When Bidstack made 3 RNS announcements last week on Tuesday 20th September they created both fear and frustration by inducing a steep decline in the share price from optically positive news. We set out to dissect the situation with as much objectivity and logic as we can muster in this case study.
I must first disclose that I have a shareholding in the company and MHM has published a memo on the business highlighting what we believe to be a highly attractive investment opportunity. I believe that the company is ahead of its competitors, extremely well positioned to grow exponentially in the coming years, has diligently executed an intelligent strategy, is doing all the rights things operationally and is about to reap the rewards of over 3 years of investment and development. Along with all other long-term shareholders, however, I have also watched in disbelief as the company appeared to score own goal after own goal through limited and vaguely worded announcements over the last 3 years.
And so to the announcements. The first 2 RNS announcements last week appeared to back up a positive thesis on the potential for the business, while the third confirmed long-held concerns over the board’s incomprehensible approach to investor communications. So, what happened?
The first announcement (“RNS 1”), was released at 07:00 and was titled “Strategy for Accelerated Growth in the US”. This provided a very positive update on the progress the business has made and disclosed a revenue target of $100 million.
The second announcement (“RNS 2”), was released at 07:03 as an RNS Reach and was titled “Bidstack Expands US Operation with CRO Hire”. This was another extremely positive announcement and formally disclosed the hiring of Jude O’Connor, a highly experienced, credible and reputable executive to drive the group’s revenue in the US.
The third announcement (“RNS 3”), was released at 11:21 and was titled “Revised Market Forecasts”. This simply stated that the company’s broker had released a new research note where they had updated their forecasts for 2023 and added forecasts for 2024.
I have broadly seen every RNS released in the UK market for the last three years and many more before that, but I do not recall having ever seen one like RNS 3, simply disclosing that a broker had updated its forecasts. It made no mention of 2022 (current year) expectations, which are the relevant numbers for market expectation measurement that would require the company to comment if it differed materially from their internal expectations. It didn’t say whether the 2023 numbers had moved up or down or whether the 2024 forecasts were in any way aligned to the company’s earlier announced target.
After RNS 1 and RNS 2, I expected a positive share price reaction and it indeed traded up in the morning of Tuesday 20th September. I did not expect, 4 hours later, to see an announcement such as RNS 3, which resulted in the share price declining steeply on the day and continuing to drift ever since. What requirement prompted RNS 3 to be released at all, why was it released 4 hours after RNS 1 and RNS 2, and how could the share price be down after such positive news from RNS 1 and RNS 2?
There has been a lot of speculation from shareholders and commentators on social media, some of whom are as confused as me as to the circumstances of the announcement, while some appear to be engaging in speculation purely to spread fear in order to profit from others. But what exactly has been speculated?
It has been speculated that the 3 RNS announcements were co-ordinated by the company, with RNS 1 and RNS 2 expected to positively impact the share price and increase liquidity to allow certain shareholders to sell their shares, with RNS 3 then expected to imply that costs had increased significantly, requiring significant additional cash through an equity raise which selling shareholders could then buy into at a much lower price. The simple presence of the new broker note has also been quoted as being produced purely for the purpose of providing guidance to potential new investors in an equity fund raise. Logic would dictate that this speculation simply cannot be true.
I do not have access to and have not seen the broker note that was published. However, I understand that the note contains detail around the new hires and incorporates those costs as well as a view on the company’s revenue target. Given the timing of the release and the standard practice of company brokers having access to information before announcement to prepare their research, potentially with some guidance from the company, we can deduce that the company at least knew that the broker note was being released and broadly what it contained at the time of RNS 1 and RNS 2. If the company was aware that the broker was indeed forecasting lower profitability and a need for equity funding (and I don’t know if it was), the content and timing of the RNS announcements could be construed as market manipulation if the speculation is to be believed. Surely there is no way the company could have engaged in such behaviour. Why would it benefit the management, holding relatively significant shareholdings, to ensure they were diluted more than they would need to be?
Equally, if funding is required and the company is undertaking sensitive discussions out of the glare of the spotlight, why would the $100m revenue target, leading to the new broker note and funding speculation, be published at all at this point in time? A company can’t publicly set a high revenue expectation, hire a large team to generate the revenue at significant cost and not have funding in place to finance it, risking insolvency. That would be negligent. It also begs the question of why a highly qualified and experienced CRO, and his team, would join a relatively small company from a multi-billion dollar company if it couldn’t clearly show them the funding was in place to pay their salaries.
It was not clear to me, prior to the 3 announcements last week, that any additional funding would be required by the company given its progress. However, noting the company’s own suggestion in the annual report that funding might be required and as a concerned shareholder seeking to protect his investment, I have previously highlighted a number of financing alternatives to the company that I believe, having discussed with a finance advisory expert active in the market, would be achievable and preferable to further diluting shareholders. I also provided the contact details of the finance advisory expert to the company, who I have confirmed has not subsequently been contacted. Can it really be possible that the company haven’t explored all financing alternatives to establish the most attractive option for the company and its stakeholders? If they haven’t made use of contacts provided to them, we could conclude that they either don’t need financing, or they are already in advanced discussions with other parties.
So, logic dictates that the company is progressing spectacularly well (due to RNS 1 and RNS 2) and doesn’t require equity funding (due to the implications of RNS 3 not making sense in that scenario). And yet the share price continues to behave as if equity funding is a huge concern. Given that funding concern has been a key driver of the share price over recent months, why was there an announcement of the growth plan in the absence of an announcement on funding strategy, unless there is no issue with funding? However, if there is no issue with funding, why is the company comfortable allowing this state of confusion to continue? It’s all so confusing!
The confusion could have so easily been avoided and at worst could have been resolved within hours with a clarificatory RNS. Almost a week later, there is still no such announcement. Sadly, this is not the first time the company has generated confusion amongst shareholders with its communications. Company communications, and lack thereof in some circumstances, have been an issue for some time and, alongside some optically shareholder unfriendly actions taken by the board, have created an air of great caution with investors.
Rather than engage in speculation, I believed that shareholders required an explanation of this latest communication mishap through a public clarification from the company. Having expressed my concerns over the impact of the 3 announcements to the new Chairman on Wednesday 21st September, I wrote formally to the Chairman and board on Friday 23rd September setting out my views in a personal and candid fashion. While the readers of that letter may have interpreted some elements as critical, my intent was to be factual and constructive in the hope of a constructive response to all shareholders. I have had no response to this letter. The market is live and shareholders are being asked to make valuation and investments judgements on pure speculation of material information in an already difficult market, while the board remains comfortable with inaction and silence.
In the letter, I asked a number of governance questions (see later), requested clarification around last week’s announcements and called for the removal and replacement of Mr Stewart, a non-executive director who was, until recently, the Chairman of the company. In my view, he presided over the company’s long running communication shortfalls and did not act in the interest of shareholders during his tenure, yet still continues to be on the payroll.
I have now tried twice to co-ordinate 5% of shareholders to requisition an EGM to vote on the removal of Mr Stewart as a director. While I am confident that I am in contact with the requisite number of shareholders and that they would like to see change at the company, it is my own failing that I have not persuaded them to actively support such action.
I remain unable to think of any reasonable explanation as to why the company, with a need to spend its cash wisely to execute its strategy, can justify continuing to pay fees to Mr Stewart. Here is a short summary of some of what occurred during his tenure as Chairman:
- An investor relations strategy that could be described as almost complete blackout, providing no meaningfully informative update on the business to shareholders, leading to a reduction in the share price from a high of 34p to 1.63p, a decline of more than 95%.
- Used COVID restrictions to exclude shareholders completely from the AGM in 2020, when so many other listed businesses provided video conference or online access alongside meaningful presentations of their businesses.
- Allowed the sale of shares by Mr Draper (CEO & Co-Founder) and Mr Petruzzelli (CTO & Co-Founder) at 20p in October 2019 when he must surely have known that the results were unlikely to meet market expectations and the company duly released a profit warning in December 2019 that sent shares tumbling.
- After this profit warning, presided over an equity fund raise at 4p per share in June 2020, at a significant discount to a previous raise at 12.5p in May 2019, with retail investors excluded from participating. This, after the business had seemingly made substantial progress but with no effort to communicate it prior to the raise.
- Presided over an equity fund raise at 2p in July 2021, a second successive down round despite further substantial business progress, with retail investors again excluded from participating while the institutions that are known to have participated no longer hold disclosable interests.
- Following the 2p placing that hugely diluted shareholders, approved a new option plan that reset exercise prices and offset the dilution of the placing for a number of the management team. This was a clear display of misalignment with shareholders who were the only ones left to feel the pain of what appeared to be a poorly managed raise. In addition, he even allowed the award to himself of 3 million of these options in December 2021, as a non-executive with no daily responsibility for generating the operational performance required to drive results.
- A seeming inability to have enough clarity on the business to ever provide even broad financial guidance, or unwillingness to provide any benchmark against which to measure performance.
I don’t believe there’s an objective interpretation of the above that would render this as anything other than an unenviable track record. I continue to believe that Mr Stewart should be replaced. Since the board, management and advisory board give the company all the industry expertise it needs, I believe that the board would greatly benefit from a director with financial experience, an investor mentality, and a willingness to ensure that the board holds itself accountable to shareholders.
If someone is driven to provide constructive feedback which might be interpreted as critical, they should be willing to help in providing the solution. Equally, a strong leader wouldn’t just listen to someone’s potentially difficult-to-hear feedback and just ignore it. They would hire that person and make them responsible for fixing the issues. Director of a plc is not a role I covet, but I can’t provide this feedback and not to be willing to be part of the solution. I must surely, therefore, offer myself for nomination to the board.
As a long-term shareholder, I have more knowledge of the company than many (although certainly not all) external parties, have an incentive to see the company succeed through my own investment, have lived through the frustration of every vaguely worded RNS in the last three years with an understanding of how they could have been more helpful and informative to shareholders, have over 22 years of experience in financial markets and was a board member of a data-driven, integrated marketing agency for over 2 years. So, there’s an argument that I’m qualified, once you’ve recovered from the immediate hilarity of the suggestion.
Clearly shareholders would rightly have concerns about this optically self-serving offer and could undoubtedly put forward even more interesting candidates, so I am sure I am safe from nomination! However, here are some reasons I think the board might also be reluctant to engage in this discussion:
- I would insist on the deferral of all board fees until profitability had been achieved and would encourage the other non-executive directors to agree to the same.
- I would lobby for the forfeiture of all non-executive option awards and encourage exposure to the upside potential of the business through the purchase of shares in the open market.
- I would ask the following governance questions that I believe shareholders should have answers to (which I mentioned earlier were included in my letter to the board):
- The company paid £527,500 in director bonuses in 2021, which I understand were predominantly paid to the 2 co-founders of the business. Why are the founders, as key management, not bootstrapping the company like other start-ups and ensuring every pound spent is carefully directed towards achieving profitability rather than accepting bonuses and extracting cash, particularly after receiving such generous option awards?
- The company is aware that broker research is generally only available to institutions, while also knowing that its shareholder base is predominantly retail and is unlikely to have access to such market expectations. The company has a $30 million guaranteed minimum revenue contract, with known gross margins and a fixed cost base predominantly made up of employee salaries. It must surely be able to produce a 1-2 year financial forecast with some accuracy. Is it an inability to forecast or a lack of willingness to take responsibility for putting out guidance that stops the company from relying on market expectations of brokers as the measure of their performance?
- The finance team seem to be functioning well without an appointed CFO, as evidenced by the expeditious release of the company’s H1 2022 trading update. However, investors and potential finance providers expect to see a CFO and if the absence of one raises even a single question mark that narrows options or discourages investment, what is the value of not appointing a CFO for over a year?
- The market valuation is optically poor for potential partners and makes the company vulnerable to an opportunistic, lowball takeover approach. Why is the board and management seemingly happy for the share price to languish and reluctant to publish clarificatory or informative announcements?
And so I expect to remain as just a shareholder, and as a shareholder in Bidstack there is so much to be positive about:
- Over 110 games utilising Bidstack’s technology, believed to be more than any other competitor, including the exclusive AAA publisher deal which is strongly rumoured to be with Electronic Arts.
- The $30 million guaranteed revenue deal with Azerion.
- A medium-term projection of $100m revenues, which would represent exponential revenue growth.
- The appointment of the highly regarded and experienced Jude O’Connor and his team, giving significant credibility towards achieving the growth targets.
- A strong and improving gross margin, suggestive of significant future profits and cash flow.
- IAB standards for in-game advertising now finally in place, allowing ‘always on’ programmatic revenue.
- An expectation of large new publisher and partnership deals to be announced shortly.
- An expectation of additional white label technology deals and revenue streams to be announced shortly.
With this set of facts, there is little doubt that the share price could and should be at least 10p today, notwithstanding the current market environment. In our own MHM forecasts published in May 2022 (which, now it seems oddly, were not the subject of an RNS, but have now been broadly validated by the company’s revenue target), we arrived at a valuation of 22p per share even accounting for further equity dilution. Equally, accounting for the possibility that the company doesn’t scale as we expect and the risk of further shareholder unfriendly actions, we incorporate a 50% probability that the shares are worth zero. Finally, we incorporate a 15% margin of safety to arrive at a risk-adjusted expected value of 10p today, even with all these layers of conservatism baked in. Why then, is the share price languishing below 3p today?
The Fear
The market has concluded that a highly dilutive equity raise is all but certain. While logical arguments and detailed financial analysis suggest this is far from certain, the fear, fuelled by the company’s silence, is that the market is correct and the board will, once again, lead shareholders into a horrible and unnecessary dilutive equity raise. Not only that, will they again be deaf to shareholder interests and award options to management to offset the dilution that they have been responsible for?
The Frustration
It can be argued that it is only sub-standard investor communications from the company that leave the share price in its demonstrably undervalued state. I believe there are a number of non-dilutive financing options available, and the company can, in any event, easily clarify the situation with a single announcement as I struggle to think of any truth that could be worse than the speculation reflected in the current price. This company truly has the potential to be one of those rare, life-changing multi-baggers. It is frustrating it is not at least 4x the price today.
For now, we can only speculate as to whether people are right to be fearful or just frustrated. Will the inherent potential of the business overcome the gaps in management and governance, or should we have heeded the red flags? The stock market allows us to place our bets and make investment decisions that are exclusively ours to own. Our chips are down – we hope that the company reveals its hand very soon and displays the leadership its shareholders have long awaited.
Nick Hargrave
Founder & CEO
