Here's the new position that I bought

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
* 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
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.



For FAQ’s and Knowledgebase
please go to Post #2319


Are you the cause of the breakout?

this one is intriguing, thanks for posting, Saul

I noticed a couple of Congressmen recently added to their Board of Directors and Advisory board, so I went to the 10-K to read up a bit more on them and the company, and noticed that their auditor is a small firm, Malone Bailey. It’s not surprising that a company of this size would have a small auditor like this.

I looked into Malone Bailey a little more (it’s the accountant in me, if I don’t feel comfortable with the auditor, I can’t feel comfortable with any of a company’s reported numbers). Their last couple of their PCAOB inspection reports don’t look too bad. What was surprising is that this list of accounting firms…

shows that Malone Bailey’s revenue decreased 22% in the past year. That’s a huge percentage, particularly in the current environment where most accounting firms are growing. I have no idea why they have this big dropoff. On a small base of clients like they probably have, losing a couple large clients could potentially have this big an impact, but this was certainly surprising.

Despite that, this is an interesting enough story that I plan to research them some more. Glad you put this one on my radar.



Saul, thanks for giving us insight into how you go about analyzing a company. This example really helped me!


From their last 10K:

In connection with the Separation, we entered into a Royalty Agreement with CMGO. Pursuant to the Royalty Agreement, for a period of five years, we would pay to CMGO 10% of cash received from income earned or settlements on judgments directly resulting from our patent enforcement and licensing strategy, whether received by us on any of our affiliates, net in either case of any direct costs or tax implications incurred in pursuit of such strategy as they relate to the patents described in the Master Agreement. Additionally, we entered into a Services Agreement with CMGO whereby, without duplication to the amounts payable under the Royalty Agreement, for a period of 5 years, CMGO will receive a commission of 7.5% of all revenues received by us after the Separation from all business, clients or other sources of revenue procured by CMGO or its employees, officers or subsidiaries and directed to us and 10% of net revenues obtained from a specified customer.

The Royalty Agreement was terminated on Nov 12, 2013, but as far as I can tell the Services Agreement is still in effect through Aug 16, 2017.

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Here are links to AudioEyes recent press releases:

This is the link to the second quarter pre announcement…

This is the link to the Vail school district launch:…

If you want to see the AudioEye product on a website, here is the link to one of the Vail high schools that is using it. You can get a feel for what the product does.

I starting following AudioEye in November 2013 upon a recommendation from my son who heard about it from a friend. I bought some shares then, and sold a few on April 1. I then bought a bunch in early May, and bought some more luckily just a couple days before the latest preannouncement.

My son and I are both holding on now and are looking/hoping for $2-$3 perhaps within the next two years.

I have spoken on the phone to their CFO.

I have to believe that their sales will continue to grow. But to what extent. At some point they will disappoint. I think things to watch going forward are:

  1. Their cash flow, and cash needs.
  2. Last quarter they had a big increase in accounts receivable. I would watch how that grows in is being used/managed.
  3. A large portion of their G&A costs are “non-cash stock option compensation”. This has me a little concerned and considers watching.

With all that being said, I see this as a great opportunity to get in the early stages of what is essentially a startup company. It does appear that they have a relatively unique product that does what I think will become a standard in the future. It is almost like a talking “SIRI” to work on websites. It would not surprise me that they could be a takeover candidate for somebody much larger (Microsoft, Verizon, Apple, Google all come to mind). Being so small it would be an easy acquisition target, and could easily fit into each company’s model and future direction.

Obviuosly I am long and extremely bullish on this company.



Let me give credit to Z-Bar who wrote about AEYE on the MF New Stocks board, and introduced me to it. (He posted here on post #2506 just before this one). He’s been following the stock for much longer than I have.


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Are you the cause of the breakout?

Hi Sherall,

The pre-announcement of sequential tripling of revenue was the cause of the breakout, and was also what interested me in taking a position.


Malone Bailey’s revenue decreased 22% in the past year.

Hi Mekong,

When little companies like AEYE get a little bigger, they probably move on to one of the major accounting firms. Clearly something like that must have happened to Malone B, having another client move on. But I wasn’t buying a little accounting firm, I was buying AudioEye.

Thanks for checking the PCAOB inspection reports for us. I wouldn’t even know what they were.


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If you want to see the AudioEye product on a website, here is the link to one of the Vail high schools that is using it. You can get a feel for what the product does.

ZBar, Once you go to the school website, how do you find the Audio Eye?


Way down in the lower right corner of the page is the AudioEye info. “click or press spacebar to access” AudioEye.


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Way down in the lower right corner of the page is the AudioEye info. “click or press spacebar to access” AudioEye.

Thanks banjr. I completely missed it.


But I wasn’t buying a little accounting firm, I was buying AudioEye.

Agreed 100% and that’s why I’m still interested and researching the company further despite this.

However, although, AudioEye is certainly too small to be using a big 4 firm (and paying big 4 rates), if they choose not to use one of the mid size firms (BDO, Grant Thornton, McGladrey etc), considering that they are publicly traded, it would be nice to see the firm they are using somewhere higher than 19th on this list of small firms in the southwest, and one of the only ones with negative growth.

That being said, it may mean nothing at the end of the day. I would just put it on my list of potential red flags.


there are some solutions now for web access for the blind. I have no idea how useful they are. Some e that showed up on a quick search…

Does AuduioEye offer any real improvement over existing programs? Is there any moat here?

Obviously this kind of service fulfills a real need. Probably a need substantially inflated by government regulations.

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According to its 10-K, most of the competing solutions are using screen reader technology alone or coupled with fond enlargement technology. They have to be installed on the user’s computer and they only interpret text but not images or other non-text content. And they lack the ability to handle web pages that have nested layers.

AEYE’s solution creates audio files out of the original web page. A customer (content owner) installs a program in its home page that, when the user gets there, will play a tune. Hearing the tune, the user simply press a button that will take the user out of the original webpage to the audio files.

This solution costs the end user absolutely nothing and allows the end users to access AEYE-powered websites anytime and anywhere from any devices.



This is the kind of company that is ripe for the picking by Google or Facebook. Can you imagine what would happen if Google rolled this out as a free service, and integrated this with their search crawlers?

They could pretty much enable a giant swath of the internet for the visually and hearing impaired, while they gained access to a previously unobtainable marketing segment. Seems like valuable user data to me.


thanks mview ,that’s very helpful.

Use by content owner seems to be important. If a reasonable means exist ,it is up to purveyors to help the handicapped. If a wheelchair bound person wants to go to Wal Mart he shouldn’t have to bring his own ramps to get over curbs.
And it might not be just the blind who use it. Some people absorb audio information better than visual information. People who like lectures better than books…

Thanks for posting Saul.

Is anyone concerned that there is a lawsuit pending and that they had to restate their financials in May?…

Sox Nation

Hi Sox Nation. I’ve been out of AEYE for what must be close to a year now. I’D CERTAINLY BE WORRIED, and I wouldn’t advise you to take a position in it. (That doesn’t mean it won’t go up 20% tomorrow, but it could go to zero too).


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I didn’t realize that the date was 2014 post, my bad.