Over the past week and a half I’ve been working on getting into a new position. I have to admit that I’ve been a little hesitant to talk about it, worrying that you’ll all decide I’ve lost my mind. To avoid being accused of losing my mind, here are some of my criteria for evaluating a new company. They are taken right off our FAQ page but I’ve shortened some of them. I’ll compare them later to the stock we are talking about.
Evaluating an Individual Company
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* I look for recurring revenue. I love recurring revenue.
* I look for insider ownership.
* First, I look for a company that is rapidly growing its revenue. By rapidly I’m looking for usually at least 25% per year.
* I look for a company that has a long way to grow. A company that I can hope will be at least a 3 bagger and maybe a 10 bagger.
* That means a company that has a long runway, and that ideally can grow almost forever. What I mean is a company where the addressable market is so big that their share of it allows them to keep growing for the foreseeable future.
* I want a company with rapidly growing earnings. I usually won’t touch a “story” company that is losing money, but that "will break even two years from now”, no matter HOW enticing the story is.
* I pay no attention to GAAP earnings and only look at non-GAAP or adjusted earnings. I know this bothers some people, but it’s what I do. I feel that GAAP earnings ridiculously distort the picture. I especially remove stock-based compensation as an expense.
* I look for companies that are easy to follow. It means that I generally avoid foreign companies.
* I want a company that does something special, a “Rule Breaker”, not a company that just makes a commodity product well.
Now let me tell you about this little company. It’s called AudioEye and its symbol is AEYE. What they do is provide software products that allow handicapped people (blind, deaf, etc) to use the internet. They sell and lease this system to anyone who needs to be compliant in providing equal services for the handicapped. That means all sorts of Federal government bureaus, but also state and local governments, school districts, hospitals, big businesses, libraries, whatever.
For example, a week ago they announced that the they “signed licensing and reseller agreements with Professional Diversity Network, which supports employers that value diversity in the workplace with targeted online networks for job seekers”.
Then yesterday they announced that a southern Arizona school district became the first in the U.S. to launch the Audio Internet platform that provides free accessibility tools to mobile and website users with disabilities. To be exact, they launched 1 preschool, 10 elementary school, 7 junior high school, and 3 high school websites, along with an administrative website in the school district, each of which incorporates AudioEye’s patented technology that supports access to the websites for users with disabilities.
So, how are they doing with this rather innovative idea? They started getting their first revenue in 2012.
In the June quarter last year (a year ago) they had about $200,000 in revenue.
In the Sept quarter they were up 95% sequentially to $380,000.
Then in the Dec quarter they were up another 100% sequentially to $750,000.
In March, they were only up 37% sequentially to $1,030,000. You’ll note that this was five times (500% of) the revenue that they had had just three quarters before.
Then they pre-announced that for this quarter (June), they will roughly triple their revenue sequentially to about $3,000,000 ($3 million) And that they will be profitable!!! .
Note that this revenue is up roughly 15 times (1500%) year-over-year.
Note also that they have a 96% gross margin, so that it almost all drops to the bottom line.
Now I know that this is a tiny little company and selling at less than a dollar a share (with 56 million shares), but let’s see how it fits with my criteria.
1 – Recurring income. They lease a lot of their systems and set up long-term contracts. That’s recurring revenue as I understand it.
2 – Insider ownership. There are no institutional owners listed, from which I’d gather insiders own all of what isn’t owned by the public. And there have been ZERO insider sales listed. I don’t know whether this is because it is so small that the listing agencies don’t capture them, or if there are really zero insider sales and zero institutional owners, but from what I can find out, it seems there is plenty of insider ownership. The company’s website lists one institution (Huntington Chase Financial) that has 687,000 shares registered for sale, but none sold.
3 – Revenue growing at least 25% per year. Well, revenue is growing well more than ten times that fast.
4 & 5 – A company with a long way to grow. There are lots of government agencies, hospitals, libraries, schools, etc, and they are just starting out. They have one school district in Arizona. There are about 15 counties in Arizona and each one has about ten to fifty school districts. And that’s just Arizona
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6 – Profitable. Will be profitable this quarter and just keep going.
7 – I tend to avoid foreign companies. This is a US company.
8 – I want a company that does something special, not just makes a commodity product better. This company certainly qualifies.
Now here are my notes to myself
About AudioEye, Inc.
Incorporated in 2005, AudioEye 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 accessibility technologies. Audio Internet is a technology that utilizes patented architecture to deliver a fully accessible audio equivalent of a visual or mobile website in a compliant format that can be navigated, utilized, interacted with and transacted from, without the use of a monitor or mouse, by individuals with visual impairments. For individuals with hearing impairments, the Audio Internet provides captioning for websites, and the challenges of reaching those with other impairments are also addressed by the technology platform.
Complete with an ever-growing suite of utilities tailored to the needs of different disabled users, the AudioEye Audio Internet Accessibility Platform is a fully scalable cloud-based solution designed and developed to meet the needs and compliance mandates for an ever-growing demographic.
May 2014 – March quarter results
Revenue was $1,032,886 up about 360% from $224,297 the year before, and up 37% sequentially from $752,092 in the Dec quarter.
The revenue run rate per year was about $4.1 million.
Gross profit margin increased sequentially to 96% of sales from 76% of sales in the Dec quarter.
Gross profit was $991,733, (out of $1,032,886 revenue)!!! Costs of services (revenue) were $41,153, down from $45,023 a year ago.
Operating expenses:
Selling and marketing costs were $495,383.
R&D costs were $130,624.
G&A expenses were $1,667,600, up from $444,050 a year ago. The increase in G&A expenses consisted of $807,356 in non-cash stock option compensation expense and $416,194 in other expense increases primarily related to changes in staffing, legal and other expenses necessary to support AudioEye’s anticipated growth.
Depreciation and amortization costs were $99,897.
AudioEye recorded a GAAP net loss of ($1,408,754), or 3 cents per share, versus a net loss of ($396,086), or 1 cent per share, a year ago. Adjusting for the stock-based compensation, adjusted loss was $601,398, or 1 cent a share.
July 2014 Pre-Announcement - Will report profitable quarter on record revenue of approximately $3.0 Million. Second quarter revenue increases approximately 200% vs. $1.0 million sequentially.
AudioEye, creator of the Audio Internet patented audio browsing and automated publishing technology platform, announced that they expect to report record operating results for the June quarter.
We expect to report approximately $3.0 million in Revenue for the June quarter. This is up from $0.2 million yoy and is up 200% from $1.0 million sequentially.
The annualized revenue run rate is thus about $12 million. We thus expect revenue to exceed our previous guidance of $8 million for the year.
(Note that Gross Margins are about 96%!!!)
Revenue for the first half of 2014 and 2013 approximated $4.0 million and $0.4 million, respectively.
Approximately $1 million in contracts were secured with leading national health care companies.
We executed licenses for our technology with organizations involved in consumer packaged goods (CPG), retail and coupon, and online jobs posting during the second quarter.
We are pleased to announce that we expect to be profitable for the quarter.
The Company is engaged in a pilot program to audio-enable websites for one of the largest telecommunications companies in the U.S.
We are involved in discussions with over 50% of the federal government agencies regarding the procurement of our services.
We are involved in early discussions with numerous state, local and municipal governments.
We have obtained scope of work parameters and identified business opportunities with multiple professional sports teams/leagues, one of the largest biopharmaceutical companies in the U.S., and dozens of other enterprises that are expected to result in contract signings over the next several months. (This sounds very early to me).
We introduced the proprietary Real-Time Auto-Discovery & Enablement feature, which allows us to greatly streamline the onboarding process while providing additional solution flexibility.
“We believe that AudioEye’s technology is becoming the de facto standard within the field of Internet accessibility. Revenue growth is an indicator that we are achieving our mission as a team. We are on pace to exceed our previous revenue guidance of $8 million for the full year, and we believe we are in the early stages of the large-scale adoption of our technologies by federal, state and local governments in the U.S. and abroad.”
July 2014 - By the way, no insider sales apparent up to here.
Don’t rush out and buy this stock just because I have. Study it and decide for yourselves. Remember that a lot of this is hopes for the future, not stuff that is guaranteed to happen. But FYI, I had put more in CTSO than I did in KRED, but I have put more in AEYE than in CTSO and KRED combined.
Best,
Saul
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