$2 party !!, page-92

last full year result (December 2018) - net loss per share 0.078USD. Accumulated losses over the years to December 2018 37.2m USD.

"Splitit has seen a 20% shift in payment mix towards credit cards over debit cards for transactions as consumers preserve cash."Under a COVID environment - online sales up, credit card use up to preserve cash.

Below is some analysis I previously performed on their latest quarterly and business update.

Revenue growth

It doubled yoy to close 2019 at USD1.65m (average of $0.41m per quarter).March 2020 quarter Revenue was $0.66mLet’s assume $3m in revenues for 2020 (Some would argue this is a stretch, but let's go with it). That has SPT averaging $0.75m per quarter

Gross margin

About 72% reported last year. This is good, but if they don’t get revenue up, it’s not enough to cover their operating expensesMore on this later

Expenses

R&D almost tripled to $2.8m in 2019– you would hope that this spend will increase their chances of accelerated revenue growth, if not, it’s money down the drain. Current quarter was $0.18m, however equivalent quarter previous year was $0.29m. It seems as though R&D is not front loaded, it hits later in the financial year.If they want to grow and not be left behind, they need to spend.So let's assume $1.5m for 2020(they might exceed this).Sales and Marketingexpenditure.This increased 7 fold to $7m in 2019.This is significant. Again, if they increased sales and marketing and R&D expenditure so significantly, yet revenue growth is lagging they run out of runway to convince investors that the cashburn is worth it.Sales and marketing expenditureMarch 2020 quarter was $0.66m. Assume by year end this is $3m.General and admin expenses in 2019 -$13m.A significant portion of this was share based payments for staff. I don’t know how they can justify paying out $7m of share based payments to staff when they’ve just cracked $1m revenue for the first time (oh that's right, they're short of cash, so why not give them some shares).Other general and admin expenses included salaries and related expenses(which tripled), professional fees (auditing and consulting)which increased 5 fold last year.Staff costs+admin and corporate costs for March 2020 quarter was $2.83m. Current run rate is $11m spend by year end.Assume they tighten admin costs given the environment, and they end the year having spent $8m on this category. Trimming the run rate by $1.1m per quarter remaining.Again, I don't know how they sustain high growth under this scenario - merchants also under pressure, as is the consumer….Assume bad debts of $0.6m(see below note on future repayments)Lease $0.14m for the year

What does this all mean – let’s try and consider acouple of scenarios

Scenario 1 - stripping out OpEx costs by $10-11m year on year (unlikely, but let's see) and increasing revenues to $3m in 2020They don’t have any loans, but I’d be surprised if a bank gave them a loanThey have $7.65m cash on hand + $2.69m future repayments from self-funded merchants. Assume some of these will be bad debts given current environment. Self-funded merchants are probably small and under increasing pressure. So there real cash on hand is $7.65m, the $2.69m hangs in the balance as a receivable. Let's assume 25% of the $2.69m is not recoverable, that leaves you with $2m bringing the total cash balance to $9.65m.If they increase revenue to $3m in 2020, assume a 70% gross marginGross margin on $3m is $2.1m. Which means they have $2.1m left in the kitty to pay their expensesExpenses last year were $23m, this year based on the above expense run rate and cost containment measures - assume $14m (unlikely, but let's see how we go)$2.1m gross marginless$14m operating expensesLoss of $11.9mThere goes all your cash…. And this is under a scenario where they increase revenue from $1.6m to $3m yoy and cost out quite signficantlyThey will need to do capital raising and/or find a bank to give them a loan (which bank is going to give them a loan at this rate and in this environment??)

Scenario 2Assume everything above remains constant, except for revenueAssume they go nuts and achieve $5m revenues in 2020 at 70% gross margin (that means they will need to generate $1.45m in revenues on average over the remaining 3 quarters, in other terms 2.2x the March 2020 quarter for the next 3 quarters)Gross margin = $3.5Expenses are $14m, the same as Scenario 1 (a decrease from the $23m, which I think is ambitious, but they will have to otherwise they won’t survive).$3.5m gross marginless $14m operating expensesLoss of $10.5mAgain, there goes all your cash

If April replicates itself in May and June we might see the second quarter revenue more than double to $1.45m. This is based on the following:

• 0.66m/23.7 = average SPT commission of 2.78%

• (15.4m/26 days) x 30 days = $17.8m (round it to $18m). This is April extrapolated merchant revenue, noting accelerated growth towards back end of April.

• 17.8m x 3 months = $53.3m (I have assumed constant merchant revenue for 3 months given my reasoning below). This is extrapolated merchant revenue for 3 months

• $53.3m x 0.0278 = $1.48m revenue for the June quarter

At this rate, my Scenario 2 is more likely. This is good, but is it sustainable? How much of the April growth could you assume is organic as a result of company efforts, as opposed to the strange situation we find ourselves in? 25:75?

It's a complicated picture. I'm not going to predict what the economy is going to do and how that is going to change consumer behaviour and also capacity to spend. All signs are showing it's not a positive outlook.

At this price, too much risk/reward for me. I want to see more results in an ordinary context, not in a COVID context. It would be good to see how a return to normal living would impact SPT. And it would be good to see their plan for onboarding merchants with Visa and Mastercard as partners. This is the key to unlocking growth, as my previous analysis shows their average Active Customers per Merchant is comparable to Afterpay. However SPT merchant numbers are only 1.6% of Afterpays onboarded merchants. This is a key challenge.

There are many tech companies that carry losses but have scale and market share to show for it. Investors buy the prospects of market dominance and future earnings and discount to today. That's the reality.