AEYE non-cash licensing revenue

I believe I’ve solved the case of the AEYE non-cash licensing revenue.

In my “deep dive” post, I had assumed that $675k of the $1m Q1 revenue was non-cash and therefore, only about $350k of Q1 revenue would ultimately be paid to the company in cash. As a result, this made the increase in AR seem impossible.

However, upon another reading of the company’s revenue recognition policy for licensing revenue. The revenue related to any licensing sales is recorded to revenue over the term of the license. Therefore, although they sold $675k of noncash licenses during Q1, only a portion of those sales are included in Q1 revenue (meaning most of the Q1 revenue are other sales that will be paid in cash).

Just taking a high level estimate, let’s say that those noncash ones are 3 year licenses (36 months), which means the revenue from those licenses would be recorded at $19k/month (=$675k/36) or $56k per quarter. Assuming those deals closed midway through Q1, only half of the quarterly $56k, or about $28k of revenue would have been recorded to Q1, and all of the rest of the $1m Q1 revenue are going to be paid to AEYE in cash.

If that is the case, then almost all of the $1m of Q1 revenue will be paid to the company in cash, and the increase in AR from December 31, 2013 to March 31, 2014 seems reasonable.

The 10-Q does say that any licenses sold in perpetuity are all recorded to revenue on day 1, so it’s possible that one or more of the three $225k non-cash licenses which make up the $675k are “perpetuity” licenses and therefore, maybe a larger chunk of Q1 revenue is non-cash than the $28k estimated above. Based on the increase in AR, I would imagine it only be one, at the most, of those three $225k licenses.

I will say that the wording in the 10-Q is poorly worded, as it could easily be interpreted to mean that all $675k of the non-cash license sales hit revenue in Q1 (it actually pretty much says that), but I no longer believe that is the case. The noncash portion of Q1 revenue is most likely either the $28k or $253k ($225k + 28k, assuming one of the noncash license sales was a perpetuity license). It would be nice to see more of this detail laid out in the the company’s future SEC filings and I will definitely be sending them a recommendation that they do so.

It also still suggests a fairly slow collection of receivables given that March 31st AR was higher than the total sales for Q1, meaning that at least some of their December 31, 2013 AR was still not collected 90 days later and most of the Q1 revenue was not collected by March 31st (which could be a result of timing of the Q1 revenue occurring late in the quarter).

Having discovered this, which has me more confident that most of the $1m Q1 revenue and (hopefully) most of the $3m+ Q2 revenue that they pre-announced, will be collected in cash, I actually bought some more shares late today when I saw the price in the high 70’s cents. I may regret it, but I think it could turn out to be a good decision.

Also, I cannot corroborate this, so take it for what it is worth, as I found it on a Yahoo! Finance message board posting from today, but this person is claiming that a firm named Janco Partners initiated coverage with a buy. Google searches of my own couldn’t find this information available publicly. This is what was in the Yahoo board post:

Janco Partners has just Initiated Research on AudioEye, Inc. (AEYE) with “Buy” Recommendation
“Investment Opinion”
"We initiate coverage on AudioEye (AEYE – $0.82) with a Buy (2) rating. This is the most favorable opinion the Janco system allows for small and/or undercapitalized companies. We believe that new capital would likely enhance our opinion by reducing risk. However, the price, terms, and conditions of any capital raise could prove to be positive or negative for current shareholders.
Our initial price target is $1.75 for now. Should the company succeed in raising money on a reasonable basis or create a partnership with a well-known internet supplier, we think $3.00 is a better target."

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I didn’t find it yet either yet (I have a link I can’t access), but I did find these interesting links, connecting AEYE and Janco.

Audioeye Inc · D · On 8/14/13
http://www.secinfo.com/d165Ha.x2m.htm

Audioeye Inc · D/A · On 12/5/13
http://www.secinfo.com/d165Ha.x3h.htm

I also read about an S-1 out today, but I didn’t see any link to it.

-Frick

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Just taking a high level estimate, let’s say that those noncash ones are 3 year licenses (36 months), which means the revenue from those licenses would be recorded at $19k/month (=$675k/36) or $56k per quarter. Assuming those deals closed midway through Q1, only half of the quarterly $56k, or about $28k of revenue would have been recorded to Q1, and all of the rest of the $1m Q1 revenue are going to be paid to AEYE in cash.

You were going to send some questions to AEYE investor relations. Perhaps they can confirm what you think in going on with AR, revenue recognition, and expect future cash receipts.

I emailed some questions to AEYE IR recently and just got back the below response:

As a matter of policy, we cannot respond to investor questions via email.

From a practical perspective, I would suggest that you dial in for AEYE’s second quarter investor conference call, which is scheduled for 11:00 Eastern Daylight Time on August 11, 2014. There will be an opportunity for shareholders and other investors to ask questions of management at that time.

Sincerely,

R. Jerry Falkner, CFA
President
RJ FALKNER & COMPANY, INC.
P. O. Box 310
Spicewood, TX 78669
800-377-9893
p_baron@yahoo.com

Found that Janco link (from investor hub website)

http://investorshub.advfn.com/boards/read_msg.aspx?message_i…

PDF file (22 pages)
https://dl.dropboxusercontent.com/u/13052989/Aeye%20janco.pd…

-Frick

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I believe I’ve solved the case of the AEYE non-cash licensing revenue.

Thanks, Mekong, Great find. It makes sense and I hope it’s correct.

Saul

I also read about an S-1 out today, but I didn’t see any link to it.

Frick

Thanks for that, I hadn’t seen it before you mentioned that, but it is available at the sec.gov site when you do a filings search for audioeye

http://www.sec.gov/Archives/edgar/data/1362190/0001047469140…

The following shareholders are looking to sell the following number of shares (5.7 million total) in this offering. They already own about half of the shares (so no dilution, just existing shareholders that want to sell to other shareholders) and the other half of the shares, they have warrants with a 40 cent exercise price that they would exercise and in order to sell them. The warrant related shares would be dilution. However, these are some of the in-the-money warrants that I mentioned in the deep dive would definitely be causing future dilution assuming the stock price stays close to a dollar or more.


1,333,334 Aberon Capital Master Fund, L.P  	
38,763    Ilan Adika  
109,855   BTIG, LLC  
19,382    David Fullerton  
2,866,666 David Moradi 
1,333,334 Ernest W. Purcell & Anne M. Purcell JTTEN  

The “current price” noted on the S-1 is $1.05 so this was prepared a few days ago (although just filed yesterday) and we’ll see if the sellers still want to move ahead with the sale now that the price has dropped into the $0.70’s. I’m guessing they want to be ready if the price pops when Q2 results are announced on August 11th. These folks most likely invested in the company when the price was around 40c and are hoping to cash out on a quick 100%+ gain.

It would be a plus if the company receives the 40c exercise price on nearly 3 million warrants. This would provide a much needed more than $1 million of cash right now.

The main thing I was looking for is to make sure that we don’t see the names of any of the companies executives or management looking to sell right now. I don’t believe any of those folks fall into that category which is good. Assuming they know more than we do about the business trend and where they feel they are headed, it would be a bad sign if they were cashing out, even a portion of their holidngs at this time.

mekong

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