Its Over, page-256

Generally speaking, it appears that retail shareholders who have bought into microcaps or smallcap stocks do not seem to think that reported financial information matters on the grounds that they are in early stages of development and often do not give as much weight to reported results. They claim that all that matters is management and how their offering performs in the market place. People should however note that management actions are more often than not reflected in the numbers as I am about to show you. They are early indicators on where management focus is and if they have the right mindset to always put shareholders ahead of them.
So to illustrate, I have compared numbers derived from annual accounts for Appen (APX), the known success tech story and 3 other stocks Yojee (YOJ), Buddy Platform (BUD) and LIvetiles (LVT) which are perceived as ‘promising growth stories’.
If you look at APX, shareholders had been handsomely rewarded over 3 years with its market cap growing almost 6 fold underpinned by revenue and profit growth of 2.75x and 3.4x respectively. With that staggering growth, its Market cap is just 5.39x revenues which is in line with typical SaaS/tech multiples (5-10x).
So what sets APX apart from the other 3 compared stocks? Let us look at 3 indicators

• Market Cap/Revenue

• • 1. APX Market Cap/Revenue has been consistently between 2.5-5.4x which suggest valuation is still very reasonable especially with growing profits as well. So if a success story like APX commands a multiple of 5, why should YOJ be at 222x and BUD at 66x and LVT at 57x their revenues? Is the market suggesting they should command a higher multiple as their prospects are better than APX? I think not, these stocks are still way overvalued. At its height, YOJ was at 2,527x and BUD at 329x reflecting the extreme exuberance tech stocks was experiencing in the second half of last year which would no longer be repeated.

• Share Based Expenses (SBE)

• • 1. If you have been following my posts, I had expressed caution about companies that issued excessive performance shares to their management and incurring large share based expenses which do not commensurate with their financial progress and position. And clearly YOJ, BUD and LVT have all been doing this at the expense of shareholders. Both YOJ and BUD’s SBE was contributing 25% of their losses and if you look at BUD, SBE was consistently high each financial year. This indicator demonstrate that management of these companies had looked after themselves first before shareholders. In contrast, APX’s SBE was incredibly small at less than 5% of profit each year. It tells you why APX exemplifies a success story.

• Share Dilution

• 1. One of the main concerns of shareholders of microcaps is dilution from capital raisings (CR) or share placements that increase the company’s share base. If you look at APX share base, the number of shares issued to date is only 10% higher than two years ago while for YOJ, its share base ballooned 2.53x over the same period and BUD and LVT increased by 16% and 45% respectively. Impact of share dilution is the reduction of share price to maintain the same level of market cap valuation. The other thing people should find peculiar is the amount of capital raised- for example BUD raised $23m at 20c last October and LVT recently raised $25m from institutional investors. These are not amounts the companies require to make or pay for an acquisition but just working capital. These requirements as we now look back are way in excess of annual requirements. So why was a bigger raise made at the time? It suggest that management of BUD and LVT are not confident that they can bring enough revenues in the immediate 1-2 years to see them through. And the large raise cushions them and allows them to freely spend and burn cash as they have been.

	Column 1	Column 2	Column 3	Column 4
0			$mil
1	APX	2018	2017	2016
2	Shares issued	107.44	107.11	97.38
3	Stock price	$ 15.34	$ 8.31	$ 2.84
4	Market cap	$ 1,648.05	$ 890.05	$ 276.56
5	Annual Revenues	$ 305.60	$ 166.6	$ 111.0
6	Profit/(Loss)	$ 35.60	$ 14.28	$ 10.49
7	Share based Expenses(SBE)	$ 1.76	$ 0.41	$ 0.37
8	Market cap/Revenue (x times)	5.39	5.34	2.49
9	SBE as % of Profit/(Loss)	4.9%	2.9%	3.5%
10
11	YOJ	2018	2017	2016
12	Shares issued	950.61	839.94	375.00
13	Stock price	$ 0.099	$ 0.300	$ 0.040
14	Market cap	$ 94.11	$ 251.98	$ 15.00
15	Annual Revenues	$ 0.42	$ 0.10	$ -
16	Profit/(Loss)	-$5.69	-$1.86	-$0.35
17	Share based Expenses(SBE)	-$ 1.42	-$ 0.19	-$ 0.01
18	Market cap/Revenue (x times)	221.96	2,527.40	N/A
19	SBE as % of Profit/(Loss)	24.9%	10.0%	1.4%
20
21	BUD	2018	2017	2016
22	Shares issued	1,149.05	1,149.05	987.61
23	Stock price	$ 0.12	$ 0.30	$ 0.06
24	Market cap	$ 137.89	$ 344.72	$ 59.26
25	Annual Revenues	$ 2.08	$ 1.05	$ 0.04
26	Profit/(Loss)	-$ 13.88	-$ 16.95	-$ 26.13
27	Share based Expenses(SBE)	-$ 3.46	-$ 7.45	-$ 11.31
28	Market cap/Revenue (x times)	66.16	328.61	N/A
29	SBE as % of Profit/(Loss)	24.9%	43.9%	43.3%
30
31	LVT	2018	2017	2016
32	Shares issued	548.182	451.249	378.383
33	Stock price	$ 0.595	$ 0.425	$ 0.12
34	Market cap	$ 326.17	$ 191.78	$ 45.41
35	Annual Revenues	$ 5.69	$ 1.77	$ 0.65
36	Profit/(Loss)	-$ 22.06	-$ 7.40	-$ 13.22
37	Share based Expenses(SBE)	-$ 0.97	-$ 0.89	-$ 4.37
38	Market cap/Revenue (x times)	57.37	108.41	69.96
39	SBE as % of Profit/(Loss)	4.4%	12.0%	33.0%