AEYE Stock Compensation

I too am a bit concerned about the stock awards to management. It looks like the issued and outstanding share count for the company is around 55M. The current maximum awards (per year) available in their stock compensation plan is 5M or an annual 9% dilution (see below to see part of their plan as described in their last 10K). A 9% dilution is more than I’d like to see for any company. However, this company is very small and has been growing very fast so as long as that growth rate continues, I think I can tolerate a 9% annual dilution. Also, their executives have very low salaries (at least as of their last 10K); CEO earned $75K in salary in 2013 (CTO: $87K, COO: $69K). The company has a very low cash position: $1.85M as of 12/31/2013. They have 18 employees and they will need cash to grow. So we can expect more dilution in the form of equity financings and stock-based compensation.

AudioEye, Inc. 2012 Incentive Compensation Plan, AudioEye, Inc. 2013 Incentive Compensation Plan and AudioEye, Inc. 2014 Incentive Compensation Plan

On December 19, 2012, our board of directors and holders of a majority of our outstanding shares of common stock adopted and approved the AudioEye, Inc. 2012 Incentive Compensation Plan (the “2012 Plan”), on August 20, 2013, our board of directors and holders of a majority of our outstanding shares of common stock adopted and approved the AudioEye, Inc. 2103 Incentive Compensation Plan and on January 27, 2014, our board of directors adopted and approved and on March 5, 2014 holders of a majority of our outstanding shares of common stock adopted and approved the AudioEye, Inc. 2014 Incentive Compensation Plan (the “2014 Plan”, together with the “2013 Plan” and the 2012 Plan, the “Plans”). The purpose of the Plans is to assist us in attracting, motivating, retaining and rewarding high-quality executives and other employees, officers, directors, consultants and other persons who provide services to us. The following summary of the Plans is qualified in its entirety by the specific language of the Plans.

Administration. The Plans are to be administered by a committee elected by the board of directors, provided, however, that except as otherwise expressly provided in the Plans, the board of directors may exercise any power or authority granted to the committee upon formation under the Plans. Subject to the terms of the Plans, the committee is authorized to select eligible persons to receive awards, determine the type, number and other terms and conditions of, and all other matters relating to, awards, prescribe award agreements (which need not be identical for each participant), and the rules and regulations for the administration of the Plans, construe and interpret the Plans and award agreements, and correct defects, supply omissions or reconcile inconsistencies in them, and make all other decisions and determinations as the committee may deem necessary or advisable for the administration of the Plans.

Eligibility. The persons eligible to receive awards under the Plans are the officers, directors, employees, consultants and other persons who provide services to us. An employee on leave of absence may be considered as still in the employ of ours for purposes of eligibility for participation in the Plans.

Types of Awards. The Plans provide for the issuance of stock options, performance stock units, stock appreciation rights, or SARs, restricted stock, deferred stock, warrants, dividend equivalents, bonus stock and awards in lieu of cash compensation, other stock-based awards and performance awards. Performance awards may be based on the achievement of specified business or personal criteria or goals, as determined by the committee.

Shares Available for Awards; Annual Per Person Limitations. The total number of shares of common stock that may be subject to the granting of awards under each of the Plans at any time during the term of each of the Plans is equal to 5,000,000 shares. This limit will be increased by the number of shares with respect to which awards previously granted under the Plans that are forfeited, expire or otherwise terminate without issuance of shares, or that are settled for cash or otherwise do not result in the issuance of shares, and the number of shares that are tendered (either actually or by attestation) or withheld upon exercise of an award to pay the exercise price or any tax withholding requirements.

The Plans impose individual limitations on the amount of certain awards. Under these limitations, during any fiscal year of ours, the number of options, stock appreciation rights, shares of restricted stock, shares of deferred stock, performance shares and other stock based-awards granted to any one participant under the Plans may not exceed 500,000 shares, subject to adjustment in certain circumstances. The maximum amount that may be paid out as performance units in any 12-month performance period is $250,000, and the maximum amount that may be paid out as performance units in any performance period greater than 12 months is $500,000.

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Thoughts on AEYE

Management Pay:
The senior management signed new employment contract with the company by which the CEO will be paid $200,000 in addition to bonus and stock award. Each of the rest of the senior management team has salary slightly less than the CEO.

Cash/Margin
The gross margin is extremely high and COGS, based on their latest 10-K, is very insignificant mostly for payment to contract software developers. I cannot believe their product development is done or almost done. I would think that as they sign up more clients, they will have to beef up its development efforts, either in-house or contract out. If they count software development cost as COGS, then that margin will have to come down quite a bit.

Audio internet sounds like a big market and as such it will attract competition. Companies like NUANCE, which AEYE listed as a competitor, may move in more aggressively. This may put pressure on AEYE to spend more dollars on product development and improvement.

CapEX
My understanding is that AEYE has patented software that will scan web pages and generate audio files. When a user surfs AEYE powered web pages, it essentially plays back the audio files. AEYE uses the SaaS model, which means, I think, all the audio files are stored in AEYE’s computers and users pull them out from the cloud as needed. This provides on-going revenue and also a way to keep the clients.

As they sign up more clients and as time goes on, the number of web pages, and audio files, will explode. There comes CapEx. The amount of storage arrays, servers, switches and hardware support contracts and so on. To maintain or improve service performance, scalability, availability and recoverability will all require more and more hardware, software and man hours. Of course they can use cloud services from vendors like Amazon or Rackspace. But non the less it will cost money.

Overall I think this is a very promising comoany.

Regards.
-M

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