Saturday, May 17, 2014

YOD: A company doomed to fail

 YOU ON DEMAND, ticker "YOD" has been pumped as the "Netflix of China."  But it's quarterly report demonstrate that YOD is not even the Netflix of China Town ... in Des Moines. 

I have repeatedly shorted this stock and did so again after earnings. I will continue to add to my position as the Quarterly Earnings report demonstrates that this company is doomed to fail.

Here is how I read the quarterly report of YOD and other pumped companies:
    If a company is in a start up stage, you want to ensure that the insiders are committed to the long haul and not in it for a quick buck--the hall mark of a pump and dump.  So when I see a questionable company, I like to determine if and how much a stock is being diluted.  This will often take the form of convertible warrants and can be determined as follows:
Annual and quarterly reports will always list the number of shares outstanding as of the last date before issuance of an earnings report. The earnings data may in excess of a month a way.  This information lets you look into the future a bit.  

YOD is being diluted:
First page of quarterly report:

"Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 16,553,022 shares as of May 15, 2014."

Now let's compare that number since quarter end.  March 31, 2014.  We can do so by looking at the the Shares outstanding on the quarter.  An earnings report will compare quarters so we see that from March of last year that over 1.3  Million shares were added over the year:


From the annual report, comparing 13 to 12:

Weighted average shares outstanding




SINCE DECEMBER 31, 2013 the Shares outstanding have increased by 1,306,806.  This Stock is being diluted faster than a Dewars with two ice cubes. 
  • Assess Cash position and burn rate:  Obviously, you want to make sure the company has enough funds on hand to pay its bills and pursue its business strategy:
Current assets:
 Cash and cash equivalents$17,954,910$ 3,822,889

Wow, a huge increase in cash! YOD company must be raking in the profits right?  Not exactly.

Digging deeper we learn than it raised 25 Million dollars over the last year by issuing warrants.  They also sold off their broadband subsidiary. Of that, it now has about 18 Mill left.  Next, we determine whether the company is cash flow positive through ordinary operations:

Revenue$ 137,681$ 938
Cost of revenue875,938848,585
Gross loss(738,257)(847,647)
Operating expense:
       Selling, general and administrative expenses1,640,6401,983,736
       Professional fees185,484251,434
       Depreciation and amortization149,960292,833
Total operating expense1,976,0842,528,003
Loss from operations(2,714,341)(3,375,650)

*The 2013 earnings are a pro forma to account for a discontinued broadband business. (I'm somewhat skeptical of pro formas as companies can manipulate shares of the discontinued operations to show growth in the current business)   According to the YOD's annual report it list the discontinued operation as being profitable.  A question I have not answered yet is why they would get rid of their business that was at least marginally working?  But since that business is gone, I'll focus on the left over carcass. 

Currently, They currently lose money on every sale. They spend $8.75 for every $1.37 received    On top of that they have the other operating expenses which accounts for an additional loss of 1.9 M on the quarter.   At the current rate they'll lose 10.7 Million for the year. Leaving them with just $7.2 for next year.  YOD does not have sufficient cash to get through the next year.  
  • Is the Company's Business Plan working?
All companies hope that at some point they can generate sufficient revenues to cover the cost of revenue and the cost of operations and at some point even make a profit.  Given the struggles YOD has had I see little value in discussing profitability as it is not really relevant that the company has lost nearly $89 million since it began.  It's all about revenue growth.  It is imperative that the companies grow and given that there is less than 2 years of cash remaining, it is imperative that YOD grows very quickly.  Unfortunately, for YOD that is not what is happening.  Q4 2013, revenues were 163,000  and first quarter earnings were down to $137,681. YOD is clearly not growing as it had planned.
  • Will a new mobile business Strategy the Savior?
YOD apparently is of the belief that mobile will be the future.  It currently is on 1 cell phone, the Huawaei Mate and can provide up to 2 movies a week to subscribers. I seriously doubt that this strategy will work--are people really going to rent movies to watch on a 4 to 6"  screen?  I'm very skeptical. And  the revenue decrease demonstrates that this strategy is not working yet.  

Setting aside my skepticism and lack of tangible revenues, let's assume for the sake of argument that such a business plan is viable.  However, to implement this strategy it is imperative to advertise this new service, develop back end support, obtain the available servers and equipment necessary to run such a business.  In other words, to obtain mobile revenues YOD  requires a substantial additional investment.  Pursuit of mobile revenues will necessarily increase the company's losses.   And it does not have any margin for error, with the less than 2 years of cash it has remaining, which will mean to  company will need to raise cash causing more dilution.

In its own words:
 "we have access to additional funding through various methods including utilization of our $50 million shelf registration of which $47.3 million is remaining as well as other means of financing such as debt or private investment."
Just so no one is surprised when the next wave of dilution comes. And then the "going concern" notice. "These conditions raise substantial doubt about the Company’s ability to continue as a going concern."
The other "Analyst" --Chardan Capital-- has a $10 price target and recently opined that this could be a take over target.  I have not identified anything that YOD has that any potential suitor would not be able to acquire on their own for far less than $40 million.  

But Chardan and its executives own over 2 Million warrants.  (incidentally Chardan's founder is the brother of YOD's CFO March Urbach)  And the 10 price target is supposed to be objective, yea right. In addition,  In the quarterly report,  YOD discloses, "The Company is committed to paying service fees to certain consultants of $25,000 through the second quarter of 2014." 

Companies that pay for play, nearly always crash after the promoters have cashed out.  Given what we know about the ongoing dilution--nearly 9% year to date.  YOD is actively being sold and will be continue to be under tremendous selling pressure. 
  • The Competition is intense and the competitors are Goliath's
As I have pointed out on stocktwits, this notion that YOD has exclusivity or is a leader is a complete myth. Finally, YOD has acknowledged as much at the Conference Call:
The market for video entertainment is subject to continuous change and aggressive competition. Our primary competitors include companies that operate online video voice type in China, such as iQiyi, Youku, Tencent and Sohu. They all carry a very large amount of the video content, including Hollywood and domestic movies and they compete on the variety and freshness of the content, in order to drive Internet traffic to their websites. 
YOD is competing against companies that are worth many billions of dollars with the same content.  Who has the infrastructure and ability to spend money on advertising?  YOD will lose that battle. 

  •  The Q1 report suggests that YOD is doomed
  •  Revenues are decreasing, 
  • YOD losses money on each sale
  • YOD does not have sufficient cash to get through the next year. 
  • More dilution is likely
  • Insiders will continue to exercise warrants keeping YOD under pressure
  • It will need substantial additional funds to pursue its mobile strategy.  
  • Competition is intense and YOD offers nothing to consumers that Chinese Internet giants do not already have.
Nonetheless, some people spent 15 minutes reading an article on seeking alpha, by an anonymous author who created his profile the day he published his first article which calling YOD the Netflix of China. Based on that pump, they continue to think will become a double and triple digit company. I plan to go point by point through that nonsense, but my conclusion is don't buy the hype. 

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