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Wednesday, July 27, 2016

Listing as a form of Series A or B - Migme

21aug 2016 Edit : Steven reached out and corrected me on some items. Here are amendments. First mgmt owns a fair bit more due to 53m restricted shares and about 20m option pool. About 73m shares in total which majority will be mgmt. so about 25-30% owned by mgmt. Second, migme has announced they will be raising 6.5m to 10m more very soon. At current burn, it will last 6 month to 9 months more. Their game strategy must really take off and reduce cash burn from current 5m per quarter. It looks like a key period coming up for the team!

Migme has resumed trading after a 1+month trading suspension. It is not normal for a listed company to stop trading for long because the basic idea of a listed firm is be liquid and tradable all the time for it's shareholders.  Migme has announced raising $8m more various investors of which Mnc group is one. Mnc is a large conglomerate in indo with a lot of broadcasting interests. A good strategic investor. However market is punishing it today with a 23% drop in stock price to 0.36 below the subscription price of 0.4. What I wrote earlier still stands. The key period is upon migme now. It has to use this 10m over next 9mths to prove it can improve financials and maybe even be cash flow breakeven. To me, this whole suspension episode is a good reason against raising via public markets instead of usual Vc. Mgmt has so much more public stress than needed. Readers can read Steven fb post to feel his pain.

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I am writing this because someone asked me what I thought of migme.

Have commented about this before. Essentially, migme was a 7m series A "ish" round raised via an ipo route. Then over the last 2 years raised another 15m or so ala a series B. So while there is added complexity clearly there is some advantage to be listed. However end of the day cash flow and subsequently profit is king.

So in migme case they are still like most series A and some series B type company, deeply unprofitable and need cashflow aka more funding. One thing good as a listed entity is that has a bit more options to raise via more non vc routes like rights issue, corporate investors etc. they proved this by further raising the 15m.

An interesting downside for listco style raising is that a listed entity structure may deter traditional vc firm from investing. Too many moving parts, less control, public disclosure and also have to spend more to maintain listing status.

So if we treat migme like a usual money losing  series b firm, then there is nothing surprising it needs to keep raising. The only issue is that it has to be all public due to listed status!

The question then turns to whether non vc investors will have the patience to fund migme moving forward. Financials are not pretty. The 22m or so raised all spent. But business still losing 10m per half. In 2015 negative cash flow of -17m!

1H2016 Cash receipts growing only 7% QonQ so not massive growth. The good part is cash receipts was 12m in 2015 and looking like 20-30m this year. But again it is not revenue and we don't know how much is high margin stuff or how much is just low margin ecommerce. How much is recognisable revenue, how much is future revenue. Too many questions.

Final point is that Mgmt has too small (about just 20m shares or < 10% of company) a stake now and it is a concern. Granted the company is extremely generous with options. For the financials of company, CEO was paid 1.35m of which 933k is in options which are in the money still as issued very early so low strike price. In contrast, Patrick grove of iprop paid himself $1 for first few years and had a much more sizable stake.

It will be interesting to see how this story turns out. There is a limit to investor patience and when it is all public, it can all go downhill very fast esp if key business metrics don't perform. Ibuy/ensogo is a good example. From 100+m company to just 20+m market cap, CEO resigned and shares
suspended.


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