PART I
This annual report contains forward-looking statements. These statements relate to either future events or our future financial performance. In some cases, you may be able to identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms or other synonymous terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors,” that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend, and we do undertake any obligation, to revise or update any of the forward-looking statements to match actual results. Readers are urged to carefully review and consider the various disclosures made in this report, which aim to inform interested parties of the risks factors that may affect our business, financial condition, results of operations and prospects.
Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
As used in this annual report, the terms “we,” “us,” “our” and similar references refer to AudioEye, Inc. and our wholly-owned subsidiary, unless otherwise indicated.
Overview
We were incorporated in 2005 and founded on patented technology at the center of the shift of mobile Internet consumers from keypad, mouse and other vision-dependent user experiences to a completely voice-driven and conversational medium. Audio Internet™, our flagship product, enables website owners and advertisers to seamlessly replicate existing Internet properties in a fully audio format, a highly scalable media captioning service, and a navigation platform. We invent, manufacturer and distribute mobile, advertising and Internet technologies that enable users to transact, communicate and engage with products, brands and content using networked interactive voice browsing technology.
We are a developer of patented voice infrastructure technology. Our company focuses on working to improve the mobility, usability and accessibility of all Internet-based content through the development, sale, licensing and use of our proprietary voice-driven technologies. We offer solutions in four distinct product/operating groups:
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Audio Internet™
AudioEye™ Mobile
AudioEye™ Advertising
AudioEye™ Technology Licensing
Our patented technology is designed to expand the functionality of a voice-controlled browser. We believe that existing voice recognition and artificial intelligence engines are inadequate, providing users with only a partial solution: the ability to get an “answer” to a specific question. Our technology is designed to enhance a user’s Internet experience with the addition of a new aspect – 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. Our technology platform, when connected to voice recognition and artificial intelligence engines, provides an expanded Internet experience that includes voice navigation and voice-driven transactions.
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The product development and deployment of our key 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.
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Audio Internet is a technology that utilizes our patented architecture to deliver a facsimile of a visual 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 other 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 our development effort. Our 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.
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AudioEye Advertising utilizes our patented architecture to deliver voice activation, rich media response, higher value impressions and superior conversion. Our sales and marketing effort is organized around our ad network platform. Any ad can be converted into an AudioEye-enabled ad through our automated creation process. End users can then click, keystroke or speak to respond to the audio prompts. Our advertising technology is scalable across ad networks.
AudioEye Mobile utilizes our patented architecture, coordinated with any mobile device, to deliver simple, intuitive and faster access to mobile device content while remaining eyes and hands-free. Our goal is to open doors to the mobile web using our patented solutions for audio mobile marketing. Our sales and marketing effort is organized around sales through existing licensees.
Our technology development was initiated at the University of Arizona Science & Technology Park in Tucson, Arizona. Beginning in 2009 and continuing to the present, we have 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 our proprietary technology, our company has been issued five U.S. patents in two distinct patent families.
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 assist visually impaired users navigate the Internet, 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. Our 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. Consequently, 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; graphics, music and images are not. Additionally, large files or files that have multiple nesting layers turn the system into a giant automated voice response system, potentially irking the user as a result of its incoherency.
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Description of Our Patented Audio Internet Product Line
Our patented invention includes a server-side method and apparatus that function as a voice browser, offering high-quality streaming audio narration and descriptions of websites that enable visually impaired users to navigate the Internet with ease. This patented invention involves creating an audible website that mimics the original 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 prior to assigning a hierarchy and navigation system based on the original website design. To implement the system, a program, which plays a tone upon a user’s visit indicating that the website is accessible with our proprietary technology, is installed on the home page of an original website. 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 then relayed through the user’s computer, reading text and describing images and other non-textual information. The narration also includes menus for navigating the site that have a hierarchy nearly identical to that of the original website. Users navigate the website menus and move from webpage to webpage by making keystroke or audible commands.
Our 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. We believe that our innovations represent a significant breakthrough in streaming technology -- the ability to keep the streaming connection “alert,” awaiting a keystroke command even after extended periods of inactivity.
Our 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, either via state-of-the-art computer generated voices or their own. Once all content is converted accordingly, each individual audio file is linked and connected by our Internet intuitive keystroke navigation system, allowing users to “Surf-By-Sound.”
Since the solution is network-based, users can seamlessly utilize our software across all their potential Internet points of entry – school, home, office, library or mobile device. We believe that this is a major advantage over local 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 AudioEye-enabled site. Our 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 Internet.
Business Plan
Our focus is to create more comprehensive access to devices, Internet, print, broadcast and other media. Our solutions and technology include comprehensive e-learning and e-commerce systems that enable interaction between brands and consumers. We have 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 that leverage our intellectual property.
Our primary business objective is to rapidly commercialize our extensive patent portfolio and other proprietary intellectual property. Our management, working in conjunction with our patent counsel, an advisory council and third party consultants, is constructing a comprehensive licensing strategy for our technology. In addition, we are continually working to track and identify infringement of our 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 our development.
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Strategy
We are in the business of the development and commercial exploitation of our intellectual property. Functionally, we organize our operations into two distinct business units:
The Services Group is charged with the commercialization of our intellectual property, business development, and sales and marketing of our services and product offerings.
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 our existing patent portfolio.
Our business model is built on the commercialization of our intellectual property through multiple avenues and business channels:
Generating revenue through the sale of services and products to corporate publishers.
Generating revenue from the sale of services and products to consumer websites.
Generating revenue from the sale of services and products to federal, state and local governments.
Generating revenue from the sales of AudioEye Advertising technology.
Generating revenue from royalties secured from licensees of our technology.
Generating revenue from settlements and judgments stemming from the enforcement of our intellectual property rights.
Our strategy is to establish our company 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:
Implementing a technology-licensing program to commercialize our intellectual property, including our patented technology.
Developing revenues from licensing royalties obtained from organizations that utilize our patented technology and systems, potentially including equity arrangements or entering into joint ventures with such organizations.
Leveraging our existing technology to develop a suite of products and services that can be sold directly to governments and corporate enterprises.
License and Service Offerings
We plan to offer a diversified portfolio of license and service offerings focused on securing our technology within devices and over the Internet – broken into four broad business categories:
Communications Technology Platform – Offered as Internet Cloud Software as a Service (SaaS)
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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
Support and Interactive Services
Support Infrastructure for SaaS Model – Operated as a Revenue Center
Customized Software and Development – Operated as a Revenue Center
Sales and Commercialization Support for all Divisions.
Patent Enforcement and Patent Portfolio Licensing Program
Establishing Enforcement and Licensing Protocols to Combat Infringement
Pricing Models/Early Adopter License Strategy
Mobile Device Manufacturers
Mobile Marketing Providers
Other Device and Hardware Manufacturers
Customers
Our potential customer base includes a broad range of private and public sector customers including, but not limited to:
Federal, State and Local Governments and Agencies
Corporate Publishers
Consumer Websites
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Mobile Advertisers
If we are unable to establish, maintain or replace our relationships with customers and develop a diversified customer base, our revenues may fluctuate and our growth may be limited. Currently, two major customers generate 81%, or 22% and 59%, respectively, of total sales for the year ended December 31, 2012.
Patent Enforcement and Licensing
Our patent portfolio provides ownership of claims within the field of Internet-based and device-embedded audio navigation technologies. We plan to license the exclusive ability to provide these products in the United States in a broad array of industry and product verticals. These potential licensee organizations include but are not limited to the following:
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
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
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U.S. Departments, Bureaus, Agencies and Territories Internet Operations
Native American Business Operations
Native American Governments
Foreign Governments
Appliance Manufacturers
Healthcare Products Manufacturers
Prescription Medication Pharmacy Operations
Pharmaceutical Companies
“How To” Operations
User Manual Publishers
Our technology, with its applications and our issued and pending patents, is intended to serve a broad landscape of clientele. Our 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, we plan to license our 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 our technology in exchange for equity and ongoing royalty payments to us. We plan to secure customized software development and service contracts that add specialized revenue streams from these partner organizations.
Progression of Equity, Royalty and Service Contract Licensing Model
We have developed, along with the Eller College of Management’s Department of Management Information Systems at the University of Arizona, a technology and vertical sales strategy targeted at post-secondary educational institutions. The business opportunity is focused on marketing our solutions and technology to approximately 10,000 higher education organizations in the United States. We have completed a trial implementation of the technology and are developing a joint venture with the Management Information Systems department, which is expected to commence in 2013.
We have licensed our technology through a limited field of use license exclusively in the mobile couponing space to Internet start-up Couponicate, Inc. In exchange for the license, we retain a 19.5% ownership of Couponicate and have established a revenue stream in form of royalties to be paid by Couponicate on all future revenues generated from the use of our inventions.
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Business to Government Direct Sales Business Model
The patent portfolio owned by us and our Internet software platform enable mobility, usability and accessibility, and are primarily marketed through marketing partnerships, resellers and licensed operations. This strategy enables us to address all of the broad markets covered by our technology and allows for a depth and market penetration that we could never approach on our own.
Our management believes that a fertile market exists within the U.S. government which we can pursue and develop directly. Further, our management believes that this direct connection with the government market will allow us to improve reseller and partner-based channel support services in a more efficient manner. We believe this tactic provides our management the ability to better anticipate the needs of and respond to our reseller network and partners with improvements and innovations in our products and services.
Our management 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, our management believes that the potential for recurring revenue generation, the data value appreciation that occurs over time, and low turnover upon establishment of government business all contribute to ideal long term conditions that make this a good market for us to conduct direct sales.
We have already filed for a GSA contract number, established proposed pricing with the GSA and are completing certification on the contracting process. We have also met with the U.S. Department of Agriculture, Education and Commerce and have 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 to be compliant under Section 508 of the Rehabilitation Act of 1973, unless covered by a provable exception. Canada and the European Union have similar requirements.
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. Our category-creating audio browser provides an intuitive Internet experience across all Internet-enabled devices without imposing any additional costs on end users. For government site administrators, our media creation tools are designed to be user-friendly so that sites can be made accessible and maintained as part of any web management process.
Marketing and Sales
The Federal Government boasts nearly 2,000 top level .gov domains and 24,000 websites of varying purpose, design, navigation, usability and accessibility. There are over 600,000 government websites, including the 50 state and all local government websites in the United States.
The UK research company Netcraft released their latest April 2013 survey and concluded there are 187 million active websites in the world today.
We plan to employ a partner-oriented marketing strategy for our technology licenses and software offerings. We expect the marketing strategy to be focused primarily on value added resellers, partners and licensed operations. We plan to directly market our Audio Internet SaaS platform to U.S. government customers.
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