Seeking Alpha - May.30.18 - "RockieK" Bulls Confu
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Posted On: 06/07/2018 4:17:18 PM
Seeking Alpha - May.30.18 - "RockieK"
Bulls Confuse $Fusz Story With A Fairy Tale
Summary
Earnings release confirms expected growth in revenue.
Corresponding increase in costs worsened losses.
Company seeks to up-list to a traded exchange.
But underlying fundamentals deteriorate even more.
Introduction
I first stumbled upon this company after noticing a large increase in trading volume on the OTC markets. Increasing interest in an issue typically demands at least a passing glance at the underlying fundamentals to see what is driving the current price/volume action. Little did I realize I was stepping into a bull pen wearing a scarlet overcoat.
Nevertheless, I gave an honest opinion and received enough rational feedback to suggest I keep nFusz Inc. (OTCQB:FUSZ) on my radar. At the very least, I want to see if I underestimated the service offered and the value notifiCRM can deliver to small- and mid-sized business owners and users of certain CRM software such as NetSuite CRM. Or, if my premise is correct and shares have been overvalued due to promotion and excessive exuberance.
Since my first article (here), the company has released annual results, received approval for and placement of notifiCRM on Oracle's (NYSE:ORCL) NetSuite CRM Suiteapp.com, and has continued marketing its brand with numerous press releases. Most recently, the company released results for the first quarter (earlier than what I expected) and announced it has engaged an advisor to help up-list to a national exchange.
In this follow up, I will briefly cover pertinent information from the latest quarterly report, including revenue and expense growth. I will introduce a couple of subjects that I believe are common misperceptions of retail investors about the company and its SaaS product line and will review the requirements for transferring FUSZ listing from the OTC to a national exchange. Next, I will lay out a bear case scenario, and address per share price valuation based upon current price and fundamentals, and recent bullish price predictions. Finally, I will address bullish growth exceptions as unrealistic.
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Quarterly Results
To begin, FUSZ reported an increase in revenue over both the year prior and the quarter prior. Of course, the company had no sales in the first quarter of 2017 because it is a development stage company that only recently began offering services to the public. Prior quarter, the company had sales revenue of $5,900 for the 4th quarter and whole year of 2017. This past quarter that increased to $8,003.
While a 60% increase in sales over the course of a quarter is more than respectable, what is disappointing is the Sales, General, and Administrative (SG&A) expenses. They increased from $617,537 in Q1 2017 to $5,269,574 for Q1 2018. Not only is that an increase of 750% year over year, it is more than the 2017 total SG&A of $4,327,529.
The company continued to address outstanding debt and paid off all remaining convertible notes as of March 31, 2018. (More on that below). As a result, shares outstanding increased 27% over the quarter to 152MM.
However, the company still has notes outstanding, with some partially convertible to common stock, and all of which are due this year. (Again, more on that below.)
Valuation of Shares and Other Misperceptions
Now, before talking about valuations based upon current reports and projections, I want to clarify some points that are important in forming the opinion I have with regard to this stock, and some changes that I have made in my opinion.
NetSuite CRM is Oracle's customer relationship management software. It is a separate product from NetSuite ERP, NetSuite OneWorld, NetSuite PSA, and a host of other Oracle products under the NetSuite brand. Just because a company uses one NetSuite product does not mean they will be using notifiCRM.
Just because a company uses NetSuite CRM, that does not mean that nFusz is going to be receiving subscription payments from the company. In addition, if a company does purchase an enterprise license to use notifiCRM, not every employee will have access too or use the app. Realistically, only the sales force should be interested in notifiCRM.
notifiCRM is not a CRM in and of itself. It is an add-on tool that is supposed to incorporate metrics and data to improve customer engagement and lead conversion. It does not replace NetSuite, and is not a competitor of Salesforce (NYSE:CRM), HubSpot, Zoho, etc.
notifiCRM is not self-producing artificially intelligent. Users of the service still have to produce their own content. You cannot just write a few pieces of code or select a couple of dropdowns and have notifiCRM magically create a quality video for you. Also, you cannot have it "intelligently" respond like Alexa, Cornata, Siri, or that scary google guy. The video is only as good as the producer, and the interaction is reactive based on parameters set by the user, not artificial intelligence or even fuzzy logic.
No sales tool ever designed can do the complete job of a salesperson. Sales, when done masterfully is an art. But, no single tool, trick, or script is going to do the selling for you.
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For clarification, other than that last one, the company has never made any of the above claims. I simply bring them up to address certain perceptions some in the investing community have with respect to this particular SaaS (Software as a Service) line.
Next, I want to make an admission of a change in opinion with respect to the company. When first starting to investigate what was driving stock price and volume, I pessimistically assumed it was yet another pump and dump penny stock that would end up worthless and enrich only the paid promoters and email newsletter distributors, as well as various nefarious offshore entities and below board executives.
To date, other than an initial listing on OTC Marketplace that FUSZ was the subject of a stock promotion, I have found no evidence of any paid promotional material being distributed electronically. I have, however, found ridiculous claims prompting my clarifications above, and unrealistic earnings, growth, and per share price models boasting targets of $20, $30, $50, even $200 per share!
Most of the commentary focuses around the association with NetSuite CRM and assumes a steady growth rate with barely any attrition. It is as if almost every bull believes that every user of NetSuite CRM is a viable consumer of notifiCRM and that most every one of them that tries the app will be so enthralled by it that they make it a favored tool in their daily job box. It also assumes that Oracle is going to take the lead by actively selling notifiCRM as a way of bringing in a steady stream of new accounts by the thousands.
However, the actual number of NetSuite users that are in sales, that are in a capacity to utilize notifiCRM, and are capable of producing quality content to distribute to sales leads is limited. Further limiting the consumer base of this SaaS tool is internal controls, regulatory concerns, and legal oversight.
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And here I am not even going to get into potential competition. notifiCRM has what appears to be first mover advantage in this space, but that does not mean that it has exclusive rights or patents that can provide it monopolistic protections from second comers and competitive upstarts.
However, the biggest flaw I have seen thus far in the bull thesis is the unrealistic assumption in customer growth, retention, and cost. Last quarter, SG&A ballooned to more than $5M. Mostly due to increased costs associated with equity compensation. So, is it prudent to believe that costs could diminish to couple hundred thousand or about 5% of prior quarters cost when the company has already disclosed that SG&A will be higher going forward due to higher per share prices?
And, in light of the most recent disclosure that the company is seeking to up-list to a national exchange, is it reasonable to believe the company is destined for immediate profit and take over by a global CRM systems provider given that near term costs will remain high or even grow and that accumulated shareholder deficit has grown to more than $37,000,000?
Then again, perhaps cleaning up the balance sheet and up-listing to a national exchange is the exact thing needed to drive this company to profitability. However, that might not be in the best interest to existing shareholders.
Let's take a look.
Listing Requirements
NYSE Listing Requirements
In order for a stock to transfer a listing to the NYSE, it must meet certain criteria, including a minimum price of $4 per share, 1.1 million shares outstanding with a market value of public shares in excess of $40 million, and a minimum number of shareholders and average monthly trading volume. In addition to the liquidity requirements, the company must also meet one of the following financial criteria:
Aggregate pre-tax income for the last 3 years of at least $10 million with a minimum in the most recent year of at least $2 million and a minimum in the next most recent year of at least $2 million. Pre-tax income must be positive in all 3 years.
Have minimum global market capitalization of at least $200M for at least 90 days prior to their application.
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nFusz's stock does not meet the minimum $4 per share requirement, but does meet the number of shares outstanding and market value minimums. Latest information from OTC markets indicate the company has almost 90 shareholders, but that includes shares held in street name, so I assume there are at least 500 total out there, and most likely at least 400 round lot holders. Finally, the average daily volume has been almost 2M shares, which is well above the average monthly minimum. However, the company meets neither the earnings test nor the global market capitalization test.
Therefore, at this time, the company is not able to transfer their listing to NYSE.
NASDAQ Listing Requirements
The NASDAQ Stock Market has three listing tiers: Global Select Market, Global Market, and Capital Market. Because the listing requirements for NASDAQ Capital Market are the least restrictive, I will focus on those specific requirements.
In order for a stock to list on NASDAQ, it must meet certain criteria, including a minimum bid price of $4 per share, 1 million shares outstanding, at least 3 market makers, and a minimum of 300 round lot shareholders. In addition to the liquidity requirements, the company must also meet one of the following financial criteria:
Stockholders' equity of at least $5 million with the market value of publicly held shares in excess of $15 million, and at least 2 years of operating history.
Stockholders' equity of at least $4 million with the market value of publicly held shares in excess of $15 million and a total market value of at least $50 million.
Stockholders' equity of at least $4 million with the market value of publicly held shares in excess of $15 million and net income from continuing operation of at least $750,000 per year in the latest fiscal year, or in two of the past three fiscal years.
nFusz currently does not meet the bid price requirement, but does (or should) meet the shares outstanding, number of market makers, and round lot shareholders. However, the company does not meet any of the equity, market value, or net income standards set forth by NASDAQ. Most telling, the company has absolutely no shareholder equity and negative net income.
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Therefore, at this time, the company is not able to transfer their listing to NASDAQ.
AMEX Listing Requirements
NYSE American, also known as AMEX, has the least restrictive financial standards for listing. In order to list on NYSE American, nFusz must meet a minimum number of round lot shareholders relative to the number of shares available in the public float and/or Daily trade volume minimum and one of the following criteria:
Have a pre-tax income in the most recent fiscal year or in two of the prior three fiscal years in excess of $750,000, a market value of the public float in excess of $3 million, a minimum stock price of $3, and total shareholders' equity in excess of $4 million.
Have a market value of the public float in excess of $15 million, a minimum stock price of $3, two years of operating history, and total shareholders' equity in excess of $4 million.
Have a total market capitalization in excess of $50 million, a market value of the public float in excess of $15 million, a minimum stock price of $2, and total shareholders' equity in excess of $4 million.
Have a total market capitalization in excess of $75 million or have at least $75 million in both assets and revenue, a market value of the public float in excess of $20 million, and a minimum stock price of $3.
nFusz currently does not meet the price requirement, but does (or should) meet the number of shareholders and public float requirement. However, the company does not meet any of the equity, assets and revenue, or net income standards set forth by NYSE American. Again, the company has absolutely no shareholder equity and negative income.
Therefore, at this time, the company is not able to transfer their listing to NYSE American or AMEX.
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The Potential for Up-listing
The easiest route for nFusz to take in order to list on an exchange would be to seek to transfer to AMEX. Simply by increasing the per share price to above the $3.00 per share minimum would allow them to claim compliance with Standard 4a.
To meet the per share price requirement, the company simply needs to implement a reverse split. With a float in excess of 50M shares, a 1:5 or even 1:10 reverse split could support the share price enough to allow the company to transfer to NYSE American, provided prices stay at these elevated levels. However, a 1:25 or even 1:50 might be more prudent.
Even so, if the company does take steps to increase per share price to meet listing requirement, that does not guarantee admission to the exchange. Approval of an application is at the sole discretion of the exchange. Additional factors that the exchange can and have look at in the past include:
the nature of an issuer's business, the market for its products, its regulatory history, its past corporate governance activities, the reputation of its management, its historical record and pattern of growth, its financial integrity (including, but not limited to, any filing for protection under any provision of the federal bankruptcy laws or comparable foreign laws, the issuance by an issuer's independent accountants of a disclaimer opinion on financial statements required to be audited, or failure to provide a required certification along with financial statements), its demonstrated earning power and its future outlook.
Given all this information, the outlook for up-listing to one of the exchanges is (although probable) very unlikely. Unless of course management and the board are willing to subject current shareholders to a very nasty reverse split. However, organic growth, provided costs are contained, could eventually eliminate shareholder deficits and could bring the per share price to within exchange requirements over the course of a number of years. But I'm afraid that does not fit into the bull frenzy bias timeline, and is therefore not an acceptable alternative.
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Alternative to the Buy-Out Scenario or The Bearish Scenario
Over the course of the past couple of years, management of nFusz has financed the company mainly through the issue of equity (most of which has been unregistered shares distributed under exemptions to "qualified" investors). As a result, the number of shares outstanding has skyrocket from 64M shares at the beginning of fiscal 2016 to more than 152M shares as of the closing of the last quarter.
That is a growth rate of about 50% compounded annually. Taking into consideration the recent form D's filed by the company for additional unregistered sales of securities, there is about 154M shares outstanding, with only 200M authorized. At this rate, the company will max out the share count in the next couple of quarters.
As a result, the company will be forced to continue financing operations with debt. Most likely, that debt will be unrated, high yield junk. From the latest quarterly, we find the following current liabilities: (Note: All of the company's liabilities are due within one year, so all liabilities are listed as current)
March 31, 2018 (Unaudited) December 31,2017
Current liabilities:
Accounts payable and accrued expenses 613,723 663,506
Accrued interest (including $31,308 and $99,425 payable to related parties) 31,308 248,120
Accrued officers' salary 118,008 607,333
Note payable - 125,000
Notes payables - related party 1,964,985 1,964,985
Convertible note payable, net of discount of $0 and $675,443, respectively - 1,020,315
Derivative liability 1,735,354 1,250,581
Total current liabilities 4,463,378 5,879,840
These current liabilities consist of:
To note, the company has paid off or settled a number of other notes consisting of:
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Interestingly enough, the company has chosen to pay off lower cost, longer term convertible notes before addressing higher cost notes, to the extent that one is now (or was as of the quarterly filing) in default.
Were the company to choose to continue financing operations with high cost debt and/or continue to default on existing current liabilities, the company could declare insolvency and restructure. Such an event could severely dilute or even wipe out completely existing shareholders, leaving debt holders in sole control of the company.
That wouldn't be a bad payout for debt holders and would certainly clean up the balance sheet enough to allow up-listing to one of the exchanges and a subsequent sale of the company with going concern.
But that's not a story the bulls want to consider. They would rather sell their shares to a buyer at a "reasonable" price. But what is a reasonable price?
Valuation
Admittedly, the bankruptcy scenario is unlikely, although probable and realistic, unlike the bullish scenario. A more likely scenario is that the company will continue to grow organically, and sales, revenue, and assets will increase over time. But that does not tell us where the company and stock price stands as of right now. What is that reasonable price?
I propose we do a peer analysis and comparison to Software as a Service (SaaS) providers and see how the market is currently pricing the company, and where the company should be priced based on current fundamentals.
To begin, we need to determine peers. Simple enough, let's take a look at the most successful SaaS companies out there; Salesforce, Microsoft, Adobe Systems, ADP, and Oracle. We will keep the analysis simple and use price ratios based upon market capitalization, fundamental data, and per share price; specifically Price to Sales (P/S), Price to Book (P/
, Price to Free Cash Flow(P/FCF). We can then use Return on Investment (ROI), Gross Margins and Operating Margins to gauge predicted sales, revenue and costs.
Currently, FUSZ has a 156M shares outstanding, with trailing twelve-month sales of $13,000. As of last quarter, revenue was $8,000 with operating cash flow of -$991,000 and operating income of $-5,391,000 with a book value of $1,674,000.
So here we have our "once upon a time" beginning. Using current fundamentals, if FUSZ were priced based on industry averages, we would be looking at:
Price per Sales average ratio of 8.24 based on $13,000 in sales on 156M shares outstanding:
(8.25 x 13,000)/156000000 = $0.00068667
Price per Book average ratio of 10.33 based on book value of $1.674M and 156M shares outstanding:
(10.33 x 1674000)/156000000 = $0.11087031
Price per Free Cash Flow ration of 41.816 on operating cash flow of -$991,000 and 156M shares outstanding:
(41.167000 x -991,000)/156000000 = $-0.2656388
Ok, well that's pretty far below where the company is currently trading, and honestly, probably not reasonable estimates based on current trends. However, is the current price properly predicting where the fundamentals are going to be in six months or so?
Assuming a $1.00 per share price resulting in a market capitalization of $156M and an average P/S ration of 8.24, the market is predicting sales of $18,932,000. That is in increase of more than 145,500%. An average P/B of 10.33 predicts that book value increase to more than $15M and P/FCF of 41.82 suggests operating cash flow increases to $3.7M.
Is any of this do-able within the next 6-12 months? The bulls certainly want us to think that and more. However, their bullish $100 per share price target of fully diluted 200M shares outstanding would require nearly $2.5B in sales on a $2B book value.
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Based on a $1.00 per share price, using average industry gross margin of 70%, we can assume that Cost of Goods Sold (currently not reported by the company) would be around $5.6M. This gives us revenue (Sales - COGS) of $13M and operating income of $3M based on an average margin of 22.86%. All this results in a per share earnings of $0.01.
However, based on the bull case of $100 per share price target, Cost of Goods Sold would be around $725M, resulting in $1.7B in revenue and operating income of $390M. All resulting in a per share earnings of $1.94. Talk about a "happily ever after" ending.
Sales and Accounts
But, what would it take to get to those points? Without trying to develop a growth model, let's just determine the number of users/enterprise accounts FUSZ will have to capture in order to justify those numbers.
Based on the company's public disclosure:
On April 11, 2018, development of the integrated notifiCRM application was completed and submitted to ORACLE for final testing and approval. On April 20, 2018, ORACLE completed its testing and review of the integrated notifiCRM application and awarded the application with the "Built For NetSuite" status, and official "BFN Badge", a designation intended to confirm that the application and the integration, built using the NetSuite SuiteCloud Computing Platform, meet NetSuite's standards and best practices, and also to give NetSuite customers confidence that the integrated notifiCRM application and integration meet NetSuite's standards and best practices. The nFusz integrated notifiCRM application for ORACLE NetSuite users is now available on NetSuite's online portal www.suiteapp.com for a price of $99 per month per enterprise account, plus an additional $10 per month for each user license associated with that enterprise account (the "nFusz Fees"
."
And
The nFusz Fees are paid in addition to the fees ORACLE NetSuite charges its customers for the ORACLE SERVICE (the "NetSuite Subscription fees" . In accordance with, and subject to the terms of the Agreement, revenue from nFusz Fees paid by NetSuite customers that ORACLE generates for us will be shared between Oracle and us as follows: 90% for us and 10% to ORACLE. In addition, ORACLE will pay a commission to us equal to 10% of the NetSuite Subscription fees from customers that we refer to ORACLE who become new NetSuite subscribers.
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notifiCRM is going to generate revenue that is shared between Oracle and nFusz just from being included in Oracle CRM apps. However, nFusz does not need Oracle to garner sales. They are perfectly capable of growing organic sales though their own entrepreneur and entourage subscription services. However, since enterprise users generate higher cash flow, we will assume all accounts are enterprise accounts.
Most recently, the company reported $8,000 in revenue. Assuming all of that revenue was generated in the last month of the quarter on enterprise accounts, we can assume the company had at least 80 enterprise accounts and somewhere between 80 and 800 users (assuming all account had 10 users or less).
In order to generate $18.9M in sales (justifying the $1.00 per share price), notifiCRM would have to capture more than 12,000 accounts of at least 25 users. Depending on the size of the account, total users could vary from 15,700 to more than 796,000. That is a growth rate of more than 19,000%
However, in order to generate $2.4B in sales (justifying $100 per share) would require 1.6M enterprise accounts and would require the support of multiple millions of users. That is a growth rate of more than 2,000,000%. And, it's going to take a lot more than just faith, trust, and pixy dust to get that kind of growth.
Since both entrepreneur and entourage subscriptions generate lower revenue, many more users and accounts would be required. However, both of these are neglecting the referral fee Oracle promises to pay nFusz for referring customers to them. However, how many small shop gagsters, small businesses or direct marketing home based business are really going to sign on to Oracle NetSuite CRM when they can use low cost or nearly free CRM services? So, I'm willing to take the hit on not assuming recurring referral revenue, given the offset of assuming every account is a high earning enterprise account.
Outlook
Now, I'm not saying that bankruptcy is imminent, and, I am not saying that a large reverse split is just around the corner either. However, I am saying that an outlook of 20x to 100x or more per share price appreciation on a fraction of real life costs estimates is a pie in the sky, regardless of the growth model used. If you want to give any credence to the "in a land far, far away" with a made up numbers bull thesis, then don't dismiss the bear thesis using real world numbers.
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Common shareholders of nFusz are in a very high risk situation, and the shares have started coming back to earth. These shares continue to be highly speculative and ill-suited for rational investors. I wouldn't hold on to shares of this stock even if you gave them to me. But, that's because I'm not a high risk taker. Bulls have been playing with this stock for months now to the detriment of long-term stakeholders that have worked hard to bring the product to market. The have set unrealistic expectations and employed bully tactics to shout down anyone that disagrees with them. It's time to get rational about this stock and the potential for returns over the short run.
I hold to my opinion that the per share price of FUSZ will return to its pre-hype levels of $0.10 to $0.15, or at best around $0.25 as sales pick up and if costs are contained; at least for the short term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This information is not investment advice, nor is it a suggestion to either buy or sell any securities. Retail investors should do their own research and fully understand the risks associated with this company.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Bulls Confuse $Fusz Story With A Fairy Tale
Summary
Earnings release confirms expected growth in revenue.
Corresponding increase in costs worsened losses.
Company seeks to up-list to a traded exchange.
But underlying fundamentals deteriorate even more.
Introduction
I first stumbled upon this company after noticing a large increase in trading volume on the OTC markets. Increasing interest in an issue typically demands at least a passing glance at the underlying fundamentals to see what is driving the current price/volume action. Little did I realize I was stepping into a bull pen wearing a scarlet overcoat.
Nevertheless, I gave an honest opinion and received enough rational feedback to suggest I keep nFusz Inc. (OTCQB:FUSZ) on my radar. At the very least, I want to see if I underestimated the service offered and the value notifiCRM can deliver to small- and mid-sized business owners and users of certain CRM software such as NetSuite CRM. Or, if my premise is correct and shares have been overvalued due to promotion and excessive exuberance.
Since my first article (here), the company has released annual results, received approval for and placement of notifiCRM on Oracle's (NYSE:ORCL) NetSuite CRM Suiteapp.com, and has continued marketing its brand with numerous press releases. Most recently, the company released results for the first quarter (earlier than what I expected) and announced it has engaged an advisor to help up-list to a national exchange.
In this follow up, I will briefly cover pertinent information from the latest quarterly report, including revenue and expense growth. I will introduce a couple of subjects that I believe are common misperceptions of retail investors about the company and its SaaS product line and will review the requirements for transferring FUSZ listing from the OTC to a national exchange. Next, I will lay out a bear case scenario, and address per share price valuation based upon current price and fundamentals, and recent bullish price predictions. Finally, I will address bullish growth exceptions as unrealistic.
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Quarterly Results
To begin, FUSZ reported an increase in revenue over both the year prior and the quarter prior. Of course, the company had no sales in the first quarter of 2017 because it is a development stage company that only recently began offering services to the public. Prior quarter, the company had sales revenue of $5,900 for the 4th quarter and whole year of 2017. This past quarter that increased to $8,003.
While a 60% increase in sales over the course of a quarter is more than respectable, what is disappointing is the Sales, General, and Administrative (SG&A) expenses. They increased from $617,537 in Q1 2017 to $5,269,574 for Q1 2018. Not only is that an increase of 750% year over year, it is more than the 2017 total SG&A of $4,327,529.
The company continued to address outstanding debt and paid off all remaining convertible notes as of March 31, 2018. (More on that below). As a result, shares outstanding increased 27% over the quarter to 152MM.
However, the company still has notes outstanding, with some partially convertible to common stock, and all of which are due this year. (Again, more on that below.)
Valuation of Shares and Other Misperceptions
Now, before talking about valuations based upon current reports and projections, I want to clarify some points that are important in forming the opinion I have with regard to this stock, and some changes that I have made in my opinion.
NetSuite CRM is Oracle's customer relationship management software. It is a separate product from NetSuite ERP, NetSuite OneWorld, NetSuite PSA, and a host of other Oracle products under the NetSuite brand. Just because a company uses one NetSuite product does not mean they will be using notifiCRM.
Just because a company uses NetSuite CRM, that does not mean that nFusz is going to be receiving subscription payments from the company. In addition, if a company does purchase an enterprise license to use notifiCRM, not every employee will have access too or use the app. Realistically, only the sales force should be interested in notifiCRM.
notifiCRM is not a CRM in and of itself. It is an add-on tool that is supposed to incorporate metrics and data to improve customer engagement and lead conversion. It does not replace NetSuite, and is not a competitor of Salesforce (NYSE:CRM), HubSpot, Zoho, etc.
notifiCRM is not self-producing artificially intelligent. Users of the service still have to produce their own content. You cannot just write a few pieces of code or select a couple of dropdowns and have notifiCRM magically create a quality video for you. Also, you cannot have it "intelligently" respond like Alexa, Cornata, Siri, or that scary google guy. The video is only as good as the producer, and the interaction is reactive based on parameters set by the user, not artificial intelligence or even fuzzy logic.
No sales tool ever designed can do the complete job of a salesperson. Sales, when done masterfully is an art. But, no single tool, trick, or script is going to do the selling for you.
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For clarification, other than that last one, the company has never made any of the above claims. I simply bring them up to address certain perceptions some in the investing community have with respect to this particular SaaS (Software as a Service) line.
Next, I want to make an admission of a change in opinion with respect to the company. When first starting to investigate what was driving stock price and volume, I pessimistically assumed it was yet another pump and dump penny stock that would end up worthless and enrich only the paid promoters and email newsletter distributors, as well as various nefarious offshore entities and below board executives.
To date, other than an initial listing on OTC Marketplace that FUSZ was the subject of a stock promotion, I have found no evidence of any paid promotional material being distributed electronically. I have, however, found ridiculous claims prompting my clarifications above, and unrealistic earnings, growth, and per share price models boasting targets of $20, $30, $50, even $200 per share!
Most of the commentary focuses around the association with NetSuite CRM and assumes a steady growth rate with barely any attrition. It is as if almost every bull believes that every user of NetSuite CRM is a viable consumer of notifiCRM and that most every one of them that tries the app will be so enthralled by it that they make it a favored tool in their daily job box. It also assumes that Oracle is going to take the lead by actively selling notifiCRM as a way of bringing in a steady stream of new accounts by the thousands.
However, the actual number of NetSuite users that are in sales, that are in a capacity to utilize notifiCRM, and are capable of producing quality content to distribute to sales leads is limited. Further limiting the consumer base of this SaaS tool is internal controls, regulatory concerns, and legal oversight.
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And here I am not even going to get into potential competition. notifiCRM has what appears to be first mover advantage in this space, but that does not mean that it has exclusive rights or patents that can provide it monopolistic protections from second comers and competitive upstarts.
However, the biggest flaw I have seen thus far in the bull thesis is the unrealistic assumption in customer growth, retention, and cost. Last quarter, SG&A ballooned to more than $5M. Mostly due to increased costs associated with equity compensation. So, is it prudent to believe that costs could diminish to couple hundred thousand or about 5% of prior quarters cost when the company has already disclosed that SG&A will be higher going forward due to higher per share prices?
And, in light of the most recent disclosure that the company is seeking to up-list to a national exchange, is it reasonable to believe the company is destined for immediate profit and take over by a global CRM systems provider given that near term costs will remain high or even grow and that accumulated shareholder deficit has grown to more than $37,000,000?
Then again, perhaps cleaning up the balance sheet and up-listing to a national exchange is the exact thing needed to drive this company to profitability. However, that might not be in the best interest to existing shareholders.
Let's take a look.
Listing Requirements
NYSE Listing Requirements
In order for a stock to transfer a listing to the NYSE, it must meet certain criteria, including a minimum price of $4 per share, 1.1 million shares outstanding with a market value of public shares in excess of $40 million, and a minimum number of shareholders and average monthly trading volume. In addition to the liquidity requirements, the company must also meet one of the following financial criteria:
Aggregate pre-tax income for the last 3 years of at least $10 million with a minimum in the most recent year of at least $2 million and a minimum in the next most recent year of at least $2 million. Pre-tax income must be positive in all 3 years.
Have minimum global market capitalization of at least $200M for at least 90 days prior to their application.
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nFusz's stock does not meet the minimum $4 per share requirement, but does meet the number of shares outstanding and market value minimums. Latest information from OTC markets indicate the company has almost 90 shareholders, but that includes shares held in street name, so I assume there are at least 500 total out there, and most likely at least 400 round lot holders. Finally, the average daily volume has been almost 2M shares, which is well above the average monthly minimum. However, the company meets neither the earnings test nor the global market capitalization test.
Therefore, at this time, the company is not able to transfer their listing to NYSE.
NASDAQ Listing Requirements
The NASDAQ Stock Market has three listing tiers: Global Select Market, Global Market, and Capital Market. Because the listing requirements for NASDAQ Capital Market are the least restrictive, I will focus on those specific requirements.
In order for a stock to list on NASDAQ, it must meet certain criteria, including a minimum bid price of $4 per share, 1 million shares outstanding, at least 3 market makers, and a minimum of 300 round lot shareholders. In addition to the liquidity requirements, the company must also meet one of the following financial criteria:
Stockholders' equity of at least $5 million with the market value of publicly held shares in excess of $15 million, and at least 2 years of operating history.
Stockholders' equity of at least $4 million with the market value of publicly held shares in excess of $15 million and a total market value of at least $50 million.
Stockholders' equity of at least $4 million with the market value of publicly held shares in excess of $15 million and net income from continuing operation of at least $750,000 per year in the latest fiscal year, or in two of the past three fiscal years.
nFusz currently does not meet the bid price requirement, but does (or should) meet the shares outstanding, number of market makers, and round lot shareholders. However, the company does not meet any of the equity, market value, or net income standards set forth by NASDAQ. Most telling, the company has absolutely no shareholder equity and negative net income.
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Therefore, at this time, the company is not able to transfer their listing to NASDAQ.
AMEX Listing Requirements
NYSE American, also known as AMEX, has the least restrictive financial standards for listing. In order to list on NYSE American, nFusz must meet a minimum number of round lot shareholders relative to the number of shares available in the public float and/or Daily trade volume minimum and one of the following criteria:
Have a pre-tax income in the most recent fiscal year or in two of the prior three fiscal years in excess of $750,000, a market value of the public float in excess of $3 million, a minimum stock price of $3, and total shareholders' equity in excess of $4 million.
Have a market value of the public float in excess of $15 million, a minimum stock price of $3, two years of operating history, and total shareholders' equity in excess of $4 million.
Have a total market capitalization in excess of $50 million, a market value of the public float in excess of $15 million, a minimum stock price of $2, and total shareholders' equity in excess of $4 million.
Have a total market capitalization in excess of $75 million or have at least $75 million in both assets and revenue, a market value of the public float in excess of $20 million, and a minimum stock price of $3.
nFusz currently does not meet the price requirement, but does (or should) meet the number of shareholders and public float requirement. However, the company does not meet any of the equity, assets and revenue, or net income standards set forth by NYSE American. Again, the company has absolutely no shareholder equity and negative income.
Therefore, at this time, the company is not able to transfer their listing to NYSE American or AMEX.
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The Potential for Up-listing
The easiest route for nFusz to take in order to list on an exchange would be to seek to transfer to AMEX. Simply by increasing the per share price to above the $3.00 per share minimum would allow them to claim compliance with Standard 4a.
To meet the per share price requirement, the company simply needs to implement a reverse split. With a float in excess of 50M shares, a 1:5 or even 1:10 reverse split could support the share price enough to allow the company to transfer to NYSE American, provided prices stay at these elevated levels. However, a 1:25 or even 1:50 might be more prudent.
Even so, if the company does take steps to increase per share price to meet listing requirement, that does not guarantee admission to the exchange. Approval of an application is at the sole discretion of the exchange. Additional factors that the exchange can and have look at in the past include:
the nature of an issuer's business, the market for its products, its regulatory history, its past corporate governance activities, the reputation of its management, its historical record and pattern of growth, its financial integrity (including, but not limited to, any filing for protection under any provision of the federal bankruptcy laws or comparable foreign laws, the issuance by an issuer's independent accountants of a disclaimer opinion on financial statements required to be audited, or failure to provide a required certification along with financial statements), its demonstrated earning power and its future outlook.
Given all this information, the outlook for up-listing to one of the exchanges is (although probable) very unlikely. Unless of course management and the board are willing to subject current shareholders to a very nasty reverse split. However, organic growth, provided costs are contained, could eventually eliminate shareholder deficits and could bring the per share price to within exchange requirements over the course of a number of years. But I'm afraid that does not fit into the bull frenzy bias timeline, and is therefore not an acceptable alternative.
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Alternative to the Buy-Out Scenario or The Bearish Scenario
Over the course of the past couple of years, management of nFusz has financed the company mainly through the issue of equity (most of which has been unregistered shares distributed under exemptions to "qualified" investors). As a result, the number of shares outstanding has skyrocket from 64M shares at the beginning of fiscal 2016 to more than 152M shares as of the closing of the last quarter.
That is a growth rate of about 50% compounded annually. Taking into consideration the recent form D's filed by the company for additional unregistered sales of securities, there is about 154M shares outstanding, with only 200M authorized. At this rate, the company will max out the share count in the next couple of quarters.
As a result, the company will be forced to continue financing operations with debt. Most likely, that debt will be unrated, high yield junk. From the latest quarterly, we find the following current liabilities: (Note: All of the company's liabilities are due within one year, so all liabilities are listed as current)
March 31, 2018 (Unaudited) December 31,2017
Current liabilities:
Accounts payable and accrued expenses 613,723 663,506
Accrued interest (including $31,308 and $99,425 payable to related parties) 31,308 248,120
Accrued officers' salary 118,008 607,333
Note payable - 125,000
Notes payables - related party 1,964,985 1,964,985
Convertible note payable, net of discount of $0 and $675,443, respectively - 1,020,315
Derivative liability 1,735,354 1,250,581
Total current liabilities 4,463,378 5,879,840
These current liabilities consist of:
To note, the company has paid off or settled a number of other notes consisting of:
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Interestingly enough, the company has chosen to pay off lower cost, longer term convertible notes before addressing higher cost notes, to the extent that one is now (or was as of the quarterly filing) in default.
Were the company to choose to continue financing operations with high cost debt and/or continue to default on existing current liabilities, the company could declare insolvency and restructure. Such an event could severely dilute or even wipe out completely existing shareholders, leaving debt holders in sole control of the company.
That wouldn't be a bad payout for debt holders and would certainly clean up the balance sheet enough to allow up-listing to one of the exchanges and a subsequent sale of the company with going concern.
But that's not a story the bulls want to consider. They would rather sell their shares to a buyer at a "reasonable" price. But what is a reasonable price?
Valuation
Admittedly, the bankruptcy scenario is unlikely, although probable and realistic, unlike the bullish scenario. A more likely scenario is that the company will continue to grow organically, and sales, revenue, and assets will increase over time. But that does not tell us where the company and stock price stands as of right now. What is that reasonable price?
I propose we do a peer analysis and comparison to Software as a Service (SaaS) providers and see how the market is currently pricing the company, and where the company should be priced based on current fundamentals.
To begin, we need to determine peers. Simple enough, let's take a look at the most successful SaaS companies out there; Salesforce, Microsoft, Adobe Systems, ADP, and Oracle. We will keep the analysis simple and use price ratios based upon market capitalization, fundamental data, and per share price; specifically Price to Sales (P/S), Price to Book (P/
, Price to Free Cash Flow(P/FCF). We can then use Return on Investment (ROI), Gross Margins and Operating Margins to gauge predicted sales, revenue and costs. Currently, FUSZ has a 156M shares outstanding, with trailing twelve-month sales of $13,000. As of last quarter, revenue was $8,000 with operating cash flow of -$991,000 and operating income of $-5,391,000 with a book value of $1,674,000.
So here we have our "once upon a time" beginning. Using current fundamentals, if FUSZ were priced based on industry averages, we would be looking at:
Price per Sales average ratio of 8.24 based on $13,000 in sales on 156M shares outstanding:
(8.25 x 13,000)/156000000 = $0.00068667
Price per Book average ratio of 10.33 based on book value of $1.674M and 156M shares outstanding:
(10.33 x 1674000)/156000000 = $0.11087031
Price per Free Cash Flow ration of 41.816 on operating cash flow of -$991,000 and 156M shares outstanding:
(41.167000 x -991,000)/156000000 = $-0.2656388
Ok, well that's pretty far below where the company is currently trading, and honestly, probably not reasonable estimates based on current trends. However, is the current price properly predicting where the fundamentals are going to be in six months or so?
Assuming a $1.00 per share price resulting in a market capitalization of $156M and an average P/S ration of 8.24, the market is predicting sales of $18,932,000. That is in increase of more than 145,500%. An average P/B of 10.33 predicts that book value increase to more than $15M and P/FCF of 41.82 suggests operating cash flow increases to $3.7M.
Is any of this do-able within the next 6-12 months? The bulls certainly want us to think that and more. However, their bullish $100 per share price target of fully diluted 200M shares outstanding would require nearly $2.5B in sales on a $2B book value.
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Based on a $1.00 per share price, using average industry gross margin of 70%, we can assume that Cost of Goods Sold (currently not reported by the company) would be around $5.6M. This gives us revenue (Sales - COGS) of $13M and operating income of $3M based on an average margin of 22.86%. All this results in a per share earnings of $0.01.
However, based on the bull case of $100 per share price target, Cost of Goods Sold would be around $725M, resulting in $1.7B in revenue and operating income of $390M. All resulting in a per share earnings of $1.94. Talk about a "happily ever after" ending.
Sales and Accounts
But, what would it take to get to those points? Without trying to develop a growth model, let's just determine the number of users/enterprise accounts FUSZ will have to capture in order to justify those numbers.
Based on the company's public disclosure:
On April 11, 2018, development of the integrated notifiCRM application was completed and submitted to ORACLE for final testing and approval. On April 20, 2018, ORACLE completed its testing and review of the integrated notifiCRM application and awarded the application with the "Built For NetSuite" status, and official "BFN Badge", a designation intended to confirm that the application and the integration, built using the NetSuite SuiteCloud Computing Platform, meet NetSuite's standards and best practices, and also to give NetSuite customers confidence that the integrated notifiCRM application and integration meet NetSuite's standards and best practices. The nFusz integrated notifiCRM application for ORACLE NetSuite users is now available on NetSuite's online portal www.suiteapp.com for a price of $99 per month per enterprise account, plus an additional $10 per month for each user license associated with that enterprise account (the "nFusz Fees"
." And
The nFusz Fees are paid in addition to the fees ORACLE NetSuite charges its customers for the ORACLE SERVICE (the "NetSuite Subscription fees"
. In accordance with, and subject to the terms of the Agreement, revenue from nFusz Fees paid by NetSuite customers that ORACLE generates for us will be shared between Oracle and us as follows: 90% for us and 10% to ORACLE. In addition, ORACLE will pay a commission to us equal to 10% of the NetSuite Subscription fees from customers that we refer to ORACLE who become new NetSuite subscribers. Page 12
notifiCRM is going to generate revenue that is shared between Oracle and nFusz just from being included in Oracle CRM apps. However, nFusz does not need Oracle to garner sales. They are perfectly capable of growing organic sales though their own entrepreneur and entourage subscription services. However, since enterprise users generate higher cash flow, we will assume all accounts are enterprise accounts.
Most recently, the company reported $8,000 in revenue. Assuming all of that revenue was generated in the last month of the quarter on enterprise accounts, we can assume the company had at least 80 enterprise accounts and somewhere between 80 and 800 users (assuming all account had 10 users or less).
In order to generate $18.9M in sales (justifying the $1.00 per share price), notifiCRM would have to capture more than 12,000 accounts of at least 25 users. Depending on the size of the account, total users could vary from 15,700 to more than 796,000. That is a growth rate of more than 19,000%
However, in order to generate $2.4B in sales (justifying $100 per share) would require 1.6M enterprise accounts and would require the support of multiple millions of users. That is a growth rate of more than 2,000,000%. And, it's going to take a lot more than just faith, trust, and pixy dust to get that kind of growth.
Since both entrepreneur and entourage subscriptions generate lower revenue, many more users and accounts would be required. However, both of these are neglecting the referral fee Oracle promises to pay nFusz for referring customers to them. However, how many small shop gagsters, small businesses or direct marketing home based business are really going to sign on to Oracle NetSuite CRM when they can use low cost or nearly free CRM services? So, I'm willing to take the hit on not assuming recurring referral revenue, given the offset of assuming every account is a high earning enterprise account.
Outlook
Now, I'm not saying that bankruptcy is imminent, and, I am not saying that a large reverse split is just around the corner either. However, I am saying that an outlook of 20x to 100x or more per share price appreciation on a fraction of real life costs estimates is a pie in the sky, regardless of the growth model used. If you want to give any credence to the "in a land far, far away" with a made up numbers bull thesis, then don't dismiss the bear thesis using real world numbers.
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Common shareholders of nFusz are in a very high risk situation, and the shares have started coming back to earth. These shares continue to be highly speculative and ill-suited for rational investors. I wouldn't hold on to shares of this stock even if you gave them to me. But, that's because I'm not a high risk taker. Bulls have been playing with this stock for months now to the detriment of long-term stakeholders that have worked hard to bring the product to market. The have set unrealistic expectations and employed bully tactics to shout down anyone that disagrees with them. It's time to get rational about this stock and the potential for returns over the short run.
I hold to my opinion that the per share price of FUSZ will return to its pre-hype levels of $0.10 to $0.15, or at best around $0.25 as sales pick up and if costs are contained; at least for the short term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This information is not investment advice, nor is it a suggestion to either buy or sell any securities. Retail investors should do their own research and fully understand the risks associated with this company.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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