BTC are no longer required to produce a 4C so their "Q3 FY24 Business Update" comes as much from the marketing department as the finance team.

Take this claim, "Q3 Free Cash Flow of $4.8m and on track to achieve 2H FY24 outlook of $5m+"

Ok, that means FCF for Q4, which should be a good quarter is > $200k? Peanuts. And the $4.8M for this quarter was adjusted, "Bigtincan ended Q3 FY24 with $21.6m in cash and cash equivalents up from $19.4m as at December 2023, including the impacts of a $2.2m deferred consideration related to the Modus acquisition and debt finance interest costs of $450k for the quarter. This results in free cash flow of $4.8m. "

Since when do you get to add back interest costs to FCF?

They tout a large EBITDA but this is a meaningless number because they capitalise large chunks of software development and write it off later. The spend is not counted as an expense and the D&A gets added back. A software company without any development costs!

The one bright spot is the (unaudited) claim of $30M revenue for the quarter. Not too shabby if they can collect it.

Lastly, I'll point out that they are guiding to ARR of $120M+. This is another rubbery number. From the half yearly: "At the end of 31 December 2023, ARR was $117m" so there's an uptick there. Possibly.

SP is up, could be a good chance to get out.

A few comments on the BTH half year.

Revenue is down 5% on previous corresponding period despite some business acquisition. Costs are down but one has to imagine that some of this is the sales and support people that generate revenue and renewals. There is a note on ARR (see below*) which went backwards by $20.5M, over 14%, so there may be further revenue contraction when this washes through.

The P&L is distorted by the D&A number (not shown separately). A big chunk of this is amortising their capitalised software development so adding it back to create a positive EBITDA number is meaningless. Better to look at the cash flow. Operating cash flow was negative $6M but adding in PPE and capitalised development cost gives a cash burn of $13M for the half. That's after cost reductions.

Actually, the cash burn may not be so bad because the deferred revenue reduced. Deferred revenue is where the client has been invoiced in advance. BTH doesn't earn the revenue until the service has been delivered. Reducing the DR means delivering the service without invoicing more, so that's negative for cash. Add that back that $5M and the cash burn would only be $8M. That's actually a good guess as to how much they really lost this half. Put another way, my estimate of their net margin is negative 13%.

Of course, this is all complicated by their acquisitions which continue to muddy the water. BTH don't have a great history of making these work so expect more capital raises to fund acquisitions that later turn into goodwill amortisation, a "non cash" item (except if you bought in to the CR in which it's your cash they are burning). Modus seems to have been debt funded, increasing gearing.

*In terms of ARR [1] the business started with $130m and acquired $7.5m in ARR from Modus Inc. ... In H1 FY24 the business churned $8.4m, net renewal contraction was $19.9m and new and expanding existing customers contributed $7.8m. At the end of 31 December 2023, ARR was $117m. 

Last year, BTC pulled out all the stops to show four quarters of positive operating cash flow and now don't have to release quarterly "4C" reports. That trend has gone into reverse and the annual report is our best chance to infer what happened.

Operating cash flow for FY23 was negative $11.7M implying CF for H2 alone of negative $9.7M. That's a massive deterioration. When you add the capitalised development costs and PPE, cash out was over $17M for H2 alone!

In earlier posts I pointed out the massive amounts of deferred revenue that appeared on the balance sheet. This means that they have been paid (collected the cash) but not provided the service yet. Good for cash flow but it can't keep increasing. I expect that this is selling two and three-year contracts with payment in advance. Now it seems that it is not always the customer paying - sometimes it is the finance company. In note 6, BTC reveal a finance charge of over $5 million for factoring. That's new. If the finance company is charging 10%, that would mean $50M of rolling funding.

I've been worried about their bad debts but that has not panned out. They wrote off a net $900k for the year. Their provision going forward looks low at about half of that but not as significant as other points above.

In short, BTC continue to burn cash and the tricks used to show a positive cash flow have run their course. If capitalised software development is included in FCF, I'd expect BTC to continue to burn over $10M per half year.

Two recent announcements released against the background of a potential 80c takeover caught my eye.

1. Acquisition of Modus Engagement
2. Issue of 24M options

Are BTC behaving like a company that is about to be taken over? First, they just spent $US 9.5M (call it $15M AUD) from cash reserves to buy Modus Engagement. Although they stick "AI" in the announcement, "Modus is the creator of the Modus Virtual Product Tours, and Modus Lead Capture Solution". This is closer to their core product than an AI hail Mary.

Acquisitions like this have been a long-term strategy of BTC but their performance has been patchy at best. Do they create synergy and cross-sell opportunities? Or do they just befuddle and dilute investors?

But further in the ann, they say: "To support ongoing development of Bigtincan's Generative Al family of products - GenieAlTM - Bigtincan has entered into a binding heads of agreement to borrow $15m from Regal Funds Management Pty Limited ... The Regal group is one of Bigtincan's largest institutional shareholders."

So they are spending $15M on an acquisition and borrowing $15M, although they had the cash. Hmmm.

The subsequent 3B, which was not market sensitive, is also interesting. They are giving away 24M options, with a 2 year expiry and 50c* exercise price. BTH have traded at or above 50c on every day of the last 3+ weeks. Closing price Friday was 46.5c with a high of 53c. Given this price and volatility, there is significant value in these options but BTH is giving them away.

Furthermore, Bigtincan has agreed to pay to the JLMs 4.0% of the proceeds of the loan facility ... as a capital raising fee and 2.0% of the proceeds of the Loan Facility as a management fee. 

So they are paying $900k for the raising that's 6% to Canacord and Henslow! Is there an interest rate for Regal on this debt? No, it seems like the options are in lieu of interest. This is not arm's length since Regal Funds Management is a substantial shareholder. If a takeover at 80c happens, they stand to rake in 30c+ x 24M options >= $7.2M dollars. That's a pretty hefty interest rate!

* The exercise price of the options is actually, "The lower of $0.50 per share or a 10% discount to the 10 day volume weighted average price of Bigtincan shares commencing on and from 21 July 2023." Just taking a guess here but the market didn't like the announcements and there could be some selling by Regal to push the price down so the actual exercise price will likely be closer to 40c that 50c.

If I were a shareholder, I'd be very upset by these dealings. They seemed to have plenty of cash and now there's expensive dept.

BigTinCan no longer has to release quarterly cash flow (more about that later) so we won't get any solid news until the end of August when their annual results are released. The best we can do is take management's guidance, like this one from 13th March.

FY 23 Guidance - Bigtincan remains on track for its guidance for FY 23, being: 

1. ARR in the range of $137m to $143m. 
2. Revenue in the range of $123m-128m2. 
3. Cash flow breakeven to be achieved in Q4 FY 233 
4. Adjusted EBITDA to exceed $5m

I wanted to list these here and refer to them when the annual numbers come out later.

Here's what they don't say.

1. ARR is a mythical number. It's unaudited and has not, in the past, correlated with revenue and cash. It means nothing.
2. Revenue recognised should be the best determinant of performance. How much has the company earned by delivering services. As long as they can revenue into cash.
3. Cash flow breakeven. This is really vague. The say breakeven for Q4 but they don't release results quarterly. They don't say if this is operating cash flow or total.
4. Adjusted EBITDA. This fashionable metric is also unaudited and adds back some of the new treatment of leases. In a company like this it should be ignored.

So how did BigTinCan get four quarters of positive operating cash flow?

A likely candidate shows up in their published accounts. An extra $25M in deferred revenue! This is revenue that has been invoiced and not yet delivered (at 31 Dec). Perhaps they said to customers, "We will give you a big discount for paying for 3 years up front". That should get the cash flow up. But it's just bringing the invoicing forward. Now they have a liability to deliver the service and no ability to raise prices (in fact they've set a discount expectation).

Had a quick look at the half yearly which is out today and it's awful. Management are comparing the numbers to the previous corresponding period but a better comparison is to the last half year (which you have to work out by subtraction).

Revenue decreased about 3% from $62M to $60M. Ouch!

Cost of revenue was up about a million, so the gross margin has declined.

Loss after tax has jumped to $17M. That's 29% of revenue.

They do claim $4.5M of severance costs. Apparently, they've cut the headcount and that should reduce costs next half. We'll see. What did these people do? There is probably an impact to sales, support or product development that will show up later.

Cash flow has also deteriorated from the prior half. Operating c/f of negative $2M but there's $9M of capitalised development costs under investing so that's negative $11M c/f for the half. No wonder they raised cash when the share price spiked.

Have heard no more about the takeover so that is suspect. Perhaps it was just a ruse to push up the share price into a cap raise.

SPP results announced today.

It raised $321k which is peanuts. They were hoping for $5M. Plenty of cash in the kitty so not sure what they need it for except to pay for their ongoing cash burn.

Obviously wouldn't get a lot of applications when trading below 60c. It was only trading above 60c because of the takeover offer and we haven't heard anything about that since the placement, which netted $30M. One has to wonder whether the non-binding indicative offer at 80c by a company associated with a director was in good faith or just designed to push up the SP (which it did).

Got to laugh that they got $30M from "sophisticated and professional investors". The regular shareholders seem smarter.

Business Update today

ARR hits $130m, completes acquisition of SalesDirector.AI, ships new products, and 4C reporting waiver received from the ASX 

Key thing here is that there will be no 4C this month. Based on (I think) four quarters of positive operating cash flow, the ASX has given them a waiver so that don't have to do quarterly reporting.

This will be a small saving in administration but it's a real blow to investors. Getting a dodgy ARR number is no substitute for seeing their actual cash receipts. True, the quarterly reports were massaged with a large amount of the software development capitalised and put in the investing section. On this basis, ASX should not have granted a waiver.

The upshot is that BTH will have more time to massage their numbers and we will get less to analyse. Next half-yearly report doesn't have to pretend to reconcile to the quarterly numbers since there will only be one quarter.

Ann today of "Unsolicited, Non-Binding, Conditional Offer from SQN Investors" of 80c a share. 45jcj4nm595008.pdf (asx.com.au)

SQN is an existing shareholder with 13.6% of BTH and Farouk Hussein, a partner of SQN is a director of BTH.

Given that this is an inside job we've got to wonder what they know that we don't. Is there hidden value in BTH that the market can't see? Is Farouk looking to protect their substantial investment from further losses by going all in and presumably doing things differently.

Is having the CEO on the review committee a conflict of interest? Presumably he will be replaced if the takeover goes ahead.

"Bigtincan also notes that it has had preliminary discussions with other interested parties" Did they run away screaming after looking at the books. This could be just talking up the price because if they were serious, it would have been announced to the market.

Also "SQN have not been provided due diligence access at this time." but with a director on the board, they should know everything, right?

So as investor, what to do? Buy at 80c and hope for a bidding war? Sell at 80c to avoid the risk that this falls over? Wait and see?

I'd take the money and run but as you can probably guess by my other posts, I don't hold.

Just saw that BTC was late releasing a bunch of 3Gs with share issues going back to April. That's not good but maybe a one off.

This is more alarming. I was just taking another look at BTCs financials and there are substantial differences between the Appendix 4E results released on 30-Aug-22 and the Annual Report, released on 3-Oct-22. WTF! These should be the same facts. For instance, compare the 4E note 4 Cost of sales and other expenses with the Annual report Note 5 Expenses, which is effectively the same note with almost completely different figures!

eg, they found an extra $12M in Wages and Salaries! How can the numbers change so much? Shouldn't this be explained?

Did the CFO sign off on this? Wait, they don't have one. It was signed by the non-exec Chairman and a non-executive director.

I had a look at the Auditor's report which identified the following Key Audit Matters: 

• Revenue recognition
• Accounting for business combinations
• Capitalisation of software development costs. 

It's riveting reading but KPMG signed off on the final figures. Interesting to consider what else should be a key audit matter. Did they check receivables? Did the changes above come from the audit?

It's interesting what BTH do and don't say in the latest quarterly report.

Cash flow improved but I'd want to see the half yearly to understand this number. Looks like they've moved some of their costs from Investing (where they capitalise software dev as intellectual property) back to operating, but this seems to be carefully managed to maintain a positive and growing operating cash flow. FCF is still negative - the bleeding hasn't stopped.

There is no mention of their current ARR, which they should know. Last quarter it was quoted as $120M. I'm trying to reconcile this statement, "Bigtincan is on track for FY 23 guidance of ARR in the range of $137-143m and revenue in the range of $123-128m." So FY23 revenue is not much ahead of the ARR that was already contracted last FY, so there must be a lot of sales expected in the back end of FY23 that will boost closing ARR but only contribute a part-year of revenue. Hmmm.

Lastly, costs (as indicated by the c/f) rose significantly - almost as much as receipts. There is no conclusive proof of economies of scale or great synergies from their acquisitions. Maybe we can deduct some one-offs but there will always be something slightly abnormal happening and we shouldn't always add it back.

Last thought is exchange rates. Much of their revenue is in USD but also their costs. Maybe the falling AUD is boosting both?

I await their half-yearly to make a better assessment.

I can't make much sense of the FY22 full year results. Licence revenue of $102M is ok. H2 of $62M operating revenue looks good. A pity so much is not subscription (see point 6 below). There's $50M of operating revenue from BrainShark for the 10 months since 8th Sept 21 (note 15b) which is good. Should be > $60M next FY based on run-rate. Turns out BS is doing more than the rest of the firm combined.

My frustrations include:

1. Note 4 does not reconcile to the P&L: $75M employee costs + $54M other = $129M vs $127M in P&L

2 D&A of $11M is not broken down. What is in this number? D&A wasn't reported in the half yearly at all. There's $3.4m depreciation of intangible assets in note 9b. What is the rest?

3 EBITDA doesn't make any sense, let alone "adjusted EBITDA". Here's my calc (in millions) bottom up.

• (22) loss before tax
• 9 net finance cost - mainly FX gains
• (11) D&A
• (20) EBITDA

From the top, it's the same, $95M GP, ($126M operating costs less $11M D&A) = ($20M) loss.

4 Segment reporting is useless. Would love to see Brainshark separately since it's > 50% of monthly revenue.

5 There is $112M of intangible assets, possibly worthless. $40M for "Customer List"! Really?

6 No explanation on why professional and contract revenue jumped up to $6M. Was $735k in first half, $1,330 in total last year. Another mystery.

7 There is less information on bad debts in this report than last year. DSO seems to be down a lot though, which is good.

8 Cash burn of $20M ($10M each half) when you include PPE and capitalised development costs. That gives them about 2 years to turn this around, more likely 18 months till they need to raise capital.

Key issues for BTH remain: Can they grow (except by acquisition)? Can they ever be profitable?

As usual, management are cherry-picking the comparisons. YoY looks good but that's because of acquisitions.

QoQ ARR barely moved from $119k to $120k so the losses equal the wins and expansions. It's likely >$1k is from "immaterial acquisitions" so core business is actually going backwards. We were told that covid was restricting their sales force but that shouldn't be a factor now.

Cash flow looks manipulated. A wafer thin operating CF of $49k seems to have been achieved by capitalising more of their development costs as "Intellectual Property" in the investing section. Will be interesting to see if they are actually amortising this IP when the P&L comes out. Bottom line is that cash burn increased and they are down to ~8 quarters remaining.

Nothing here indicates that this will be a sustainable profitable business any time soon.

Still burning $4M per quarter and no sign of this slowing down. Don't be fooled by "operating cash positive" - they seem proud of "$4.4m in Q3 Cash investment into capitalised development software". Who knows if that's new product, "50 features shipped" or support & maintenance? Maybe there is a blockbuster new product in the skunkworks but I doubt it.

Looking at "Q3 FY22 Trading Highlights & Outlook" there's nothing to cheer about. Under "New Wins and Expansion" there is no detail on deal sizes or whether the customers are new logos or expansion. Also, no stats on retention. There wasn't any significant new customer win announced during the quarter. Guidance on ARR and revenue is steady. And no comment on how the Brainshark acquisition is doing. Is it saving the day or dragging the average down? To be fair, Q2 & Q4 are usually the strong sales quarters.

SP down a cent to 61.5c on a day when the market rose 1.3%, so I'm not the only one unimpressed.

It's easy to tout YoY growth when you've made a massive acquisition. Show me the money! (ie PBT).

While the top line growth for this half year looks good, it comes from their acquisition of Brainshark in September - about four months of Brainshark are included. Of concern is the increasing operating loss, $11.5M for the half (but to be fair this includes $8.3M of one-off acquisition costs).

In this half they capitalised $7.8M of development costs. If that were in operating costs, the operating loss would be so much higher. Total capitalised development costs is now 19M and only now has any amortisation been applied, a mere $200k. Amortisation is not shown separately on the P&L which is odd. Other SaaS companies that I've looked at are much more conservative in capitalising development.

Trade and Other Receivables blew out to $33M (more than double). There is no break-down of this in the half year but the FY21 full year has some detail (before Brainshark) - worth a look.

Management's preferred metrics of EBITDA, Adjusted EBITDA and ARR are not GAAP measures and not subject to audit and not really explained in detail (where's the amortisation expense that's in note 7?).

How does "sustainable ARR of $99m at completion [Sep 21]" get to $119m eight months later? If that's sales at June 30, it won't show as revenue till FY23.