Tag: Hype
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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.
Buy My Place
In December 2015, Killara Resources, an unsuccessful Indonesian coal mining company announced they would be relisting on the ASX as the online real estate sales company Buy My Place. The backdoor listing involved an offer of up to 25,000,000 shares at a price of 0.20 each to raise $5,000,000.
Unlike some of the more speculative backdoor listings that the ASX is known for, Buy My Place was an actual established business. Launched in 2009, Buy My Place let Australians sell their house cheaply without spending thousands on real estate commissions. For a low fixed cost, they gave you an ad on Domain and the other major property sites, photographed your property, and sent you a billboard for the front of your house. It was a simple model, designed to demonstrate just how overpaid real estate agents are in an age of inflated house prices and increased reliance on online research.
BMP re-listed on the ASX on the 15thof March 2016 at a Market capitalisation of just over $11 million, roughly 11.5 times their pre-IPO annual revenue. In the January – March quarter the company achieved revenue of $288,000, and by the July-September quarter this had grown to $514,000. Not long after that, the share price hit a high of $0.44 on the 28thof October 2016, a 120% return on investment for IPO investors in just over seven months.
While investors didn’t know it at the time, 44 cents was as good as it got. Over the next few months the share price dropped steadily, reaching an all-time low of 15 cents in July 2017. There was no defining moment that can explain this slump in price. Throughout this period updates from the company continued to be positive, promoting record cash-flow numbers with nearly every quarterly report. Reading back through the company announcements, there is nothing to suggest that this is a company losing 65% of its value.
It is only when you look at the Prospectus in more detail though, do you get a sense of how Buy My Place has failed to live up to its own expectations. While there were no forecasts in the Prospectus, the three tranches of performance rights for senior Buy My Place employees gives us an idea of what the company, and by extension shareholders, were hoping for. The three tranches vest if the company achieves 8,000 property listings, $10,000,000 in revenue or EBITDA of $3 million in one financial year by July 2019. As it stands, these goals seem completely out of reach. If you annualize their last quarter numbers, Buy My Place is on track for annual listings of 1676, revenue of $3,668,000 and so far away from profitability it’s probably not even worth discussing. Whether a 10x increase in revenue over three years while retaining profitability was a realistic goal or not, somehow it seemed that this became the standard the company has been judged against.
A slightly more charitable way to look at Buy My Place’s lukewarm first couple of years on the ASX is that convincing someone to sell their own home without a real estate agent is a harder transition than both investors and the company initially realized. People may resent the huge amounts of commission Real Estate Agents pick up with relatively little work, but the step from resentment to taking the pressure of selling a house on yourself is another matter entirely. In February 2017 the company seemed to acknowledge this fact, and launched a full-service package, where for a higher fee of $4,595 home sellers gain access to a licensed real estate for advice, who also manages the whole process. This strategy seemed to be part of a broader re-positioning that happened throughout 2017, where the company sought to increase its revenue per client. In July, Buy My Place announced the Acquisition of My Place conveyancing, an online conveyancing firm they had referred business to in the past. A few months later in September Buy My Place announced a partnership with FlexiGroup, allowing customers to finance both Buy My Place fees and other costs associated with selling their property.
To cap off these changes, in October Buy My Place announced the departure of Alan Heath and the appointment of Colin Keating as CEO, a younger executive who had spent time at American Express and more recently at an investment administration company. The new strategy seems to have also involved a re-focus on revenue growth above all else. For the last two quarters, revenue growth has increased to an impressive 20%+ per quarter, but expenses have grown just as quickly.
Buy My Place - Quarterly cash flows since listing (thousands)
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For a company running at this sort of deficit, the obvious concern is how much runway they have before they will run out of money. At the end of December, the company had $800,000 in cash, plus an unsecured, zero interest credit facility with the investment/bankruptcy firm Korda Mentha of $1,000,000. Given they are currently running at a deficit of roughly $750,000 a quarter, it seems highly likely the company will need to go through another capital raising round in the next six to twelve months.
While normally the knowledge of an impending capital raise is enough to make me lose interest pretty quickly, the current share price seems close to the floor of any potential future equity raise. In December 2017, Buy My Place raised $400,000 from sophisticated and professional investors at a price of $0.16 each. In addition, the company secured a zero interest credit facility with the finance firm Korda Mentha of $1,000,000 in return for the issuance of 6,250,000 options with an excise price of 16 cents. With this in mind, It is unlikely these investors (Korda Mentha is also a major shareholder) will allow any future equity raise at less than $0.16 cents a share, given that announcements since then have generally been positive. With shares currently trading around the $0.16 mark, future equity raises should be at or above this price.
The competition
Although there are a number of online sites offering online house sale services in Australia, the elephant in the room in any discussion of Buy My Place is Purple Bricks. The UK low cost real estate agent expanded to Australia a couple of years ago, and with revenue of more than double Buy My Place in Australia and a market capitalisation of over $900 million pounds internationally, they represent the biggest competition by a few orders of magnitude. With this in mind, I thought it might be useful to compare the two companies’ latest half year reports for Australia only.
Buy My Place and Purple bricks H1FY18 (Millions)
| Purple Bricks | PB costs/revenue | Buy My Place | BMP costs/revenue | |
| Revenue | 6.8 | 1.57 | ||
| Cost of sales | -3.2 | 47% | -0.53 | 34% |
| Gross Profit | 3.6 | 53% | 1.04 | 66% |
| Administrative expenses | -3 | 44% | -2.97 | 189% |
| Sales and marketing | -5.7 | 84% | -0.87 | 55% |
| Operating loss | -5.1 | 75% | -2.80 | 178% |
The thing that immediately jumps out is Buy My Place’s much higher administrative expenses as a percentage of revenue compared to Purple Bricks. This can partially be explained by some one-off costs Buy My Place had regarding the appointment of their new CEO and acquisition of MyPlace Conveyancing, but it does look like these are costs that need to be reined in. You would also expect this ratio to improve as Buy My Place’s revenue grows. However, the overall picture suggests that these are two companies operating in broadly similar ways. The fact that Purple Bricks has managed to hit profitability with this model in the UK should be seen as a positive for potential Buy My Place investors. Purple bricks entrance to the Australian market should also help familiarise people with low cost real estate agent options, opening up more potential customers for Buy My Place.
Valuation and Verdict
At its core, Buy My Place is an idea that I really believe in. There is no reason for a Real Estate Agent to take in tens of thousands of dollars in commission to sell a house, in an age where buyers are increasingly comfortable doing their own research and the same handful of online sites are used by everyone when searching for a house.
With a market capitalization of just under $10.8 million dollars at time of writing and annual revenue of $1.53 million as per their latest half year accounts, Buy My Place is currently trading at 3.53 times annual revenue. For a company that has managed to sustain 20%+ quarterly growth for the last six months this seems like a pretty enticing deal. While some of this can be chalked up to the Buy My Place’s rather precarious cash position, it seems that at least part of the companies relatively cheap price can be explained by the short attention span of the market. Micro-cap investors are quick to move onto the new thing, and after failing to live up to their initial hype, it seems many investors have simply lost interest in Buy My Place.
I bought a relatively small investment in Buy My Place at $0.155 cents each last week. I will be watching the coming 4C closely due in just over a month’s time, and if they can start reducing their loses I will likely add to that position.
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