Tag: aurora
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Aurora Labs
Aurora Labs is one of a long list of ASX pre-revenue IPO’s that achieved massive gains before crashing when the much-hyped revenue failed to materialize. Listing in August 2016, the stock peaked at just under $4 in February 2017 for a nearly 20X return and then lost 90% of its value over the next year. Recently though, Aurora has been staging somewhat of a comeback. Their shares were trading at around 36 cents in September of this year when they began to release announcements regarding progress with their Large Format Printer. The market reacted with predictable over-exuberance and within a few weeks the stock was back over 90 cents. That investors have willingly jumped back into bed with a company like Aurora is a pretty sad indictment of the Australian small cap market. Aurora’s brief history on the ASX is a tale littered with failed targets, unclear communication and a steadfast refusal to own up to any of their mistakes. It is also a story worth knowing for anyone interested in investing in pre-revenue stocks.
Aurora labs was founded in August 2014 by David Budge, an engineer and product designer from WA when he posted on Facebook that he wanted to start a rocket company. The rocket idea didn’t last long, and the company quickly switched to 3D printing. If you are to believe the official company version of events, within 18 months of that Facebook post Aurora labs developed three separate revolutionary techniques for 3D metal printing with major implications for reducing costs, increasing speed and managing 3D printing software. What exactly these inventions were has never clearly been articulated, but with a message as enticing and marketable as this a public listing was inevitable and by June 2016 Aurora had launched their prospectus to raise $3.5 million.
While the prospectus was largely focused on returns far in the future, a key point in their initial pitch was their Small Format Printer. This printer was designed to be substantially cheaper than their competitors and was apparently already in beta testing with 31 secured pre-sales. The Small Format Printers price was listed in in the prospectus at between $40,000 and $43,000 USD each, so this was a significant amount of sales for such a young company.
The shares listed on the 12thof August 2016 at $0.20 cents and shot up in value quickly. In December 2016 they announced that they were shipping their first unit of the Small Format Printer to customers and by the 10th of February 2017 the share price had reached a staggering $3.93, representing returns of just under 1,900% since listing and a market capitalization of over $216 million.
As is the story with many pre-revenue companies though, it was when the revenue was supposed to materialize that the wheels fell off. On their quarterly activities report on the 28th of April 2017 the company announced that they were now ready to focus on sales, as they had completed the necessary certifications and testing to sell the Small Format Printer internationally. Despite these assurances, cash flows from sales for the March to June period was only $103,000 and dropped to $6,000 for the next quarter. For a company whose product was apparently market leading with a strong order bank of pre-sales this made no sense. How could a company selling 3D printers for $40,000 USD each take revenue of only $6,000 a quarter when they apparently had an order bank of 30 pre-sales to fill?
Investors looking for an answer had to wait until November 2017, when the company finally admitted via a market update that the much-vaunted pre-sales had been sold at a fraction of the current prices. Instead of the $40,000 USD listed in the prospectus, the pre-sale prices were for prices between $7,000 and $9,000 AUD. Given the retail price had now risen to USD $49,999, Aurora labs was now deciding to cancel their pre-sales and refund the prospective customers their deposits.
It is hard to understand how Aurora got away with this announcement without a slap on the wrist from the ASX. Until this announcement Aurora had given no indication that their pre-sales were for anything less than their current proposed price, if anything they had worked hard to give the opposite impression.
The below is a direct screenshot from the prospectus, these two sentences come one after the other:
Any investor reading the above sentences would have naturally assumed the pre-sale prices were somewhere around $40,000 USD. In addition to this quote the pre-sales are mentioned on 6 other occasions in the prospectus, and not once is the fact that the pre-sales were sold at heavily discounted prices disclosed.
After listing, the company continued to mention pre-sales in their announcements. In a January 2017 announcement the company stated that:
For a product that’s main selling point is its cheapness compared to its competitors, how does a sale at less than 25% of the current market price indicate demand from “all corners of the globe?” It is the equivalent of a new phone company using sales of $200 smart phones as evidence for demand of an identical model at $800.
Another obvious question is why Aurora waited until November to dishonour their pre-sales. At the time of their prospectus their retail price was already considerably higher than the pre-sale prices, yet the company waited more than 12 months before deciding to cancel the pre-sale orders. The obvious explanation that they were keeping their pre-sales on the book as long as possible to maintain their share price is hard to overlook.
Even leaving the pre-sales aside, Aurora has made some dramatic promises regarding their Small Format Printer that have failed to materialize. In April 2017, the CEO David Budge gave a speech at an investors conference where he said:
A lot of investors took notice of this statement, as if true it meant the company was close to achieving annual revenue of $18 million USD a year from the Small Format Printer alone.
However when their annual report for 2017 was released more than 15 months later, revenue was only $329,970, indicating sales of not even 1 device per month. In typical Australian small cap fashion, not only does the annual report fail to explain why sales were so far off this forecast, it doesn’t even acknowledge that this forecast was made.
You might be wondering at this point why I’m bothering to write about this. Another Micro Cap company played the PR game and managed to pump the share price to a ridiculous valuation with a bunch of promises that they never delivered on. Hardly a unique occurrence for the ASX. It matters because too often the companies getting funding on the ASX seem to be bad companies with good PR departments. A central promise of capitalism is that money can be efficiently allocated from those with money to those who need it. At it’s best, the share market is an effective vehicle for getting money from investors into the hands of companies with great ideas and limited funds. The reality is every dollar spent funding or purchasing a stock of a hype company is a dollar not going to a legitimate pre-revenue company, and there are a lot of legitimate pre-revenue companies out there that desperately need money.
The tendency of companies to make wild predictions also puts pressure on other small business owners looking for investment to be equally optimistic. A friend of mine owns a growing business that has achieved impressive growth of around 40% a year for the last couple of years. Their latest forecasts for 2019 increases this growth to nearly 100% for FY18, yet investors so used to seeing forecasts like Aurora’s remain unimpressed and have asked if there are any ways to increase this. For the industry my friend is in, growth at more than 100% would likely have serious affects on his margins and risk profile, but this is a difficult point to make to investors habituated to start-ups promising multi-million dollar revenues in years.
As investors, we have a responsibility to be more critical when presented with the next slick presentation light on detail but big on promises. If this is asking too much then at the very least we need to ensure that executives of small companies are held accountable for their promises. When a CEO says that he is intending to sell 30 devices a month, he shouldn’t be able to release an annual report 15 months later showing total sales of less than 10 for the year without even bothering to address what went wrong. And when that same CEO starts making chest beating announcements about their latest product, the market’s reaction should be a little more suspicious.
Registry Direct
Overview
Registry Direct is a software business that provides share registry services to publicly listed and private companies. This includes keeping track of shareholders, facilitating the issuance of new capital, convening shareholder meetings and providing meeting minutes, share raising information and other required communications to shareholders. Registry Direct aims to provide low cost registry services to smaller privately-owned companies than have typically been ignored by the established share registry companies. The maximum raise is 6 million, with a post raise market cap of 20.5 million.
Founder
One of the main things I look at when evaluating the IPO’s of new companies is the strength of the Managing Director/CEO and how long they have been involved in the business. It was a key factor in why I invested in both Oliver’s and Bigtincan, and why I passed on Croplogic. Registry Direct’s founder is a guy called Steuart Roe. Steuart has been a key figure in the Australian investing world for years. He was involved in launching the first Exchange Traded Fund on the ASX back in 2001, and more recently was the manager of Aurora Funds Management from 2010 to 2014. It is his time at Aurora Funds Management that may potentially be a concern for some investors. Aurora Funds Management was created when three separate funds management companies were merged in 2010. One of the funds that was part of the merger was a fund founded by Steart called Sandringham Capital, and Steuart became the Managing Director of Aurora Funds management upon the new funds creation.
Without going too much into the details, the fund performed poorly, and Steuart Roe left the business in 2014. This article has some insight into the problems as does this hot copper thread where someone from registry direct actually turns up to give Steuart’s side of the story.
Having spent some time reading through all of this, it seems Aurora’s problems were caused by a few unlucky investment decisions rather than incompetence or mis-management. As a result, I don’t see how this should have any negative impact on how this IPO is evaluated. On the other hand, the experience and connections Steuart must have picked up in his time running investment funds seem to make him uniquely qualified to lead a successful share registry business. If you look at how quickly Registry Direct has grown since the business began in 2012 a lot of this has to be down to Steuart’s connections and experience enabling him to both design a product that fund managers and company owners would like, and have the connections to sell if effectively. Post listing Steuart will own just under 50% of Registry Direct’s stock and will continue in his current role as managing director. And all in all, I see his significant stock holdings and continued presence in the company as a significant bonus for this IPO.
Financials
Registry Direct are one of the few companies I’ve reviewed whose only pro forma adjustments actually reduce net profit.
Below are the unadjusted audited figures for the last three years:
Whereas the figures once pro forma adjustments have been made are here:
The rationale behind the reduction in revenue is that Registry Direct received consulting fees unrelated to the share registry business in 2015 and 2016 of $377,167 and $555,224 respectively that have been excluded from the pro forma figures. Interestingly enough, these fees came from Steuart’s old company Aurora Funds Management (Aurora Funds Management was renamed SIV Asset Management in 2016). While Steuart stepped down from his Managing Director position in 2014, he only resigned from the board of SIV Asset Management in June 2017. It would be interesting to hear what shareholders of SIV Asset Management think about the company shelling out over $900,000 to a company owned by one of its directors – but that is a
topic for another day.
There can often be a real lag in revenue growth for software companies in early years, with every dollar of revenue dwarfed by massive investments in software development. That Registry Direct managed to grow its revenue so quickly is impressive, as is the fact the company managed to achieve profitability in 2015 and 2016, even if it was only due to the somewhat suspect related party consulting fees.
Industry and strategy
The Share Registry market seems to be a relatively healthy industry, with good growth potential and profitability. Computershare and Link, the two biggest companies in this sector in Australia grew their profits by 68% and 101% respectively over the last financial year. As mentioned at the start of this post, Registry Direct intends to diverge from these companies by providing cheaper registry services to a larger number of smaller privately-owned companies. The prospectus uses the below table to present Registry Direct’s proposed fee structure.
The prospectus also indicates they intend to drive this growth by allowing accountants lawyers and other professionals to sell “white label” versions of the Registry Direct software. From an outside perspective at least, this makes a lot of sense. If Registry Direct can offer simplified registry services through a standard software package, increasing customer numbers by allowing accountants and other professionals to sell Registry Direct’s software on their behalf seems like a logical way to increase revenue without hiring a large salesforce. This strategy should be further buoyed by the Turnbull government’s recent legislation changes regarding crowdfunding in Australia. These changes make it much easier for unlisted companies to raise money from the public, which should result in a dramatic increase in the number of private companies looking for cheap registry services.
Despite how promising this all sounds, it should be noted that at the date of the Prospectus, Registry Direct only had 60 share registry clients and its two largest registry clients made up over $400,000 of the companies FY17 revenue. It seems that last year at least, Registry Direct was still operating more like a typical share registry business, providing tailored services to a smaller number of high paying customers. This pivot to a larger number of lower cost clients may be good in theory, but it is worth remembering that at this stage it is more of a plan than current business operations.
Valuation and Verdict
At only $648,000 of FY17 revenue vs a market cap of 20.5 million, this IPO is a little more expensive than I would prefer. Market cap divided by revenue is a troubling 31.7, vs 6.6 for Bigtincan, a Software IPO I invested in earlier this year. However, considering the company was only founded in 2012 and just how quickly revenue has grown over the last few years, I feel that this expensive price is at least somewhat justified.
At only $648,000 of FY17 revenue vs a market cap of 20.5 million, this IPO is a little more expensive than I would prefer. Market cap divided by revenue is a troubling 31.7, vs 6.6 for Bigtincan, a Software IPO I invested in earlier this year. However, considering the company was only founded in 2012 and just how quickly revenue has grown over the last few years, I feel that this expensive price is at least somewhat justified.
Overall, the main thing that makes me willing to overlook this high valuation is how confident I feel that Registry Direct will be successful. The company has demonstrated that it can grow revenue quickly, has recorded profitability in previous years, and is led by an impressively well connected and experienced Managing Director. What’s more, the company is operating in what seems to already be a relatively profitable industry that is likely to see an explosion of demand thanks to the Turnbull governments legislation changes. While I would be happier if the price was a little lower, for these reasons Registry Direct will be my fourth IPO investment since starting this blog.
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