s management will remain in place.  The loss of any of AE’s management and technical team members could have a material adverse effect on AE’s results of operations and financial condition, as well as on the market price of AE’s common stock.  See “Management of AE .”
 
AE’s future development and operations require substantial capital, and AE may be unable to obtain needed capital or financing on satisfactory terms, which would prevent AE from fully developing its business and generating revenues.
 
AE’s business is capital intensive and AE anticipates that it will need to raise significant amounts of capital to meet AE’s funding requirements.  AE expects its capital outlays and operating expenditures to increase substantially over at least the next several years as AE implements its business plan.  AE expects that AE will need to raise substantial additional capital, through future private or public equity offerings, strategic alliances or debt financing.  AE’s future capital requirements will depend on many factors, including:  market conditions, sales force cost, cost of litigation in enforcing AE’s patents, and information technology (IT) development and acquisition costs.
 
AE does not currently have any commitments for future external funding and AE does not expect to generate any significant revenue from its business for some period of time.  Additional financing may not be available on favorable terms, or at all.  Even if AE succeeds in selling additional securities to raise funds, at such time, the ownership percentage of AE’s existing stockholders would be diluted, and new investors may demand rights, preferences or privileges senior to those of existing stockholders.  If AE raises additional capital through debt financing, the financing may involve covenants that restrict its business activities.  If AE is not able to obtain financing when needed, AE may be unable to carry out its business plan.  As a result, AE may have to significantly limit its operations and its business, financial condition and results of operations would be materially harmed.
 
Current economic and credit conditions could adversely affect AE’s plan of operations.
 
AE’s ability to secure additional financing and satisfy its financial obligations under indebtedness outstanding from time to time will depend upon its 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 its control.  The prolonged continuation or worsening of current credit market conditions would have a material adverse effect on its ability to secure financing on favorable terms, if at all.
 
AE’s revenue and collections may be materially adversely affected by the economic downturn.
 
A continuation or worsening of the recent economic downturn could result in reduced demand for AE’s services and products which could have a material adverse effect on AE’s business financial position or results of operations.
 
 
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AE could be materially adversely affected by its level of indebtedness.
 
Prior to the Separation, AE’s material debt consisted of a related party loan in the amount of $ 1,245,840 ($ 1,087,724 plus accrued interest of $158,116), which, at the holder’s option, may be converted into common stock of AE no later than August 31, 2013 .  This conversion is a risk of AE since it has not occurred, and there is no assurance that it will occur.
 
In addition, the Separation was contingent upon the Senior Notes in the principal amount of $1,075,000 plus accrued interest, being repaid.  In connection therewith, AEAC has paid to the former holders of the Senior Notes the aggregate amount of $700,000, and delivered a new secured promissory note issued by AE in the principal amount of $425,000 for the benefit of the former holders of the Senior Notes (the “New Note”) and issued 1,500,000 shares of AEAC common stock for the benefit of the holders.   The New Note is guaranteed by AEAC, and is secured by all of the assets of AE and AEAC, including the 80% interest of AEAC in AE’s capital stock.  The initial funds were obtained by the issuance of convertible debentures of AEAC and it is expected that the funds required to repay the New Note will also be obtained from the issuance of debentures. .  Upon the AEAC Distribution, these debentures will be exchange for debentures of AE (the “AE Debentures”) and will be convertible into common stock of AE at a conversion price of $0.25 per share.   This conversion is a risk of AE since it has not occurred, and there is no assurance that it will occur.
 
The Pro Forma Debt Ratio for AE is as follows:
 
   
Pre-Separation
   
Post-Separation
 
             
             
Assets
  $ 113,732     $ 113,732  
Liabilities
    2,571,697
[1]
    3,801,704
[2]
Debt Ratio
    2261 %     3342 %
                 
 
[1]
Includes related party debt of $ 1,245,840 , convertible into common stock of AE by August 31, 2013. To date, none of the debt has been converted.
[2]
Includes the AE Debentures totaling $915,000 which will be exchanged for debentures of AE concurrently with the AEAC Distribution, and $425,000 promissory note issued by AE in connection with repayment of senior notes, convertible into common stock of AE within 2 years of issuance. .
 
An increase in market interest rates could increase AE’s interest costs on existing and future debt and could adversely affect its stock price.
 
If interest rates increase, so could AE’s interest costs for any new debt.  This increased cost could make the financing of any acquisition more costly.  AE may incur variable interest rate indebtedness in the future.  Rising interest rates could limit AE’s ability to refinance existing debt when it matures, or cause AE to pay higher interest rates upon refinancing and increased interest expense on refinanced indebtedness.
 
 
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AE intends to seek acquisitions and other strategic opportunities, which may result in the use of a significant amount of management resources or significant costs, and AE may not be able to fully realize the potential benefit of such transactions.
 
AE intends to seek acquisitions and other strategic opportunities.  Accordingly, it may often be engaged in evaluating potential transactions and other strategic alternatives.  In addition, from time to time, it may engage in discussions that may result in one or more transactions.  Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transaction, AE may devote a significant amount of its management resources to such a transaction, which could negatively impact its operations.  In addition, AE 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 AE consummates an acquisition or strategic alternative in the future, there is no assurance that it would fully realize the potential benefit of such a transaction.
 
AE does not expect to pay any dividends for the foreseeable future, which will affect the extent to which `AE’s investors realize any future gains on their investment.
 
It is anticipated that AE will be prohibited by the terms of its debt agreements from paying dividends to holders of its common stock, and AE does not anticipate that it will pay any dividends to holders of its common stock in the foreseeable future.  Accordingly, investors must rely 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.
 
AE may commence additional legal proceedings against third parties who AE believes are infringing on its intellectual property rights, and if AE is forced to litigate to defend its intellectual property rights, or to defend claims by third parties against AE relating to intellectual property rights, legal fees and court injunctions could adversely affect AE’s financial condition or end its business.
 
At present, AE does not have any active or pending litigation.  AE is aware of certain companies that are currently violating its patents.  AE expects the number of companies violating its patents to grow in number as the market develops new uses of voice controlled internet usage and consumers begin to increase their adoption of the technology and integrate it into their daily lives.  AE foresees the potential need to enter into active litigation to defend the enforcement of its patents.  AE expects such litigation and the appeals process to be time-consuming and costly, which may adversely affect AE’s financial condition and ability to operate its business.  AE cannot assure you that any of the potential lawsuits will result in a final outcome that is favorable to AE or its stockholders.
 
AE expects to allocate a significant amount of its existing cash on hand towards the fees and expenses associated with these litigation matters.  AE anticipates that these legal proceedings could continue for several years and may require significant expenditures for legal fees and other expenses.  In the event AE is not successful through appeal and does not subsequently obtain monetary and injunctive relief, these litigation matters may significantly reduce AE’s financial resources and have a material impact on its ability to continue its operations.  The time and effort required of AE’s management to effectively pursue these litigation matters may adversely affect AE’s ability to operate its business, since time spent on matters related to the lawsuits will take away from the time spent on managing and operating its business.
 
AE may or may not be able to capitalize on potential market opportunities related to AE’s licensing strategy or AE’s patent portfolio.
 
In order to capitalize on AE’s patent portfolio, AE’s business strategy calls for AE to enter into licensing relationships with the leading companies in AE’s target markets in order to reach a larger end-user base than AE could reach through sales and marketing efforts.  Although AE may enter into certain settlement and license agreements, there can be no assurance that AE will be able to continue to capitalize on its patent portfolio or any
 
 
8

 
 
potential market opportunity in the foreseeable future.  AE’s inability to generate licensing revenues associated with the potential market opportunity could result from a number of factors, including, but not limited to:
 
 
·
AE may not be successful in entering into licensing relationships with its targeted customers on commercially acceptable terms; and
     
 
·
challenges to the validity of certain of AE’s patents underlying AE’s licensing opportunities.
 
AE has and will experience competition as more companies seek to provide products and services similar to AE’s products and services, and because larger and better-financed competitors may affect its ability to operate its business and achieve profitability, its business may fail.
 
AE expects competition for its products and services to be intense.  AE expects to compete directly against other companies offering similar products and services that will compete directly with its proposed products and services.  AE also expects that it will compete against established vendors in its markets.  These companies may incorporate other competitive technologies into their product offerings, whether developed internally or by third parties.  For the foreseeable future, substantially all of AE’s competitors are likely to be larger, better-financed companies that may develop products superior to AE’s current and proposed products, which could create significant competitive advantages for those companies.  AE’s future success depends on its ability to compete effectively with its competitors.  As a result, AE may have difficulty competing with larger, established competitors.  Generally, these competitors have:
 
 
·
substantially greater financial, technical and marketing resources;
     
 
·
a larger customer base;
     
 
·
better name recognition; and
     
 
·
more expansive product offerings.
 
These competitors are likely to command a larger market share than AE, which may enable them to establish a stronger competitive position, in part, through greater marketing opportunities.  Further, AE’s 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 those of AE .  If AE fails to address competitive developments quickly and effectively, AE may not be able to remain a viable business .
 
If AE is not able to adequately protect its patented rights, its operations would be negatively impacted.
 
AE’s ability to compete largely depends on the superiority, uniqueness and value of its technology and intellectual property.  To protect its intellectual property rights, AE will rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with its employees and third parties, and protective contractual provisions.  AE can give no assurances that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against it or that any such assertions or prosecutions will not materially adversely affect its business.
 
Regardless of whether these or any future claims are valid or can be successfully asserted, defending against such claims could cause AE to incur significant costs, could jeopardize or substantially delay a successful outcome in any future litigation, and could divert resources away from its other activities.  In addition, assertion of infringement claims could result in injunctions that prevent AE from distributing its products.  In addition to challenges against AE’s existing patents, any of the following could also reduce the value of AE’s intellectual property now, or in the future:
 
 
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·
AE’s applications for patents, trademarks and copyrights relating to its business may not be granted and, if granted, may be challenged or invalidated;
     
 
·
issued trademarks, copyrights, or patents may not provide AE with any competitive advantages;
     
 
·
AE’s efforts to protect AE’s intellectual property rights may not be effective in preventing misappropriation of AE’s technology; or
     
 
·
AE’s efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those AE develops.
 
Also, AE may not be able to effectively protect its intellectual property rights in certain foreign countries where AE may do business in the future or from which competitors may operate.  Obtaining patents will not necessarily protect AE technology or prevent AE’s international competitors from developing similar products or technologies.  AE’s inability to adequately protect its patented rights would have a negative impact on its 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 AE’s areas of interest, and AE believes that there has been, and is likely to continue to be, significant litigation in the industry regarding patent and other intellectual property rights
 
The burdens of being a public company may adversely affect AE’s ability to pursue litigation.
 
Following the Spin-off, as a public company, AE’s management must devote substantial time, attention and financial resources to comply with U.S. securities laws.  This may have a material adverse effect on management’s ability to effectively and efficiently pursue litigation as well as AE’s other business initiatives.  In addition, AE’s disclosure obligations under U.S. securities laws require AE to disclose information publicly that will be available to future litigation opponents.  AE may, from time to time, be required to disclose information that will have a material adverse effect on its litigation strategies.  This information may enable AE’s litigation opponents to develop effective litigation strategies that are contrary to AE’s interests.
 
The current regulatory environment for AE’s services remains unclear.
 
AE can give no assurance that its planned product offerings will be in compliance with local, state and/or U.S. federal laws or other laws.  Further, AE can give no assurance that AE will not unintentionally violate such laws or that such laws will not be modified, or that new laws will be enacted in the future which would cause AE to be in violation of such law.   More aggressive domestic or international regulation of the internet may materially and adversely affect AE’s business, financial condition, operating results and future prospects.
 
AE’s business greatly depends on the growth of mobile services, streaming, file transfer and remote desktop 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:
 
 
·
unwillingness of consumers to shift to and use other such next-generation internet -based audio applications;
     
 
·
refusal to purchase AE’s products;
 
 
10

 
 
 
·
perception by the licensees of product quality and performance;
     
 
·
limitations on access and ease of use;
     
 
·
congestion leading to delayed or extended response times;
     
 
·
inadequate development of internet   infrastructure to keep pace with increased levels of use; and
     
 
·
increased government regulations.
 
If the market for AE’s mobile services, audio control of the internet browser, file transfer and remote desktop does not grow as anticipated, AE’s business would be adversely affected.
 
While other next-generation internet -based applications have grown rapidly in personal and professional use, there can be no assurance the adoption of AE’s product and services will grow at a comparable rate.
 
AE expects that it will experience long and unpredictable sales cycles, which may impact its operating results.
 
AE expect that its sales cycles will be long and unpredictable due to a number of uncertainties such as:
 
 
·
the need to educate potential customers about AE’s patent rights and AE’s product and service capabilities;
     
 
·
customers’ willingness to invest potentially substantial resources and infrastructures to take advantage of AE’s products;
     
 
·
customers’ budgetary constraints;
     
 
·
the timing of customers’ budget cycles; and
     
 
·
delays caused by customers’ internal review processes.
 
AE expects that it will be substantially dependent on a concentrated number of customers.
 
If AE is unable to establish, maintain or replace its relationships with customers and develop a diversified customer base, AE’s revenues may fluctuate and AE’s growth may be limited. Currently, 75% of AE’s revenue is generated by six major customers.
 
If AE does not successfully develop its 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, AE’s 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.  AE’s future success will depend, in part, on its ability to use new technologies effectively, to continue to develop its technical expertise   and proprietary technology , to enhance its existing products and services and to develop new products and services that meet changing customer needs on a timely and cost-effective basis.  AE may not be able to adapt quickly enough to changing technology, customer requirements and industry standards.  If AE fails to use new technologies effectively, to develop AE’s technical expertise and new products and services, or to enhance existing products and services on a timely basis, either internally or through arrangements with third parties, AE’s product and service offerings may fail to meet customer needs, which would adversely affect AE’s revenues and prospects for growth.
 
 
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In addition, if AE is unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, AE 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 AE’s 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 AE continually improves the performance, features and reliability of AE’s products and services.  AE’s success will depend, in part, on AE’s ability to:
 
 
·
design, develop, launch and/or license AE’s planned products, services and technologies that address the increasingly sophisticated and varied needs of AE’s prospective customers; and
     
 
·
respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
 
The development of AE’s planned products and services and other patented technology involves significant technological and business risks and requires substantial expenditures and lead-time.  AE may be unable to use new technologies effectively.  Updating AE’s technology internally and licensing new technology from third parties may also require AE to incur significant additional expenditures.
 
If AE’s products do not gain market acceptance, AE may not be able to fund future operations.
 
A number of factors may affect the market acceptance of AE’s planned products or services or any other products or services AE develops or acquires, including, among others:
 
 
·
the price of AE’s products or services relative to other products that seek to secure real-time communication;
     
 
·
the perception by users of the effectiveness of AE’s products and services ;
     
 
·
AE’s ability to fund AE’s sales and marketing efforts; and
     
 
·
the effectiveness of AE’s sales and marketing efforts.
 
If AE’s products and services   do not gain market acceptance, AE may not be able to fund future operations, including the development of new products and services   and/or AE’s sales and marketing efforts for AE’s current products and services , which inability would have a material adverse effect on AE’s business, financial condition and operating results.
 
AE’s products are highly technical and may contain undetected errors, which could cause harm to AE’s reputation and adversely affect AE’s business.
 
AE’s products are highly technical and complex and, when deployed, may contain errors or defects.  Despite testing, some errors in AE’s products may only be discovered after a product has been installed and used by customers.  Any errors or defects discovered in AE’s products 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 AE’s business, operating results and financial condition.  In addition, AE could face claims for product liability, tort or breach of warranty.  The performance of AE’s products 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 AE’s products and services, which could result in legal claims against AE , harming AE’s business.  Furthermore, AE expects to provide implementation, consulting and other technical services in connection with the implementation and ongoing maintenance of AE’s products, which typically involves working with sophisticated software, computing and communications systems. AE
 
 
12

 
 
expects that its 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 management’s attention and adversely affect the market’s perception of AE and its products and services .  In addition, if AE’s business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, AE’s business, operating results and financial condition could be adversely impacted.
 
Malfunctions of third-party communications infrastructure, hardware and software expose AE to a variety of risks AE cannot control.
 
AE’s business will depend upon the capacity, reliability and security of the infrastructure owned by third parties over which AE ’s offerings would be deployed .  AE has 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.  AE depends on these companies to maintain the operational integrity of AE’s connections.  If one or more of these companies is unable or unwilling to supply or expand its levels of service in the future, AE’s operations could be adversely impacted .  Also, to the extent the number of users of networks utilizing AE’s 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 AE’s products and services do not function properly and could therefore adversely affect AE’s ability to attract and retain licensees, strategic partners and customers.
 
System failure or interruption or AE’s failure to meet increasing demands on AE’s systems could harm AE’s business.
 
The success of AE’s product and service offerings will depend on the uninterrupted operation of various systems, secure data centers, and other computer and communication networks that AE uses or establishes.  To the extent the number of users of networks utilizing AE’s 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 AE’s products, services, systems and operations will also be vulnerable to damage or interruption from:
 
 
·
power loss, transmission cable cuts and other telecommunications failures;
     
 
·
damage or interruption caused by fire, earthquake, and other natural disasters;
     
 
·
computer viruses or software defects; and
     
 
·
physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond AE’s control.
 
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 AE’s products and services to users.  These types of occurrences could cause users to perceive that AE’s products and services do not function properly and could therefore adversely affect AE’s ability to attract and retain licensees, strategic partners and customers.
 
 
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AE’s ability to sell its solutions will be dependent on the quality of AE’s technical support and AE’s failure to deliver high-quality technical support services could have a material adverse effect on AE’s sales and results of operations.
 
If AE does not effectively assist its customers in deploying its products and services , succeed in helping its customers quickly resolve post-deployment issues and provide effective ongoing support, or if potential customers perceive that AE may not be able to achieve the foregoing, AE’s ability to sell its products and services would be adversely affected, and its reputation with potential customers could be harmed.  In addition, if AE expands its operations internationally, its 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, AE’s failure to deliver and maintain high-quality technical support services to its customers could result in customers choosing to use AE’s competitors’ products or services in the future.
 
AE will need to recruit and retain additional qualified personnel to successfully grow its business.
 
AE’s future success will depend in part on its 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 AE’s business.  Competition for technical , sales, marketing and executive personnel is intense, particularly in the technology and internet sectors.  AE can provide no assurance that it will attract or retain such personnel.
 
Growth of internal operations and business may strain AE’s financial resources.
 
AE may need to significantly expand the scope of its operating and financial systems in order to build its business.  AE’s growth rate may place a significant strain on its financial resources for a number of reasons, including, but not limited to, the following:
 
 
·
the need for continued development of its financial and information management systems;
     
 
·
the need to manage relationships with future licensees, resellers, distributors and strategic partners;
     
 
·
the need to hire and retain skilled management, technical and other personnel necessary to support and manage AE’s business; and
     
 
·
the need to train and manage its employee base.
 
The addition of products and services and the attention they demand, may also strain AE’s management resources.
 
Risks Related to the Market for AE’s Common Stock
 
The market price and trading volume of AE securities may be limited or volatile and may face negative pressure.
 
There is currently no trading market for shares of AE common stock.  Investors may decide to dispose of some or all of the AE’s common stock that they receive in the Spin-off.  It is expected that AE’s common stock issued in the Spin-off will be trading publicly for the first time at some date following the effective date of the Spin-off although no assurance can be given as to such date or that such trading will occur at all.  Until, and possibly even after, orderly trading markets develop for these securities, there may be significant fluctuations in price.  It is not possible to accurately predict how investors in AE’s securities will behave after a trading market develops.  The market price for AE’s common stock following the Spin-off may be more volatile than the market price of CMGO’s common stock before the Separation.  The market price of AE’s common stock could fluctuate significantly for many reasons, including the risks identified in this prospectus or reasons unrelated to AE’s
 
 
14

 
 
performance.  These factors may result in short- or long-term negative pressure on the value of the AE’s common stock.
 
AE ’s stock price may be volatile, and purchasers of AE’s common stock could incur substantial losses.
 
If and when a trading market for AE ’s common stock occurs, AE ’s stock price may be volatile.  The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies.  As a result of this volatility, investors may not be able to sell their common stock.  The market price for AE common stock may be influenced by many factors, including, but not limited to:
 
 
·
regulatory developments in the United States and any foreign countries where AE may operate;
     
 
·
the recruitment or departure of key personnel;
     
 
·
quarterly or annual variations in AE ’s financial results or those of companies that are perceived to be similar to AE;
     
 
·
market conditions in the industries in which AE competes and issuance of new or changed securities;
     
 
·
analysts’ reports or recommendations;
     
 
·
the failure of securities analysts to cover AE ’s common stock or changes in financial estimates by analysts;
     
 
·
the inability to meet the financial estimates of analysts who follow AE ’s common stock;
     
 
·
the issuance of any additional securities by AE;
     
 
·
investor perception of AE and of the industry in which AE competes; and
     
 
·
general economic, political and market conditions.
 
A substantial number of shares of AE common stock may be sold into the market at any time.  This could cause the market price of AE’s common stock to drop significantly, even if AE’s business is doing well.
 
All of the shares being registered pursuant to AE’s registration statement will be freely tradable without restrictions or further registration under the federal securities laws, except for shares owned by AE’s “affiliates” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”).  The remaining shares of common stock outstanding after the effective date of this registration statement, including the shares issued in the Separation, are restricted securities as defined in Rule 144 under the Securities Act.  Restricted securities may be sold in the U.S. public market only if registered under the Securities Act or if they qualify for an exemption from registration, including by reason of Rule 144 under the Securities Act.  All of AE’s restricted shares will be eligible for sale in the public market beginning after the effective date, provided that such restricted shares have been held for at least six months, subject in certain circumstances to the volume, manner of sale and other limitations under Rule 144.  Sales of a substantial number of shares of AE’s 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 AE’s common stock.
 
 
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Risks Relating to AE’s Charter Documents and Capital Structure
 
The concentration of AE capital stock ownership among its largest stockholders and their affiliates, will limit AE’s other stockholders’ ability to influence corporate matters.
 
It is contemplated that pursuant to the AEAC Distribution, AEAC will distribute to its stockholder s the shares of AE common stock it received in the Separation.  Upon such distribution, the current stockholder s of AEAC will own a majority of AE’s outstanding common stock, before giving effect to any shares issued or issuable in connection with any financing of AE.  Consequently, these stockholder s will have significant influence over all matters that require approval by AE’s stockholders, including the election of directors and approval of significant corporate transactions.  This concentration of ownership will limit a stockholder’s ability to influence corporate matters, and as a result, actions may be taken that a stockholder may not view as beneficial.
 
The following table sets forth certain pro-forma information regarding the ownership of AE common stock as if the AEAC Distribution took place on the date of the filing of this prospectus , for each of AE’s related party directors and executive officers:
 
     
Post-Separation
 
Class
Name
 
Shares
   
Pct (1)
 
Common
Bradley Brothers, LLC (2)
    11,296,067       37.65 %
Common
James Crawford
    340,689       1.14 %
Common
Edward W. Withrow III (3)
    1,129,607       3.76 %
Common
Constantine S. Potamianos
           
 
(1)
Based on 30,005,185 shares outstanding. Does not include any shares issuable upon conversion of AE’s convertible notes issued to Nathaniel T. Bradley or the AE Debentures or in connection with any financing occurring after August 15, 2012.
(2)
Bradley Brothers, LLC is the record owner of 11,296,067 shares; Nathaniel Bradley and Sean Bradley are each 50% owners of Bradley Brothers, LLC, and share investment power with respect to such shares.
(3)
Huntington Chase Financial Group, LLC is the record owner of the shares. Mr. Withrow is the Managing Member of Huntington Chase Financial Group, LLC.

Provisions of AE’s certificate of incorporation and by-laws could discourage potential acquisition proposals and could deter or prevent a change in control.
 
Some provisions in AE’s 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 AE preferred stock, which may be divided into series and with the preferences, limitations and relative rights to be determined by AE’s 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 AE’s board of directors, to make a tender offer or otherwise acquire a substantial number of shares of AE 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 AE’s common stock.
 
Delaware law may delay or prevent takeover attempts by third parties and therefore inhibit AE’s stockholders from realizing a premium on their stock.
 
AE is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (“ DGCL ”) .  This section prevents any stockholder who owns 15% or more of AE’s outstanding common stock from engaging in certain business combinations with AE for a period of three years following the time that the stockholder acquired such stock ownership unless certain approvals were or are obtained from AE’s board of directors or the holders of 66 2/3% of AE’s outstanding common stock (excluding the shares of AE common
 
 
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stock owned by the 15% or more stockholder).  AE’s board of directors can use these and other provisions to discourage, delay or prevent a change in the control of AE or a change in AE’s management.  Any delay or prevention of a change of control transaction or a change in AE’s board of directors or management could deter potential acquirers or prevent the completion of a transaction in which AE’s 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 AE common stock.
 
 
This prospectus contains forward-looking statements and information.  Any statements that do not relate to historical or current facts or matters are forward-looking statements.
 
Examples of forward-looking statements include all statements regarding the expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, , the expected amounts and timing of dividends and distributions, the expected or intended tax treatment for the Separation and transactions related thereto, the outcome and costs of litigation, projected expenses and capital expenditures, competitive position, growth opportunities and potential acquisitions, plans and objectives of management for future operations and compliance with and changes in governmental regulations.  You can identify some of the forward-looking statements by the use of forward-looking words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “may” and other similar expressions, although not all forward-looking statements contain these identifying words.
 
You are cautioned that any forward-looking statements made in this prospectus are not guarantees of future performance and that you should not place undue reliance on any of such forward-looking statements.  The forward-looking statements are based on the information currently available and are applicable only as of the date on the cover of this prospectus.  Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements.  You should carefully consider the risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, including those set forth under the heading “Risk Factors.” AE does not intend, nor does it undertake any obligation, to update the forward-looking statements to reflect future events or circumstances.
 
 
 
AE will pay CMGO 10% of cash or other forms of compensation received from income earned or settlements on claims, suits or judgments directly resulting from AE’s patent enforcement and licensing strategy whether received by AE or any of its affiliates, net of any direct costs or tax implications incurred in pursuit of such strategy as they relate to the patents described in the Master Agreement, for a period of five years from the date of the Separation.
 
 
Without duplication of amounts payable under the Royalty Agreement, CMGO will receive a commission of 7.5% of all revenues received by AE after the closing from all business, clients or other sources of revenue procured by CMGO or its employees, officers or subsidiaries and directed to AE and 10% of net revenues obtained from a specified customer, for a period of five years.  Within 90 days of the date of the Separation, AE will deliver to CMGO 0.05% of AE’s outstanding capital stock as of the date of Separation as an initial services fee.
 
 
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As a condition to the Separation, AEAC was required to arrange to pay the obligations under the Senior Notes.  The funds have been obtained from the issuance of convertible debentures of AEAC.  Each debenture accrues interest at 8% per annum, and is convertible into common stock of AE at $0.25 per share. Upon the AEAC Distribution, the debentures will be exchanged for the AE Debentures.   As of September 15 , 2012, the aggregate principal amount of the debentures was approximately $1,000,000.
 
Additionally, AE has issued Funding Notes issued to Nathaniel T. Bradley , AE’s Chief Executive Officer, to evidence amounts loaned by him to AE to fund its operations which as of the date of this prospectus are in the aggregate amount of $ 1,087,724 .  The terms of the Funding Notes are as follows:   principal and interest at a rate of 7% per annum convertible to common stock of AE within 24 months at $0.25 per share. Interest accrued to date is $158,116. To date, no portion of the debt has been converted.
 
 
The following discussion describes certain United States federal income tax consequences of the Spin-off.  The discussion is for general information only and does not purport to consider all aspects of federal income taxation that may be relevant to the CMGO stockholders.  The discussion applies only to United States persons, not to foreign stockholders (as defined below), except as specifically set forth.  The consequences to any particular stockholder may differ depending upon that stockholder’s own circumstances and tax position.  The discussion deals only with shares held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and does not address matters that may be relevant to stockholders in light of their particular circumstances.  It also does not address matters that may be relevant to certain stockholders subject to special treatment under the Code, such as financial institutions, insurance companies, S corporations, partnerships and other pass-through entities, trusts, stockholders liable for the alternative minimum tax, dealers in securities or currencies, traders who elect to apply a mark-to-market method of accounting, tax-exempt organizations, U.S. expatriates, directors, employees, former employees or other persons who acquired their shares as compensation, including upon the exercise of employee stock options, and persons who are holding shares as part of a straddle, conversion, constructive sale, hedge or hedging or other integrated transaction. The discussion does not consider the effect of any applicable estate tax, gift tax, state, local or foreign tax laws.  In addition, this discussion is based upon the Code, applicable U.S. Treasury regulations, administrative pronouncements and judicial decisions in effect on the date of this prospectus , all of which are subject to change, possibly with retroactive effect.   Each stockholder is urged to consult his or her tax advisor as to the particular tax consequences to such stockholder of the distribution, including the applications of state, local and foreign tax laws and possible tax law changes.
 
TO COMPLY WITH IRS CIRCULAR 230, YOU ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF FEDERAL TAX ISSUES CONTAINED OR REFERRED TO HEREIN IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY YOU, FOR THE PURPOSES OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU UNDER THE CODE; (B) SUCH DISCUSSION IS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE MATTERS ADDRESSED BY THE WRITTEN ADVICE HEREIN; AND (C) YOU SHOULD SEEK ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
 
 
The distribution of AE shares to CMGO stockholder s will give rise to gain to the extent that the fair market value of such AE shares exceeds their tax basis to CMGO. (Additional gain to CMGO may also arise under the consolidated return regulations to the extent of the excess loss account, if any, with respect to AE as a subsidiary of CMGO.) This gain will be included in determining whether CMGO has current year “earnings and profits.”  If the gain results in CMGO having current year earnings and profits (and accumulated earnings and profits), it will affect the tax treatment of the distribution to CMGO stockholders as described below.
 
 
18

 
 
 
A CMGO stockholder will be treated as having received a distribution in an amount equal to the sum of the fair market value on the distribution date of AE shares distributed to such stockholder and any cash received in lieu of fractional shares.  This distribution will be taxable as a dividend to the extent of CMGO’s current year earnings and profits (and accumulated earnings and profits, if any) allocable to such stockholder’s CMGO shares.  For certain U.S. non-corporate taxpayers, dividend income is currently taxed for federal income tax purposes at the same rate as net long-term capital gain.  The excess of the fair market value of AE shares and any cash received over the allocable portion of CMGO’s current year and accumulated earnings and profits, if any, will be treated first as a non-taxable return of capital causing a reduction (but not below zero) in the adjusted tax basis in the stockholder’s CMGO shares, with any remaining excess taxable as capital gain.  CMGO is presently unable to make a determination as to whether the gain to CMGO from the exchange and distribution will result in CMGO having current year earnings and profits such that all or a portion of the amounts treated as a distribution will be taxed as a dividend.  The stockholder ’s basis in AE shares received in the distribution will generally equal the fair market value of such shares as of the distribution date.  The stockholder ’s holding period with respect to CMGO shares received will begin on the distribution date.
 
The actual tax impact of the distribution will be affected by a number of factors that are unknown at this time, including CMGO’s final taxable income loss for 2012 , the gain CMGO recognizes upon the exchange and distribution and the fair market value on the distribution date of the AE shares distributed to you.  Thus, a definitive calculation of the U.S. federal income tax impact on you from the distribution will not be possible until after the close of CMGO’s 2012 taxable year.  CMGO will notify you after year-end 2012 of the tax attributes and amount of the distribution to you on IRS Form 1099-DIV.
 
 
To the extent that the distribution to a corporate stockholder is treated as a dividend under the rules described above, such stockholder may be eligible for the dividends received deduction.  The dividends received deduction is subject to certain limitations.   Corporate stockholders should consult their own tax advisors as to the tax consequences of dividend treatment in their particular circumstances.
 
 
To prevent backup federal income tax withholding equal to 28% of the distribution, each non-corporate stockholder who is not a foreign stockholder (as defined below) and who does not otherwise establish an exemption from backup withholding must notify the distribution agent of the stockholder’s correct taxpayer identification number (employer identification number or social security number), or certify that the taxpayer is awaiting a taxpayer identification number, and provide certain other information by completing, under penalties of perjury, Internal Revenue Service (“IRS”) Form W-9.  Failure to timely provide the correct taxpayer identification number on Form W-9 may subject such stockholder to a $50 penalty imposed by the IRS.  A stockholder that is a foreign stockholder should generally complete and sign an appropriate IRS Form W-8BEN in order to avoid backup withholding.  For this purpose, a “foreign stockholder” is any stockholder that is not:
 
 
·
an individual citizen or resident of the United States,
     
 
·
a corporation (including any entity treated as a corporation for U.S. federal income tax purposes), partnership or other entity created or organized in or under the laws of the United States, any state or any political subdivision thereof,
     
 
·
an estate, the income of which is subject to United States federal income taxation regardless of the source of the income, or
 
 
19

 
 
 
·
a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all of its substantial decisions or which has elected to be treated as a United States person.
 
 
The treatment, for U.S. federal income tax purposes, of the distribution as a dividend, a tax-free return of capital or as capital gain for foreign stockholder s will be determined in the manner described above under the caption “Consequences to the CMGO Stockholder s.”  To the extent that amounts received by a foreign stockholder are treated as dividends, such dividends will generally be subject to withholding of United States federal income tax at the rate of 30%, or such lower rate as may be specified by an applicable income tax treaty or other exemption, provided CMGO has received proper certification of the application of such income tax treaty.  A foreign stockholder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS.  Amounts treated as dividends that are effectively connected with a foreign stockholder ’s conduct of a trade or business in the United States and, if provided in an applicable income tax treaty, are attributable to a permanent establishment in the United States, are not subject to U.S. federal withholding tax, but generally are instead taxed in the manner applicable to U.S. persons, as described above.  In that case, CMGO will not have to withhold U.S. federal withholding tax if the foreign stockholder complies with the applicable certification and disclosure requirements.  In addition, dividends received by a foreign corporation that are effectively connected with the conduct of a trade or business in the United States may be subject to a branch profits tax at a 30% rate, or a lower rate specified in an applicable income tax treaty.
 
In order to obtain a reduced rate of withholding pursuant to a tax treaty, a foreign stockholder must deliver to the distribution agent before any payment is made to the stockholder a properly completed and executed IRS Form W-8BEN with respect to the foreign stockholder and, in the case of a foreign stockholder that is neither an individual nor a corporation, the foreign stockholder may be required to deliver both a Form W-8IMY and an appropriate Form W-8BEN or Form W-9 with respect to the partners, members, beneficiaries or owners (and their beneficial owners) of the foreign stockholder .  In order to obtain an exemption from withholding on the grounds that the gross proceeds paid pursuant to the offer are effectively connected with the conduct of a trade or business within the United States or otherwise exempt, a foreign stockholder must deliver to the distribution agent before any payment is made to the stockholder a properly completed and executed IRS Form W-8ECI or IRS Form W-8EXP, as applicable.  CMGO and the distribution agent will determine a stockholder ’s status as a foreign stockholder and eligibility for a reduced rate of, or exemption from, withholding by reference to any outstanding certificates or statements concerning eligibility for a reduced rate of, or exemption from, withholding (e.g., IRS Form W-8BEN, IRS Form W-8ECI or IRS Form W-8EXP) unless the facts and circumstances indicate that reliance is not warranted.
 
Because the distribution agent cannot determine whether distributions to a particular foreign stockholder will qualify for sale or exchange treatment, the distribution agent will withhold 30% of any gross payments made to a foreign stockholder (as if such payments were a dividend) unless a reduced rate of withholding or an exemption from withholding is applicable.   Foreign stockholder s should consult their own tax advisors regarding their entitlement to benefits under an applicable income tax treaty or other exemption and the manner of claiming the benefits of such treaty or other exemption.
 
Information Reporting
 
A copy of this prospectus will be provided to CMGO stockholder s and to the IRS (except with respect to stockholder s that are exempt from the information reporting rules, such as corporations).
 
 
20

 
 
 
AE does not anticipate paying dividends on its common stock in the foreseeable future.  AE anticipates that any credit agreement it may expect to enter will restrict AE’s ability to pay dividends or make distributions to its stockholders.  Any future determination to pay dividends will be at the discretion of the board of directors of AE and will depend on the financial position, results of operations, cash flows, capital requirements, debt covenants, applicable law and other factors as the board of directors of AE deems relevant.
 
 
Corporate Overview and History
 
Founded in 2005 , AE is a developer of patented voice infrastructure technology.  AE focuses on working to improve the mobility, usability and accessibility of all internet-based content through the development, sale, licensing and use of its proprietary voice driven technologies. AE offers its solutions in four distinct product/operating groups:
 
 
·
Audio Internet™
     
 
·
AudioEye™ Mobile
     
 
·
AudioEye™ Advertising
     
 
·
AudioEye™ Technology Licensing
 
AE’s patented technology is designed to expand the functionality of the voice-controlled browser. AE believes that existing voice recognition and artificial intelligence engines only provide a partial solution, allowing users to get an “answer” to a specific question. AE’s technology is designed to enable a third aspect to a user’s internet experience  – delivering audio menus that allow users to choose among multiple responses and navigate the internet via keypad or voice just as they would with familiar mouse/icon or gestural interfaces. AE’s technology platform, when connected to voice recognition and artificial intelligence engines, provides an expanded internet experience complete with voice navigation and voice driven transactions.
 
The product development and deployment of AE’s flagship products – Audio Internet, AudioEye Advertising and AudioEye Mobile – are focused on the automated creation of alternative versions of popular websites that can be both accessed and navigated by sound. Audio Internet is a technology that utilizes the AE patented architecture to deliver an exact mirror image of a visual website or mobile website in an audio format that can be navigated, utilized, interacted with, and transacted from without the use of a monitor, mouse or gestural forms of user input. The conversion of social media sites and other dynamic e-commerce and e-learning sites have been another focal point of AE’s development effort. AE’s sales and marketing effort is organized within clear targeted verticals including but not limited to e-commerce, social media, news and entertainment publishers, corporate sites, products sites, mobile marketing campaigns, advertising, and promotional websites.
 
In 2006, AE received technology development venture funding from the Maryland Technology Development Corporation (TEDCO). AE’s technology development has been incubated at the University of Arizona Science & Technology Park in Tucson, Arizona and, beginning in 2009 and continuing to the present, AE has been involved 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 its proprietary technology, AE has been issued four U.S. patents in two distinct patent families and received notice of allowance on a fifth patent from the U.S. Patent and Trademark Office.
 
 
21

 
 
Patents Overview – General
 
The U.S. Patent Act secures for a limited time to inventors the exclusive right to their discoveries.  A patent is a document issued by the federal government that grants to its owner a legally enforceable right to exclude others from practicing the invention described and claimed in the document.  The value of a patent is closely tied to the value of the technological contribution of the material disclosed within the patent.  Over the past three decades, patents have become the major asset class for many large corporations.  These intellectual property assets are an essential part of such corporations’ competitive advantage and the foundation for new products and even new industries.
 
Background of Prior Art and Conventional Technology
 
Conventional solutions have been developed to help visually impaired users use websites, but these systems often require software and hardware to be installed on the user's computer.  Many of these solutions simply use screen reading technology alone or in combination with print magnifying software applications.   AE’s management believes that these systems are costly, unwieldy, and inconvenient.  Furthermore, because such technology is installed on the user's computer, visually impaired users cannot effectively use conventional computer files anywhere except at their own computers.  As a consequence, websites and other computer files are often inaccessible to visually impaired users anywhere except at home.  Unfortunately, even at home, these systems still have drawbacks.  For one, only text is played back to the user while graphics, music, images are not.  Additionally, large files or those having multiple nesting layers turn the system into a giant automated voice response system, which is difficult to understand, navigate, and can be potentially frustrating to a user.
 
Description of AE’s Patented Audio Internet Product Line
 
AE’s patented invention relates to a server-side method and apparatus that enables users to navigate audibly websites and hear high-quality streaming audio narration and descriptions of websites.  The patented invention involves creating an audible website corresponding to an original website by utilizing voice talent and automated conversion methods to read and describe web content and create audio files for each section within an original website, and then assigning a hierarchy and navigation system based on the original website design.  To implement the system, a program is installed on the home page of an original website which plays a tone upon a user's visit indicating that the website is accessible with AE’s proprietary technology .  Upon hearing the tone, a user presses a key on the keyboard to exit the original website and 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 substantially similar to that of the original website.  Users navigate the website menus and move from webpage to webpage by making keystroke or audible commands.
 
AE’s technology allows users to navigate the internet and mobile devices solely by listening to audio prompts and performing simple commands from any internet- enabled device or mobile smartphone.  AE’s technologies represent a significant breakthrough in streaming technology in that they have the ability to keep the streaming connection “alert”, awaiting a keystroke command even after extended periods of inactivity.
 
AE ’s technology recognizes the possibility to operate the internet as a spoken medium by cataloging each section of a website into an audio “filing cabinet.”  All the menu items and corresponding content on a given website can be easily converted to a series of audio files using web-based media creation software.  Site owners have the option of personalizing content by reading and recording specific sections via the human voice or relying on state-of-the-art computer generated voices.  Once all content is converted accordingly, all the individual audio files are woven together and connected by AE’s Audio Internet intuitive keystroke navigation system, allowing users to “Surf By Sound.”
 
Since the solution is network-based, users can seamlessly utilize the AE software across all their potential internet points of entry - school, home, office, library or mobile device.  This is a major advantage over local
 
 
22

 
 
devices and provides portability while removing technical boundaries.  The solution is triggered by clicking on a hyperlink on a web page, or automatically upon accessing an AE-enabled site.  The AE navigation player will launch and allow users to listen to the page or web site so that anyone, regardless of vision, age, or computer skill level, can experience the Audio I nternet .
 
 
AE’s focus is to create more comprehensive access to devices, internet , print, broadcast and other media. AE’s solutions and technology include comprehensive e - learning and e - commerce systems that enable interaction between brands and consumers. AE has created a variety of internet publishing products and internet cloud-based software services that enable customers to create and deliver highly scalable web-based applications leveraging AE ’s intellectual property.
 
AE’s primary business objective is to rapidly commercialize AE ’s extensive patent portfolio and other proprietary intellectual property. A E’s management, working in conjunction with AE’s patent counsel, an advisory council and third party consultants, is constructing a comprehensive licensing strategy for AE’s technology. In addition, AE is continually working to identify and track infringement of AE’s technology in the market verticals of device manufacturers, smart phones, internet software service providers, content delivery networks , and others, and several corporate resources are tasked with full time focus on this area of AE ’s development.
 
AE’s Strategy
 
AE is in the business of the development and commercial exploitation of its intellectual property.   Functionally, AE organizes its operations into two distinct business units:
 
 
·
The IP Group is charged with the development of additional intellectual property, development and implementation of a licensing strategy and the prosecution and enforcement of AE’s existing patent portfolio.
     
 
·
The Services Group is charged with the commercialization of AE ’s intellectual property , business development, and sales and marketing of AE’s services and product offerings.
 
AE ’s business model is built on the commercialization of its intellectual property through multiple avenues and business channels:
 
 
·
Generate revenue through the sale of services and products to corporate publishers .
     
 
·
Generate revenue from the sale of services and products to consumer websites.
     
 
·
Generate revenue from the sale of services and products to federal, state and local governments.
     
 
·
Generate revenue from the sales of AudioEye Advertising technology.
     
 
·
Generate revenue from royalties from licensees of AE’s technology.
     
  ·
Generate revenue from settlements and judgments in connection with patent infringement enforcement of AE’s intellectual property.
 
AE’s strategy is to establish AE as the leading provider of audio technologies with revenues derived through technology licensing , platform software as a service (SaaS) product sales, technology support services, and a comprehensive technology enforcement strategy.  Key operational objectives currently include:
 
 
23

 
 
 
·
Implementing a technology-licensing program to commercialize AE’s intellectual property, including the AE patented technology.
     
 
·
Developing revenues from licensing royalties from organizations that utilize AE’s patented technology and systems, to include potentially taking equity in or entering into joint ventures with such organizations.
     
 
·
Leveraging AE’s existing technology to develop a suite of products and services that can be sold directly to governments and corporate enterprises.
 
License and Service Offerings
 
AE plans to offer a diversified portfolio of license and service offerings focused on securing AE’s technology within devices and over the internet , – broken into four broad business categories :
 
 
  · AE Communications Technology Platform – Offered as Internet Cloud Software as a Service (SaaS)
     
   
·
Audio Internet™
       
   
·
AudioEye™ Mobile
       
   
·
AudioEye™ Advertising
       
  · AE Technology Licensing – Offered on an Equity and/or Royalty Licensing Basis
     
   
·
Digital Coupon
       
   
·
Mobile Advertising Solutions
       
   
·
Mobile Marketing Solutions
       
   
·
Counseling/ Behavioral Health Care
       
   
·
Medical Applications
       
   
·
Content Delivery Networks (CDN)
       
   
·
Mobile Networks
       
   
·
Others
       
  · AE Patent Enforcement and Patent Portfolio Licensing Program
     
   
·
Establishing Enforcement and Licensing Protocols to Combat Widespread Infringement
       
   
·
Pricing Models/Early Adopter License Strategy
       
   
·
Mobile Device Manufacturers
 
 
24

 
 
   
·
Mobile Marketing Providers
       
   
·
Other Device and Hardware Manufacturers
       
  · AE Support and Interactive Services
     
   
·
Support Infrastructure for SaaS Model – Operated as a Revenue Center
       
   
·
Customized S oftware and Development – Operated as a Revenue Center
       
   
·
Sales and Commercialization Support for all Divisions.
 
Customers
 
AE’s potential customer base includes a broad range of private and public sector customers including but not limited to:
 
 
·
Corporate Publishers
     
 
·
Consumer Websites
     
 
·
Federal, State and Local Governments and Agencies
     
 
·
Mobile Advertisers
 
Currently, 75% of AE’s revenue is generated by six major customers.
 
Patent Enforcement and Licensing
 
AE’s patent portfolio provides ownership of claims within the field of internet- based and device- embedded audio navigation technologies.  AE plans to license the exclusive ability to provide these products in the U nited S tates in a broad array of industry and product verticals.  The strategy of AE’s technology program is to identify infringing organizations that have reduced to practice and have successfully monetized the AE inventions with the objective to develop licensing programs for infringing operations with the use of litigation as a last resort means of protecting the intellectual property as required by U.S. law.  These organizations include but are not limited to the following:
 
 
·
Mobile Device Manufacturers
     
 
·
Mobile Device Software Providers
     
 
·
Mobile Device Operating System Providers
     
 
·
Mobile Marketing Operations
     
 
·
Mobile Internet Access Providers
     
 
·
Internet Device Manufacturers
     
 
·
Satellite, GPS, and Automotive Device Manufacturers
 
 
25

 
 
 
·
Internet Browser Providers
     
 
·
Internet Media Service Providers
     
 
·
Internet Content Publishers
     
 
·
Internet Media Publishers
     
 
·
Internet Service Providers
     
 
·
Internet Search Providers
     
 
·
Internet E-commerce Providers
     
 
·
Internet Marketing Operations
     
 
·
Internet Accessibility Services Providers
     
 
·
U.S. Federal Government Internet Operations
     
 
·
U.S. State Governments Internet Operations
     
 
·
U.S. Departments, Bureaus, Agencies, and Territories Internet Operations
     
 
·
Native American Business Operations
     
 
·
Native American Governments
     
 
·
Content Delivery Networks (CDN)
     
 
·
Foreign Governments
     
 
·
Appliance Manufacturers
     
 
·
Healthcare Products Manufacturers
     
 
·
Prescription Medication Pharmacy Operations
     
 
·
Pharmaceutical Companies
     
 
·
“How To” Operations
     
 
·
User Manual Publishers
 
AE technology serves a broad landscape of clientele with the claims of AE’s issued and pending technology patents and its technology applications.   AE's strategy is to hire, partner with, and secure relationships with licensing professionals and value added reseller operations that specialize in addressing each of the above mentioned market verticals.  Through value added resellers, licensing operations, and strategic partnerships, AE plans to license its technology, software, and patents in a highly scalable, profitable and sustainable infrastructure.
 
The licensing offering is also tailored for startup and emerging technology service companies that desire a license to AE’s technology in exchange for equity and ongoing royalty payments to AE.  AE plans to secure
 
 
26

 
 
customized software development and service contracts that add specialized revenue streams from these partner organizations.
 
2012 Progression of Equity, Royalty, and Service Contract Licensing Model
 
AE has developed , along with the Eller College of Management’s Department at the University of Arizona a technology and vertical sales strategy targeted at post- secondary educational institutions. The business opportunity is focused of Management Information Systems  on marketing AE solutions and technology to approximately 10,000 higher education organizations in the United States .  AE has completed a trial implementation of the technology and is developing a joint venture with the MIS department which is expected to commence in late 2012. Currently, AE is collaborating with graduate students from the college and has completed bench testing and beta technology releases within this market vertical. 
 
AE has licensed its technology through limited field of use license exclusively in the mobile couponing space to internet start- up Couponicate, Inc.  In exchange for its license, AE retains a 19.5% ownership of Couponicate and has established a revenue stream in form of royalties to be paid by Couponicate on all future revenues generated from the use of AE’s inventions.
 
Business to Government Direct Sales Business Model
 
The patent portfolio owned by AE and its internet software platform enables mobility, usability and accessibility, and is primarily marketed through marketing partnerships, resellers, and licensed operations.  This strategy enables addressing of the broad markets covered by AE’s technology and allows for a depth and market penetration that AE could never approach on its own.
 
AE ’s management believes there exists in the U.S. government a market which AE can pursue and develop directly.  Further, AE’s management believes that this direct connection with the government market will allow AE to improve reseller and partner based channel support services in a more efficient manner.  AE believes this tactic provides AE’s management the ability to better anticipate the needs of and respond to AE’s reseller network and partners with improvements and innovations in its products and services.
 
AE’s m anagement believes that the government market imposes certain barriers to entry to new potential entrants because of requirements such as U.S. General Services Administration (GSA) listing . However, AE’s 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 AE to conduct direct sales.
 
AE has filed with the GSA for a GSA contract number, has established proposed pricing with the GSA and has completed certification on the contracting process. AE has also met with the U.S. Department of Agriculture, Education and Commerce and has established a business pipeline for licensing.
 
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.
 
Elderly 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.  AE's category-creating audio browser provides an intuitive internet experience across all internet-enabled devices without imposing any additional costs on end users. For
 
 
27

 
 
government site administrators, AE's media creation tools are easy to use so that sites can be made accessible and maintained as part of any web management process.
 
Marketing and Sales
 
AE plans to employ a partner-oriented marketing strategy for its technology licenses and software offerings.  AE expects the marketing strategy will primarily be focused on value added resellers, partners, and licensed operations.  AE plans to directly market its Audio Internet SaaS platform to its U.S. government customers.
 
Competition
 
AE ’s management believes its technology and solutions will compete primarily against various proprietary solutions of large search and browser market players.  AE groups these solutions into three main categories:
 
 
1.
Mobile and Internet Browser Solutions .  A serious competitive threat to AE comes from the internet browsers that have already begun to infringe upon AE’s technology and have started to provide voice navigation and multi-format content consumption.
     
 
2.
Mobile Device Operating Solutions .   AE’s management believes that this segment involves the highest volume and presence of technology infringement of apparatus and device claims of AE’s portfolio.  In view of this segment also offering competing audio navigation and audio control of device features and functions, AE’s management has determined that this segment has the highest priority.
     
 
3.
Tablets and E-readers . Internet e-readers and tablet computers with competing functionalities and audio navigation commands and controls pose a potential competitive threat.  Competitive analysis is ongoing; licensing strategy requires additional investment and focus in this area of ongoing competitive analysis.
 
Intellectual Property and Patent Rights
 
AE’s intellectual property is primarily comprised of trade secrets, patented know-how, issued and pending patents, copyrights and technological innovation.
 
AE has a portfolio comprised of  four patents in the United States, as well as several pending U.S. patents.  AE’s portfolio includes a number of patents that describe unique systems and methods for navigating devices and internet content, as well as publication and automated solutions that connect to any content management system, and can deliver a mobile, usable, and accessible user experience to any consumer device.  AE’s software and technology solutions also have direct sales potential that can be expanded but are currently focused on the U.S. government market .  AE has extensive indirect sales channels developed through a network of value added resellers, partners and licensed operations that make up the majority of the projected sales volume.
 
The following is a list of AE’s patents , both issued and pending .  The patents have been extended and cover a period from 2002 through 2026.
 
#
 
ID
 
Status
 
Title
1
 
US7966184 B2
 
Issued
 
System and method for audible website navigation
2
 
US7653544 B2
 
Issued
 
Method and apparatus for website navigation by the visually impaired
3
 
US8260616
 
Issued
 
System and method for Audio Content Generation
4
 
US8046229
 
Issued
 
Method and Apparatus for website navigation by the visually impaired
 
 
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5
 
13/483758
 
Pending
 
System and Method for Audio Content Generation
6
 
13/280184
 
Pending
 
System and Method for Audio Content Management
7
 
13/214347
 
Pending
 
System and Method for Audio Content Navigation
8
 
13/545417
 
Pending
 
System and Method for Audio Content Navigation
 
AudioEye Patent Family #1
 
 
AudioEye Patent Family #2
 
 
AE has also filed the following trademarks with the U.S. Patent and Trademark Office:
 
 
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Government Regulation
 
Government regulation in the United States that affects the market and commercial potential for AE’s products and services includes the Rehabilitation Act of 1973, the American with Disabilities Act of 1990 and the Twenty-First Century Communications and Video Accessibility Act of 2010.
 
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 includes provisions that require that all telecommunications companies in the United States take steps to ensure functionally equivalent services for consumers with disabilities. The applicability of these provisions is relevant to today’s environment where an increasing amount of voice and video communications occur over the internet.
 
In October 2010, Congress passed and the President signed into law, the Twenty-First Century Communications 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.
 
AE ‘s management believes that AE’s   patents are pertinent to the development of the government-accessible market as well as the solution for internet publishers and device manufactures requiring compliance with Sections  504 and 508 of the Rehabilitation Act of 1973 .  AE’s product positioning is centered in audio technology that enables mobility, usability and accessibility.  In addition to the federal mandates for technology adoption, AE has focused on providing comprehensive features and capabilities that bolster its value propositions and product demand creation through distribution of AE’s proprietary enabling technologies.
 
Competitive Strengths
 
AE’s management believes the following competitive strengths will enable AE’s success in the marketplace:
 
 
·
Unique patented technology .  AE is focused on developing innovations in the field of networked and device- embedded audio technology.  AE’s first patent family entitled “Method and Apparatus for Website Navigation by the Visually Impaired” U.S. patent # 7653544 filed in 2003 and issued on January 29, 2010 provides technology claims that cover audio content
 
 
30

 
 
    navigation.  AE’s second family of patents is entitled “System and Method for Audible Web Site Navigation.”  AE’s key foundational patent, U.S. patent # 7966184 filed in 2007 and issued on June, 23 2011, includes additional mobile smartphone navigation and audio publishing capabilities. AE has filed continuations within both patent families keeping both open for the filing of continuations and continuations in part.  AE owns a unique patent portfolio comprised of four   issued patents in the United States, and four U.S. patents pending with three additional patents being drafted for filing with the U.S. Patent and Trademark Office in 2012/2013 . AE’s portfolio includes patents and pending patent applications in the United States with over 60 issued claims that canvass internet and mobile markets that support AE’s business and technology licensing process.
     
 
·
Licensing business model .  AE is pursuing agreements under which AE will license its technology within key identified vertical end-markets including but not limited to the U.S. government , mobile carrier, higher education, digital couponing, content delivery networks, marketing organizations, e-learning organizations, ecommerce operations, device manufactures, internet technology, and communications.
     
 
·
Highly experienced inventors, technologist and product development team .  AE’s research and development team is comprised of experienced software, e-commerce, mobile marketing and internet broadcasting developers and technologists that have worked together as a team 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 in a wide range of end-markets.
 
Employees
 
As of September 15, 2012, AE had six full-time employees.  
 
Legal Proceedings
 
AE is not party to any legal proceedings.  However, from time to time in the future, AE may be subject to various lawsuits, claims and proceedings that arise in the normal course of business, including employment, commercial, safety and health matters.  It is not presently possible to determine whether any such matters will have a material adverse effect on AE’s consolidated financial position, results of operations, or liquidity.  In the future, AE may from time to time commence litigation to enforce its patents.
 
 
AE’s principal executive offices are located at 9070 S. Rita R oa d , Suite 1450, Tucson, Arizona 85747, consisting of approximately 800 square feet with a satellite office in Chicago, Illinois consisting of approximately 1,700 square feet, each pursuant to lease arrangements.
 
 
AE maintain s a website at www.audioeye.com.  Following the Spin-off, AE will file reports with the SEC.  Through its website, AE intends to make available free of charge, as soon as reasonably practicable after such information has been filed or furnished to the SEC, each of its filings with the SEC, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).   In addition, investors and other members of the public will be able to read and copy any materials AE files or furnishes with the SEC at the SEC’s Public Reference at 100 F Street, NE, Washington, DC
 
 
31

 
 
20549.  Information concerning the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.  This information, and any other reports, proxy and information statements or other information filed or furnished with the SEC by issuers, can also be obtained free of charge on the internet site maintained by the SEC, www.sec.gov.
 
Reporting Policies
 
Following the Spin-off, AE will become subject to the information reporting requirements of the Exchange Act, pursuant to which AE will file periodic reports, proxy statements and other information, including audited financial statements, with the SEC.  Such filings will be publicly available to AE’s stockholders.
 
 
32

 
 
 
The following table sets forth the unaudited pro forma capitalization of AE at June 30, 2012 which gives effect to the Separation as if the Separation occurred on June 30, 2012:
 
Pro Forma Capitalization
 
Pro Forma
June 30, 2012
 
       
Long term debt
  $ 2,695,640 (1) (2)
         
Preferred Stock, $0. 00 001 par value, 10,000,000 shares authorized, none issued and outstanding
  $
 
Common stock, $0.00001 par value, 100,000,000 shares authorized, 30,005,185 issued and outstanding as of June 30, 2012
    300  
Additional paid in capital
    ( 300 )
Total Liabilities and Stockholders' Equity
  $ 2,695,640  
 
(1)
Includes Note Payable to Nathaniel T. Bradley of $1,245,840, payable and/or convertible into AE common stock by August 31, 2013.
   
(2)
Includes debentures of $915,000 (convertible into common stock of AE within 2 years of issuance) issued by AEAC and paid to CMGO, plus and note payable of $425,000 issued by AE to secure the release of the CMGO Senior Debt.  Upon the AEAC Distribution, the debentures will be exchanged for the AE Debentures.
 
 
33

 
 
INDEX TO FINANCIAL INFORMATION
 
   
Page
     
 
35
 
36
 
37
 
38
     
 
39
 
40
 
41
 
42
 
43
 
44
 
45
   
 
34

 
 
 
The following financial information reflect s the unaudited condensed consolidated pro forma balance sheet of AE as of June 30, 2012 , as if the Separation had occurred on June 30, 2012 , the unaudited condensed consolidated pro forma income statement of AE for the six months ended June 30, 2012, as if the Separation had occurred on January 1, 2012 , and the unaudited condensed consolidated pro forma income statement of AE for the year ended December 31, 2011 , as if the Separation had occurred on January 1, 2011.
 
  The pro forma adjustments are preliminary and have been made solely for purposes of developing the pro forma financial information for illustrative purposes necessary to comply with the requirements of the SEC.  The actual results reported in periods following the transactions may differ significantly from that reflected in these pro forma financial statements for a number of reasons, including differences between the assumptions used to prepare these pro forma financial statements and actual amounts and cost savings from operating efficiencies.  In addition, no adjustments have been made to the unaudited pro forma consolidated income statements for non-recurring items related to the transactions.  As a result, the pro forma financial information does not purport to be indicative of what the financial condition or results of operations would have been had the transactions been completed on the applicable dates of this pro forma financial information.  The pro forma financial statements are based upon the historical financial statements of AE and do not purport to project future financial condition and results of operations after giving effect to the transactions.
 
The accompanying pro forma consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations for AudioEye .”
 

 
 
35

 
 
UNAUDITED CONDENSED CONSOLIDATED PROFORMA FINANCIAL INFORMATION
FOR AUDIOEYE, INC.
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2012

 
AUDIOEYE, INC.
 
 
As of June 30, 2012
 
 
                      Pro Forma  
     
Historical
   
 
   
 
   
Consolidated
 
   
June 30,
   
AEAC
   
Pro Forma
   
June 30,
 
   
2012
   
Consolidation
   
Adjustments
   
2012
 
   
(unaudited)
                   
ASSETS
                       
Current Assets
  $ 105,614     $ 915,000 [5]   $ (700,000 ) [6]   $ 105,614  
                      (215,000 ) [9]        
Property and equipment, net
    8,118                       8,118  
Goodwill
                    3,737,972 [8]     3,737,972  
TOTAL ASSETS
  $ 113,732     $ 915,000     $ 2,822,972     $ 3,851,704  
                                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                               
                                 
Current Liabilities
  $ 1,001,057     $     $ 155,007 [10]   $ 1,156,064  
Long-term liabilities
    1,570,640       915,000 [5]     425,000 [7]     2,695,640  
                      (215,000 ) [9]        
Total Liabilities
    2,571,697       915,000       365,007       3,851,704  
                                 
Stockholders’ Deficit
                               
Preferred Stock
    [1]     [2]            
Common stock
    25 [3]     275 [4]             300  
Additional paid in capital
    1,118,958       (275 ) [4]     (700,000 ) [6]     (300 )  
                      (425,000 ) [7]        
                      6,017 [8]        
Retained earnings
    (3,562,247 )             3,717,254 [8]      
                      (155,007 ) [10]        
Total AudioEye Inc. Stockholders’ Deficit
    (2,457,966           2,443,264        
Non-controlling interest
    (14,701 )             14,701 [8]      
Total Stockholders’ Deficit
    (2,457,965           2,457,965        
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 113,732     $ 915,000     $ 2,822,972     $ 3,851,704  
 
[1]
500,000 shares authorized, none issued
[2]
10,000,000 shares authorized , none issued
[3]
4,000,000 shares authorized, 2,546,483 shares issued and outstanding
[4]
100,000,000 shares authorized, 30,005,185 shares issued and outstanding resulting from sale of AE by CMGO to AEAC
[5]
Issuance by AEAC of $915,000 8% Convertible Debentures
[6]
Partial payment of Senior Notes to CMGO upon Separation
[7]
Issuance by AE of $425,000 Note Payable to Senior Noteholders upon Separation
[8]
Elimination of subsidiary equity and recording of goodwill due to business combination
[9]
Intercompany eliminations
[10]
Expenses to be incurred by AE in connection with the issuance and distribution of securities registered
 

 
 
36

 
 
AUDIOEYE, INC.
For the Six Months Ended June 30, 2012
 
   
AudioEye
                   
   
Historical
               
Pro Forma
 
   
June 30,
   
AEAC
   
Pro Forma
   
June 30,
 
   
2012
   
Consolidation
   
Adjustments
   
2012
 
   
(unaudited)
   
 
   
 
   
 
 
                         
Revenue
  $ 54,128     $     $     $ 54,128  
Revenue from related party
    1,500                   1,500  
                                 
Cost of revenues
    153,031                   153,031  
                                 
Gross Profit
      (97,403 )                 (97,403 )
                                 
General and administrative expenses
    287,853         —       [3]     287,853  
                                 
Operating income (loss)
    (385,256 )       —             (385,256 )
                                 
Other income (expense)
    21,000             (17,094 ) [1]     (23,864 )
                      (27,770 ) [2]        
                                 
Net (loss)
  $ (364,256 )   $     $ (44,864 )   $ (409,120 )
                                 
Net (loss) per common share - basic and diluted
  $ (0.14 )                   $ (0.01 )
                                 
Weighted average common shares outstanding - basic and diluted
    2,546,483                       30,005,185  
 
[1]
Interest on Note Payable = $425,000 x 8% x 181 days (360 day/yr) = $17,094
[2]
Interest on Debentures = $915,000 x 8% x 181 days (365 day/yr) = $27,770
[3]
$155,007 of expenses to be incurred by AE in connection with the issuance and distribution of securities registered are not included because they are non-recurring and are not expected to have a continuing impact on the registrant
 

 
 
37

 
 
UNAUDITED CONDENSED CONSOLIDATED PROFORMA FINANCIAL INFORMATION
FOR AUDIOEYE, INC.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2011

 
AUDIOEYE, INC.
 
 
For the Year Ended December 31, 2011
 
   
   
   
AudioEye
                   
   
Historical
               
Pro Forma
 
   
December 31,
   
AEAC
   
Pro Forma
   
December 31,
 
   
2011
   
Consolidation
   
Adjustments
   
2011
 
   
(audited)
   
 
   
 
   
 
 
                         
Revenue
  $ 125,521     $     $     $ 125,521  
Revenue from related party
    12,500                   12,500  
                                 
Cost of revenues
    641,124                   641,124  
                                 
Gross Profit
  $ (503,103 )   $         $ (503,103 )
                                 
General and administrative expenses
    810,341             [3]     810,341  
Patent impairment expense
    147,908                   147,908  
                                 
Operating income (loss)
    (1,461,352 )                 (1,461,352 )
                                 
Other income (expense)
    (283,050 )           (34,000 ) [1]     (390,250 )
                      (73,200 ) [2]        
                                 
Net (loss)
  $ (1,774,402 )   $     $ (107,200 )   $ (1,851,602 )
                                 
Net (loss) per common share - basic and diluted
  $ (0.69 )                   $ (0.06 )
                                 
Weighted average common shares outstanding - basic and diluted
    2,546,483                       30,005,185  
 
[1]
Interest on Note Payable = $425,000 x 8%  = $34,000
[2]
Interest on Debentures = $915,000 x 8%  = $73,200
[3]
$155,007 of expenses to be incurred by AE in connection with the issuance and distribution of securities registered are not included because they are non-recurring and are not expected to have a continuing impact on the registrant
 

 
 
38

 
 
 
The following financial statements reflect the unaudited consolidated balance sheet of AE as of June 30, 2012 , and the audited consolidated balance sheets of AE as of December 31, 2011 and 2010 , before the Separation occurred on August 15, 2012 , and also reflect the unaudited consolidated income statements for the six months ended June 30, 2012 and 2011 , and the audited consolidated income statements of AE for the years ended December 31, 2011 and 2010 .
 
 The accompanying consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations for AudioEye .”
 

 
 
39

 
 
FINANCIAL STATEMENTS
FOR AUDIOEYE, INC.
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2012
AND THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

 
 
Board of Directors
AudioEye, Inc.
Dover, Delaware
 
We have audited the accompanying consolidated balance sheets of AudioEye, Inc. and its subsidiary (collectively, the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AudioEye, Inc. and its subsidiary as of December 31, 2011 and 2010 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that AudioEye, Inc. will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, AudioEye, Inc. suffered losses from operations and has a working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
 
October 1, 2012
 

 
 
40

 
 
AUDIOEYE, INC.
 
   
   
June 30,
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2010
 
   
(unaudited)
             
ASSETS
                 
Current Assets
                 
Cash
  $ 25,953       27,426     $ 3,611  
Accounts receivable, net
    25,911       11,637       22,343  
Related party receivables
    14,750       13,125        
Marketable securities
    39,000       18,000       14,000  
Total Current Assets
    105,614       70,188       39,954  
                         
Property and equipment, net
    8,118       7,998       13,551  
                         
Intangible assets, net
                52,839  
TOTAL ASSETS
  $ 113,732       78,186     $ 106,344  
                         
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                       
                         
Current Liabilities
                       
Accounts payable and accrued expenses
  $ 374,588       368,790     $ 502,685  
Unearned income
    77,276       13,195        
Notes and loans payable-current
    24,000       24,000       74,900  
Related party payable
    525,193       398,270        
Total Current Liabilities
    1,001,057       804,255       577,585  
                         
Long term liabilities
                       
Notes and loans payable-long term
    109,800       121,800        
Related party loans
    1,460,840       1,245,840        
Total Long term Liabilities
    1,570,640       1,367,640        
Total Liabilities
    2,571,697       2,171,895       577,585  
                         
STOCKHOLDERS’ DEFICIT
                       
Preferred Stock, $0.00001 par value, 500,000 shares authorized, none issued and outstanding
                 
Common stock, $0.00001 par value, 4,000,000 shares authorized, 2,546,483, 2,546,483 and 2,546,483 issued and outstanding as of June 30, 2012, December 31, 2011 and December 31, 2010, respectively
    25       25       25  
Additional paid in capital
    1,118,958       1,118,958       997,024  
Accumulated deficit
    (3,562,247 )     (3,197,991 )     (1,453,589 )
Total AudioEye, Inc. Stockholders’ Deficit
    (2,443,264 )     (2,079,008 )     (456,540 )
Non-controlling interest
    (14,701 )     (14,701 )     (14,701 )
Total Stockholders’ Deficit
    2,457,965       (2,093,709 )     (471,241 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 113,732     $ 78,186     $ 106,344  
 
See Notes to Consolidated Financial Statements
 

 
 
41

 
 
AUDIOEYE, INC.
 
   
(unaudited)
             
   
For the 6 months ended
   
For the 12 months ended
 
   
06/30/2012
   
06/30/2011
   
12/31/2011
   
12/31/2010
 
                         
Revenue
  $ 54,128     $ 112,019     $ 125,521     $ 328,397  
Revenue from related party
    1,500             12,500       19,850  
Cost of revenues
    153,031       323,196       641,124       429,705  
                                 
Gross Profit
    (97,403 )     (211,177 )     (503,103 )     (81,458 )
                                 
General and administrative expenses
    287,853       423,860       810,341       644,908  
Patent impairment expense
                147,908        
                                 
Operating income (loss)
    (385,256 )     (635,037 )     (1,461,352 )     (726,366 )
                                 
Other Expenses
                               
Unrealized gain (loss) on marketable securities
    21,000       19,500       (3,000 )     (78,000 )
Loss attributable to non-controlling interest
                      14,701  
Interest expense
          (114,447 )     (280,050 )     (42,641 )
Total Other Expenses
    21,000       (94,947 )     (283,050 )     (105,940 )
                                 
Net (loss)
  $ (364,256 )   $ (729,984 )   $ (1,744,402 )   $ (832,306 )
                                 
Net (loss) per common share - basic and diluted
  $ (0.14 )   $ (0.29 )   $ (0.69 )   $ (0.33 )
                                 
Weighted average common shares outstanding -  basic and diluted
    2,546,483       2,546,483       2,546,483       2,510,568  
 
See Notes to Consolidated Financial Statements
 

 
 
42

 
 
AUDIOEYE, INC.
 
                         
   
For the 6 months ended
   
For the 12 months ended
 
   
6/30/2012
   
6/30/2011
   
12/31/2011
   
12/31/2010
 
                         
Cash Flows from Operating Activities:
                       
Net loss
  $ (364,256 )   $ (729,984 )   $ (1,744,402 )   $ (832,306 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                               
Depreciation and amortization
    1,648       7,129       13,111       7,933  
Unrealized (gain) loss on investments
    (21,000 )     (19,500 )     3,000       78,000  
Bad debt expense
                2,153       87,000  
Patent impairment expense
                147,908        
Loss attributable to non-controlling interest
                      (14,701 )
Changes in operating assets and liabilities:
                               
Accounts receivable
    (14,274 )     (58,757 )     1,553       (99,464 )
Related party receivable
    (1,625 )           (13,125 )      
Fees and interest incurred on debt
                280,050        
Accounts payable and accrued expenses
    5,798       182,484       (58,995 )     443,827  
Unearned income
    64,081             13,195        
Related party payables
    126,923             398,270        
Net cash used in operating activities
    (202,705 )     (618,628 )     (957,282 )     (329,711 )
                                 
Cash Flows from Investing Activities:
                               
Cash paid for computer equipment
    (1,768 )                 (11,287 )
Cash paid for patent costs
          (74,536 )     (102,627 )     (31,447 )
Net cash used in financing activities
    (1,768 )     (74,536 )     (102,627 )     (42,734 )
                                 
Cash Flow from Financing Activities:
                               
Proceeds from related party loans
    215,000       734,224       1,087,724        
Repayment of notes and loans payable
    (12,000 )           (4,000 )      
Repayment of related party loans
                      (100,000 )
Capital contribution from parent
                      470,000  
Net cash provided by financing activities
    203,000       734,224       1,083,724       370,000  
                                 
Increase (decrease) in cash
    (1,473 )     41,060       23,815       (2,445 )
                                 
Cash - beginning of period
    27,426       3,611       3,611       6,056  
Cash - end of period
  $ 25,953     $ 44,671     $ 27,426     $ 3,611  
                                 
NON-CASH INVESTING AND FINANCING ACTIVITIES
                         
Conversion of debt for common stock
  $     $     $     $ 112,500  
Gain on troubled debt restructuring with related party
  $     $     $ 121,934     $  
Interest reclassed to principal
  $     $     $ 74,900     $  
Marketable securities received for accounts receivable
  $     $ 7,000     $ 7,000     $ 33,000  
                                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                         
Interest paid
  $     $     $ 9,679     $ 23,916  
Income taxes paid
  $     $     $     $  
 
See Notes to Consolidated Financial Statements
 

 
 
43

 
 
AUDIOEYE, INC.
PERIOD FROM DECEMBER 31, 2009 TO DECEMBER 31, 2011
 
                     
NON-CONTROLLING
             
   
COMMON STOCK
   
PAID IN
   
ACCUMULATED
       
   
SHARES
   
AMOUNT
   
CAPITAL
   
INTEREST
   
(DEFICIT)
   
TOTAL
 
                                     
Balance, December 31, 2009
    2,241,626       22       414,527             (621,283 )     (206,734 )
                                                 
Conversion of debt for common stock
    304,857       3       112,497                   112,500  
                                                 
Capital contribution from parent
                470,000                   470,000  
                                                 
Loss attributable to non-controlling interest
                      (14,701 )           (14,701 )
                                                 
Net loss
                            (832,306 )     (832,306 )
                                                 
Balance, December 31, 2010
    2,546,483       25       997,024       (14,701 )     (1,453,589 )     (471,241 )
                                                 
Gain on troubled debt restructuring with related party
                121,934                     121,934  
                                                 
Net loss
                            (1,744,402 )     (1,744,402 )
                                                 
Balance, December 31, 2011
    2,546,483       25       1,118,958       (14,701 )     (3,197,991 )     (2,093,709 )
                                                 
Net loss
                            (364,256 )     (364,256 )
                                                 
Balance, June 30, 2012
    2,546,483     $ 25     $ 1,118,958     $ (14,701 )   $ (3,562,247 )   $ (2,457,965 )
 
See Notes to Consolidated Financial Statements
 

 
 
44

 
 
AUDIOEYE, INC.
 DECEMBER 31, 2010 and DECEMBER 31, 2011 (audited)
AND JUNE 30, 2012 (unaudited)
 
NOTE 1: OVERVIEW
 
AudioEye, Inc. (the “Company”) was incorporated on May 20, 2005 in the state of Delaware. On March 31, 2010, the Company was acquired by CMG Holdings Group, Inc., a Nevada corporation (“CMG”).  Effective August 15, 2012, CMG transferred to AudioEye Acquisition Corporation shares of the Company representing 80% of the Company’s then-outstanding common stock.
 
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.  AE owns a unique patent portfolio comprised of four issued patents in the United States as of August 28, 2012, as well as four U.S. patents pending with additional patents being drafted for filing with the U.S. Patent and Trademark Office and internationally.
 
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 50% owned 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. whereby the Company owned 50% of Empire.  Empire is considered a variable interest entity as defined by ASC 805-10 “Business Combinations”.  The Company is the primary beneficiary of Empire as defined by ASC 805-10 and therefore consolidates the accounts of Empire.

The Company has recorded $0, $0 and $14,701 of loss during the six months ended June 30, 2012, and the years ended December 31, 2011 and, 2010, respectively, attributable to the non-controlling interest in Empire.  During the six months ended June 30, 2012 and the year ended December 31, 2011, Empire had no activity.  Empire had no assets or liabilities as of June 30, 2012, December 31, 2011 and December 31, 2010.

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.

Revenue Recognition
Sales are recognized when revenue is realized or realizable and has been earned. Most revenue transactions represent sales of services. Our policy is to recognize revenue when services are preformed and/or the project is completed.

Under the terms of the Company’s standard agreement for website design and development, revenue is recognized upon completion of the project. Revenue received prior to project completion is recognized as deferred revenue.

Under the terms of the Company’s standard agreement for website hosting, revenue is recognized as services are provided.  Invoices are generated, and revenue is recognized on a monthly basis.
 
 
45

 
 
Unearned Revenue
Revenue is recognized when services are performed and/or the project is completed.  Certain contracts contain payment terms of 2-3 installments which become due upon the completion of various stages of the project or service.

The Company evaluates contracts upon receipt of installment payments to determine if the project and/or service has been completed.  In the event an installment payment is received prior to the full completion of the contracted project or service, it is held as Unearned Revenue until the completion of the project and/or service.

Certain website hosting contracts are prepared and invoiced on an annual basis.  Any funds received for hosting services not provided yet are held in Unearned Revenue, and are recorded as revenue is earned.

Fiscal Year End
The Company has a fiscal year ending on December 31.

Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Marketable Securities
Marketable securities 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.

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 our customers. The Company does not generally require collateral for its accounts receivable. There was an allowance for doubtful accounts of $102,000, $87,000 and $87,000 as of June 30, 2012, December 31, 2011 and 2010, 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.

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.

Due to the Company’s recurring losses, its patents were evaluated for impairment and it was determined that future cash flows were insufficient for recoverability of the asset. The Company recognized impairment losses of $0, $147,908, and $0 during the six months ended June 30, 2012, and the years ended December 31, 2011 and 2010, respectively.

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.
 
 
46

 
 
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period.  Diluted loss per share includes the dilutive effects of common stock equivalents on an “as if converted” basis. For the six months ended June 30, 2012 and 2011 and the years ended December 31, 2011 and 2010, the Company had no common stock equivalents and therefore diluted earnings (loss) per share and basic earnings (loss) per share are the same.

Financial instruments
The carrying amount of our 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 our 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.

The following are the Company's marketable securities as of June 30, 2012, December 31, 2011 and 2010:
 
   
Fair Value
 
Fair Value
Hierarchy
Marketable securities, June 30, 2012
  $ 39,000  
Level 1
Marketable securities, December 31, 2011
  $ 18,000  
Level 1
Marketable securities, December 31, 2010
  $ 14,000  
Level 1

New Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.

NOTE 3: GOING CONCERN

As shown in the accompanying financial statements, the Company has incurred net losses of $364,256, $1,744,402 and $832,306 for the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively. In addition, the Company had an accumulated deficit of $3,562,247, $3,197,991 and $1,453,589 and a working capital deficit of $895,443, $734,067 and $537,631 as of June 30, 2012, December 31, 2011 and December 31, 2010, respectively. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. In response to these conditions, the Company may raise additional capital through the sale of equity securities, through an offering of debt securities or through borrowings from financial institutions or individuals. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 4: MARKETABLE SECURITIES

As of the six months ended June 30, 2012, and the years ended December 31, 2011 and 2010, the Company held 150,000, 150,000 and 100,000 shares of the common stock of Ecologic Transportation, Inc. with a fair value of $39,000, $18,000 and $14,000, respectively. An unrealized gain of $21,000 was recorded for the six months ended June 30, 2012. An unrealized loss of $3,000 and $78,000 were recorded for the years ended December 31, 2011 and 2010 respectively.
 
 
47

 
 
NOTE 5: PROPERTY, PLANT & EQUIPMENT

Property, plant and equipment consists of the following:

   
June 30
   
December 31
   
December 31
 
   
2012
   
2011
   
2010
 
                   
Computer & Peripherals
  $ 24,318     $ 22,550     $ 22,550  
Accumulated Deprecation
    (16,200 )     (14,552 )     (8.999 )
Property Plant & Equipment, Net
  $ 8,118     $ 7,998     $ 13,551  

Depreciation expense totaled $1,648, $5,553 and $5,269 for the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively.

NOTE 6: INTANGIBLE ASSETS

Prior to December 31, 2011, patents, technology and other intangibles with contractual terms were generally amortized over their respective legal or contractual lives. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

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

   
June 30,
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2010
 
                   
Patents
  $     $ 157,865     $ 55,678  
Domains
          440        
Accumulated Amortization
          (10,397 )     (2,839 )
Intangible Assets, Net
  $     $ 147,908     $ 52,839  

Amortization expense totaled $0, $7,558 and $2,664 for the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively.
 
Due to the Company’s recurring losses, its patents were evaluated for impairment and it was determined that future cash flows were insufficient for recoverability of the asset. The Company recognized impairment losses of $0, $147,908 and $0 during the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively.

NOTE 7: RELATED PARTY TRANSACTIONS

During the year ended December 31, 2010, the Company repaid the CEO $100,000 of advances made to the Company in prior years. The advances did not bear interest, were unsecured and due on demand.

During the year ended December 31, 2011, the Company entered into several promissory notes with one of its officers. The promissory notes total $1,084,224, bore interest at 15% and were due before the end of August 2011.

On August 30, 2011, the Company and the officer entered into a modified promissory note agreement in which the nine promissory notes (the “Notes”) totaling $1,084,224 were modified into one promissory note of $1,084,224 (the “Modified Note”). Any interest accrued on the Notes prior to the modification were adjusted and recalculated at a rate of 7% per annum. Any penalties assessed on the Notes prior to August 30, 2011 were waived. Interest was accrued at a rate of 7% per annum commencing August 31, 2011. The term of the Modified Note extends to August 31, 2013. The Modified Note is convertible into common stock of the Company at a conversion price of $0.25 per share by August 31, 2013.  As of June 30, 2012, none of the Modified Note has been converted.
 
 
48

 
 
The Company analyzed the convertible notes for derivative accounting consideration under FASB ASC 815-15 and FASB ASC 815-40. The Company determined the embedded conversion option in the convertible notes met the criteria for classification in stockholders equity under ASC 815-15 and ASC 815-40 “Derivatives and Hedging”.  In addition, the Company determined that the convertible notes did not contain a beneficial conversion feature under FASB ASC 470-20 “Debt with Conversion and Other Options”.

The Company also analyzed the modification of the term under ASC 470-60 “Trouble Debt Restructurings”. The Company is experiencing financial difficulty and the creditor has a granted a concession under the Modified Note terms. The Company concluded the modification should be accounted under ASC 470-60 “Trouble Debt Restructurings”. The total future cash payments specified by the new terms is $1,242,340 which was less than the carrying amount of the promissory note of $1,364,274 (including accrued interest and penalties) prior to the modification.  Accordingly, the Company has reduced the carrying amount to an amount equal to the future cash payments and of the difference of $121,934 is recognized in additional paid in capital during the year ended December 31, 2011.

Subsequent to the restructuring of debt, an additional $3,500 was loaned to the Company on December 16, 2011, which amount is interest free and payable upon demand. No payments of principal or interest were made during 2011 or the six months ended June 30, 2012. Accrued interest in the amount of $0, $158,116, and $0 has been expensed for the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively, and has been included with principal for a total amount of $1,245,840, $1,245,840 and $0 as Related Party Loans Payable as of June 30, 2012, December 31, 2011 and 2010, respectively.

During the six months ended June 30, 2012, the Company received loans totaling $215,000 from one affiliate.  The loans bear no interest, and are payable upon demand.

As of June 30, 2012, December 31, 2011 and December 31, 2010, Related Party Loans totaled $1,460,840, $1,245,840 and $0, respectively.

As of June 30, 2012, December 31, 2011 and December 31, 2010, there were Related Party Payables of $525,193, $398,270 and $0, respectively, for services performed by related parties.

As of June 30, 2012, December 31, 2011 and December 31, 2010, there were outstanding receivables of $14,750, $13,125 and $0, respectively, for services performed for related parties.

For the six months ended June 30, 2012, and the years ended December 31, 2011 and 2010, there were revenues earned of $1,500, $12,500 and $19,850, respectively, for services performed for related parties.

NOTE 8: NOTES PAYABLE

The Company had an outstanding loan to a former officer for $110,000 bearing interest at 6%, unsecured and in default.  During the year ended December 31, 2010, the Company settled this loan and accrued interest of $2,500 by issuing 304,857 shares of common stock.

As of June 30, 2012, December 31, 2011 and 2010, the Company had an outstanding loan to a third party in the amount of $74,900 which was originally issued during 2006 as part of an Investment Agreement.  The loan was unsecured and bore interest at 25% per year for four years.  The Company had accrued interest of $74,900, which was included in accounts payable and accrued expenses on the balance sheet.  The note was in default until October 24, 2011, at which time the Company entered into a MTTF Termination and Release Agreement (“Release”) with the third party.  The terms of the Release, among other things, terminated the Investment Agreement between the parties, and required the Company to issue a Promissory Note to the third-party in the combined amount of principal and accrued interest to date, for a total principal amount of $149,800.  The note is interest free, and is payable in monthly installments of $2,000 beginning November 1, 2011.  As of June 30, 2012, December 31, 2011 and 2010, the principal amount owing was $133,800 $145,800, and $74,900 respectively, of which $24,000, $24,000 and $74,900, has been recorded as the current portion of the note, and $109,800, $121,800 and $0 as the long term portion of the note, respectively.

NOTE 9: COMMITMENTS AND CONTINGENCIES

On April 1, 2010, Nathaniel T. Bradley signed an employment agreement with the Company to serve as Chief Executive Officer and President of the Company. The employment agreement calls for Mr. Bradley to be paid $150,000 per year for a period of 4 years. The employment agreement provides for annual bonus compensation, standard health benefits, incentive programs, incentive compensation, and restricted stock compensation.  As of June 30, 2012 and December 31, 2011 and 2010, the Company has accrued $275,770, $206,539 and $66,923, respectively, in unpaid executive salaries owed to Nathaniel T. Bradley which is included in related party payable in the consolidated balance sheet.
 
 
49

 
 
On April 1, 2010, Sean Bradley signed an employment agreement with the Company to serve as Vice President of Product Development of the Company. The employment agreement calls for Mr. Bradley to be paid $125,000 per year for a period of 4 years. The employment agreement provides for annual bonus compensation, standard health benefits, incentive programs, incentive compensation, and restricted stock compensation.  As of June 30, 2012 and December 31, 2011 and 2010, the Company has accrued $249,423 and $191,731 and $81,154 in unpaid executive salaries owed to Sean Bradley which is included in related party payable in the consolidated balance sheet.

NOTE 10: STOCKHOLDERS’ EQUITY

The total number of authorized shares of common stock that may be issued by the Company is 4,000,000 with a par value of $0.00001 per share.

In February 2010, the Company issued 304,857 shares of common stock in exchange for settlement of a debt in the amount of $112,500 (see Note 8).

On March 31, 2010, the Company was acquired by CMG, and all outstanding shares of the Company’s common stock were sold by the Company’s stockholders directly to CMG. In April 2010, the Company received a capital contribution from CMG of $470,000.

As of June 30, 2012, December 31, 2011 and 2010, the Company had 2,546,483 shares of common stock issued and outstanding.

NOTE 11: INCOME TAXES
The Company accounts for income taxes under ASC 740, “Income Taxes”. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the ultimate realization of a deferred tax as The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

Deferred tax assets:
 
June 30, 2012
   
December 31, 2011
   
December 31, 2010
 
Net operating loss carry forwards
  $ 990,000     $ 870,000     $ 325,000  
Less valuation allowance
    (990,000 )     (870,000 )     (325,000 )
Net deferred tax asset
  $     $     $  

At this time, the Company is unable to determine if it will be able to benefit from its deferred tax asset. There are limitations on the utilization of net operating loss carry forwards, including a requirement that losses be offset against future taxable income, if any. In addition, there are limitations imposed by certain transactions which are deemed to be ownership changes. Accordingly, a valuation allowance has been established for the entire deferred tax asset. The approximate net operating loss carryforward was $2,915,000, $2,550,000 and $955,000 as of June 30, 2012, December 31, 2011 and 2010, respectively and will start to expire in 2029.

NOTE 12: SUBSEQUENT EVENTS

On March 31, 2010 the Company and its then-stockholders entered into a share exchange agreement with CMG (formerly known as CMG Holdings, Inc.) whereby CMG purchased 100% of the Company’s common stock, and whereby the Company became a wholly-owned subsidiary of CMG. On June 22, 2011, CMG entered into a Master Agreement (“Agreement”) with AudioEye Acquisition Corporation, a Nevada corporation (“AEAC”), pursuant to which: (i) the stockholders of AEAC would acquire from CMG 80% of the capital stock of the Company (the “Separation”) and (ii) CMG would distribute to its stockholders, in the form of a dividend, 5% of the capital stock of the Company (the “Spin-off”).

On April 5, 2012, CMG and AEAC amended the Agreement in order to separate the Spin-off and Separation. On August 15, 2012, CMG and AEAC completed the Separation. Pursuant to the amended Agreement:
 
  1. CMG will retain 15% of the Company subject to transfer restrictions following the Spin-off.
  2. Pursuant to the Spin-off, CMG will distribute to its stockholders, in the form of a dividend, 5% of the capital stock of the Company.
 
 
50

 
 
  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 as fully described in the agreement.
  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.
  5. The Company finalized the release of the obligations of CMG under CMG’s 13%  Senior Secured Convertible Extendible Notes with an aggregate principal balance of $1,075,000.
 
 
51

 
 
AND RESULTS OF OPERATIONS FOR AUDIOEYE
 
The following discussion should be read in conjunction with AE’s consolidated audited financial statements and the related notes for the years ended December 31, 2010 and 2011 and for the six months ended June 30, 2012 that appear elsewhere in this prospectus . The following discussion contains forward-looking statements that reflect AE's plans, estimates and beliefs. AE’s actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this prospectus , particularly in the section entitled "Risk Factors."
 
AE’s consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
 
Overview
 
On March 31, 2010, CMGO acquired AE and effective as of August 15, 2012, CMGO transferred to AEAC 80% of AE’s outstanding capital stock.  AE 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. On January 26, 2010, the U.S. Patent and Trademark Office issued a U.S. patent for “Method and apparatus for website navigation by the visually impaired” filed by AE. This invention enables internet navigation and multi-format publishing capabilities. After receiving the patent, AE ’s management filed an application with newly added claims that further define embodiments of the invention and has obtained international filings now available for prosecution. The patented technology is the foundation of the AE mission to become a leader in internet accessibility, mobile audio internet navigation, and multi-format publishing technology as well as internet content publication and distribution software.   AE’s management believes that there is significant market opportunity for AE’s services as most websites are developed with the assumption that users can see the site, with the result that visually-impaired users have difficulty using such websites. Accordingly, providing accessibility services for these websites has become a significant market opportunity as there are approximately 33 million computer users who have some form of visual impairment.
 
          In October 2010, Congress passed and the President signed into law the Twenty-First Century Communication and Video Accessibility Act of 2010, which mandates that all government websites (city, state, and federal) be compliant and provide accessibility to Americans with disabilities. As a result, AE’s management believes that providing accessibility services for these government websites has become a significant market opportunity in view of the potential demand for AE’s patented solution.
 
   
Six Months Ended
   
Year Ended
 
Results of Operations
 
June 30,
   
December 31,
 
   
2012
   
2011
   
2011
   
2010
 
Revenue
  $ 54,128     $ 112,019     $ 125,521     $ 328,397  
Revenue from related party
    1,500       -       12,500       19,850  
Cost of Sales
    153,031       323,196       641,124       429,705  
Gross profit (loss)
    (97,403 )     (211,177 )     (503,103 )     (81,458 )
General and administrative expenses
    287,853       423,860       810,341       644,908  
Patent impairment expense
                147,908        
Operating (loss)
    (385,256 )     (635,037 )     (1,461,352 )     (726,366 )
Unrealized gain (loss) on marketable securities
    21,000       19,500       (3,000 )     (78,000 )
Loss attributable to non-controlling interest
                      14,701  
Interest expense
          (114,447 )     (280,050 )     (42,641 )
Net (loss)
  $ (364,256 )   $ (729,984 )   $ (1,744,402 )   $ (832,306 )
 
 
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Revenue
 
For the six months ended June 30, 2012 and 2011 , revenue in the amount of $ 54,128 and $ 112,019, respectively, consisted primarily of various levels of website design. For the year s ended December 31, 2011 and 2010, respectively , revenue in the amount of $ 125,521 and $328,397 consisted primarily of various levels of website design.
 
Cost of sales
 
         For the six months ended June 30, 2012 and 2011, cost of sales in the amount of $ 153,031 and $323,196, respectively, consisted primarily of sub-contracting to outside sources and direct labor.  For the year s ended December 31, 2011 and 2010 , cost of sales in the amount of $ 641,124 and $429,705, respectively, consisted primarily of sub-contracting to outside sources and direct labor.
 
Gross Profit
 
The reduction in revenue and increase in sub-contracting and direct labor resulted in a gross loss of $ 97,404 and $ 211,177 for the six months ended June 30, 2012 and 2011 , respectively, and $ 503,103 and $81,458 for the years ended December 31, 2011 and 2010, respectively.
 
Significant changes in gross profit for the six months ended June 30, 2012 and 2011 were attributable to the following items:
 
 
·
a decrease in website design services of $ 36.515;
 
·
a decrease in website hosting fees of $ 19,876 for monthly hosting of client websites;
 
·
a decrease in amortization expense related to patent costs of $4,326;
 
·
a dec rease in sub-contracted design fees of $ 167,100 due to the creation and development of additional software; and
 
·
an increase in direct labor and other related expenses of  $1,260 for additional staff support .
 
        Significant changes in gross profit for the years ended December 31, 2011 and 2010 were attributable to the following items:
 
 
·
a decrease in website development services of $ 102,113 ;
 
·
a decrease in website hosting fees of $ 108,114 for monthly hosting of client websites;
 
·
an increase in amortization expense related to patent costs of $4,454;
 
·
an increase in sub-contracted design fees of $ 75,733 due to the creation and development of additional software;
 
 
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·
a decrease in bartered services expense of $23,249;
 
·
an increase in direct labor of  $ 138,562 for additional staff support; and
 
·
an increase in website hosting expenses of $15,918.
 
General and Administrative Expenses
 
General and administrative expenses for the six months ended June 30, 2012 were $ 287,853 as compared to $ 423,860 for the six months ended June 30, 2011 .
 
Significant changes in general and administrative expenses for the six months ended June 30, 2012 and 2011 were attributable to the following items:
 
 
·
a decrease in professional fees of $ 97,500 due to $97,500 for the services of a valuation consultant in 2011 that did not recur in 2012 ;
 
·
a decrease in legal , accounting and audit fees of $ 22,991 resulting from the CMGO acquisition in March 2010 and additional audit requirements during 2011 ;
 
·
a dec rease in staff salaries and wages of $ 30,617 , primarily due to a decrease in staffing;
 
·
an increase in rent expense of $17,749 due to additional office space leased; and
 
·
an increase in other general and administrative expenses of $1,820.
 
General and administrative expenses for the year ended December 31, 2011 were $ 810,341 as compared to $ 644,908 for the year ended December 31, 2010 .
 
Significant changes in general and administrative expenses in the year 2011 over 2010 were attributable to the following items:
 
 
·
an increase in professional fees of $127,500 due primarily to $97,500 for the services of a valuation consultant in 2011;
 
·
an increase in legal, accounting and audit fees of $23,161 resulting from the CMGO acquisition in March 2010 and additional audit requirements;
 
·
a decrease in bad debt expense of $84,847, resulting from the initial allowance for doubtful accounts in expensed in 2010 of $87,000, compared to $2,153 of uncollectible receivables expensed in 2011;
 
·
an increase in executive salaries and wages of $77,615, primarily due to an increase in executive compensation as provided for in the employment agreements entered into and commencing April 1, 2010;
 
·
an increase in rent expense of $15,611 due to additional office space leased in 2011; and
 
·
a decrease in other general and administrative expenses of $6,391.
 
 
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Liquidity and Capital Resources
 
Working Capital
At June 30,
 
At December 31,
 
2012
 
2011
   
2010
 
Current Assets
  $ 105,614     $ 70,188     $ 39,954  
Current Liabilities
    1,001,057       804,255       577,585  
Working Capital (Deficit)
  $ (895,443 )   $ (734,067 )   $ (537,631 )

AE had cash in the amount of $ 25,953 as of June 30, 2012 , $ 27,426 as of December 31, 2011 , and $ 3,611 as of December 31, 2010 . AE had a working capital deficit of $ 895,444 as of June 30, 2012 , $ 734,067 as of December 31, 2011 , and $ 537,631 as of December 31, 2010 .
 
During the year ended December 31, 2010, AE repaid the CEO $100,000 of advances made to AE in prior years. The advances did not bear interest, were unsecured and due on demand.
 
During the year ended December 31, 2011, AE entered into several promissory notes with one of its officers. The promissory notes total $1,084,224, bore interest at 15% and were due before August, 2011.  On August 30, 2011, AE and the officer entered into a modified promissory note agreement in which the nine promissory notes (the “Notes”) totaling $1,084,224 were modified into one promissory note of $1,084,224 (the “Modified Note”). Any interest accrued on the Notes prior to the modification were adjusted and recalculated at a rate of 7% per annum. Any penalties assessed on the Notes prior to August 30, 2011 were waived. Interest was accrued at a rate of 7% per annum commencing August 31, 2011. The term of the Modified Note extends to August 31, 2013. The Modified Note is convertible into common stock of AE at a conversion price of $0.25 per share by August 31, 2013. As of June 30, 2012, none of the Modified Note has been converted. On December 16, 2011, an additional $3,500 was loaned to AE by the officer, which amount is interest free and payable upon demand. No payments of principal or interest were made during 2011 or the six months ended June 30, 2012. Accrued interest in the amount of $0, $158,116, and $0 has been expensed for the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively, and has been included with principal for a total amount of $1,245,840, $1,245,840 and $0 as Related Party Loans Payable as of June 30, 2012, December 31, 2011 and 2010, respectively.
 
During the six months ended June 30, 2012, AE received loans totaling $215,000 from one affiliate.  The loans bear no interest, and are payable upon demand.
 
As of June 30, 2012, December 31, 2011 and December 31, 2010, Related Party Loans totaled $1,460,840, $1,245,840 and $0, respectively.
 
As of June 30, 2012, December 31, 2011 and December 31, 2010, there were Related Party Payables of $525,193, $398,270 and $0, respectively, for services performed by related parties.
 
As of June 30, 2012, December 31, 2011 and December 31, 2010, there were outstanding receivables of $14,750, $13,125 and $0, respectively, for services performed for related parties.
 
For the six months ended June 30, 2012, and the years ended December 31, 2011 and 2010, there were revenues earned of $1,500, $12,500 and $19,850, respectively, for services performed for related parties. .
 
 
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AE has suffered recurring losses from operations of $364,256, $1,744,402 and $832,306 for the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively. In addition, AE had an accumulated deficit of $3,562,247, $3,197,991 and $1,453,589 and a working capital deficit of $895,444, $734,067 and $537,631 as of June 30, 2012, December 31, 2011 and December 31, 2010, respectively. . The continuation of AE is dependent upon AE attaining and maintaining profitable operations and raising additional capital as needed. AE’s management anticipates that it will have to raise additional funds through private placements of AE’s equity securities and/or debt financing to complete AE’s business plan. There is no assurance that the financing will be completed as planned or at all. If AE’s management is unable to secure adequate capital to continue AE’s planned operations, AE’s  stockholder s may lose some or all of their investment and AE’s business may fail.
 
AE’s principal sources of funds have been from sales of its common stock and loans from affiliates.
 
 
 
The following information is as of the date of this prospectus with respect to those persons who are serving as AE’s directors and executive officers.
 
Name
 
Age
 
Director/Position
Edward W. Withrow III
 
47
 
Director
Nathaniel T. Bradley
 
36
 
Director, Chief Executive Officer , President
Sean Bradley
 
31
 
Director, Chief Technology Officer, Vice President, Secretary
James Crawford
 
31
 
Director, Chief Operating Officer, Treasurer
Constantine S. Potamianos
 
46
 
Chief Legal Officer, General Counsel
         
 
Edward W. Withro w III.   Mr. Withrow has served as a director of AE since August 2012. With over 20 years experience as a financier, broker, manager, marketer and developer of innovations in various industries, Mr. Withrow has developed an expertise in finding small undervalued and underfunded companies and building them up through his leadership in strategic initiatives and business development activities. In 2000, Mr. Withrow founded Huntington Chase Financial Group, LLC, and Huntington Chase, Ltd. to engage in venture capital, private equity and merchant banking activities. From 2000 until the present , Mr. Withrow acquired, restructured, merged, created and was a senior advisor to approximately 10 companies. In 2002, Mr. Withrow became the CEO of Reward Enterprises, Inc., a public company and early adopter of VoIP technology. Mr. Withrow also founded Symphony Card, LLC , an issuer of stored value debit cards. In 2004 , Mr. Withrow became the CEO of Addison-Davis Diagnostics, Ltd., a leading edge point-of-care diagnostic company. In 2005, he was the President of The Cabo Group, Ltd., a publicly traded company whose primary functions were wholesale marketing and distribution of retail products.   In 2006, Mr. Withrow became the President and CEO of Montecito Bio Sciences, Ltd., a multi-faceted medical diagnostics company.  In 2008, Mr. Withrow founded Ecologic Transportation, Inc., a publicly traded company and is presently its Chairman.  Mr. Withrow also founded Parallax Diagnostics, Inc., a fully reporting company headquartered in Cambridge, M assachusetts , currently in its developmental stage.
 
 
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Mr. Withrow has maintained a business relationship with AudioEye, Inc. since 2008, contracting AE’s services for the design and development of various websites for Mr. Withrow’s businesses, and has a comprehensive knowledge of the capabilities of the AE product.  Furthermore, Mr. Withrow, having an extensive background in corporate restructuring, has acted as strategic advisor to AE since 2009, and has the leadership skills and experience required by AE during its transitions towards a successful publicly traded company.
 
Mr. Withrow is married with one child and lives in the Los Angeles, C alifornia area.  He works with Planet Hope a Los Angeles based foundation that works with abused children and battered women.
 
Nathaniel T. Bradley. Mr. Bradley served as a director of AE from the company’s founding in 2005 to the present and as Chief Executive Officer and President since July 2007. Mr. Bradley is a recognized pioneer and active expert in the new media internet technology sector. He is the named inventor of several internet technology patents and patents pending with U.S. Patent and Trademark Office. Over the past decade, Mr. Bradley has been involved in the invention, reduction to practice, commercial licensing, and enforcement of foundational internet and mobile technology patents. In addition to managing the growth of AE's patent portfolio through invention, Mr. Bradley is developing an intellectual property operation at the University of Arizona Science & Technology Park in Tucson. Prior to AE, Mr. Bradley was Chairman of the Board of Modavox®, founder and Managing Member of Kino Digital, Kino Communications, Kino Interactive and currently serves as the Chief Technology Officer for Augme Technologies, Inc and its subsidiary Hipcricket, inc. and currently serves as a managing member of Bradley Brothers, LLC, an Arizona-based investment company. Previous to his career in the technology field, which began in 1999, Mr. Bradley was a General Manager for Intercontinental Hotels and a marketing manager for The Westin La Paloma Resort. Mr. Bradley lives in Tucson, Arizona with his wife and two sons.
 
Sean Bradley . Mr. Bradley has been involved with AE from the company’s founding in 2005 to the present and has served as Vice President and Secretary since April 2010, and as a director and Chief Technology Officer since August 2012.     Mr. Bradley has co -founded several technology companies, including Kino Digital, LLC and Kino Communications, LLC, from 1999-2005.   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.  Over the past nine years, he has led an international team of software developers, has produced global webcasting technologies, and is planning, designing and managing the fulfillment of intellectual property assets, including the next generation mobile marketing solutions for industry leading Hipcricket. In the past Mr. Bradley was chief arch i tect 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. In addition to his role at AE, Mr. Bradley is a managing member of Bradley Brothers, LLC, an Arizona-based investment company.
 
James Crawford. Mr. Crawford has been involved with AE from the company’s founding in 2005 to the present and has served as a director, Chief Operating Officer and Treasurer since August 2012. Mr. Crawford was a founding member of Kino Interactive, LLC, a developer of enhanced communication software and digital media solutions, and of AE. Mr. Crawford’s experience as an entrepreneur spans the entire life cycle of companies from start - up capital to compliance officer and director of reporting public companies. Prior to his involvement as Chief Operating Officer of AE, Mr. Crawford served as a director and officer of Augme Technologies, Inc. beginning March 2006, and assisted the company in maneuvering through the initial challenges of acquisitions executed by the company through 2011 that established the company as a leading mobile marketing company in the
 
 
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United States. Mr. Crawford is experienced in public company finance and compliance functions. He has extensive experience in the area of intellectual property creation, management and licensing.  Prior to AE, Mr. Crawford served on the board of directors Modavox® and Augme Technologies, and as founder and managing member of Kino Digital, Kino Communications and Kino Interactive; and currently continues to serve as the Chief Operating Officer for Augme Technologies, Inc and its subsidiary Hipcricket, Inc.
 
Constantine S. Potamianos:   Mr. Potamianos has served as AE’s outside corporate counsel from the company’s founding in 2005 and as Chief Legal Officer and General Counsel since January 2012. From June 2009 to December 2011, Mr. Potamianos was a partner at Duval & Stachenfeld, LLP, a noted New York law firm that primarily works with large institutional investors and hedge funds. Mr. Potamianos served as the co-leader of the firm’s Corporate Practice. Prior to that, from March 2005 to May 2009, Mr. Potamianos was part of the Corporate and Securities group in the New York office of international law firm Greenberg Traurig, LLP. Mr. Potamianos is an experienced business lawyer who has assisted numerous public and private companies with a broad range of matters including corporate governance, public and private financings, commercial transactions, mergers and acquisitions, securities registration, SEC reporting, technology licensing, litigation, and bankruptcy and corporate restructurings. In the late 1990’s, Mr. Potamianos also served as Vice President – Investment Banking and team leader for the Internet/Networking Group for a New York-based merchant banking firm where he negotiated and structured acquisitions, principal transactions as well as private equity placements with numerous public and private companies, during which time he also served on the boards of directors of various portfolio companies. In addition to his legal and finance experience, Mr. Potamianos has experience in private sector business operations as well as government. Following initial military service, Mr. Potamianos gained experience in systems analysis, business operations and administration, serving as an administrative officer in the federal government and afterwards founding and managing an information systems consulting company and a RF (radio frequency) engineering services company. Mr. Potamianos holds a BA degree, magna cum laude , in Economics and Government from Georgetown University as well as a BS degree in Computer and Information Science from the University of Maryland. Mr. Potamianos received his JD degree as well as his MBA from Georgetown University, during which he also completed the Landegger Honors Program in International Business Diplomacy through the School of Foreign Service, served as an editor on law review, and was also inducted into Beta Gamma Sigma, the national business school honor society.
 
 
 
Following the Separation, the standing committees of AE’s board of directors will consist of Audit and Compensation.  The members of these standing committees will be appointed by and will serve at the discretion of the board of directors of AE.
 
Audit Committee .  The Audit Committee is expected to be responsible for overseeing AE’s accounting and financial reporting processes.  In addition, the Audit Committee will be responsible for periodically discussing AE’s policies for the assessment and management of risks to AE that could materially and adversely impact AE’s financial position or operating results, or the financial reporting of the same, with management and AE’s internal auditors and independent accountants, as well as AE’s plans to monitor, control and minimize risks pursuant to such policies.  The Audit Committee will also be responsible for primary risk oversight relating to AE’s financial reporting, accounting and internal controls, and will oversee risks relating to insurance matters (including AE’s self-insurance programs), general and professional liability and workers’ compensation.
 
 
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Compensation Committee .  The Compensation Committee will oversee and determine the compensation of AE’s Chief Executive Officer and other executive officers, including salaries, bonuses, grants of stock options and other forms of equity-based compensation, approve all employment and severance agreements for executive officers, approve significant changes to benefit plans and perform such other functions as the board of directors of AE may direct.  The Compensation Committee will also administer AE’s stock incentive plans and make recommendations to the board of directors of AE concerning the compensation of the directors.
 
It is expected that the Compensation Committee will take into account recommendations of AE’s Chief Executive Officer, in determining the compensation (including stock awards) of executive officers other than the Chief Executive Officer.  Otherwise, it is not expected that AE’s officers will have any role in determining the form or amount of compensation paid to the executive officers of AE.  In addition, the Compensation Committee will retain the power to appoint and delegate matters to a subcommittee but any such subcommittee does not have final decision-making authority on behalf of the Compensation Committee.  The Compensation Committee is not currently expected to appoint or delegate any matters to a subcommittee.  The Compensation Committee will meet as necessary to formulate its compensation decisions.  Such meetings may include one or more of AE’s executive officers or consultants retained by the Compensation Committee.
 
Stockholder and Interested Party Communications with Directors
 
Following the Spin-off, AE stockholders may send written communications to AE’s board of directors or to specified individual directors on the board, c/o AE’s Secretary at 875 North Michigan Avenue, Chicago, Illinois 60601.  All mail received will be opened and communications that relate to matters that are within the scope of the responsibilities of the board of directors, other than solicitations, junk mail and frivolous or inappropriate communications, will be forwarded to AE’s board of directors or any specified individual director, as applicable.  
 
 
Members of the board of directors of AE do not normally receive cash compensation for their services as directors, although some directors are reimbursed for reasonable expenses incurred in attending board or committee meetings.  It is expected that members of the board of directors of AE who are not employees will receive the grant of equity compensation in amounts to be determined.
 
 
The board of directors of AE is expected to adopt a written Related Person Transaction Policy prior to completion of the Spin-off.  The purpose of th is polic y will be to describe the procedures used to identify, review, approve and disclose, if necessary, any transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which (i) AE, was, is or will be a participant, (ii) the aggregate amount involved exceeds $120,000 and (iii) a related person has or will have a direct or indirect interest.  For purposes of these policies, a related person is (i) any person who is, or at any time since the beginning of AE’s, as applicable, last fiscal year was, an executive officer, director or director nominee of such company, (ii) any person who is known to be the beneficial owner of more than 5% of such company’s common stock, (iii) any immediate family member of any of the foregoing persons, or (iv) any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position, or in which all the related persons, in the aggregate, have a 10% or greater beneficial interest.
 
 
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It is expected that under these policies, the Audit Committee of AE will be responsible for reviewing, approving or ratifying each related person transaction or proposed transaction.  In determining whether to approve or ratify a related person transaction, the Audit Committee would consider all relevant facts and circumstances of the related person transaction available to the Audit Committee and would approve only those related person transactions that are in, or not inconsistent with, the best interests of AE and its stockholders, as the Audit Committee determines in good faith.  No member of the Audit Committee would be permitted to participate in any consideration of a related person transaction with respect to which that member or any of his or her immediate family is a related person.
 
In addition, there will continue to be an ongoing relationship between AE and CMGO following the Separation.  See “Relationship Between AE and CMGO After the Separation.”
 
 
As of August 15, 2012, 80% of the outstanding shares of common stock of AE were owned by AEAC and 20% by CMGO.  None of the persons expected to become the directors or executive officers of AE currently owns any common stock of AE.  However, if the persons who become the directors or executive officers of AE own shares of CMGO common stock as of the record date for the Spin-off, those persons will receive a distribution of shares of AE common stock in the Spin-off.  Additionally, Edward W. Withrow, III, Nathaniel T. Bradley, Sean Bradley and James Crawford are stockholder s of AEAC and upon the consummation of the distribution of AE stock to the stockholder s of AEAC, will secure shares of AE as a result thereof.
 
The following table sets forth certain information regarding the beneficial ownership of CMGO common stock assuming the AEAC Distribution had occurred on August 15, 2012, for each of AE’s directors and executive officers.
 
         
Post Separation/
Pre-Debt Conversion
 
Class
 
Name
   
Shares
     
Pct (1)
 
Common
 
Nathaniel T. Bradley
   
5,648,034
(2)(3)
   
18.82
Common
 
Sean Bradley
   
5,648,034
(3)
   
18.82
Common
 
Edward W. Withrow III
   
1,129,607
(4)
   
3.76
Common
 
James Crawford
   
340,689
     
1.14
Common
 
Constantine S. Potamianos
   
     
 
 
(1)
Based on 30,005,185 shares outstanding.
(2)
Does not include any shares issuable upon conversion of AE’s convertible notes issued to Nathaniel T. Bradley or the AE Debentures.
(3)
Bradley Brothers, LLC is the record owner of 11,296,067 shares; Nathaniel T. Bradley and Sean Bradley are each 50% owners of Bradley Brothers, LLC, and share investment power with respect to such shares.
(4)
Huntington Chase Financial Group, LLC is the record owner of the shares. Mr. Withrow is its Managing Member.
 
 
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Market Information Regarding AE
 
The market price of AE common stock to be received by CMGO stockholders after the completion of the Spin-off cannot be accurately predicted.  The historical trading prices of CMGO common stock are not necessarily indicative of the future trading prices of AE common stock because the current stock price of CMGO reflects the current market valuation of CMGO’s current business and assets and does not necessarily take into account the changes in CMGO’s business and operations that will occur in connection with the Separation.  See “Risk Factors” for a discussion of factors that may affect the market price of AE common stock following the Spin-off .
 
Restrictions on Sale of AE Common Stock to be Received in Connection with the Spin-off
 
Shares of AE common stock to be distributed in connection with the Spin-off will be freely transferable under the Securities Act, except for the restrictions on transfer and ownership applicable to affiliates of AE.  Shares received in connection with the Spin-off by persons who may be deemed to be affiliates of AE may be sold, transferred or otherwise disposed of only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.  Persons who may be deemed to be affiliates of AE after the Spin-off generally include individuals or entities that control are controlled by or are under common control with AE, as applicable, and may include certain of their officers, directors or principal stockholders.  The registration statement of which this prospectus forms a part does not cover the resale of shares of AE common stock to be received by their affiliates in the Spin-off.
 
 
The following is a summary description of the material terms of AE’s capital stock as set forth in AE’s charter documents and that govern the rights of holders of AE common stock.
 
While the following attempts to describe the material terms of AE’s capital stock, the description may not contain all of the information that is important to you.  You are encouraged to read the full text of AE’s certificate of incorporation and by-laws , forms of which are included as exhibits to the registration statement of which this prospectus is a part, as well as the provisions of applicable Delaware law.
 
At the time of the Spin-off, AE’s authorized capital stock is expected to consist of 100,000,000 shares of common stock, par value $0. 00 001 per share, and 10,000,000 shares of preferred stock, par value $0. 00 001 per share.  It is expected that AE will have 30,005,185 shares of common stock issued and outstanding upon completion of the AEAC Distribution.  No shares of preferred stock of AE will be issued and outstanding at the time of the Spin-off.
 
Common Stock
 
All of the shares of AE common stock issued in the Spin-off will be duly authorized, fully paid and non-assessable.  Subject to the relative rights, limitations and preferences of the holders of any then outstanding preferred stock, holders of AE common stock will be entitled to certain rights, including (i) to share ratably in dividends if, when and as declared by AE’s board of directors out of funds legally available therefor and (ii) in the event of liquidation, dissolution or winding up of AE, to share ratably in the distribution of assets legally available therefor, after payment of debts and expenses. Each
 
 
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outstanding share of AE common stock will entitle the holder to one vote on all matters submitted to a vote of the stockholders, including the election of directors, and the holders of shares of AE common stock will possess the exclusive voting power.  The holders of AE common stock will not have cumulative voting rights in the election of directors or preemptive rights to subscribe for additional shares of AE capital stock.  AE’s by-laws require that, in uncontested elections, each director be elected by the majority of votes cast with respect to such director.  This means that the number of shares voted “for” a director nominee must exceed the number of votes cast “against” that nominee in order for that nominee to be elected.
 
Holders of shares of AE common stock will have no preference, conversion, exchange, sinking fund, redemption or appraisal rights.  The rights, preferences and privileges of holders of AE common stock will be subject to the terms of any series of preferred stock which AE may issue in the future.
 
Preferred Stock
 
The board of directors of AE will have the authority, within the limitations and restrictions stated in its certificate of incorporation, to authorize the issuance of shares of preferred stock, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, preemptive rights and the number of shares constituting any series or the designation of such series.  The issuance of preferred stock could have the effect of decreasing the market price of AE common stock and could adversely affect the voting and other rights of the holders of AE common stock.  AE has no current plans to issue any shares of preferred stock.
 
Anti-Takeover Effect of Delaware Law and AE’s Certificate of Incorporation and By-laws
 
AE is governed by the DGCL.  Certain provisions of the DGCL and AE’s certificate of incorporation and by-laws could make more difficult the acquisition of AE by means of a tender offer, a proxy contest or otherwise.
 
Vacancies on Board of Directors
 
AE’s certificate of incorporation provides that any newly created directorships resulting from any increase in the authorized number of directors or any vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause will be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board.
 
Stockholder Meetings
 
Under AE’s certificate of incorporation and subject to the rights of holders of preferred stock, if any, only a majority of the members of the board of directors, the chairman of the board of directors or the Chief Executive Officer or the President may call special meetings of stockholders.  This provision will make it more difficult for stockholders to take action opposed by the board of directors.
 
Authorized but Unissued Shares
 
AE’s authorized but unissued shares of common stock will be available for future issuance without stockholder approval.  AE may issue additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans.  The existence of authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of AE by means of a proxy contest, tender offer, merger or otherwise.
 
 
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The overall effect of the foregoing provisions may be to deter a future tender offer.  AE stockholders might view such an offer to be in their best interest should the offer include a substantial premium over the market price of AE common stock at that time.  In addition, these provisions may have the effect of assisting AE’s management to retain its position and place it in a better position to resist changes that the stockholders may want to make if dissatisfied with the conduct of the business of AE.
 
Business Combinations
 
AE is subject to Section 203 of the DGCL, which regulates corporate acquisitions.  In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder, unless:
 
 
·  
the board of directors approved the transaction in which the stockholder became an interested stockholder prior to the date the interested stockholder attained such status;
 
 
·  
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholders owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
 
 
·  
the business combination is approved by a majority of the board of directors and by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.
 
Trading
 
AE expects that, at some date following completion of the Spin-off, the shares of AE common stock will trade on the OTCQB, the OTC Bulletin Board or the new BX Venture Market operated by NASDAQ.
 
Indemnification of Directors and Executive Officers
 
As authorized by Section 102(b)(7) of the DGCL, AE’s certificate of incorporation will provide that a director of AE will not be liable to AE or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption for liability or limitation thereof is not permitted under the DGCL.  The DGCL provides that the liability of a director may not be limited (i) for any breach of the director’s duty of loyalty to AE or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for liability for payments of dividends or for stock purchases or redemptions in violation of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit.
 
 
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While the certificate of incorporation will provide directors with protection from awards for monetary damages for breaches of their duty of care, it does not eliminate such duty.  Accordingly, the certificate of incorporation will have no effect on the availability of equitable remedies, such as an injunction or rescission based on a director’s breach of such director’s duty of care.
 
In addition, AE’s by-laws will provide that AE will indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a “Covered Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director of AE or an officer of AE elected by its board of directors or, while a director of AE or an officer of AE elected by its board of directors, is or was serving at the request of AE as a director, officer, employee or agent of another company or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such Covered Person.  Notwithstanding the preceding sentence, except as otherwise provided in the bylaws, AE will be required to indemnify a Covered Person in connection with a proceeding (or part thereof) commenced by such Covered Person only if the commencement of such proceeding (or part thereof) by the Covered Person was authorized by the board of directors of AE.
 
AE will enter into indemnification agreements with each of its executive officers and directors providing for the indemnification of, and advancement of expenses to, each such person in connection with claims, suits or proceedings arising as a result of such person’s service as an officer or director of AE.  AE also will maintain directors’ and officers’ liability insurance policies insuring directors and officers of AE for certain covered losses as defined in the policies.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of AE pursuant to the foregoing provisions, AE has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
 
The validity of the shares of AE common stock to be issued in the Spin-off will be passed upon by TroyGould PC.
 
 
The unaudited financial statements of AudioEye, Inc. as of June 30, 2012 and 2011, and for the six months then ended , and the audited financial statements as of December 31, 2011 and 2010 , and for the years then ended , incorporated in this prospectus have been so incorporated in reliance on the consent and audit report of MaloneBailey, LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
 
 
AE will file annual, quarterly and current reports, proxy statements and other information with the SEC.  You may read and copy any reports, statements or other information filed by AE at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.  20549.  Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.  You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates, or from commercial document retrieval services.
 
 
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The SEC maintains a website that contains reports, proxy statements and other information, including those filed by AE , at www.sec.gov.  You will also be able to access the SEC filings and obtain other information about AE at its website, www.audioeye.com . The information contained in those websites is not incorporated by reference into this prospectus.
 
AE has filed a registration statement on Form S-1 to register the shares of stock to be distributed in connection with the Spin-off.  This prospectus is part of the registration statement of AE and is a prospectus of AE.
 
 
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13. Other Expenses of Issuance and Distribution.
 
The following is a statement of the expenses to be incurred by AE in connection with the distribution of the securities registered under this registration statement. All amounts are estimated except the SEC registration fee.
 
Item
 
Amount
 
SEC Registration Fee
  $ 7.00  
Printing Fees and Expenses
    10,000.00  
Accounting Fees and Expenses
    35,000.00  
Legal Fees and Expenses
    100,000.00  
Transfer Agent Fees
    5,000.00  
Miscellaneous
    5,000.00  
Total
  $ 155,007.00  
 
Item 14. Indemnification of Directors and Officers.
 
As authorized by Section 102(b)(7) of the DGCL, AE’s certificate of incorporation provides that a director of AE will not be liable to AE or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption for liability or limitation thereof is not permitted under the DGCL. The DGCL provides that the liability of a director may not be limited (i) for any breach of the director’s duty of loyalty to AE or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for liability for payments of dividends or for stock purchases or redemptions in violation of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit.
 
 
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While the certificate of incorporation will provide directors with protection from awards for monetary damages for breaches of their duty of care, it does not eliminate such duty. Accordingly, the certificate of incorporation will have no effect on the availability of equitable remedies, such as an injunction or rescission basd on a director’s breach of such director’s duty of care.
 
In addition, AE’s by-laws will provide that AE will indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a “Covered Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director of AE or an officer of AE elected by its board of directors or, while a director of AE or an officer of AE elected by its board of directors, is or was serving at the request of AE as a director, officer, employee or agent of another company or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except as otherwise provided in the bylaws, AE will be required to indemnify a Covered Person in connection with a proceeding (or part thereof) commenced by such Covered Person only if the commencement of such proceeding (or part thereof) by the Covered Person was authorized by the board of directors of AE.
 
AE will maintain directors ’ and officers’ liability insurance policies insuring directors and officers of AE for certain covered losses as defined in the policies.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of AE pursuant to the foregoing provisions, AE has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
Item 15. Recent Sales of Unregistered Securities.
 
None.
 
Item 16. Exhibits and Financial Statement Schedules.
 
The following exhibits are filed herewith or incorporated herein by reference.
 
Exhibit No.
 
Description
3.1*
 
Certificate of Incorporation of AudioEye, Inc. , as amended
3.2*
 
By-laws of AudioEye, Inc.
3.3
 
5.1
 
10.1*
 
Master Agreement dated as of September 22, 2011 between CMG Holdings Group, Inc. and AudioEye Acquisition Corp oration
10.2*
 
Form of Royalty Agreement between CMG Holdings Group, Inc. and AudioEye, Inc.
10.3*
 
Form of Services Agreement between CMG Holdings Group, Inc. and AudioEye, Inc.
 
 
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10.4*
 
Form of Share Exchange Agreement among the stockholder s of AudioEye Acquisition Corp oration and CMG Holdings Group, Inc.
10.5*
 
Convertible Promissory Note dated August 31, 2011 between AudioEye, Inc. and Nathaniel T. Bradley .
10.6*
 
Termination and Release Agreement dated October 24, 2011 between Maryland Technology Development Corp. and AudioEye, Inc.
10.7*
 
Promissory Note dated October 24 2011 between Maryland Technology Development Corp. and AudioEye, Inc.
10.8*
 
Customer Contract dated August 24, 2011 between Kenneth G. Mills Foundation and AudioEye, Inc. for E-Commerce Multi-Media Development Services
10.9*
 
Customer Contract dated December 29, 2010 between NextMed Management Services Inc. and AudioEye, Inc, for Software Development Services
10.10*
 
Customer Contract dated June 9, 2010 between Southern Arizona Attraction Alliance and AudioEye, Inc. for Custom Website Development
10.11
 
10.12
 
23.1
 
Consent of MaloneBailey, LLP
23.2
 
Consent of TroyGould PC (included in Exhibit 5.1, above)
 
* Previously filed
 
Item 17. Undertakings.
 
(a)           The undersigned Registrant hereby undertakes:
 
(1)           To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
 
(i)           to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
 
(ii)           to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement; and
 
 
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(iii)           To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement.
 
(2)           That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
 
(3)           To remove from registration by means of a post-effective amendment any of the securities being registered, which remain unsold at the termination of the offering.
 
(4)           That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
 
(i)           If the Registrant is relying on Rule 430B:
 
(A)           Each prospectus filed by the Registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
 
(B)           Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
 
(ii)           If the Registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
 
 
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(5)           That, for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
 
(i)            Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424;
 
(ii)           Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant;
 
(iii)          The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and
 
(iv)          Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.
 
(b)           The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
(c)           Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tucson, State of Arizona, on October 1 , 2012.
 
  AUDIOEYE, INC.
     
  By:
/ s/ Nathaniel T. Bradley  
   
Name: Nathaniel T. Bradley
   
Title:   President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities and on the date indicated.
 
Signature
 
Title
 
Date
         
/s/ Nathaniel T. Bradley
 
President and Chief Executive Officer
 
October 1, 2012
Nathaniel T. Bradley
 
(Principal Executive Officer)
   
         
/s/ Sean Bradley
 
Chief Technical Officer, Vice President , Secretary and Director
 
October 1, 2012
Sean Bradley
       
         
/s/ James Crawford
 
Chief Operating Officer, Treasurer  and Director
 
October 1 , 2012
James Crawford
       
         
/s/ Edward W. Withrow III
 
Director
 
October 1 , 2012
Edward W. Withrow III
       
         
The foregoing constitutes all of the members of the board of directors of AudioEye, Inc.
 
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AudioEye, Inc. S-1/A
EXHIBIT 3.3
 
 
State of Delaware
Secretary of State
Division of Corporations
Delivered 10:32 AM 08/17/2012
FILED 10:32 AM 08/17/2012
SRV 120946235 - 3974015 FILE
 
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
AUDIOEYE, INC.
 
(a Delaware corporation)
 
The undersigned, James Ennis, hereby certifies that:
 
1.  He is the Chief Financial Officer and Director of AudioEye, Inc. (the “Corporation”), a Delaware corporation, and is duly authorized by the unanimous written consent of the Board of Directors of the Corporation to execute this instrument.
 
2.   The present name of the Corporation is “AudioEye, Inc.” The Corporation filed its Certificate of Incorporation with the Secretary of State of the State of Delaware on May 20, 2005.
 
3.   This Certificate of Amendment of the Certificate of Incorporation was duly approved by the Corporation’s Board of Directors and duly adopted by written consent of the stockholders of the Corporation in accordance with the applicable provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware.
 
4.   The Fourth Article of the Certificate of Incorporation of the Corporation is hereby amended to read in its entirety as follows:
 
FOURTH : Effective immediately, upon this Amended Certificate of Incorporation becoming effective under the General Corporation Laws of the State of Delaware, and without any further action by the holders of such shares, every one (1) outstanding share of the Corporation’s Common Stock, par value $0.00001 per share (“Common Shares”), shall be forward split into eleven and 78299032/100 (11.78299032) validly issued, fully paid and non-assessable shares of Common Stock.
 
The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 110,000,000, of which 100,000,000 shares shall be Common Stock of the par value of $.00001 per share and 10,000,000 shares shall be Preferred Stock of the par value of $.00001 per share.
 
A. Preferred Stock . The Board of Directors is expressly granted authority to issue shares of the Preferred Stock, in one or more series, and to fix for each such series such voting powers, full or limited, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series (a “Preferred Stock Designation”) and as may be permitted by the General Corporation Law of the State of Delaware. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital slock of the Corporation entitled to vote generally in the election of directors (the “Voting Stock”), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation.

 
 

 
 
B. Common Stock . Except as otherwise required by law or as otherwise provided in any Preferred Stock Designation, the holders of the Common Stock shall exclusively possess all voting power. The powers, preferences and rights of the shares of Common Stock are as follows:
 
1. Dividends . The holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in property, or in shares of Common Stock.
 
2. Voting Rights . At every annual or special meeting of stockholders of the Corporation, every holder of Common Stock shall be entitled to one vote, in person or by proxy, for each share of Common Stock standing in his name on the books of the Corporation.
 
3. Dissolution, Liquidation or Winding-Up . In the event of any dissolution, liquidation or winding-up of the affairs of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation, the holders of all outstanding shares of Common Stock shall be entitled to share ratably in the remaining net assets of the Corporation.
 
IN WITNESS WHEREOF , the Corporation has caused this Certificate of Amendment of the Certificate of Incorporation to be executed this 16th day of August, 2012.
 
 
 
James Ennis
 
Chief Financial Officer and Director
 




AudioEye, Inc. S-1/A
 
EXHIBIT 5.1
TroyGould PC
1801 Century Park East, 16th Floor
Los Angeles, California 90067
 
October 1, 2012
 
AudioEye, Inc.
9070 S. Rita Road, Suite 1450
Tucson, Arizona 85747

Ladies and Gentlemen:

You have requested our opinion in connection with the filing by AudioEye, Inc., a Delaware corporation (the “Company”), of a Registration Statement on Form S-1, as amended (the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”), including a related prospectus made part of the Registration Statement (the “Prospectus”), for the distribution by spin-off of 1,500,259 shares of common stock (the “Shares”).
 
In connection with this opinion, we have examined and relied upon the Registration Statement and the Prospectus, the Company’s Certificate of Incorporation, as amended to date, the Company’s Bylaws, as amended to date, the originals or copies certified to our satisfaction of such other records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. We have assumed the genuineness and authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies thereof.
 
The law covered by our opinion is limited to the applicable statutory provisions of the Delaware General Corporation Law (“DGCL”) (including applicable rules and regulations promulgated thereunder and applicable reported judicial and regulatory determinations interpreting the DGCL). We neither express nor imply any opinion (and we assume no responsibility) with respect to any other laws or the laws of any other jurisdiction or with respect to the application or effect of any such laws.
 
This opinion is provided to the Company and the Commission for their use solely in connection with the transactions contemplated by the Registration Statement and may not be used, circulated, quoted or otherwise relied upon for any other purpose without our express written consent.
 
Based upon the foregoing, and in reliance thereon, we are of the opinion that the Shares, when issued in accordance with the terms and conditions set forth in the Registration Statement, will be duly authorized, validly issued, fully paid and nonassessable.
 
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement. In giving such consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the rules and regulations of the Commission thereunder.
 
 
Very truly yours,
   
 
/s/ TROYGOULD PC
 




AudioEye, Inc. S-1/A
 
Exhibit 10.11
 
PROMISSORY NOTE
 
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND THEREFORE THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT REGISTRATION THEREUNDER OR PURSUANT TO AN EXEMPTION FROM REGISTRATION.
 
$425,000
Tucson, Arizona
 
FOR VALUE RECEIVED , AudioEye, Inc., a Delaware corporation (hereinafter called the “ Borrower ” or the “ Company ”), hereby promises to pay to the order of CMGO Investors, LLC, or its successors (the “ Holder ”), the principal amount of Four Hundred Twenty-Five Thousand Dollars ($425,000), together with interest   thereon as provided below.  Subject to Section 1.6 hereof, all payments shall be in lawful currency of the United States of America.
 
The following terms shall apply to this Note:
 
ARTICLE I
PAYMENT AND DEFAULT-RELATED PROVISIONS
 
1.1             Payment .  On November 30, 2012 (the “ Maturity Date ”), unless previously paid, the entire principal amount of this Note together with all accrued and unpaid interest shall be due and payable in full.
 
1.2             Interest Rate .  Interest shall accrue on the outstanding principal balance of this Note at the annual rate of eight percent (8%).  Interest under this Note shall be calculated on the basis of a 360-day year for the actual days elapsed.
 
1.3             Order of Payments .  All payments made by Borrower hereunder (including, without limitation, any prepayments) shall be applied, first, to the payment of costs or expenses payable by Borrower hereunder, second, to the payment of accrued but unpaid interest, and last, to the reduction of the outstanding principal balance thereof.
 
1.4             No Setoff or Counterclaim .  All payments under this Note shall be made to the Holder without set-off, recoupment, counterclaim or other deduction whatsoever.
 
1.5             Waiver of Presentment and Enforcement .   All parties now or subsequently liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentation for payment, demand, notice of nonpayment or dishonor, protest and notice of protest and any and all lack of diligence or delay in collection or enforcement hereof.
 
 
 

 
 
ARTICLE II
CONVERSION RIGHTS
 
Conversion into the Borrower’s Common Stock .

(a)            Upon the occurrence and continuation of an Event of Default, the Holder shall have the right, but not the obligation, upon delivery to the Borrower of the Holder’s written request for conversion (a “ Notice of Conversion ”) at any time and from time to time after the occurrence of an Event of Default until this Note is fully paid, to convert all of the outstanding principal balance and accrued and unpaid interest on this Note into shares of Borrower’s Common Stock (the “ Conversion Shares ”) representing 10% of the Company’s issued and outstanding restricted shares of the Company’s common stock as of the date of the Notice Conversion (the “ Conversion Shares ”); provided, however, that the number of Conversion Shares shall not exceed 6,000,000 (the “ Maximum Number ”) (subject to adjustment as set forth in (d) and (e), below).  The Company shall deliver to the Holder within fifteen business days from the date of delivery of the Conversion Notice the Conversion Shares.
 
(b)            If the Borrower at any time shall consolidate with or merge into or sell or convey all or substantially all its assets to any other person or entity, this Note, as to the unpaid principal portion thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase such number and kind of shares or other securities and property as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the securities subject to the conversion or purchase right immediately prior to such consolidation, merger, sale or conveyance.  The foregoing provision shall similarly apply to successive transactions of a similar nature by any such successor or purchaser.  Without limiting the generality of the foregoing, the provisions of this Section 2.1 shall apply to such securities of such successor or purchaser after any such consolidation, merger, sale or conveyance.
 
(c)            If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the unpaid principal portion thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to acquire an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.
 
(d)            If the shares of Common Stock are subdivided or combined into a greater or lesser number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the number of Conversion Shares shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event.
 
 
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(e)            The number of Conversion Shares and the Maximum Number shall be proportionately reduced to the extent of any prepayment of the Note pursuant to Section 3.1 or Section 5.8 hereof.
 
ARTICLE III
COVENANTS
 
3.1             Application of Financing Proceeds .   Until the Note has been paid in full, the Company shall apply not less than 70% of the net proceeds from any financing to the repayment of the Note.
 
3.2             Registration .  As soon as reasonably practicable after the date hereof (but not later than sixty (60) days), AE shall amend the Registration Statement on Form S-1/A (File No. 333-177403) and use its reasonable efforts to have such Registration Statement declared effective thereafter.  In the event that such Registration Statement is not effective within eighteen (18) months from the date hereof, upon demand from the Holder (or its successor(s)), the Company shall file a separate registration statement covering, at least, the resale of the shares of Company stock owned by Holder or its successor(s) and use its reasonable efforts to have such registration statement declared effective.
 
ARTICLE IV
EVENT OF DEFAULT
 
The occurrence of any of the following events of default (“ Event of Default ”) shall make all sums of principal and interest then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable, all without demand, presentment or notice, or grace period, all of which hereby are expressly waived:
 
4.1             Failure to Pay Principal or Interest .  The Borrower fails to pay when due any portion of the principal, interest or other amount under this Note.
 
4.2             Breach of Covenant .  The Borrower breaches any covenant or other term or provision of this Note in any material respect and such breach, if subject to cure, continues for a period of twenty (20) calendar days after written notice to the Borrower from the Holder.
 
4.3             Breach of Representations and Warranties .  Any representation or warranty of the Borrower made herein, or in any agreement, statement or certificate given in writing pursuant hereto or in connection therewith shall be false or misleading.
 
4.4             Receiver or Trustee .  The Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed.
 
 
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4.5             Bankruptcy .  Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower.
 
4.6             Failure to Deliver Securities or Replacement Note .  The Borrower’s failure to timely deliver to the Holder Shares or other securities, or any replacement Note, pursuant to and in the form required by this Note.
 
4.7             Remedies of Holder are Cumulative .  The remedies of Holder as provided herein, and any one or more of them, whether in law or in equity, shall be cumulative and concurrent, and may be pursued singularly, successively or together at Holder’s sole discretion, and may be exercised as often as Holder may decide in its sole and absolute discretion.
 
ARTICLE V
MISCELLANEOUS
 
5.1             Failure or Indulgence Not Waiver .  No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
 
5.2             Notices .  Any notice herein required or permitted to be given shall be in writing and shall be deemed effectively given:  (a) upon personal delivery to the party notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) three days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt.  All communications shall be sent to the Borrower and Holder at the addresses on the signature page of this Note or at such other address as the Borrower or the Holder may designate by ten days advance written notice to the other parties hereto.
 
5.3             Amendment Provision .  The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented.
 
5.4             Assignability .  This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder.
 
5.5             Cost of Collection .  If default is made in the payment of this Note, the Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys’ fees.
 
 
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5.6             Governing Law .  This Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws.  Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of or in the federal courts located in the State of New York.  Both parties and the individual signing this Note on behalf of the Borrower agree to submit to the jurisdiction of such courts.  The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs.
 
5.7             Maximum Payments .  Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law.  In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower.
 
5.8             Prepayment .  This Note may be paid (in whole or in part) prior to the Maturity Date, in cash, without the consent of the Holder upon not less than 10 days’ prior notice from the Borrower to the Holder.
 
5.9             Time .  Time is of the essence as to all matters in and related to this Note.
 
5.10           Construction .  Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party against the other.
 
[Signature Page Follows]
 
 
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IN WITNESS WHEREOF , the Borrower has caused this Note to be signed in its name by its Chief Executive Officer on this 15 th day of August 2012.
 
   
AUDIOEYE, INC.
       
   
By:
/s/ Nathaniel T. Bradley
     
Name:
Nathaniel T. Bradley
     
Title:
President and Chief Executive Officer
         
Address for Holder:
 
32 SE Second Avenue, Unit 218
Delray Beach, Florida 33444
Attention: Craig Boden
       
 
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AudioEye, Inc. S-1/A
 
Exhibit 10.12
 
SECURITY AGREEMENT
 
This SECURITY AGREEMENT, dated as of August 15, 2012 (this “ Agreement ”), is among AudioEye, Inc., a Delaware corporation (the “ Company ”); AudioEye Acquisition Corp., a Nevada corporation (the “ Guarantor ” and together with the Company, the “ Debtors ”); and CMGO Investors, LLC, a Delaware limited liability company, its endorsees, transferees and assigns (collectively, the “ Secured Parties ”).
 
W I T N E S S E T H:
 
WHEREAS, the Secured Parties have made loans to CMG Holdings, Inc. (“CMGO”) evidenced by promissory notes of CMGO (the “ CMGO Notes ”) in the aggregate principal amount of $1,075,000;
 
WHEREAS, CMGO and the Guarantor have entered into a Master Agreement (as amended, the “ Master Agreement ”) pursuant to which, inter alia, CMGO has agreed to transfer 80% of the Company’s capital stock to the Guarantor provided that the Guarantors purchase or otherwise arrange for the payment of the CMGO Notes;
 
WHEREAS, the Guarantor is concurrently arranging the pay off of the CMGO Notes owed to the Secured Parties in part pursuant to the delivery of a promissory note of the Company in the principal amount of $425,000 (the “ AE Note ”)
 
WHEREAS, pursuant to a certain Guarantee, dated as of the date hereof (the “ Guarantee ”), the Guarantor has agreed to guarantee and act as surety for payment of the AE Note; and
 
WHEREAS, in order to induce the Secured Parties to accept the AE Note, each Debtor has agreed to execute and deliver to the Secured Parties this Agreement and to grant the Secured Parties, pari passu with each other Secured Party and through the Agent (as defined in Section 18 hereof), a security interest in certain property of such Debtor to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the AE Note and the Guarantor’s obligations under the Guarantee.
 
NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
 
1.            Certain Definitions .  As used in this Agreement, the following terms shall have the meanings set forth in this Section 1.  Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as “account”, “chattel paper”, “commercial tort claim”, “deposit account”, “document”, “equipment”, “fixtures”, “general intangibles”, “goods”, “instruments”, “inventory”, “investment property”, “letter-of-credit rights”, “proceeds” and “supporting obligations”) shall have the respective meanings given such terms in Article 9 of the UCC.
 
 
 

 
 
(a)           “ Collateral ” means the collateral in which the Secured Parties are granted a security interest by this Agreement and which shall include the following personal property of the Debtors, whether presently owned or existing or hereafter acquired or coming into existence, wherever situated, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith, and all dividends, interest, cash, notes, securities, equity interest or other property at any time and from time to time acquired, receivable or otherwise distributed in respect of, or in exchange for, any or all of the Pledged Securities (as defined below):
 
(i)           All goods, including, without limitation, (A) all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with any Debtor’s businesses and all improvements thereto; and (B) all inventory;
 
(ii)           All contract rights and other general intangibles, including, without limitation, all partnership interests, membership interests, stock or other securities, rights under any of the Organizational Documents, agreements related to the Pledged Securities, licenses, distribution and other agreements, computer software (whether “ off-the-shelf ”, licensed from any third party or developed by any Debtor), computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, and income tax refunds;
 
(iii)          All accounts, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each account, including any right of stoppage in transit;
 
(iv)          All documents, letter-of-credit rights, instruments and chattel paper;
 
(v)           All commercial tort claims;
 
(vi)          All deposit accounts and all cash (whether or not deposited in such deposit accounts);
 
(vii)         All investment property;
 
(viii)        All supporting obligations; and
 
(ix)          All files, records, books of account, business papers, and computer programs; and
 
(x)           the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(ix) above.
 
 
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Without limiting the generality of the foregoing, the “ Collateral ” shall include all investment property and general intangibles respecting ownership and/or other equity interests in AE, including, without limitation, the shares of capital stock and the other equity interests listed on Schedule H hereto (as the same may be modified from time to time pursuant to the terms hereof), and any other shares of capital stock and/or other equity interests of any other direct or indirect subsidiary of any Debtor obtained in the future, and, in each case, all certificates representing such shares and/or equity interests and, in each case, all rights, options, warrants, stock, other securities and/or equity interests that may hereafter be received, receivable or distributed in respect of, or exchanged for, any of the foregoing and all rights arising under or in connection with the Pledged Securities, including, but not limited to, all dividends, interest and cash.
 
Notwithstanding the foregoing, nothing herein shall be deemed to constitute an assignment of any asset which, in the event of an assignment, becomes void by operation of applicable law or the assignment of which is otherwise prohibited by applicable law (in each case to the extent that such applicable law is not overridden by Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law); provided , however , that to the extent permitted by applicable law, this Agreement shall create a valid security interest in such asset and, to the extent permitted by applicable law, this Agreement shall create a valid security interest in the proceeds of such asset.
 
(b)           “ Intellectual Property ” means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, (ii) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof, and all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, (iii) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade dress, service marks, logos, domain names and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common law rights related thereto, (iv) all trade secrets arising under the laws of the United States, any other country or any political subdivision thereof, (v) all rights to obtain any reissues, renewals or extensions of the foregoing, (vi) all licenses for any of the foregoing, and (vii) all causes of action for infringement of the foregoing.
 
(c)           “ Majority in Interest ” means, at any time of determination, the majority in interest (based on then-outstanding principal amount of the AE Note at the time of such determination) of the Secured Parties.
 
 
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(d)           “ Necessary Endorsement ” means undated stock powers endorsed in blank or other proper instruments of assignment duly executed and such other instruments or documents as the Agent (as that term is defined below) may reasonably request.
 
(e)           “ Obligations ” means all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or several) due or to become due, or that are now or may be hereafter contracted or acquired, or owing to, of any Debtor to the Secured Parties, including, without limitation, all obligations under this Agreement, the AE Note, the Guarantee and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from any of the Secured Parties as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time.  Without limiting the generality of the foregoing, the term “ Obligations ” shall include, without limitation: (i) the outstanding principal amount of the AE Note; (ii) any and all interest payable under the AE Note, (iii) any and all other fees, indemnities, costs, obligations and liabilities of the Debtors from time to time under or in connection with this Agreement, the AE Note, the Guarantee and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith; and (iv) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that the obligations to pay such amounts are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving any Debtor.
 
(f)           “ Organizational Documents ” means with respect to any Debtor, the documents by which such Debtor was organized (such as a certificate of incorporation, certificate of limited partnership or articles of organization, and including, without limitation, any certificates of designation for preferred stock or other forms of preferred equity) and which relate to the internal governance of such Debtor (such as bylaws, a partnership agreement or an operating, limited liability or members agreement).
 
(g)           “ Pledged Interests ” shall have the meaning ascribed to such term in Section 4(j).
 
(h)           “ Pledged Securities ” shall have the meaning ascribed to such term in Section 4(i).
 
(i)           “ UCC ” means the Uniform Commercial Code of the State of New York and or any other applicable law of any state or states which has jurisdiction with respect to all, or any portion of, the Collateral or this Agreement, from time to time.  It is the intent of the parties that defined terms in the UCC should be construed in their broadest sense so that the term “ Collateral ” will be construed in its broadest sense.  Accordingly if there are, from time to time, changes to defined terms in the UCC that broaden the definitions, they are incorporated herein and if existing definitions in the UCC are broader than the amended definitions, the existing ones shall be controlling.
 
 
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2.            Grant of Security Interest in Collateral .  As an inducement for the Secured Parties to accept the Debenture and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, each Debtor hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Parties a security interest in and to, a lien upon and a right of set-off against all of their respective right, title and interest of whatsoever kind and nature in and to, the Collateral (a “Security Interest” and, collectively, the “Security Interests”).
 
3.            Delivery of Certain Collateral .  Contemporaneously or prior to the execution of this Agreement, each Debtor shall deliver or cause to be delivered to the Agent (a) any and all certificates and other instruments representing or evidencing the Pledged Securities, and (b) any and all certificates and other instruments or documents representing any of the other Collateral, in each case, together with all Necessary Endorsements.  The Debtors are, contemporaneously with the execution hereof, delivering to Agent, or have previously delivered to Agent, a true and correct copy of each Organizational Document governing any of the Pledged Securities.
 
4.            Representations, Warranties, Covenants and Agreements of the Debtors .  Except as set forth under the corresponding section of the disclosure schedules delivered to the Secured Parties concurrently herewith (the “Disclosure Schedules”), which Disclosure Schedules shall be deemed a part hereof, each Debtor represents and warrants to, and covenants and agrees with, the Secured Parties as follows:
 
(a)           Each Debtor has the requisite corporate, partnership, limited liability company or other power and authority to enter into this Agreement and otherwise to carry out its obligations hereunder.  The execution, delivery and performance by each Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of such Debtor and no further action is required by such Debtor.  This Agreement has been duly executed by each Debtor.  This Agreement constitutes the legal, valid and binding obligation of each Debtor, enforceable against each Debtor in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization and similar laws of general application relating to or affecting the rights and remedies of creditors and by general principles of equity.
 
(b)           The Debtors have no place of business or offices where their respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A attached hereto.  Except as specifically set forth on Schedule A , each Debtor is the record owner of the real property where such Collateral is located, and there exist no mortgages or other liens on any such real property except for Permitted Liens.  Except as disclosed on Schedule A , none of such Collateral is in the possession of any consignee, bailee, warehouseman, agent or processor.
 
(c)           Except for those liens and encumbrances set forth on Schedule B (the “ Permitted Liens ”), the Debtors are the sole owner of the Collateral (except for non-exclusive licenses granted by any Debtor in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and are fully authorized to grant the Security Interests.  Except as set forth on Schedule C attached hereto, there is not on file in any
 
 
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governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that will be filed in favor of the Secured Parties pursuant to this Agreement) covering or affecting any of the Collateral.  Except as set forth on Schedule C attached hereto and except pursuant to this Agreement, as long as this Agreement shall be in effect, the Debtors shall not execute and shall not knowingly permit to be on file in any such office or agency any other financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Parties pursuant to the terms of this Agreement).
 
(d)           No written claim has been received that any Collateral or any Debtor’s use of any Collateral violates the rights of any third party.  There has been no adverse decision to any Debtor’s claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to any Debtor’s right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of any Debtor, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority.
 
(e)           Each Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Parties at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements under the UCC and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interests to create in favor of the Secured Parties a valid, perfected and continuing perfected first priority lien in the Collateral, subject only to Permitted Liens.
 
(f)           This Agreement creates in favor of the Secured Parties a valid security interest in the Collateral, subject only to Permitted Liens securing the payment and performance of the Obligations.  Upon making the filings described in the immediately following paragraph, all security interests created hereunder in any Collateral which may be perfected by filing Uniform Commercial Code financing statements shall have been duly perfected.  Except for the filing of the Uniform Commercial Code financing statements referred to in the immediately following paragraph and the following actions: the recordation of the Intellectual Property Security Agreement (as defined in Section 4(p) hereof) with respect to the Intellectual Property in the United States Copyright Office or United States Patent and Trademark Office, as applicable, to be duly recorded at the applicable office referred to in paragraph (m)(m), the execution and delivery of deposit account control agreements satisfying the requirements of Section 9-104(a)(2) of the UCC with respect to each deposit account of the Debtors, and the delivery of the certificates and other instruments provided in Section 3, no action is necessary to create, perfect or protect the security interests created hereunder.  Without limiting the generality of the foregoing, except for the filing of said financing statements, the recordation of said Intellectual Property Security Agreement, and the execution and delivery of said deposit account control agreements, no consent of any third parties and no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for (i) the execution, delivery and performance of this Agreement, (ii) the creation or perfection of the Security Interests created hereunder in the Collateral or (iii) the enforcement of the rights of the Agent and the Secured Parties hereunder.
 
 
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(g)           Each Debtor hereby authorizes the Agent to file one or more financing statements under the UCC, with respect to the Security Interests, with the proper filing and recording agencies in any relevant jurisdiction.
 
(h)           The execution, delivery and performance of this Agreement by the Debtors does not (i) violate any of the provisions of any Organizational Documents of any Debtor or any judgment, decree, order or award of any court, governmental body or arbitrator or any applicable law, rule or regulation applicable to any Debtor or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing any Debtor’s debt or otherwise) to which any Debtor is a party or by which any property or asset of any Debtor is bound or affected.  If any, all required consents (including, without limitation, from stockholders or creditors of any Debtor) necessary for any Debtor to enter into and perform its obligations hereunder have been obtained.
 
(i)           The capital stock and other equity interests listed on Schedule G hereto (the “ Pledged Securities ”) represent all of the capital stock and other equity interests of the Guarantor, and represent all capital stock and other equity interests owned, directly or indirectly, by the Company.  All of the Pledged Securities are validly issued, fully paid and nonassessable, and the Guarantor is the legal and beneficial owner of the Pledged Securities, free and clear of any lien, security interest or other encumbrance except for the security interests created by this Agreement and other Permitted Liens.
 
(j)           The ownership and other equity interests in partnerships and limited liability companies (if any) included in the Collateral (the “ Pledged Interests ”) by their express terms do not provide that they are securities governed by Article 8 of the UCC and are not held in a securities account or by any financial intermediary.
 
(k)           Except for Permitted Liens, each Debtor shall at all times maintain the liens and Security Interests provided for hereunder as valid and perfected first priority liens and security interests in the Collateral in favor of the Secured Parties until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 14 hereof.  Each Debtor hereby agrees to defend the same against the claims of any and all persons and entities.  Each Debtor shall safeguard and protect all Collateral for the account of the Secured Parties.  At the request of the Agent, each Debtor will sign and deliver to the Agent on behalf of the Secured Parties at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to the Agent and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Agent to be, necessary or desirable to effect the rights and obligations provided for herein.  Without limiting the generality of the foregoing, each Debtor shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interests hereunder, and each Debtor shall obtain and furnish to the Agent from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interests hereunder.
 
 
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(l)           No Debtor will transfer, pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the Collateral (except for non-exclusive licenses granted by a Debtor in its ordinary course of business and sales of inventory by a Debtor in its ordinary course of business) without the prior written consent of a Majority in Interest.
 
(m)           Each Debtor shall keep and preserve its equipment, inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage.
 
(n)           Each Debtor shall maintain with financially sound and reputable insurers, insurance with respect to the Collateral, including Collateral hereafter acquired, against loss or damage of the kinds and in the amounts customarily insured against by entities of established reputation having similar properties similarly situated and in such amounts as are customarily carried under similar circumstances by other such entities and otherwise as is prudent for entities engaged in similar businesses but in any event sufficient to cover the full replacement cost thereof.  Each Debtor shall cause each insurance policy issued in connection herewith to provide, and the insurer issuing such policy to certify to the Agent, that (a) the Agent will be named as lender loss payee and additional insured under each such insurance policy; (b) if such insurance be proposed to be cancelled or materially changed for any reason whatsoever, such insurer will promptly notify the Agent and such cancellation or change shall not be effective as to the Agent for at least thirty (30) days after receipt by the Agent of such notice, unless the effect of such change is to extend or increase coverage under the policy; and (c) the Agent will have the right (but no obligation) at its election to remedy any default in the payment of premiums within thirty (30) days of notice from the insurer of such default.  If no Event of Default (as defined in the Purchase Agreement) exists and if the proceeds arising out of any claim or series of related claims do not exceed $25,000, loss payments in each instance will be applied by the applicable Debtor to the repair and/or replacement of property with respect to which the loss was incurred to the extent reasonably feasible, and any loss payments or the balance thereof remaining, to the extent not so applied, shall be payable to the applicable Debtor; provided, however, that payments received by any Debtor after an Event of Default occurs and is continuing or in excess of $25,000 for any occurrence or series of related occurrences shall be paid to the Agent on behalf of the Secured Parties and, if received by such Debtor, shall be held in trust for the Secured Parties and immediately paid over to the Agent unless otherwise directed in writing by the Agent.  Copies of such policies or the related certificates, in each case, naming the Agent as lender loss payee and additional insured shall be delivered to the Agent at least annually and at the time any new policy of insurance is issued.
 
(o)           Each Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Parties promptly, in sufficient detail, of any material adverse change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Parties’ security interest, through the Agent, therein.
 
(p)           Each Debtor shall promptly execute and deliver to the Agent such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Agent may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce the Secured Parties’ security interest in the Collateral including, without limitation, if applicable, the
 
 
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execution and delivery of a separate security agreement with respect to each Debtor’s Intellectual Property (“ Intellectual Property Security Agreement ”) in which the Secured Parties have been granted a security interest hereunder, substantially in a form reasonably acceptable to the Agent, which Intellectual Property Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof.
 
(q)           Each Debtor shall permit the Agent and its representatives and agents to inspect the Collateral during normal business hours and upon reasonable prior notice, and to make copies of records pertaining to the Collateral as may be reasonably requested by the Agent from time to time.
 
(r)           Each Debtor shall take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral.
 
(s)           Each Debtor shall promptly notify the Secured Parties in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by such Debtor that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Parties hereunder.
 
(t)           All information heretofore, herein or hereafter supplied to the Secured Parties by or on behalf of any Debtor with respect to the Collateral is accurate and complete in all material respects as of the date furnished.
 
(u)           The Debtors shall at all times preserve and keep in full force and effect their respective valid existence and good standing and any rights and franchises material to its business.
 
(v)           No Debtor will change its name, type of organization, jurisdiction of organization, organizational identification number (if it has one), legal or corporate structure, or identity, or add any new fictitious name unless it provides at least 30 days prior written notice to the Secured Parties of such change and, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
 
(w)           Except in the ordinary course of business, no Debtor may consign any of its inventory or sell any of its inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale without the consent of the Agent which shall not be unreasonably withheld.
 
(x)           No Debtor may relocate its chief executive office to a new location without providing 30 days prior written notification thereof to the Secured Parties and so long as, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
 
 
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(y)           Each Debtor was organized and remains organized solely under the laws of the state set forth next to such Debtor’s name in Schedule D attached hereto, which Schedule D sets forth each Debtor’s organizational identification number or, if any Debtor does not have one, states that one does not exist.
 
(z)           (i) The actual name of each Debtor is the name set forth in Schedule D attached hereto; (ii) no Debtor has any trade names except as set forth on Schedule E attached hereto; (iii) no Debtor has used any name other than that stated in the preamble hereto or as set forth on Schedule E for the preceding five years; and (iv) no entity has merged into any Debtor or been acquired by any Debtor within the past five years except as set forth on Schedule E .
 
(aa)           At any time and from time to time that any Collateral consists of instruments, certificated securities or other items that require or permit possession by the secured party to perfect the security interest created hereby, the applicable Debtor shall deliver such Collateral to the Agent.
 
(bb)           Each Debtor, in its capacity as issuer, hereby agrees to comply with any and all orders and instructions of Agent regarding the Pledged Interests consistent with the terms of this Agreement without the further consent of any Debtor as contemplated by Section 8-106 (or any successor section) of the UCC.  Further, each Debtor agrees that it shall not enter into a similar agreement (or one that would confer “ control ” within the meaning of Article 8 of the UCC) with any other person or entity.
 
(cc)           Each Debtor shall cause all tangible chattel paper constituting Collateral to be delivered to the Agent, or, if such delivery is not possible, then to cause such tangible chattel paper to contain a legend noting that it is subject to the security interest created by this Agreement.  To the extent that any Collateral consists of electronic chattel paper, the applicable Debtor shall cause the underlying chattel paper to be “ marked ” within the meaning of Section 9-105 of the UCC (or successor section thereto).
 
(dd)           If there is any investment property or deposit account included as Collateral that can be perfected by “ control ” through an account control agreement, the applicable Debtor shall cause such an account control agreement, in form and substance in each case satisfactory to the Agent, to be entered into and delivered to the Agent for the benefit of the Secured Parties, at the request of the Agent.
 
(ee)           To the extent that any Collateral consists of letter-of-credit rights, the applicable Debtor shall cause the issuer of each underlying letter of credit to consent to an assignment of the proceeds thereof to the Secured Parties.
 
(ff)           To the extent that any Collateral is in the possession of any third party, the applicable Debtor shall join with the Agent in notifying such third party of the Secured Parties’ security interest in such Collateral and shall use its best efforts to obtain an acknowledgement and agreement from such third party with respect to the Collateral, in form and substance reasonably satisfactory to the Agent.
 
(gg)           If any Debtor shall at any time hold or acquire a commercial tort claim, such Debtor shall promptly notify the Secured Parties in a writing signed by such Debtor of the particulars thereof and grant to the Secured Parties in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Agent.
 
 
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(hh)           Each Debtor shall immediately provide written notice to the Secured Parties of any and all accounts which arise out of contracts with any governmental authority and, to the extent necessary to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof, shall execute and deliver to the Agent an assignment of claims for such accounts and cooperate with the Agent in taking any other steps required, in its judgment, under the Federal Assignment of Claims Act or any similar federal, state or local statute or rule to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof.
 
(ii)           Each Debtor shall vote the Pledged Securities to comply with the covenants and agreements set forth herein.
 
(jj)           Each Debtor shall register the pledge of the applicable Pledged Securities on the books of such Debtor.  Each Debtor shall notify each issuer of Pledged Securities to register the pledge of the applicable Pledged Securities in the name of the Secured Parties on the books of such issuer.  Further, except with respect to certificated securities delivered to the Agent, the applicable Debtor shall deliver to Agent an acknowledgement of pledge (which, where appropriate, shall comply with the requirements of the relevant UCC with respect to perfection by registration) signed by the issuer of the applicable Pledged Securities, which acknowledgement shall confirm that: (a) it has registered the pledge on its books and records; and (b) at any time directed by Agent during the continuation of an Event of Default, such issuer will transfer the record ownership of such Pledged Securities into the name of any designee of Agent, will take such steps as may be necessary to effect the transfer, and will comply with all other instructions of Agent regarding such Pledged Securities without the further consent of the applicable Debtor.
 
(kk)           In the event that, upon an occurrence of an Event of Default, Agent shall sell all or any of the Pledged Securities to another party or parties (herein called the “ Transferee ”) or shall purchase or retain all or any of the Pledged Securities, each Debtor shall, to the extent applicable: (i) deliver to Agent or the Transferee, as the case may be, the articles of incorporation, bylaws, minute books, stock certificate books, corporate seals, deeds, leases, indentures, agreements, evidences of indebtedness, books of account, financial records and all other Organizational Documents and records of the Debtors and their direct and indirect subsidiaries; (ii) use its best efforts to obtain resignations of the persons then serving as officers and directors of the Debtors and their direct and indirect subsidiaries, if so requested; and (iii) use its best efforts to obtain any approvals that are required by any governmental or regulatory body in order to permit the sale of the Pledged Securities to the Transferee or the purchase or retention of the Pledged Securities by Agent and allow the Transferee or Agent to continue the business of the Debtors and their direct and indirect subsidiaries.
 
(ll)           Without limiting the generality of the other obligations of the Debtors hereunder, each Debtor shall promptly (i) cause to be registered at the United States Copyright Office all of its material copyrights, (ii) cause the security interest contemplated hereby with
 
 
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respect to all Intellectual Property registered at the United States Copyright Office or United States Patent and Trademark Office to be duly recorded at the applicable office, and (iii) give the Agent notice whenever it acquires (whether absolutely or by license) or creates any additional material Intellectual Property.
 
(mm)           Each Debtor will from time to time, at the joint and several expense of the Debtors, promptly execute and deliver all such further instruments and documents, and take all such further action as may be necessary or desirable, or as the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Parties to exercise and enforce their rights and remedies hereunder and with respect to any Collateral or to otherwise carry out the purposes of this Agreement.
 
(nn)            Schedule F attached hereto lists all of the patents, patent applications, trademarks, trademark applications, registered copyrights, and domain names owned by any of the Debtors as of the date hereof.   Schedule F lists all material licenses in favor of any Debtor for the use of any patents, trademarks, copyrights and domain names as of the date hereof.  All material patents and trademarks of the Debtors have been duly recorded at the United States Patent and Trademark Office and all material copyrights of the Debtors have been duly recorded at the United States Copyright Office.
 
(oo)           None of the account debtors or other persons or entities obligated on any of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or any similar federal, state or local statute or rule in respect of such Collateral.
 
5.            Effect of Pledge on Certain Rights .  If any of the Collateral subject to this Agreement consists of nonvoting equity or ownership interests (regardless of class, designation, preference or rights) that may be converted into voting equity or ownership interests upon the occurrence of certain events (including, without limitation, upon the transfer of all or any of the other stock or assets of the issuer), it is agreed that the pledge of such equity or ownership interests pursuant to this Agreement or the enforcement of any of Agent’s rights hereunder shall not be deemed to be the type of event which would trigger such conversion rights notwithstanding any provisions in the Organizational Documents or agreements to which any Debtor is subject or to which any Debtor is party.
 
6.            Defaults .  The following events shall be “Events of Default”:
 
(a)           The occurrence of an Event of Default (as defined in the AE Note) under the AE Note;
 
(b)           Any representation or warranty of any Debtor in this Agreement shall prove to have been incorrect in any material respect when made;
 
(c)           The failure by any Debtor to observe or perform any of its obligations hereunder for five (5) days after delivery to such Debtor of notice of such failure by or on behalf of a Secured Party unless such default is capable of cure but cannot be cured within such time frame and such Debtor is using best efforts to cure same in a timely fashion; or
 
 
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(d)           If any provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Debtor, or a proceeding shall be commenced by any Debtor, or by any governmental authority having jurisdiction over any Debtor, seeking to establish the invalidity or unenforceability thereof, or any Debtor shall deny that any Debtor has any liability or obligation purported to be created under this Agreement.
 
7.            Duty To Hold In Trust .
 
(a)           Upon the occurrence of any Event of Default and at any time thereafter, each Debtor shall, upon receipt of any revenue, income, dividend, interest or other sums subject to the Security Interests, whether payable pursuant to the AE Note or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Parties and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Parties, pro-rata in proportion to their respective then-currently outstanding principal amount of the AE Note for application to the satisfaction of the Obligations.
 
(b)           If any Debtor shall become entitled to receive or shall receive any securities or other property (including, without limitation, shares of Pledged Securities or instruments representing Pledged Securities acquired after the date hereof, or any options, warrants, rights or other similar property or certificates representing a dividend, or any distribution in connection with any recapitalization, reclassification or increase or reduction of capital, or issued in connection with any reorganization of such Debtor or any of its direct or indirect subsidiaries) in respect of the Pledged Securities (whether as an addition to, in substitution of, or in exchange for, such Pledged Securities or otherwise), such Debtor agrees to (i) accept the same as the agent of the Secured Parties; (ii) hold the same in trust on behalf of and for the benefit of the Secured Parties; and (iii) to deliver any and all certificates or instruments evidencing the same to Agent on or before the close of business on the fifth business day following the receipt thereof by such Debtor, in the exact form received together with the Necessary Endorsements, to be held by Agent subject to the terms of this Agreement as Collateral.
 
8.            Rights and Remedies Upon Default .
 
(a)           Upon the occurrence of any Event of Default and at any time thereafter, the Secured Parties, acting through the Agent, shall have the right to exercise all of the remedies conferred hereunder and under the AE Note, and the Secured Parties shall have all the rights and remedies of a secured party under the UCC.  Without limitation, the Agent, for the benefit of the Secured Parties, shall have the following rights and powers:
 
(i)           The Agent shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and each Debtor shall assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at such Debtor’s premises or elsewhere, and make available to the Agent, without rent, all of such Debtor’s respective premises and facilities for the purpose of the Agent taking possession of, removing or putting the Collateral in saleable or disposable form.
 
 
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(ii)           Upon notice to the Debtors by Agent, all rights of each Debtor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise and all rights of each Debtor to receive the dividends and interest which it would otherwise be authorized to receive and retain, shall cease.  Upon such notice, Agent shall have the right to receive, for the benefit of the Secured Parties, any interest, cash dividends or other payments on the Collateral and, at the option of Agent, to exercise in such Agent’s discretion all voting rights pertaining thereto.  Without limiting the generality of the foregoing, Agent shall have the right (but not the obligation) to exercise all rights with respect to the Collateral as it were the sole and absolute owner thereof, including, without limitation, to vote and/or to exchange, at its sole discretion, any or all of the Collateral in connection with a merger, reorganization, consolidation, recapitalization or other readjustment concerning or involving the Collateral or any Debtor or any of its direct or indirect subsidiaries.
 
(iii)           The Agent shall have the right to operate the business of each Debtor using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Agent may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to any Debtor or right of redemption of a Debtor, which are hereby expressly waived.  Upon each such sale, lease, assignment or other transfer of Collateral, the Agent, for the benefit of the Secured Parties, may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of any Debtor, which are hereby waived and released.
 
(iv)           The Agent shall have the right (but not the obligation) to notify any account debtors and any obligors under instruments or accounts to make payments directly to the Agent, on behalf of the Secured Parties, and to enforce the Debtors’ rights against such account debtors and obligors.
 
(v)           The Agent, for the benefit of the Secured Parties, may (but is not obligated to) direct any financial intermediary or any other person or entity holding any investment property to transfer the same to the Agent, on behalf of the Secured Parties, or its designee.
 
(vi)           The Agent may (but is not obligated to) transfer any or all Intellectual Property registered in the name of any Debtor at the United States Patent and Trademark Office and/or Copyright Office into the name of the Secured Parties or any designee or any purchaser of any Collateral.
 
(b)           The Agent shall comply with any applicable law in connection with a disposition of Collateral and such compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.  The Agent may sell the Collateral
 
 
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without giving any warranties and may specifically disclaim such warranties.  If the Agent sells any of the Collateral on credit, the Debtors will only be credited with payments actually made by the purchaser.  In addition, each Debtor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Agent’s rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto.
 
(c)           For the purpose of enabling the Agent to further exercise rights and remedies under this Section 8 or elsewhere provided by agreement or applicable law, each Debtor hereby grants to the Agent, for the benefit of the Agent and the Secured Parties, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to such Debtor) to use, license or sublicense following an Event of Default, any Intellectual Property now owned or hereafter acquired by such Debtor, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.
 
9.            Applications of Proceeds .  The proceeds of any such sale, lease or other disposition of the Collateral hereunder or from payments made on account of any insurance policy insuring any portion of the Collateral shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys’ fees and expenses incurred by the Agent in enforcing the Secured Parties’ rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations pro rata among the Secured Parties (based on then-outstanding principal amounts of AE Note at the time of any such determination), and to the payment of any other amounts required by applicable law, after which the Secured Parties shall pay to the applicable Debtor any surplus proceeds.  If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Parties are legally entitled, the Debtors will be liable for the deficiency, together with interest thereon, at the rate of 18% per annum or the lesser amount permitted by applicable law (the “Default Rate”), and the reasonable fees of any attorneys employed by the Secured Parties to collect such deficiency.  To the extent permitted by applicable law, each Debtor waives all claims, damages and demands against the Secured Parties arising out of the repossession, removal, retention or sale of the Collateral, unless due solely to the gross negligence or willful misconduct of the Secured Parties as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction.
 
10.            Securities Law Provision .  Each Debtor recognizes that Agent may be limited in its ability to effect a sale to the public of all or part of the Pledged Securities by reason of certain prohibitions in the Securities Act of 1933, as amended, or other federal or state securities laws (collectively, the “ Securities Laws ”), and may be compelled to resort to one or more sales to a restricted group of purchasers who may be required to agree to acquire the Pledged Securities for their own account, for investment and not with a view to the distribution or resale thereof.  Each Debtor agrees that sales so made may be at prices and on terms less favorable than if the Pledged Securities were sold to the public, and that Agent has no obligation to delay the sale of any Pledged Securities for the period of time necessary to register the Pledged Securities for sale to the public under the Securities Laws.  Each Debtor shall cooperate with Agent in its attempt to satisfy any requirements under the Securities Laws (including, without limitation, registration thereunder if requested by Agent) applicable to the sale of the Pledged Securities by Agent.
 
 
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11.            Costs and Expenses .  Each Debtor agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements pursuant to the UCC, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Agent.  The Debtors shall also pay all other claims and charges which in the reasonable opinion of the Agent is reasonably likely to prejudice, imperil or otherwise affect the Collateral or the Security Interests therein.  The Debtors will also, upon demand, pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Agent, for the benefit of the Secured Parties, may incur in connection with the creation, perfection, protection, satisfaction, foreclosure, collection or enforcement of the Security Interest and the preparation, administration, continuance, amendment or enforcement of this Agreement and pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Agent, for the benefit of the Secured Parties, and the Secured Parties may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Parties under the AE Note.  Until so paid, any fees payable hereunder shall be added to the principal amount of the AE Note and shall bear interest at the Default Rate.
 
12.            Responsibility for Collateral .  The Debtors assume all liabilities and responsibility in connection with all Collateral, and the Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason.  Without limiting the generality of the foregoing, (a) neither the Agent nor any Secured Party (i) has any duty (either before or after an Event of Default) to collect any amounts in respect of the Collateral or to preserve any rights relating to the Collateral, or (ii) has any obligation to clean-up or otherwise prepare the Collateral for sale, and (b) each Debtor shall remain obligated and liable under each contract or agreement included in the Collateral to be observed or performed by such Debtor thereunder.  Neither the Agent nor any Secured Party shall have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Agent or any Secured Party of any payment relating to any of the Collateral, nor shall the Agent or any Secured Party be obligated in any manner to perform any of the obligations of any Debtor under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Agent or any Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Agent or to which the Agent or any Secured Party may be entitled at any time or times.
 
 
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13.            Security Interests Absolute .  All rights of the Secured Parties and all obligations of the Debtors hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the AE Note or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the AE Note or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guarantee, or any other security, for all or any of the Obligations; (d) any action by the Secured Parties to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to a Debtor, or a discharge of all or any part of the Security Interests granted hereby.  Until the Obligations shall have been paid and performed in full, the rights of the Secured Parties shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy.  Each Debtor expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance.  In the event that at any time any transfer of any Collateral or any payment received by the Secured Parties hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Parties, then, in any such event, each Debtor’s obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof.  Each Debtor waives all right to require the Secured Parties to proceed against any other person or entity or to apply any Collateral which the Secured Parties may hold at any time, or to marshal assets, or to pursue any other remedy.  Each Debtor waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby.
 
14.            Term of Agreement .  This Agreement and the Security Interests shall terminate on the date on which all payments under the AE Note have been indefeasibly paid in full including pursuant to the conversion of the AE Note and all other Obligations have been paid or discharged; provided, however, that all indemnities of the Debtors contained in this Agreement (including, without limitation, Annex B hereto) shall survive and remain operative and in full force and effect regardless of the termination of this Agreement.
 
15.            Power of Attorney; Further Assurances .
 
(a)           Each Debtor authorizes the Agent, and does hereby make, constitute and appoint the Agent and its officers, agents, successors or assigns with full power of substitution, as such Debtor’s true and lawful attorney-in-fact, with power, in the name of the Agent or such Debtor, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any note, checks, drafts, money orders or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Agent; (ii) to sign and endorse any financing statement pursuant to the UCC or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to
 
 
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demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; (v) to transfer any Intellectual Property or provide licenses respecting any Intellectual Property; and (vi) generally, at the option of the Agent, and at the expense of the Debtors, at any time, or from time to time, to execute and deliver any and all documents and instruments and to do all acts and things which the Agent deems necessary to protect, preserve and realize upon the Collateral and the Security Interests granted therein in order to effect the intent of this Agreement and the AE Note all as fully and effectually as the Debtors might or could do; and each Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof.  This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding.  The designation set forth herein shall be deemed to amend and supersede any inconsistent provision in the Organizational Documents or other documents or agreements to which any Debtor is subject or to which any Debtor is a party.  Without limiting the generality of the foregoing, after the occurrence and during the continuance of an Event of Default, each Secured Party is specifically authorized to execute and file any applications for or instruments of transfer and assignment of any patents, trademarks, copyrights or other Intellectual Property with the United States Patent and Trademark Office and the United States Copyright Office.
 
(b)           On a continuing basis, each Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule C attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Agent, to perfect the Security Interests granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Agent the grant or perfection of a perfected security interest in all the Collateral under the UCC.
 
(c)           Each Debtor hereby irrevocably appoints the Agent as such Debtor’s attorney-in-fact, with full authority in the place and instead of such Debtor and in the name of such Debtor, from time to time in the Agent’s discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of such Debtor where permitted by law, which financing statements may (but need not) describe the Collateral as “all assets” or “all personal property” or words of like import, and ratifies all such actions taken by the Agent.  This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding.
 
16.            Notices .  Any notices and other communications required or permitted hereunder shall be in writing and shall be effective upon delivery by hand or upon receipt if sent by certified or registered mail (postage prepaid and return receipt requested) or by a nationally recognized overnight courier service (appropriately marked for overnight delivery) or upon transmission if sent by facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type and with physical delivery of the communication being made by one or the other means specified in this Section as promptly as practicable thereafter).  Notices shall be addressed as follows:
 
 
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If to the Company
or Guarantor:
   
AudioEye Acquisition Corp.
1327 Ocean Avenue, Suite M
Santa Monica, CA 90401
Attention: Nathaniel T. Bradley
Facsimile No: (520) 844-2989
 
   
With a copy to:
 
   
TroyGould PC
1801 Century Park East, Suite 1600
Los Angeles, California 90067
Attention:  David L. Ficksman, Esq.
Facsimile No: (310) 789-1490
 
 
If to the Secured Parties, to:
   
   
CMG Investors, LLC
32 SE Second Avenue, Unit 218
Delray Beach, FL 33444
Attention: Craig Boden

Any Party may change the address to which notices are required to be sent by giving notice of such change in the manner provided in this Section.
 
17.            Other Security .  To the extent that the Obligations are now or hereafter  secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Agent shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Parties’ rights and remedies hereunder.
 
18.            Appointment of Agent .  The Secured Parties hereby appoint CMGO Investors, LLC to act as their agent (“ CMGO ” or “ Agent ”) for purposes of exercising any and all rights and remedies of the Secured Parties hereunder.  Such appointment shall continue until revoked in writing by a Majority in Interest, at which time a Majority in Interest shall appoint a new Agent.
 
19.            Miscellaneous .
 
(a)           No course of dealing between the Debtors and the Secured Parties, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties, any right, power or privilege hereunder or under the AE Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
 
(b)           All of the rights and remedies of the Secured Parties with respect to the Collateral, whether established hereby or by the AE Note or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently.
 
 
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(c)           This Agreement, together with the exhibits and schedules hereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into this Agreement and the exhibits and schedules hereto.  No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Debtors and the Secured Parties holding 60% or more of the principal amount of AE Note then outstanding (provided that such an amendment shall be effective against Secured Parties holding 100% of the principal amount of AE Note then outstanding), or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought.
 
(d)           If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
 
(e)           No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
 
(f)           This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.  The Company and the Guarantors may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Secured Party (other than by merger).  Any Secured Party may assign any or all of its rights under this Agreement to any Person (as defined in the Purchase Agreement) to whom such Secured Party assigns or transfers any Obligations, provided such transferee agrees in writing to be bound, with respect to the transferred Obligations, by the provisions of this Agreement that apply to the “ Secured Parties .”
 
(g)           Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.
 
(h)           Except to the extent mandatorily governed by the jurisdiction or situs where the Collateral is located, all questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of
 
 
20

 
 
conflicts of law thereof.  Except to the extent mandatorily governed by the jurisdiction or situs where the Collateral is located, each Debtor agrees that all proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and the AE Note (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan.  Except to the extent mandatorily governed by the jurisdiction or situs where the Collateral is located, each Debtor hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such proceeding is improper.  Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
 
(i)           This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same agreement.  In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
 
(j)           All Debtors shall jointly and severally be liable for the obligations of each Debtor to the Secured Parties hereunder.
 
(k)           Each Debtor shall indemnify, reimburse and hold harmless the Agent and the Secured Parties and their respective partners, members, shareholders, officers, directors, employees and agents (and any other persons with other titles that have similar functions) (collectively, “ Indemnitees ”) from and against any and all losses, claims, liabilities, damages, penalties, suits, costs and expenses, of any kind or nature, (including fees relating to the cost of investigating and defending any of the foregoing) imposed on, incurred by or asserted against such Indemnitee in any way related to or arising from or alleged to arise from this Agreement or the Collateral, except any such losses, claims, liabilities, damages, penalties, suits, costs and expenses which result from the gross negligence or willful misconduct of the Indemnitee as determined by a final, nonappealable decision of a court of competent jurisdiction.  This indemnification provision is in addition to, and not in limitation of, any other indemnification provision in the AE Note, or any other agreement, instrument or other document executed or delivered in connection herewith or therewith.
 
 
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(l)           Nothing in this Agreement shall be construed to subject Agent or any Secured Party to liability as a partner in any Debtor or any if its direct or indirect subsidiaries that is a partnership or as a member in any Debtor or any of its direct or indirect subsidiaries that is a limited liability company, nor shall Agent or any Secured Party be deemed to have assumed any obligations under any partnership agreement or limited liability company agreement, as applicable, of any such Debtor or any of its direct or indirect subsidiaries or otherwise, unless and until any such Secured Party exercises its right to be substituted for such Debtor as a partner or member, as applicable, pursuant hereto.
 
(m)           To the extent that the grant of the security interest in the Collateral and the enforcement of the terms hereof require the consent, approval or action of any partner or member, as applicable, of any Debtor or any direct or indirect subsidiary of any Debtor or compliance with any provisions of any of the Organizational Documents, the Debtors hereby grant such consent and approval and waive any such noncompliance with the terms of said documents.
 
(n)           The Secured Parties acknowledge and agree that the conversion by CMGO Investors, LLC of the AE Note shall constitute satisfaction in full of the Obligations.
 
[SIGNATURE PAGES FOLLOW]
 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.
 
 
 
AUDIOEYE, INC.
 
 
 
 
 
 
By:
/s/ Nathaniel Bradley
 
 
 
Name:
Nathaniel Bradley
 
 
 
Title:
President
 
 
 
 
 
   
AUDIOEYE ACQUISITION CORP.
         
   
By:
/s/ Nathaniel Bradley
     
Name:
Nathaniel Bradley
     
Title:
President
         
   
CMGO INVESTORS, LLC
         
   
By:
/s/ Craig Boden
     
Name:
Craig Boden
     
Title:
Manager
 
 
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SCHEDULE A
 
Principal Place of Business of Debtors:
9070 S. Rita Road
 
Suite 1450
 
Tucson, Arizona 85747
   
Locations Where Collateral is Located or Stored:
Tucson, Arizona;
 
Chicago, Illinois

 
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SCHEDULE B
 
License from Couponicate
 
 
25

 
 
SCHEDULE C
 
None
 
 
26

 
 
SCHEDULE D
 
Legal Names
 
AudioEye, Inc.
 
AudioEye Acquisition Corp.
 
 
27

 
 
SCHEDULE E
 
Names; Mergers and Acquisitions
 
None
 
 
28

 
 
SCHEDULE F
 
Intellectual Property
 
Method and apparatus for website navigation by the visually impaired
#US8046229
US Pat. - Filed Dec 14, 2009 - Issued Oct 25, 2011 - Nathan T. Bradley - Audioeye, Inc.
Original Assignee: Audioeye ... Original Assignee, Title ...
 
Method and apparatus for website navigation by the visually impaired#
#US7653544
US Pat. - Filed Aug 8, 2003 - Issued Jan 26, 2010 - Nathan T. Bradley - AudioEye, Inc.
Original Assignee: AudioEye ... Cited Patent, Filing date, Issue date, Original Assignee, Title ... Citing
 
System and method for audible web site navigation
US7966184
US Pat. - Filed Mar 6, 2007 - Issued Jun 21, 2011 - William C. O'Conor - Audioeye, Inc.
Original Assignee: Audioeye ...
 
AND ALL CONTINUATIONS AND CONTINUATIONS IN PART.

 
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SCHEDULE G
 
Pledged Securities
 
2,037,186 shares of AudioEye, Inc.
 
 
30

 
 
ANNEX A
to
SECURITY
AGREEMENT
 
THE AGENT
 
1.            Appointment .  The Secured Parties (all capitalized terms used herein and not otherwise defined shall have the respective meanings provided in the Security Agreement to which this Annex B is attached (the “ Agreement ”)), by their acceptance of the benefits of the Agreement, hereby designate CMGO Investors, LLC (“ CMGO ” or “ Agent ”) as the Agent to act as specified herein and in the Agreement.  Each Secured Party shall be deemed irrevocably to authorize the Agent to take such action on its behalf under the provisions of the Agreement and any other Transaction Document (as such term is defined in the Purchase Agreement) and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto.  The Agent may perform any of its duties hereunder by or through its agents or employees.
 
2.            Nature of Duties .  The Agent shall have no duties or responsibilities except those expressly set forth in the Agreement.  Neither the Agent nor any of its partners, members, shareholders, officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Agreement or hereunder or in connection herewith or therewith, be responsible for the consequence of any oversight or error of judgment or answerable for any loss, unless caused solely by its or their gross negligence or willful misconduct as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction.  The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of the Agreement or any other Transaction Document a fiduciary relationship in respect of any Debtor or any Secured Party; and nothing in the Agreement or any other Transaction Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of the Agreement or any other Transaction Document except as expressly set forth herein and therein.
 
3.            Lack of Reliance on the Agent .  Independently and without reliance upon the Agent, each Secured Party, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Company and its subsidiaries in connection with such Secured Party’s investment in the Debtors, the creation and continuance of the Obligations, the transactions contemplated by the Transaction Documents (as defined in the Purchase Agreement), and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Company and its subsidiaries, and of the value of the Collateral from time to time, and the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Secured Party with any credit, market or other information with respect thereto, whether coming into its possession before any Obligations are incurred or at any time or times thereafter.  The Agent shall not be responsible to the Debtors or any Secured Party for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith, or for the execution, effectiveness, genuineness, validity, enforceability,
 
 
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perfection, collectibility, priority or sufficiency of the Agreement or any other Transaction Document, or for the financial condition of the Debtors or the value of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Agreement or any other Transaction Document, or the financial condition of the Debtors, or the value of any of the Collateral, or the existence or possible existence of any default or Event of Default under the Agreement, the AE Note or any of the other Transaction Documents.
 
4.            Certain Rights of the Agent .  The Agent shall have the right to take any action with respect to the Collateral, on behalf of all of the Secured Parties.  To the extent practical, the Agent shall request instructions from the Secured Parties with respect to any material act or action (including failure to act) in connection with the Agreement or any other Transaction Document, and shall be entitled to act or refrain from acting in accordance with the instructions of a Majority in Interest; if such instructions are not provided despite the Agent’s request therefor, the Agent shall be entitled to refrain from such act or taking such action, and if such action is taken, shall be entitled to appropriate indemnification from the Secured Parties in respect of actions to be taken by the Agent; and the Agent shall not incur liability to any person or entity by reason of so refraining.  Without limiting the foregoing, (a) no Secured Party shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the terms of the Agreement or any other Transaction Document, and the Debtors shall have no right to question or challenge the authority of, or the instructions given to, the Agent pursuant to the foregoing and (b) the Agent shall not be required to take any action which the Agent believes (i) could reasonably be expected to expose it to personal liability or (ii) is contrary to this Agreement, the Transaction Documents or applicable law.
 
5.            Reliance .  The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to the Agreement and the other Transaction Documents and its duties thereunder, upon advice of counsel selected by it and upon all other matters pertaining to this Agreement and the other Transaction Documents and its duties thereunder, upon advice of other experts selected by it.  Anything to the contrary notwithstanding, the Agent shall have no obligation whatsoever to any Secured Party to assure that the Collateral exists or is owned by the Debtors or is cared for, protected or insured or that the liens granted pursuant to the Agreement have been properly or sufficiently or lawfully created, perfected, or enforced or are entitled to any particular priority.
 
6.            Indemnification .  To the extent that the Agent is not reimbursed and indemnified by the Debtors, the Secured Parties will jointly and severally reimburse and indemnify the Agent, in proportion to their initially purchased respective principal amounts of AE Note, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder or under the Agreement or any other Transaction Document, or in any way relating to or arising out of the Agreement or any other Transaction Document except for those determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction to have resulted solely from
 
 
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the Agent’s own gross negligence or willful misconduct.  Prior to taking any action hereunder as Agent, the Agent may require each Secured Party to deposit with it sufficient sums as it determines in good faith is necessary to protect the Agent for costs and expenses associated with taking such action.
 
7.            Resignation by the Agent .
 
(a)           The Agent may resign from the performance of all its functions and duties under the Agreement and the other Transaction Documents at any time by giving 30 days’ prior written notice (as provided in the Agreement) to the Debtors and the Secured Parties.  Such resignation shall take effect upon the appointment of a successor Agent pursuant to clauses (b) and (c) below.
 
(b)           Upon any such notice of resignation, the Secured Parties, acting by a Majority in Interest, shall appoint a successor Agent hereunder.
 
(c)           If a successor Agent shall not have been so appointed within said 30-day period, the Agent shall then appoint a successor Agent who shall serve as Agent until such time, if any, as the Secured Parties appoint a successor Agent as provided above.  If a successor Agent has not been appointed within such 30-day period, the Agent may petition any court of competent jurisdiction or may interplead the Debtors and the Secured Parties in a proceeding for the appointment of a successor Agent, and all fees, including, but not limited to, extraordinary fees associated with the filing of interpleader and expenses associated therewith, shall be payable by the Debtors on demand.
 
8.            Rights with respect to Collateral .  Each Secured Party agrees with all other Secured Parties and the Agent (i) that it shall not, and shall not attempt to, exercise any rights with respect to its security interest in the Collateral, whether pursuant to any other agreement or otherwise (other than pursuant to this Agreement), or take or institute any action against the Agent or any of the other Secured Parties in respect of the Collateral or its rights hereunder (other than any such action arising from the breach of this Agreement) and (ii) that such Secured Party has no other rights with respect to the Collateral other than as set forth in this Agreement and the other Transaction Documents.  Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations under the Agreement.  After any retiring Agent’s resignation or removal hereunder as Agent, the provisions of the Agreement including this Annex B shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent.
 
33 



AudioEye, Inc. S-1/A
 
Exhibit 23.1






CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation in this Registration Statement on Form S1 of our report dated September 28, 2012 with respect to the audited consolidated financial statements of AudioEye, Inc. for the year ended December 31, 2010 and 2011.

We also consent to the references to us under the heading “Experts” in such Registration Statement.

/s/ MaloneBailey, LLP
MaloneBailey, LLP
www.malone−bailey.com
Houston, Texas

October 1, 2012