Currently two companies, Recyctec and CybAero of my portfolio is in trouble. This is the first time as investor I have experienced possible bankruptcy. Of course, I knew it was a possible risk. The risk is even larger when investing in companies with no proven track record… And not even a product to sell. The companies are Recyctec listed on Aktietorget and CybAero listed on First North in Stockholm. Even though Recyctec is the theme today, I will shortly visit CybAero first.
CybAero is by far the more critical of the two. Trading is halted on Nasdaq since mid-February. Two days ago, the new CEO left the company – he’d only been CEO since January 23th. Otherwise, there have been radio silence. As I wrote earlier, I’ll be more than happy if the company survives. Right now, I count my investment in CybAero as lost.
Recyctec in hindsight
Recyctec has been a slow starter with a solid focus on the process of cleaning used glycol for re-use. The company listed before New Year 2012/13 after building the production site.
Reading the Memorandum today, I am not sure I would have participated in the IPO (which I didn’t). I am of course burdened by the troubles of the past year, but somehow the CEO then seemed more eager to sell of the board of directors – and their personal relations – than presenting a credible the business plan. Psychologists have a term, ‘groupthink’ that came to my mind as I re-read the memorandum.
Here is how Wikipedia defines it: “Groupthink is a psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative viewpoints by actively suppressing dissenting viewpoints, and by isolating themselves from outside influences.”
The invention of the process and the scaling to an industrial level is the core of the company, no doubt. Unfortunately, technical abilities and a unique process alone does not make a company. In hindsight (which is always cheap and easy, I know), the transition from building a factory and fine-tuning the process to a commercial focused company came very late. I don’t know if it was groupthink or an underlying feeling among the board of directors that ‘this idea is so terrific that the product will sell itself.’ The business idea is (and was) fool proof – people will pay you to receive the used glycol and then pay you for the renewed product. Not many companies have paying customers in both ends of the value chain. Nevertheless, you still need to find your customers and find profitable ways of interacting with them. And that came late for Recyctec.
Life on the observations list
Aktietorget has Recyctec at the observations list. Currently there are four companies on the list, one because of a fusion and the other three due to financial issues. Despite observation-list status, the share is not completely illiquid. Share trading goes on – the last 10 days the average number of shares traded are 145.000 in 33 daily trades.
Recyctec’s current financial situation is very tight as the latest private issue only gave enough cash to run the business until summer. Despite a number of small, private placement, the company has not been able to secure sufficient cash for more than a few months at a time.
In a post some months ago, I put forward Recyctec as a positive example of investor communication. This continues with monthly updates. The latest from beginning of March announced a sale of 1 MSEK in February and expected sales in Q1 of 2.3 MSEK and 3.5 MSEK in Q2. It also announced that the company does not expect any agreements on licence-production during 2018 and gave a status on production and the need for further capacity.
Judged by Q4, costs are 1.8 MSEK per month. I expect only a few marginal costs when stepping up production and a guess could be that monthly sales of 2.5 MSEK would cover costs. In terms of cash flow, sales in excess of 2.25 MSEK might be enough as depreciations is app. 243.000 SEK per month.
It is clear that even if Recyctec reaches sales of 3.5 MSEK in Q2 (=1.76 MSEK per month), they will still need additional funding both for running the business and for expansion plans.
The share price reflects the uncertainties of the company. By the end of January the price was almost 1.6 SEK and yesterday almost half of that (0.81 SEK). The balance sum by the end of 2017 was 25.4 MSEK compared to a market cap today of 22.7 MSEK. Fixed assets alone are 22.1 MSEK, which indicates that the financial situation puts heavy pressure on the share prices. This shouldn’t come as a surprise to anyone, I guess.
Contrary to the CybAero case, I am quite optimistic about the future of Recyctec. Of course, it will be nice to get rid of the financial uncertainty, and I think the company makes it easier to attract funding as sales grow and it becomes feasible that breakeven is possible and in a not-all-too-distant future.