Aptilon Corp APTOF

Tough results

[smallcap87]

Revenue declined sequentially and costs (as well as capitalized costs) up substantially, sequentially q/o/q. The probability that Q4/17 will not be nearly as strong as Q4/16 has gone up. The apparent strong operating cash flow growth was entirely due do deferred revenue changes which will reverse during Q4.

Most troubling, however, is the lack of transparency around the company's new R&D activities, and the associated accounting treatment:

YTD capitalized R&D is $1.557m, compared to $0.020m for the same period last year. Of the YTD/17 amount, $742,000 was capitalized in the current quarter. This compares to just $20,000 expensed in the current quarter.

Those numbers alone do not suggest any improprieties, however, the company has not discussed in a transparent manner (respecting competitive constraints) the nature of the R&D spending, and its criteria for expensing vs. capitalization. The point is that management has significant discretion in what it chooses to expense vs. capitalize (more of the latter results in higher EBITDA), and of course interim statements are not reviewed by its auditors (who are themselves a small firm with incentive to please management during the year end audit: https://www.cagl.ca/en/about-us/profile/david-lavallee/default.idigit).

No accusations here - just raising the point. I invite management to increase transparency around the nature of its R&D spending, and the related accounting treatment.

I would also note, that capital expenditures have also increased a substantial amount, without commentary on the nature these expenditures ($723k YTD, vs. $nil last year).

The broader point about the business performance should be apparent: income statement and balance sheet spending is increasing materially, while revenues have been declining sequentially.

Hopefully this company doesn't turn out to be an example of where not to invest in small-cap land.