Tag: Selling
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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.
Simble
I’ve been distracted by a few other things lately, so my apologies for the lack of posts. I also started a few posts before realizing I didn’t really have much to say about the company. There are certain IPO’s in technical fields where if you aren’t a subject matter expert in whatever area the company operates in its hard to offer much in the way of useful commentary.
As it looks like my investment in Bigtincan is finally paying off, it seemed like a good time to review another SaaS (Software as A Service) IPO.
Background
I’m having a little difficulty properly understanding the history of Simble. The Prospectus states that Simble was created as a merger of Incipient IT, an international technology venture group and Acresta, and Australian Software company. What doesn’t make sense though is that according to the Prospectus Simble was created in September 2015, yet the acquisition of Acresta and Incipient IT only occurred in September 2016. The prospectus doesn’t give much information on what exactly was happening with Simble during the 12 months between being created and acquiring Acresta and Incpient IT, but whatever they were doing they managed to rack up over 1 million in expenses during that time.
Just to be clear, these are statutory figures so are actual expenses for Simble, not of Acresta and Incipient IT before they were acquired. One possible explanation is that these expenses could have had something to do with purchasing the two companies, but that seems like an awful lot of money to spend on due diligence, and doesn’t explain the $86,000 marketing expenses. A more likely possibility is that Simble initially had some other business venture that they have since discontinued that the prospectus is neglecting to mention.
After doing a bit of digging around, it does seem that Simble has been involved in a few different areas that they don’t bother mentioning in the prospectus. Type Simble into the Android app store or Google and you find a bunch of results, some a little more hairbrained than others. There’s Simble Kids, a website for finding children’s activities in the United Arab Emirates (Google that one at your own risk as the website has an expired security certificate), a booking platform for small businesses (this one appears to be functional at least) and Simble Live, which was apparently a social commerce app again based in the Arab Emirates (I still have no idea what a social commerce app actually is). All these businesses seem to have largely been abandoned though, so I guess they decided it made a cleaner narrative to leave them out of the prospectus.
As an outsider, the merger between Acresta and Simble initially doesn’t make much sense. The little information I was able to find online about Incipeint IT shows that it was operating as a software venture capital firm and incubator before being acquired. Incipient IT was Co-founded by Phillip Shamieh, who may be familiar to Australian Small-Cap investors from his Australian stock research company Wise-Owl. (More Controversially, Shamieh was also involved in the now defunct sandlewood company Quintis. Wise-Owl was criticized in Glaucus Research’s now famous short report on Quintis for posting buy recommendations on Quintis Stock without disclosing Shamieh’s involvement in the company).
Acresta on the other hand, are an Australian software company with a focus on providing automation services to government and businesses.
What exactly the synergies are between an Australian Software Company and an Asian Business incubator is not that clear, but it seems that the business has been organized to maintain Incipient IT’s coding and software team in Vietnam, while keeping Australia as the businesses base of operations. Economically at least this makes sense, due to the lower costs of maintaining a development team in a country like Vietnam. I have seen a number of different businesses work with a similar model. The executive structure seems to largely reflect the merger between Incipient IT and Acresta. The CEO Fadi Geha was a co-founder of Acresta, and the next highest paid executive is the Commercial Director Phillip Shamieh from Incipient IT.
Products
Simble historically has received the bulk of its income from Simble Mobility. A good example of Simble Mobility’s work is the App they developed for Barwon Health’s Cancer Centre for patient registration and booking.
Simble will typically work with an organization to develop an electronic solution for a business process and then develop the software. It is important to note that for a lot of these projects Simble does not actually own the platform that they work on. Instead, Simble has previously used a platform developed and owned by Blink Mobile, another small Australian software company. Simble has an agreement in place to use Blink Mobile’s platform, but is does not look like its exclusive which is a bit of a concern.
From an investment perspective, this is all pretty unexciting. A large proportion of Simble’s clients in this space seem to be Not-for Profit and government organizations. Having worked previously selling products to local government I know from experience that this can be a slow moving, uninspiring slog with products that are hardly at the cutting edge of technological development. It is also an industry with little prospects for rapid growth, as each organization is likely to want their own customized products that need to be developed individually.
Perhaps unsurprisingly then, the prospectus spends a lot of time promoting the growth potential of the Simble Energy Platform. This is a recently developed platform for businesses seeking to better manage their energy use. In addition to monitoring energy consumption, the platform is able to remotely turn on and off different circuits and appliances to take advantage of lower energy prices, or sell back surplus energy to the grid when prices spike. This is achieved via an Internet of Things hardware solution that needs to be installed on the relevant appliances and machines on-site. Simble gets revenue both from the initial installation of the hardware and the monthly subscription fee to use their software.
While the Internet of Things element is a recent development for the company, Simble and its predecessor Acresta have been providing energy management services for quite some time. You can old case study for carbon monitoring services that Acresta provided back in mid-2015 to Jurlique here.
On the face of it, the Simble Energy Platform seems like a solid business idea. There’s been an increased focus lately on the variability of energy demand on grids, and the rollout of smart metres presents significant savings for businesses able to match their energy demands to off-peak times. The Internet of Things element makes a lot of sense as well, as it transforms the platform from a purely monitoring service to one that can provide real savings.
On the negative side, it doesn’t look like Simble is the only company operating in this space. Simble seems to be initially focusing on the UK for its energy management business, and the Prospectus lists a few different companies already operating in this market. More worryingly, IBM also looks like they are providing a similar solution, with both an energy monitoring and Internet of Things element. One of the biggest fears for tech start-ups is that some giant company starts offering a similar service before they are able to compete, to the extent that “what happens when Google gets involved in your business” is a standard question Venture Capitalists ask when interviewing start-ups. While IBM doesn’t quite have the reputation of Google for moving into industries and quickly destroying the competition, they are still a pretty formidable competitor for a business barely able to clear $2 million of revenue a year.
Financials
Mid-January is typically a pretty quiet time in the IPO world. It’s an awkward time to list as one month or so later you would be able to include results for the 2018 calendar year, yet as it stands you are left with financial information that is over six months old. This is a particular problem for the Simble IPO, as a pessimistic interpretation of their balance sheet from June 2017 suggests they could be bankrupt by now.
In June 2017, the business had only $182,000 in cash, vs $1,650,000 in payables, $309,000 in employee benefit liabilities, and just under one million in unearned revenue. For a company with negative net cash flows for the six months until June 2017 of -$951,000 this is a pretty major concern. Deloitte seems to have been of the same opinion, as they submitted an emphasis of matter statement regarding the troubling net working capital position when they signed off on the HY16 and and HY17 financial report.
From a revenue perspective the situation isn’t much better. Below is the normalized profit and loss for Simble, which incorporates both Acresta and Incipient IT figures from before the merger.
The labelling is a bit confusing, but the first three are all Calendar years 2014-16, then HY16 is July-December 2016 and HY17 is January-June 2017. This is due to the business recently changing to a December end of year. It’s a hard table to look at, as it switches from 12 month periods to 6 months. By subtracting the HY16 numbers from the CY16s, I was able to work out the figures for the first half of 2016, giving me 3 6 month profit and loss periods.
| $000 | jan - Jun 2016 | Jul - Dec 2016 | Jan - Jun 2017 |
| Revenue | $ 1,090 | $ 1,629 | $ 1,160 |
| Cost of Sales | -$ 340 | -$ 810 | -$ 359 |
| Gross Profit | $ 751 | $ 819 | $ 801 |
| Other Income | $ 300 | $ 455 | $ 348 |
| Operating Expenses | $ - | ||
| General and Administration | -$& nbsp; 2,243 | -$ 1,823 | -$ 1,637 |
| Marketing | -$ 164 | -$ 359 | -$ 62 |
| Total Overhead expenses | -$ 2,407 | -$ 2,182 | -$ 1,699 |
| EBITDA | -$ 1,355 | -$ 909 | -$ 550 |
| Depreceation and Amortisation | -$ 366 | -$ 407 | -$ 462 |
| EBIT | -$ 1,721 | -$ 1,316 | -$ 1,012 |
As you can see, there has been a negative trend in revenue from a high of $2.9 million in 2015 (or 1.45 Million every six months) to only $1.16 in the six months to June 2017. The prospectus mentions that the business is currently went through a restructuring period prior to listing, and it seems they are yet to see much revenue growth from their new energy platform. The jump to $2.2 million in operating expenses in the six-month period before the acquisition of Incipient IT and Acresta is also interesting. Around $1 million of these expenses are from Simble’s statutory accounts, so this does seem to confirm Simble was doing something else at that time other than simply getting ready to purchase Acresta and Incipient IT. It gets especially weird when you look further down at the cash flow statements and see that the business capitalized $4.711 million in development costs in the second half of 2016 as well.
In total, this means the business spent around $9 million in 12 months on operating expenses and software development, a phenomenal amount for a business this size. This seems to suggest the current management team is not exactly frugal, which isn’t great news considering they will have less than $7 million in net cash to play with post-listing.
Valuation
Simble made a statutory loss before tax of $1.25 million for the six months to June 2017, so any traditional valuation method as a multiple of earnings isn’t going to be possible. Instead, as seems standard for SASS companies, the main metric we can use to evaluate the company is a multiple of revenue.
With a maximum market capitalisation of $17.98 million, Simble is valuing its IPO at 7.75 times revenue. If you subtract the money that is to be raised, the pre-IPO value is $10.48 million or 4.52 times revenue. For a SASS company this is pretty reasonable. Bigtincan, a SASS company I invested in that was at the low end for SASS valuations listed at 6.6 times revenue and is now up over 50% on its listing price. On the negative side, Registry Direct, another SASS company that I invested in listed at 31.7 times revenue and now is trading around 40% lower than its listing price. However, what both these companies had which Simble doesn’t is impressive revenue growth. At the end of the day, the only reason investing in a company currently losing money makes any sense is because you think it is going to grow rapidly. The fact that Simble is currently shrinking makes this a much harder sell. If they had been able to wait long enough to show actual revenue growth from the Energy Management platform the valuation would be much more compelling, but I guess given the dire state of their balance sheet waiting six months probably wasn’t an option.
Verdict
While the idea at least of the Simble Energy Management platform seems compelling, at this stage there is too little actual evidence of real growth of this platform for me to justify an investment. In six months’ time if they can show some revenue growth it might be worth picking up some shares even if you need to pay substantially more than $0.20, but without seeing that growth the investment seems like too much of a gamble. I’ll waiting for something a little more compelling for my first investment of 2018.
Croplogic
When I first saw the Croplogic IPO I was pretty excited. Lately ASX IPOs seem to have been an endless list of speculative mining startups and suspicious Chinese organizations, so its nice to see a company that seems genuinely innovative. Based on technology and crop management techniques developed by the New Zealand government research institute Plant & Food Research, the company is looking to revolutionize the agronomics sector with various technological and modelling-based solutions. This includes both patented electronic monitoring devices that provide live soil moisture levels from the field, as well as sophisticated modelling that allows farmers to predict moisture levels and show optimal times for watering and fertilizer application. The idea is that this technology will allow agronomists to spend less time driving from field to field taking samples, while giving farmers a higher level of service at the same time. The company has been around for five years, and has completed a few trials with large multinationals. While they claim these trials have been promising, they haven’t really amounted to much revenue as can be seen by the meagre profit and loss report.
Croplogic is seeking to raise up to 8 million, with an indicative market capitalization of $23.9 million based on a maximum subscription.
Strategy
One interesting things about Croplogic is that they have decided to grow by acquiring established agronomy businesses rather than organically (if you’ll excuse the pun.) This is based on the idea that the agricultural market is suspicious of new entrants and values existing relationships. Croplogic therefore intends to purchase traditional agronomics businesses then slowly introduce Croplogic’s various innovations to their customers. While I understand the thinking behind this (at a previous role I saw first-hand a European fertilizer company fail spectacularly in their expansion into Australia due to difficulties selling to suspicious Australian farmers), there are a few factors that make me worried this strategy won’t work. Post listing, Croplogic will have only around 8 million dollars with which to buy the very specific type of company they are looking for (they are specifically targeting potato agronomics companies) in the limited amount of time they have before shareholders start getting impatient. With such specific criteria and a limited amount of time, it seems a real risk they will be forced to pay above market prices for the first suitable company they find.
Croplogic’s most recent acquisition doesn’t really inspire confidence either. On the 28thof April 2017 Croplogic acquired a company called Proag services, an agricultural consulting business based in Washington state USA. Croplogic paid $1.4 Million AUD, with another $1.25 million to be paid over the next few years provided Proag’s revenue does not decline sharply. As a test case for Croplogics acquisition model, the Proag purchase does raise a few questions.
While in the financial year ending March 2016 the business made a profit of $140,000 AUD, in 2017 this had reduced to a loss of $24,650 (to make things simpler, I am using AUD for both the revenue and purchase price, despite Proag being an American company). This loss was caused mainly by small a decrease in revenue from 2.24 million to 2.14, and an increase in operating costs from $580,000 to $690,000. To be clear, the FY17 financial year ended before Croplogic bought the business, so these costs cannot be easily attributed to acquisition expenses. While there could potentially be other factors that explain the 2017 loss, 2.65 Million seems hugely unreasonable for a company that lost money last financial year, and even seems on the steep side if you just take the FY16 numbers into account. Were Croplogic so desperate to secure an acquisition before the IPO that they ended up paying more than they should have for a struggling company? As an outsider it certainly looks like that.
While in the financial year ending March 2016 the business made a profit of $140,000 AUD, in 2017 this had reduced to a loss of $24,650 (to make things simpler, I am using AUD for both the revenue and purchase price, despite Proag being an American company). This loss was caused mainly by small a decrease in revenue from 2.24 million to 2.14, and an increase in operating costs from $580,000 to $690,000. To be clear, the FY17 financial year ended before Croplogic bought the business, so these costs cannot be easily attributed to acquisition expenses. While there could potentially be other factors that explain the 2017 loss, 2.65 Million seems hugely unreasonable for a company that lost money last financial year, and even seems on the steep side if you just take the FY16 numbers into account. Were Croplogic so desperate to secure an acquisition before the IPO that they ended up paying more than they should have for a struggling company? As an outsider it certainly looks like that.
Management
One of the things I look for in an IPO is strong founder with a real passion for the company. Bigtincan’s David Keane and Oliver’s Jason Gunn are two great examples of this. In addition to being good businessmen, both founders seem to have a real passion for their respective companies and expertise in their specific industries. You get the sense with both Jason and David that they have invested personally in their companies, and will stick by them for as long as it takes.
In contrast, the managing director of Croplogic Jamie Cairns has only been with Croplogic for just over a year and has a background in internet companies. The CFO James Jones has been with the company for even less time, and last worked at a private equity firm. While they both seem capable enough, they don’t seem to be experts in agronomics, and it’s hard to imagine either of them sticking around if they were offered a more lucrative role at a different company.
Powerhouse Ventures
The largest Croplogic shareholder is the ASX listed Powerhouse Ventures, owning both directly and through its subsidiaries roughly 20% of the Croplogic stock post listing. I like to think of Powerhouse Ventures a
s New Zealand’s answer to Elrich Bachman from Sillicon Valley. The company invests in early stage New Zealand companies, most typically those that use technology developed in connection to New Zealand universities with the hope that these can eventually be sold later for a profit.
To put it mildly, Powerhouse Ventures has not been going that well lately. Listing originally for $1.07 in October 2016, the company now trades at around $0.55, following problems with management, higher than expected expenses, and difficulties with a number of start-up investments.
This is a concern for any potential Croplogic investor, as one of Powerhouse Ventures easiest ways to lock in some profits and generate cash would be to offload their Croplogic shares. Considering the size of their stake in Croplogic, this would have disastrous effects on the Croplogic share price.
Summary
As you can probably guess if you’ve read this far, I will not be investing in Croplogic. While the shares are undeniably being sold for a pretty cheap price, their chances of success seem so small buying shares would feel more like getting a spin on a roulette wheel than a long-term investment. When you read through the prospectus, you get the feeling that the company is a weird miss-match of various technologies dreamt up in Kiwi research labs that some over-excited public servants felt would be a commercial success. Considering the minimal progress that has been made in the last five years, they probably should have stuck to writing journal articles.
ReTech Technology
Overview
ReTech provides online learning and educational services to companies in China. They plan to raise 22.5 million through the prospectus by selling 20% of the company via the IPO, giving a total post IPO market capitalization of 112.5 million. The business has three main arms, an E-learning business where they provide training courses to businesses for staff, a newer e-training partnership area where they will partner with established education entities (they have a memorandum of understanding with Queensland TAFE) and a proposed e-course direct area where they intend to sell courses direct to companies and individuals. According to the prospectus, e-learning is a rapidly growing industry, with a growth rate of 32.9% between 2010 and 2015. While this seems high, service and knowledge based jobs are exploding in China, and online education is one of the fastest and cheapest ways to train staff. Having had the misfortune to complete a few work-mandated e-learning courses in my career myself, it’s not exactly an exciting industry, but the benefits they offer companies are clear. The prospectus lists a few of the courses which ReTech owns the intellectual property rights to and looking at names like “how to introduce the gear box” and “how to recommend vehicle insurance for clients,” you can almost imagine a bunch of bored car salesmen sitting in an office somewhere in China clicking through multiple choice questions.
The IPO funds will be used, amongst other things, to set up an office in Hong Kong. This means that unlike Tianmei, the IPO I reviewed most recently of another Chinese company, the final parent company isn’t located in Australia. While I’m no expert on Hong Kong company law, I think this is a mark against ReTech. With an Australian company, shareholders have the recourse of class actions or potential moves against the board if things go wrong. I’m not sure how easy those things would be to organize against a Honk Kong based company.
Company background
According to ReTech’s website, ReTech was originally founded as a website development company in 2000 by a guy called Ai Shugang while he was still a university student. Since then it has grown and expanded into several different technology and internet related areas. Instead of just listing as the original entity, the founders decided to create a newly incorporated company called ReTech Technology to list on the ASX. They injected their own capital into the business, and then sold/transferred significant amounts of the intellectual property and existing E-Learning contracts to the newly created company. To make things more complicated, at the same time the founders also created another company called Shanghai ReTech Information Technology (SHR) which as far as I can understand will remain wholly owned by Ai Shungang. SHR has also had a significant number of E-Learning contracts assigned to it from the original ReTech entity. SHR has signed an agreement with ReTech regarding these contracts where ReTech will provide the services on SHR’s behalf, in exchange for 95% of the resulting fees. If this all sounds a bit confusing you’re not the only one.
My concern with all of this is that ReTech is in the sort of industry where a founder siphoning off business is a major threat, meaning another business still operating owned by the original founder is a big risk. In the prospectus, ReTech list expertise and their existing client list as two of their four main competitive advantages, two things that would be easy for the founder Ai Shungang to poach to SHR. Although Ai Shungang does own a significant stake in ReTech, he owns 100% of SHR’s parent company, so the motivation for him to do this is there. The prospectus points out that both Ai Shungang and his companies have signed non-compete contracts, guaranteeing they will not operate in the same sector as ReTech, but I know how hard to enforce these contracts are in Australia, and can only imagine what the process would be like in China.
Finding out what exactly this separate company will be doing given they have committed to not entering the online education sector proved difficult. I eventually found a legal document on ReTech’s website that states Shaghai ReTech Information Technology is going to focus on software and technology development and technical management consulting. To make things even more confusing, they also seem to be still using identical branding to ReTech, based on what I found on a management consulting website. If you trust the founders of the company, probably none of this would bother you but for me these are considerable issues.
Valuation
Before looking at any of the financial information for ReTech it is important to remember that the company was incorporated in its current form in May 2016, and the final part of the restructure was only completed in November. This means that all historical profit and loss figures are pro forma only, estimates of what the contracts, intellectual property and assets now owned by the ReTech Group earnt before the company was split. This is a massive red flag for me. I’m sceptical of pro forma figures at the best of times, and when they are used by an unknown company in a prospectus where the unadjusted figures are not even provided it’s a massive concern. To give just one example of how these figures could potentially be distorted, education software development costs could be written off as not part of the business, while the associated revenue is counted towards ReTech’s bottom line. Examining the pro forma figures doesn’t exactly assuage my concerns either. Have a look at the below table taken from the prospectus, in particular the profit before tax to revenue ratio. In 2015 off revenue of just 6.9 million the profit before tax is listed as 4.2 million, meaning for every dollar of revenue the company made 61 cents of profit. Of course, I understand that profits can be high in the technology sector, but a profit to revenue ratio of .61 is extraordinary, especially when you consider that this is a young company in a growth phase.
Most young companies with growth rates this large are running at deficits as they re-invest into the business, not earning profit margins that would be the envy of booming mining companies.
Even with these relatively major concerns put aside, the valuation appears expensive. The pro forma Net Profit after Tax for FY 2015 was only 3.6 million, which against a valuation of 112.5 million is a Price/Earnings of just over 31 (annualizing the profits from the first half of 2016 doesn’t give you much better numbers). Full year profits for FY2016 are expected to be 5.8 million, a P/E of 20, but if there is one thing I am more suspicious of than Pro forma historical accounts it’s prospectus profit forecasts, so I have little inclination to use these numbers to try and justify the valuation.
Management personnel
When I started digging around on the management personnel, one of the first things I noticed was the strong link to Investorlink, a Sydney based financial firm that seems to specialize in assisting Chinese companies list on the ASX. In addition to being the corporate advisors to this listing (for which they will be paid $380,000), Chris Ryan, an executive from Investorlink is one of the five board members of ReTech. I was already sceptical of this IPO at this stage, but this was the final nail in the coffin. Chris Ryan’s CV is like a checklist of bad Chinese IPOs. Ryan was and apparently continues to be the chairman of Chinese Waste Corporation Limited, a Chinese company that reverse listed in 2015 and was suspended from the ASX in mid-2016 for not having “sufficient operations to warrant the continued quotation.” He is currently the chairman of TTG Fintech Limited, a company that listed on the stock exchange at 60 cents in late 2012, inexplicably reached as high as 4 dollars in mid 2014, and is now trading at 7 cents and he has been on the board of ECargo Holdings, a company that listed at 40 cents in late 2014 and is now trading at 20 cents. I spent some time looking at the various Chinese IPO’s that Investorlink has advised on, and was unable to find a single IPO whose shares aren’t now trading significantly below their listing price. If ReTech are indeed a legitimate company, it’s hard to understand why they would seek to list through Investorlink given this track record.
Verdict
To put it bluntly, I wouldn’t buy shares in ReTech if I could get them half price. Everything from the odd restructure to the lack of statutory accounting figures, the high valuation and the awful track record of the Corporate Advisor makes me want to put all my money in treasury bonds and never invest in anything speculative again. Of course, it’s possible that Ai Shungang is going to turn out to be the next Mark Zuckerberg and I’m going to end up looking like an idiot (to the handful of people who read this blog at least), but that is one risk I am happy to take.
The offer closes on the 9th March.
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