As bad as this sounds, and I’m sure the shares will get punished today, this actually isn’t so bad as far as I’m concerned.
They basically are saying that they are no longer going to treat the non-cash revenue as revenue, which many on this board and elsewhere have always said that those revenues don’t really count and I personally never considered them revenue in any analysis or valuation that I performed on AEYE.
They still say that they had $2m more cash revenue bookings in Q1, on top of the $2m+ they had in Q4, so that’s a good sign and more important to me than the fact that they will restate their old financials to exclude the cash revenues.
Obviously the fact that they couldn’t record their financials properly is bad sign from a control and management perspective. They fired the CFO and hired someone new who seems to have a much better pedigree.
This ride will continue to be bumpy, but if they keep booking significant cash revenues, they could have success in the future. Still, as I’ve said before, this is by far the riskiest investment I’ve ever owned and today’s news certainly supports that
Investor call just ended. I’m not crazy about the way the structured the call. It started with some prepared remarks about the fact that they didn’t cover all of the accounting requirements to book the non-cash revenue as revenue since April 1, 2014. They seem to think that all of the noncash revenue recorded prior to 4/1/14 was correct so they are only planning to reverse the noncash rev starting in April 2014. My guess is that’s probably right. I’m sure the first time they did the noncash revenue they went through every aspect to ensure it was correct and then made some assumptions that subsequent deals were similar enough that they should be recorded the same way, when in reality, they were not.
The part I really wasn’t crazy about on the call is after a couple of minutes about the restatement and change in CFO, they spent at least twice as much time selling their product and the opportunity in the marketplace. I don’t think this is the right time to go into the kind of detail they did and it just didn’t come across very well.
There were a couple questions just confirming that there will be no changes to their cash balances or cash revenues which it sounds like there will not be. The Morgan Stanley analyst that asked a question, still does not understand their business and seemed to think that the $2m of new cash revenue contracts they signed in Q1 is the same as recording $2m of revenue in Q1. Management patiently explained to him that he was either misreading or misinterpreting the press release. They were nice to him but I can’t believe he understands so little about the most important aspect of this business. I’m sure he just spends so little of his time on this company that he hasn’t invested the time to understand them.
So, everything is pretty consistent with what I expected when reading this morning’s press release. Looks bad because they didn’t have good controls over reporting the financial results of the company. Having such a small audit firm surely contributed to that. It’s likely that the market may take a long time to give them the benefit of the doubt. However, if they keep growing the cash revenue and can keep costs in check, they can be successful. The new CFO did say all of the right things and seems to know what he’s doing. Time will tell.
The Morgan Stanley analyst that asked a question, still does not understand their business and seemed to think that the $2m of new cash revenue contracts they signed in Q1 is the same as recording $2m of revenue in Q1. Management patiently explained to him that he was either misreading or misinterpreting the press release. They were nice to him but I can’t believe he understands so little about the most important aspect of this business.
I can’t believe they actually have an analyst following the company. As far as the actual cash revenue contracts, I would still be suspect of what they really amount to. It is a contract, so it is probably recognized over a period of time. If they only booked them, who knows when they will be collected? And if they are based on a deliverable, they can always get in dispute.
I view the call as an attempt to make lemonade from lemons. On a business basis it will be some time before we know the depth of the malaise. On the positive side, the product is definitely in greater demand than some months ago. On the negative side, the stock offering in January will have serious consequences to the issuing company; the
prior Sarbanes-Oxley violations may impact more than the exited CFO; the fundamental position of the company’s balance sheet and working capital will await the June CC.
The company may well be blessed that they are so small, there aren’t enough assets for the lawyers to fight over. It will be worthwhile to follow along and see where the technology ends up, for the foundation of a great business is there and a worthwhile opportunity might show up from a resolution of the problems. For the sake of those here invested,
I hope that the existing shareholders retain some of the upside.