Ann: Half Yearly Report and Accounts, page-126

Apologies for the rant, just feeling frustrated by the dribble on this forum at the moment but I guess a share pricing tripling and then more than halving in a few weeks will bring out the extremes of all views and emotions, but I digress

Now I understand not everyone on here is an accountant so I’ll try and not use too much accounting speak but if anyone doesn’t understand something or has a question please ask, the only stupid questions are the ones you don’t ask.

The first thing I do when I look at set of financials is decide what lens I’m looking through, what I mean by this is am I looking at a start up, a mature company, a company in transition etc. For Cirralto (CRO) I view this as a start up, yes it’s been around for a while but the Spenda suite and the ability to monetise it’s capabilities are new. So I’m expecting a pretty ugly report, it should be losing money, it’s operating cashflow should be negative (but sustainable). What I’m looking for are green shoots, if any.

I already have some positives in my mind before I open the report:

·Booming Fintech / payments industry

·Product that is disruptive and solves real problems

·Sticky revenue (recurring in nature)

(Link to my feedback from my demo for those that are interested / have not seen it: https://hotcopper.com.au/threads/spenda-demos.5920546/?post_id=51229831)

Now onto the report….

		1H21	1H20	VAR $	VAR%	Comment
1	Revenue	629,092	269,855	359,237	133%	1
2	Cost of services rendered	-207,505	-184,108	-23,397	13%	2
3	Gross Profit	421,587	85,747	335,840	392%	2
4	Gross Profit Margin %	67%	32%			2
5
6	Other income	95,093	181	94,912	52438%
7
8	Employee expenses	-748,502	-766,630	18,128	-2%
9	Depreciation and amortisation	-5,892	-362,320	356,428	-98%	7
10	Consulting fees	-295,269	-184,947	-110,322	60%	3
11	Legal and other professional fees	-149,876	-62,546	-87,330	140%	3
12	Regulatory and listing costs	-72,366	-19,290	-53,076	275%	3
13	Occupancy expenses	-26,705	-45,701	18,996	-42%
14	Other expenses	-246,173	-314,305	68,132	-22%	4
15	Finance costs	-76,399	-69,887	-6,512	9%
16	Movement in fair value of financial liabilities	-73,712	0	-73,712	100%	5
17	Share based payments expense	-86,415	-89,137	2,722	-3%
18	Total Expenses	-1,781,309	-1,914,763	133,454	-7%
19
20	Loss	-1,264,629	-1,828,835	564,206	-31%	6

P+L

1.Obviously the headline number when looking at a growth company is in the increase in revenue, 133% increase and this is before the BPSP / BPA has been launched. Once this goes live we will continue to grow this is why I’ve previously said wait until the December 21 quarterly before reassessing this stock, that’s when we’ll know if the strategy is working

2.COGS only increased 13% compared to the 133% increase in revenue, this leads to a more than doubled Gross Profit Margin (67% from 32%). This is quite incredible, no real commentary on it in report so I can’t dive into it further

3.Need to highlight the $250k increase in expenditure across Consulting fees, Legal and other professional fees and Regulatory and listing costs. You would hope the legal costs would relate to the merger and would not continue at this rate. I’m not too concerned at this stage as you would expect an increase in costs to support growth. Once again hard to draw a conclusion due to the limited information and will review in more detail at the full year

4.Always good to see other expenses go down, you want to be lean

5.One off cost that won’t repeat

6.Good to see a decrease in loss this was driven by:

a.Increase in Revenue of $359k

b.Decrease in Amortisation of $356k (will discuss further)

c.Offset by an increase in operational expenditure

7.This decrease in amortisation has to with the change in accounting treatment with Appstablishment (App) I will discuss the impacts below

When this report was released I don’t think anyone understood the nature of this loan and what it meant for the financials and it took me a while to get there. A few people were really mad about it, I actually believe it benefits CRO shareholders

What typically happens when APP development software for CRO is we pay them money (credit bank) and we add to an Intangible asset (debit Intangible asset) on our balance sheet. Intangible assets then need to be amortised (written off through the P+L) over the useful life of the asset (credit intangible asset and debit amortisation expense).

What the directors of the entities have agreed is that they are going to merge and the accounting treatment should reflet this. What was happened in the accounts of CRO to reflect this is we have gotten rid of the intangible asset and replaced it with a loan from APP, APP would have a loan payable to CRO in their books.

What is the benefit to CRO shareholders:

·There is no intangible asset to amortise (decrease in expenses)

·The loan receivable from APP will most likely decrease the consideration CRO need to pay for APP as it will form a settlement adjustment Ie say we need to pay APP $10m for their business we would reduce this amount by the $800k loan and only pay $9.2M (numbers are just an example, need to wait for details on the merger to clarify this but this is how I read the accounts)

Cashflow Statement

Only thing of note here is actually a bit disappointing, given we are software provider that is designed to help increase cashflow it’s a bit disappointing we have only collected 62% of our revenue for the half. Given most of it is for SaaS I would have assumed all our customers would be on a direct debit arrangement and this would be higher, it might be timing due to growth but I would have assumed this would be 75-80%

Balance Sheet

Not worth looking at now we have $22M+ in the bank

The key here for me is to wait for the merger which I think realistically is another 6 weeks away but that means we should have the information in 2 weeks.

As I said the key to this was to find green shoots and we definitely have that in the revenue and margin growth.

The way I’m viewing this investment is:

·Current fair value is 7-9 cents (once we got above 10 cents I changed my disclosure from buy to hold), I’ve discussed why in other posts. I’m not personally buying anymore because I’m holding enough for my risk appetite

·Merger is key, wait for more information then reassess your opinion if you think there is anything material in there

·If you are holding now because you believe in the product hold until the December 21 quarter to see if the growth is playing out. Don’t be scared of by share price fluctuations on a day to day basis it happens down this end of the market

·Take profits along the way

·DYOR and only put money into spec stocks you can afford to lose

Feel free to ask any questions, post apposing news, no $5 at Christmas or did you know there will be lots of shares on issue comments please