Hi all,
Before I provide some further thoughts on a recent announcement, I just wanted to make it clear from the outset that I am an avid supporter of management and and a strong believer in Xped's technology. For the record I continue to hold and accumulate both shares and options and I have no intention of selling out anytime soon.
I would like to draw your attention to a couple of issues that IMO require a 'please explain' or review from management.
After digesting all of the info that we have on the JCT SPA so far (and to add to Dreagle's point) I do agree that Eddie Jackson (JCT) appears to have negotiated an exceptionally sweet deal for the sale and integration of his company. The $2m in cash that he (and others at JCT?) are set to receive is probably fair value in consideration, however an additional $1m worth of Xped shares (25m shares valued at 4c) makes the deal extremely lucrative for him IMO.
In addition to the above, JCT shareholder(s) are also set to receive 37.5m performance shares (or $1.5m cash) if certain revenue milestones are achieved by using up to $1.5m worth of Xped's working capital.
The problem I have with this particular performance bonus (in addition to the 25m guaranteed shares) is that in reality JCT are likely to represent/contribute only a small part of Xped's total future revenue. Therefore I cannot understand nor explain why JCT shareholder(s) are being rewarded so handsomely ($2m cash + up to 62.5m shares) if when our shares are worth say 7-13c within 24 months from now.
For example let's assume that our shares are worth 10c avg. upon achievement of all milestones. That is the equivalent of $3.75m worth of performance shares (versus the alternative of $1.5m in cash) so it is already clear what JCT are likely to elect to receive as their bonus.
Now assuming JCT's current revenue is $1.8m annually with a 50%-60% gross margin (refer to my previous post if you're wondering where I got those figures from), my guesstimate is that they would be making less than $0.4m net profit p.a. i.e. after all overheads including including wages for 13 staff are taken into account.
So the question is... is JCT currently worth what management are proposing and should JCT be rewarded for any future value appreciation in the company i.e. that is beyond their control and beyond their domain?
From Eddie's point of view, he gets to keep his job only now with a guaranteed and secure remuneration package as an employee of Xped, takes home $2m in cash, pockets 25m Xped shares (thanks for coming) and then negotiates another 37.5m shares as a performance bonus. I mean when does the party end for this guy? (half joking but not really)
Xped shareholders would need to be able to access and perform our own due diligence on JCT's business activities before we could make an accurate assessment on whether the proposed SPA represents fair value or not.
Obviously Xped management would have performed DD prior to the intended transaction, however I do question whether they have understated the value of their proposal/offer compared with their estimated value of JCT.
From this shareholder's perspective (admittedly from the outside looking in) it appears as though we are paying a hefty premium for JCT, even if it is an established business that fits well with our tech and therefore may turn out to be a little cash cow for us in future years.
The other issue relates to our management's performance shares that are subject to the following revenue targets;
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Milestone 1.
50 mil shares upon Xped reaching $1mil revenue within 12mths, and a market cap of not less than $75m M/cap for 20 consecutive trading days.
Milestone 2.
50 mil shares upon reaching $2.5mil in revenue within 24mths, and a market cap of not less than $100m M/cap for 20 consecutive trading days.
Milestone 3.
50m shares upon reaching $5mil in revenue within 30mths, and a market cap of not less than $125m M/cap for 20 consecutive trading days.
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Joining the dots it appears that management have in effect bought their way to the first performance milestone, and the other two milestones (particularly the 2nd) appear to be ridiculously easy/cosy targets when including JCT into the equation. I am not sure how everyone else feels but to me this doesn't seem fair nor ethical, particular when the terms of the RTO may have been set when this deal in mind.
Therefore given the recent HOA and proposed terms with JCT, I am proposing that shareholders urge management to;
a) reconsider the terms with JCT or, if not, explain to the market (in detail) how and why the SPA represents fair and reasonable value for all shareholders and
b) on behalf of shareholders, review the revenue targets within the milestones that trigger the 150m Management Performance shares, as the current targets are far too low and too easily achievable (particularly if the proposed SPA with JCT is approved).
Furthermore, my intention is to advise the board that to take no action on these issues would insult fellow shareholders and only serve to provoke the harmonious relationship/rapport that currently exists.
I would like to reiterate that my thoughts on these issues are in no way meant to be damning, negative or threatening to the board - reality suggests that there are many great things to like and say about our team and their progress to date, and that is why personally I continue to hold and accumulate on weakness.
However I would like to remind shareholders that as part owners of Xped, we have an obligation to keep our board and management honest and in-check when something that they either propose or do doesn't seem or feel right based on the information that they have provided to the market.
Remember that it is our investment that they are managing. We can either put on our rose coloured glasses and pretend that everything is wonderful and they (management) are only thinking of us in their daily conversations, or we can take a pro-active approach and not just assume that everything they provide to us on a silver platter is in the best interests of the collective.
Best of luck to all shareholders and feel free to let management know your concerns, including any of the above points that I've raised should you agree.
Have a great long weekend everyone.
Cheers
Elpha
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