This morning Big Sofa Technologies (LSE:BST) announced its full year results to 31 December 2016. Unfortunately, the numbers failed to live up to expectations and the company’s stock has fallen to 25p on the bid, last seen. This still values Big Sofa at £14.2million and unless there has been a dramatic improvement in H1 of this year, the obvious risk is that the company will need to come back to the market with its cap in hand before the end of 2017.
When Big Sofa came to market in December last year there was a lot of excitement surrounding the stock. The IPO was offered through the Teathers App and the company’s share price has performed very well since, peaking at 29.25p in the last few days. From the listing price of 17p, this represents a near 70% gain.
In his note to shareholders today Big Sofa’s Chairman, Nick Mustoe, described some of the company’s “notable achievements’ in H1 of this year. These include:
“… a three-year Master Service Agreement signed with Ipsos, one of the top-five largest market research companies in the world; a global partnership with P&G; and a Supplier Service Agreement with Survey Sampling International, a leading global provider of data solutions and technology for consumer and business-to-business survey research.”
Taken at face value, this is impressive stuff, but some other cracks have started to appear in the story, which have the potential to damage sentiment.
The first problem is Big Sofa’s revenue. When Big Sofa came to market, the underlying business was valued at just over £4million. We were told revenues for 2016 were expected to be between £1.5million to £2million. In fact, Big Sofa only generated £757,000 during the year.
The revenue miss was a big one, but the greater concern is Big Sofa’s cash position.
On 31 December 2016, Big Sofa had cash and cash equivalents of £2.5million. This is OK, but when you consider the company raised £6.1million only 2 weeks before it is clear over half of that fundraise went straight out of the door to cover existing debts and listing costs.
Big Sofa’s total costs of sales for 2016 were £378,000 and admin overheads were £3.19million. The company’s running costs were nearly £300,000 a month and that was before the post-listing expansion drive. Since it debuted on AIM, Big Sofa has expanded operations in the USA and taken on new staff. This is great if this increased expenditure has lead to greater sales, but it is normally the case such investment in a business takes time before it starts to make a positive contribution to the bottom line.
Talking about the early results of Big Sofa’s attempts to grow the company, Simon Liddington, Big Sofa’s CEO, wrote:
“We have made significant operational and financial progress in the first half of the year, growing a substantial new business pipeline from just c.£100,000 at the outset of the year to over £1.35 million today…
…[the] strategic partnership with P&G has already led to over £500,000 worth of proposals submitted with £190,000 already commissioned in Q2 2017. Big Sofa also expects P&G’s level of engagement with our technology to grow significantly in the future.”
This all sounds positive, but is it enough?
When Big Sofa listed, non-executive director Adam Reynolds estimated that Big Sofa’s cost base for 2017 would be between £5million and £5.25. Reynolds hoped that Big Sofa’s revenue would be “in the region of £4million to £4.5million, with the company losing £1million in 2017”.
If Big Sofa lives up to these expectations then the company could sail into 2018 on the crest of a wave. However, since the company has just suffered quite a big miss in terms of revenue generation for 2016, the risk is that revenue for 2017 will also fail to live up to expectations. If this happens, shareholders will naturally be concerned how long the company’s remaining cash will last.
While it is encouraging that Big Sofa has a £1.35million sales pipeline, it is difficult for shareholders to be able to assess how meaningful this is. What is Big Sofa’s conversion rate of potential sales into fee-paying contracts? What is Big Sofa’s monthly cost base now? What future potential is there for the sales pipeline to grow?
Until we see Big Sofa’s interim figures for 2017 in September we won’t be able to answer these questions. However, now that the company has just delivered a disappointing set of results relative to expectations, it would seem appropriate to adopt a more cautious stance towards the stock.
At 25p on the bid, investors who participated in last December’s IPO are still showing a near 50% paper profit. Banking a good chunk of this looks like a sensible move.