Interesting presentation and not much chatter about it which is odd since it's so overdue.
To me all it really boils down to is a) cash and b) funding. Everything else flows from that (there’s no point having an expansion plan into SEA if you can’t fund it, for example). So to my mind it’s easy to distill this down to a conversation about numbers.The most recent balance sheet we have is from 31/12/21 – they are quoting unaudited figures from 31/5/22 which we can’t verify (yet). But using the December numbers a few things can be inferred:
- The latest presentation says cash, cash equivalents and trade receivables of $20.9M. At 31/12 this figure was $31.0M (split 50/50 between cash and receivables). So five months on, it’s fallen $10M. This is why funding is such a big deal, because they are using their own cash for both receivables AND funding the business opex (which currently is burning, on average, -$4.62M per quarter).
- The presentation has Net Tangible Assets (NTA) of $45.4M. Be careful though because NTA includes cash – so they are showing this number twice (once as cash, and again within the NTA). If you’re not across basic accounting principles you might think the cash was on top; it isn’t.
- Also, remember this NTA figure is from 31/5 so it is factoring in 21% of IDSB; in May this 21% ownership was deemed to be worth $20.5M. We know this because a) that’s what they paid in the first tranche and b) it’s in the 31/12 balance sheet under ‘non-current assets’ / ‘investment in associate’ as $20.5M. But is that 21% of IDSB really worth that much? No. That figure is obviously overinflated because since then there’s been a significant downward adjustment on the overall value of IDSB. For the first 21% IOU paid $20.5M but for the second 21% they only have to pay $6.9M. So in round terms, IOU’s total 42% stake in IDSB is equivalent to $27M cash. Therefore, as at May 2022, the ‘real’ value of their 21% ownership of IDSB is actually just $13.5M, not $20.5M. So there’s nothing sneaky here, it’s just a question of timing – but the net tangible assets is looking higher than what it will really be.
- Finally, this company has hardly any property/plant/equipment (obviously – tech co). At 31/12 that was only $1.6M. So of the Net Tangible Assets, it’s really 1) cash + receivables of $20.9M 2) their investment in IDSB 3) some plant and equipment. And of those three things, 1) is being reduced every quarter by the general costs of running the business, and 2) is overinflated (as of May 2022). So from an asset point of view the figures in the presentation aren’t as great as they really are.
The point of all of this to me is how important funding is. That’s where plenty in the presentation makes sense; we’ve known for over 18 months about the credit law which precludes taking people to court over bad debts under A$32K – it sort of explains why IOU are super-cautious on credit-worthy consumers etc, but at the same time, the other US/AU BNPL players aren't exactly suing bad debtors to get money back anyway. But all of that 'strategy' side largely stacks up, and I think they’ve outlined the reasons for not trying to take over the world like every other BNPL (all of whom are now madly cutting back, selling operations etc). So that’s justified.
The weird thing in the presentation is that wholesale funding has been pushed back to FY24 (!) with
“interim debt (or hybrid) facility” scheduled for the second half of FY23, i.e. next year. But what does ‘hybrid’ mean? Will they be getting some funding via debt, some via more shareholder capital? Egad. This is the part that surprises me. Yes I know the whole payments landscape has changed, but if they were really as across the debt markets as they had shareholders believe back in March 2021 ("20 year relationships with local banks" etc), then surely they would have known that funding was getting harder to come across. Given how this presentation is all about how cautiously and sustainably they need to grow,
why did they tell the market on 16 March 2021 that “SEA wholesale funding program” was a Q3 2021 aim? With these microcaps you have to read between the lines a fair bit. Either a) they thought they’d grow much faster than they did and/or b) they thought funding would be much easier to get than it really is. I really think there’s been a disclosure failure here; they should have come out a long time ago and been up-front about the fact they couldn’t/wouldn’t get funding, and they’d have to press ahead on their own cash reserves for a good while. As it was, shareholders had this uncomfortable news dumped on them at the back of a 4C with the SP at 14.5c, and it’s never recovered since. Even with this presentation, it still doesn’t answer the key problem: funders want to see growth/scale before they commit, and IOU can’t get growth/scale without funding – so the only answer to me appears to be raising more cash (unless IDSB magically loan them some money).
That’s my read of it, happy to hear others’ thoughts. If this company had funding I think it’d be worth a punt. They’ve done things different to other BNPL’s that’s for sure – but all using shareholder cash, which is a pretty wild.Cheers
(20min delay)