Feel the Cash Burn as Profit Season Closes (or "In memory of Pocketmail")
Another crazy month of reporting financials has come to an end on the ASX, with the typical last minute dump of reports on the evening of August 31 (or the following morning) reflecting unfavourably on business models or financial robustness.
"Have you heard if Company X has approached anyone about a convertible note or something like that", an investor peer asked me in passing on Friday.
No, I hadn't. But I had looked at the financials Company X had just released and I know why he was asking. Cash on hand was equivalent to about 45% of its annual cash burn. Without fresh funding, Company X's brief life could soon come to an end.
Too often founders or cornerstone investors choose to raise just enough funds to get to the next milestone, at which point they are sure investors will significantly revalue the business, allowing a less dilutive round of funding to get to the next milestone.
Company X probably thought the same thing - the only problem is that its share price is now ~70% off its high and the market cap is now so small that the kind of funds required would be massively dilutive to existing shareholders.
Except in rare circumstances there are always delays, failures, broken promises from customers, and so on. Such risks often seem to be underestimated by those raising funds.
Even if the business does get to the milestone on budget, investors know you need their cash to take the venture any further and that can result in a "buyers' strike" until funding is sorted.
In 2017 we've already seen a number of the social media and tech listings of the past few years fall apart. Niche market social media group Moko Social Media called in the administrator after reporting its March quarter cash flows - it had spent $1m in the quarter and had $221k left at the end of that period. Asian-focused social media group migme burned $535k on operations and investments in the March quarter, leaving it with just $160k in the bank. Migme is now suspended by the ASX, having failed to pay its annual listing fees in August.
I've been casting an eye over cash burners since the days of the original "dot com" boom and bust. The current crop of flailing ASX-listed ventures makes me feel nostalgic for the days of companies like Pocketmail, which was selling a system for sending emails acoustically over phone lines that was quickly overtaken by technological development (ie ultimately the iPhone).
Whatever happened to Pocketmail? A quick search on the internet tells me the company became a shell into which a mining company was back-door listed back in 2007, rebirthing as Adavale Resources (ADD). But the change in direction still didn't workout for shareholders. The chart looks pretty miserable over 10 years and cash is still a problem, with the ASX querying the company just a few weeks ago, noting:
So one of the things Equitable Investors looks at when screening the market for potential investments is funding. Can the company last at least a year at the current rate at which it is consuming cash? If not, can we benefit by being part of the funding solution?
"Have you heard if Company X has approached anyone about a convertible note or something like that", an investor peer asked me in passing on Friday.
No, I hadn't. But I had looked at the financials Company X had just released and I know why he was asking. Cash on hand was equivalent to about 45% of its annual cash burn. Without fresh funding, Company X's brief life could soon come to an end.
Too often founders or cornerstone investors choose to raise just enough funds to get to the next milestone, at which point they are sure investors will significantly revalue the business, allowing a less dilutive round of funding to get to the next milestone.
Company X probably thought the same thing - the only problem is that its share price is now ~70% off its high and the market cap is now so small that the kind of funds required would be massively dilutive to existing shareholders.
Except in rare circumstances there are always delays, failures, broken promises from customers, and so on. Such risks often seem to be underestimated by those raising funds.
Even if the business does get to the milestone on budget, investors know you need their cash to take the venture any further and that can result in a "buyers' strike" until funding is sorted.
In 2017 we've already seen a number of the social media and tech listings of the past few years fall apart. Niche market social media group Moko Social Media called in the administrator after reporting its March quarter cash flows - it had spent $1m in the quarter and had $221k left at the end of that period. Asian-focused social media group migme burned $535k on operations and investments in the March quarter, leaving it with just $160k in the bank. Migme is now suspended by the ASX, having failed to pay its annual listing fees in August.
I've been casting an eye over cash burners since the days of the original "dot com" boom and bust. The current crop of flailing ASX-listed ventures makes me feel nostalgic for the days of companies like Pocketmail, which was selling a system for sending emails acoustically over phone lines that was quickly overtaken by technological development (ie ultimately the iPhone).
Whatever happened to Pocketmail? A quick search on the internet tells me the company became a shell into which a mining company was back-door listed back in 2007, rebirthing as Adavale Resources (ADD). But the change in direction still didn't workout for shareholders. The chart looks pretty miserable over 10 years and cash is still a problem, with the ASX querying the company just a few weeks ago, noting:
"It is possible to conclude, based on the information in the Appendix 5B that if the company were to continue to expend cash at the rate indicated by the Appendix 5B, the Company may not have sufficient cash to continue funding its operations."
So one of the things Equitable Investors looks at when screening the market for potential investments is funding. Can the company last at least a year at the current rate at which it is consuming cash? If not, can we benefit by being part of the funding solution?
Equitable Investors Pty Ltd is a Corporate Authorised Representative (No. 001256627) and Martin Pretty is an Authorised Representative (No. 001256674) of Glennon Capital Pty Ltd (AFSL No. 338567)
