On the two-year anniversary of the biggest bubble in small cap tech since 2000 I thought it would be good to reflect on a few things…
This one is tough to write up because I have entirely, utterly and in all respects lost everything and completely blew up my portfolio combined between this area of the market and AdTech to the point of utter wreckage and beyond repair to an unrecoverable level. When running a concentrated book goes against you it gets ugly fast… funny how history only remembers the winners with a massive survivorship bias.
Let’s set the scene, a late 2020 into early 2021 into an utter melt up a bubble cresting that second week of February. With complete trash down market cap just gapping higher 20-30% higher every day. The worse the company the higher it went. Let’s just highlight a couple;
Virtual Armour VAI.CN – Got into the 0.50’s from <0.05/share only to go private at 0.07/share within 12 months…
VSBLTY Group VSBY.CN – Highs of 1.89/share to close today at 0.175/share to never turn a profit heck, to be selling product at NEGATIVE GROSS MARGIN…
TrackX TKX.V – My personal favourite, was churning massive volume doing millions of shares a day for weeks on end to hit a high as high as 0.14/share to only turn around and be all but a ZERO here…
Why do I bring these up, there was a massive appetite for anything growth/tech with a ARR revenue stream and a story. With private raising rounds going for >100x ARR and public index basket of stocks that even got as high as 30x ARR in aggregate.
Then you got little ole’ Tall Craig, sitting >50% cash going into 2021 watching names run away with value and actual fundamentals names not moving without that liquidity impulse. Next thing you know you get forced to chase as the end goal (A property in Southwest Ontario fleets further into the abyss if you don’t keep up) put simply, FOMO to only end up once the dust settles further away then ever.
The plan was simple, to go down further on market cap where they haven’t moved as much at a discount to larger cap peers to play for a re-rate on a liquidity impulse. With the availability in hindsight that was the worst possible thing to do at the worst time so lets go through a post-mortem of the Good, the Bad & the Ugly.
Lets Dig in;
The Ugly – Martello Technologies Group MTLO.V
Entry Point – Low 0.20s/share
Current Price – 0.025/share
Performance – DOWN a smooth 90%
The Story – A play on Microsoft Teams growth through DEM backend monitoring/performance with a legacy Mitel support business that was funding the growth of the MSFT365 growth on the back of the shift from work from home.
The balance sheet was an absolute mess but in a bull market and big financiers behind the story that didn’t matter as they would be able to refi on a re-rating of the business as the mix shift went to more of a pure growth model.
It was a pureplay SaaS name that was able to reach EBITDA profitability with 90% gross margins in the midst of COVID trading at a 2-3x EV/ARR multiple at the entry point where peers were trading 8-10x EV/ARR as the business shift mix was shifting to more and more of a high growth DEM business model where the cash cow Mitel business was still stable to growing mid single digits.
When it Cracked - June 28th, 2021 on the announcement of Fiscal Q4 numbers. (0.15/share)
That should have been the point to pull the rip cord and sell everything, they turned back on the spending spigot to the point where they were burning >1M/quarter an yet they were seeing negative QoQ growth in their growth engine of their MSFT365 DEM product and the Legacy Service Analytics/Mitel business started to fall off a cliff.
The MSFT growth rate was suppose to make up for the decline in the legacy business and reach a pivot by the end of that fiscal year. Which did not even come close to happening. At the same time they were changing how the measured/counted users if I recall which in hindsight was a red flag.
At that point, it should have been blown out, but you were looking at a point in time where it was getting below 1x ARR… (If you believed if the ARR growth was going to go back to the guided figure) So what did I do, I kept plowing more and more money into it throwing good money after bad. Especially with the doom loop of the balance sheet weighs around the neck of this thing like an anvil it just kept getting worse and they refused to cut spending even as incremental spend was not driving any ARR growth.
I just sat there adding, thinking that on a strategic asset value it was worth more then the enterprise value of the business, but as the egregious spending and lack of discipline by management on the cost side led to a decaying asset and has since just turned it into a credit story being kept alive by a single investor.
Where are we Now – I sold everything I could for tax purposes.
Its exactly where we started… still sitting there at 2x EV/ARR but between ARR declines and the massive cash burn it has increased the enterprise value as they keep plowing more debt & equity onto this thing.
Just a complete mess.
Lessons Learned – Add into fundamental execution & reduce into fundamental performance (Completely did the opposite here)
On these strategic asset plays, if it is not default alive as in cashflow positive the natural decay of the financial position of the business is going to kill you. It is like you are holding an option and there is THETA decay just eating away at your upside optionality.
Just pull back the chart kid, if a group of people in software have not been able to create shareholder value in the SaaS space in the greatest run ever for SaaS in the 2010s why would it change and they start making good decisions. It was always down and to the right.
Sacrificing business quality for a valuation discount at the entry point is never going to work, especially when the cash burn is that high. Operating cash burn when the balance sheet was already stretched is a recipe for disaster especially when the market sentiment turns.
It was always a bet they could turn the business around from a revenue mix shift basis before they ran out of balance sheet runway and they unequivocally failed.