The IOT Group (IOT) – SELL

Introduction

So far we have introduced four companies that we believe are worthy additions to the Little Hedge portfolio. When it comes to outperforming the index, choosing which stocks not to buy is just as important as choosing which stocks to hold. In selecting stocks to add to our portfolio we screen and assess hundred’s of small caps, this week we will talk about why we will NOT be buying the IOT Group (IOT). We hope this will give an insight as to what to look for when crossing stocks off our list. We have purposefully chosen IOT for this example as it ticks almost all of our boxes when it comes to finding a company not to buy. Let us know what you think in the comments section below and please subscribe to our newsletter to get our articles in your inbox! Subscribe for our free newsletter

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Business overview

The IOT Group (market cap of ~$12m) has had a turbulent ride since joining the ASX via a backdoor listing in January 2016. Initially it’s shares enjoyed a sharp rise to 14 cents a share (a market cap of ~$100m) as hype for Australia’s first listed “Internet of Things” company gathered steam. The joy for shareholders didn’t last long however, as delayed product launches, internal lawsuits and competition from established manufacturers saw IOT’s share price crumble. IOT was originally planning an IPO in 2015, however changes to their product lineup pushed this back to January 2016. The reverse IPO marketed IOT as a producer of innovative wearable devices and consumer electronics, with a focus on three key technology streams. Wearable Devices – Sale of Outdoor Konnect smart watches TV streaming service – Distribution of IPTV through the Intervision brand Drones – Development and sale of low cost selfie drones The key leaders in the company were Simon Kantor, Sean Neylon and Ian Duffel. Since listing just over 16 months ago, there have been total capital contributions from shareholders of $15m. So why didn’t we jump on the IPO and why won’t we be buying this small cap tech story?

Management analysis

One of the first things that we investigate when evaluating a company or IPO to invest in is the company’s management. This includes both analysis into their historic performance and also an evaluation of the incentive structure. Let’s take a look at IOT’s management team!

Simon Kantor – “the whiz kid” What IOT says… Simon has over 12 years experience in the high-tech industry. During his early career, Simon worked on projects, testing, correcting and developing optimization solutions for major Australian corporations including Westpac Bank, Macquarie Bank, Commonwealth Bank, NSW Rail and the Department of Community Services. Throughout his career, Simon pursued innovative and disruptive technology, which led him to attend Haifa University in Israel, where he completed his Bachelor of Computer Science while working at IML Tech Co. During his time at IML, Simon worked with Google to develop Google Labs (now known as Google Apps) and Microsoft assisting in the deployment of their global network cloud platform (now known as Microsoft Azure). Simon brings to the IoT team a breath (sic) of experience and understanding of the drivers of the “Internet of Things” sector. Kantor will be paid $300k a year with 10% annual pay rises. What IOT doesn’t say… Simon Kantor was around 26 years old at the time of the IPO, meaning that he has been in the “high-tech” industry since he was 14… Kantor was the founder of a company called “Kandler”. Kandler is a Solutions Consulting Services company – providing enterprise level systems integration, implementation, consulting and outsourcing expertise to help both public and private organizations tackle the toughest technological challenges using best of breed practices and principals. Unfortunately he was involved in a breach of contract dispute in 2012 over a $14,000 IT installation of which Kandler allegedly took payment upfront and then bailed on delivery for it’s client. “Kandler” appears to be a combination of the surnames “Kantor” and “Adler”… and in this case “Adler” is Jason Adler, who believe it or not is the son of Rodney Adler (who went to jail over the $5 billion dollar collapse of HIH). AICE Group – Kantor is the CEO with his long term partner Valery “Val” Lipkin. Val and Kantor came up for the “flying selfie stick” together whilst sitting on the couch in March 2015.

Ian Duffell – “the industry insider” What IOT says… Ian has extensive international experience in the consumer products, retail. entertainment and music industries. As Group Marketing Manager of Sony Corporation in the UK. He was at the forefront of launching key new innovations including the Walkman and Compact Disc. These successes led to his appointment as Managing Director of HMV and the subsequent relaunch of the brand and substantial growth in market share and proﬁtability. During this period. HMV opened the World’s largest music store in London and was the pre-eminent music chain in the UK. His International career began in 198? when he was appointed as CEO of Virgin Entertainment Group, heading up the company’s expansion into the Asia-Paciﬁc region. In 1992 he relocated to the USA and established a highly proﬁtable business with sales exceeding $250 million from 20 Megastores including the landmark Times Square, New York store. In 2001 he relocated back to Australia and joined Brazin Ltd as Managing Director, with a mandate to restructure the retail business portfolio and extend the music division into overseas markets. Following this success, he has been an investor and adviser to new ventures, capitalising on his broad International experience. Duffell will be paid $300k a year with 10% annual pay rises. What IOT doesn’t say… Whilst Duffell was the CEO of Brazin in 2001 (the owner of Sanity music stores and clothing chain Bra’s ‘N Things), it is unclear that his time there was successful. In early 2003 the company reported a 65% profit downgrade attributable to Duffell’s expansion of Sanity stores into the UK which resulted in Duffell being shown the door in April 2003. Brazin would eventually be delisted from the ASX. Duffell was also the Chairman of Signature Brands which listed on the ASX in January 2004 as SBL. Signature Brands managed to remain solvent under the stewardship of Duffell until March 2006. Of interest during his time at SBL was that only one day after floating on the ASX he announced a takeover of PULP Juice. This was interesting for two reasons. Signature Brands didn’t raise equity as a juice retailer, it had a key focus on establishing Olivia Newton-John’s Koala Blue wine range along with swimwear brand Brian Rochford. PULP Juice was founded by Ian Duffell’s 21 year old daughter Chloe and at the time comprised of six Juice bars. Signature Brands bought the juice company for $5m.

Sean Neylon – “the Aussie entrepreneur” What IOT says… Sean has completed more than $100m in multi-national deals over the past 15 years. He was the founder of two Public Companies such as LibertyOne Ltd and Signature Brands Ltd. The former company reached a market capitalization of over $1bn at its peak and was the darling of the Australian Internet Industry in the late 90’s. Sean has global brand experience, being involved in businesses with people such as Richard Branson, Greg Norman and Olivia Newton John. As Strategic Business Development Manager Sean will seek out opportunities that will bring growth and value to the group. Sean will be paid $300k a year with 10% annual pay rises. What IOT doesn’t say… Reading through Sean’s LinkedIn you see a lot of companies written about in past tense. Unfortunately this isn’t for stylistic reasons and most of these companies are actually no more. Baron’s Brewing – Sean was the founding Director and shareholder of Baron’s Brewing before being booted from the board. Unfortunately the company didn’t survive much longer. Signature Brands (SBL) – Sean was the CEO, founding Director and shareholder (working with his old pal Ian Duffell)! Of note again was the transaction to purchase PULP Juice with Sean fronting up to the media with the following. “We picked that business at a very good price,” he said, referring to Pulp’s good growth outlook and ability to generate high cash flows. Signature said it hoped to have 50 Pulp stores within 18 months, and to expand the business overseas. “In the following years to come it will be a very good investment for SBL shareholders,” Mr Neylon said. He predicted that the “high margin” business could one day generate revenues of up to $60 million a year. “The shareholders will judge this acquisition, and the shareholders have judged today by making the share price go from 60c to 78c” he said. The shareholders of SBL were wiped out just over 18 months later. Neylon was the founding Director and shareholder of Australia’s first internet company LibertyOne! After lining up a distribution deal with the search engine “excite” LIbertyOne fell to pieces wiping out $1bn in shareholder value. LibertyOne called in the administrators in the year 2000, just two short years after listing.

Market and product analysis

The next thing that we look for when analyzing a stock is if they have a leading product in a growing market. We see this with all of the companies we have added to the Little Hedge portfolio so far, with fantastic tech offerings in growing markets. Lets take a look at each of the IOT Group’s product lines. Wearables What IOT said… The Outdoor Konnect (OK) business focuses on sales and distribution of affordable wearable devices and accessories. OK provides IOT with a ‘ready for market’, initial suite of products positioning IOT as niche player in the rapidly expanding ‘wrist wear’ product market, coupled with positioning the IOT brandas an active player in the broader Internet of Things environment. The market test for “Viper” sold out in days at selected Coles stores and Viper remains available in-store at all Coles stores across Australia with over 6,000 units shipped. Research by GfK notes that price is the key determinant in smartwatch selection, followed by functionality, activity tracker and accuracy. The OK products are speciﬁcally targeted to a price-conscious market segment. Viper – A cheapo smart watch sold at Coles

Trademaster – A water-resistant, durable smartwatch designed for tradies, with features including a laser tape measure

A smart watch for kids so you can GPS track them

Smart watch designed for the elderly so you can be notified if they fall over What IOT doesn’t say… Whilst Outdoor Konnect was the only product line to be sold in an Australian retail store so far, it appears that it has now been killed off. Shipping 6,000 units at $79 a pop RRP doesn’t seem to cut it in the world of consumer electronics. As of now we have been unable to find an OK watch for sale anywhere online or in store, save from two cash converters auctions (which unfortunately have now ended). IOT advised that in November the OK wearables division would be wound down.

IPTV What IOT said… Intervision currently provides customers with smart STBs and a subscription based streaming platform for content from around the world. For IOT, lntewision is both an important cash ﬂow business, and strategic opportunity. The IPTV sector is growing rapidly with signiﬁcant user uptake (e.g. Netflix, Stan. Presto), eroding market share from free-to-air and Pay TV operators (who also offer streaming services via, for example lview (ABC) and Foxtel Go). lOT’s Intervision IPTV business distributes content to subscribers via its IPTV platform. Some content which is currently distributed is under licence or is freely available content that does not require any licence. Some is unlicensed and IOT is currently exploring licensing requirements for its various offerings of IPTV channels so that it does not infringe intellectual property rights of third parties. If IOT cannot or does not license the requisite intellectual property on reasonable terms or at all, or cannot or does not substitute similar intellectual property from another source, its revenue and operating results from the Intervision IPTV business could be adversely impacted. What IOT doesn’t say… So it’s kind of hard to fault IOT here… It may be hard to believe but they did announce in their prospectus that they are distributing unlicensed content. Intervision was shut down this year as the IOT group allegedly faced a lawsuit from a licensed IPTV competitor who was losing business to Intervision’s cheap unlicensed product offering.

Drones Personal selfie drones are such an incredibly cool and exciting product. It’s hard not to think of science fiction when seeing videos of little drones hovering around our heads in the promotional material of these products. However building a selfie drone has proven to be incredibly difficult. There have been so many failed Kickstarter campaigns raising millions of dollars before going up in smoke. Some of the bigger ones are below… The Zano – cutest drone

Lily – best promo video

Selfly – may actually succeed eventually

Orbit – saddest comments

The Pocket Drone – never had a chance

Drofie – dumbest name Reading the comments from these projects and hearing backers frustrated about dodgy drones and money fleeced is absolutely heartbreaking, This research was actually the first thing that made us skeptical of the IOT group’s ability to pull off a market leading selfie drone out of Sydney. Nevertheless the IOT group has made three attempts of launching a personal selfie drone product which we will dig into next.

Drone 1 – ROAM-e The flagship flying selfie-stick which was a key part of IOT’s IPO and was expected to retail ~$300. Unfortunately we can’t buy the ROAM-e yet, however it’s website is live. IOT didn’t let minor problems like exposed blades, missing landing gear, or the fact that it looked like a helicopter sex toy get in the way of pushing the ROAM-e all the way to mass production. The IOT group even shelled out for an incredibly slick promotional ad featuring kids break dancing and riding BMX bikes whilst CGI ROAM-e effortlessly snapped their cheesey grins. Check it out below.

Drone 2 – ROVA The second try at cracking the selfie drone market came via the ROVA drone. AEE are the production partner for both the ROAM-e and the ROVA and are the second largest drone manufacturer in China. Upon closer inspection of the ROVA it looks very similar to the AEE Sparrow drone. In any case, IOT was convinced that this was going to be the BIG one and they pulled out all the marketing stops to get the ROVA flying off the shelves. Max Markson was contracted to get a big name celebrity for an official launch party in Sydney. Markson delivered by snagging Ruby Rose for the big launch party including flight demo’s and an interview. IOT have also been selling the ROVA on Amazon with relatively mixed reviews and have been negotiating some big name purchase orders in the USA (Best Buy). Check out the video of the ROVA! It is on sale for $399 AUD.

Drone 3 – AirSelfie Aiming to offer a smaller more gadget-like drone IOT partnered with the Kickstarter developed AirSelfie to distribute exclusively into Australia and the US. Unfortunately, IOT might as well have partnered with any of the dozen or so dud Kickstarter drones as browsing through the original Kickstarter page it appears that the AirSelfie has similar issues. The comments section of the original Kickstarter is quite depressing. The AirSelfie is so far being sold on Amazon and is priced at $339.

The competition – Eachine E50 Almost $300 cheaper than both of IOT’s available products with 500 reviews and a 4.9 star rating. Buy it here for 50 bucks.

The competition – DJI Spark The other end of the price range is the DJI Spark. It costs almost $900, but DJI is the clear market leader in drone technology and it is expected to be a high quality product.

Financial Analysis The next thing that we look at when analyzing a company is how has it been performing financially. A company may have the best management team and the best product in the market however it will likely all end in tears if the finances don’t stack up. IOT has raised $16m in equity through both it’s IPO and additional capital raisings. In the year and a half since listing, the IOT group has paid $2.5m in advertising costs (Ruby Rose), paid $3.1m in staff wages, $3.1m in admin costs and $2.3m in production expenses and $2.2m in R&D. To offset this cash burn they have generated ~$0.4m in revenue. The IOT Group have burned through almost $14m in a year and a half whilst developing a white-labeled Chinese drone (the ROVA), a rehashed Kickstarter (the Airselfie) and a flying dildo (the ROAM-e).

So what went wrong?

Everything started well for the IOT Group with a successful IPO and an exciting product set. The share price peaked at 18 cents a share in early 2016 as IOT talked to various tech blogs and investment news sites about the sales potential of the ROAM-e. Sitting on a market cap of over $100m in May 2016 IOT looked to be one of the most successful ASX floats of the year. Fortunes changed however in August 2016, as shareholders of the original ROAM Systems (who was amalgamated into the IOT group) filed court proceedings against IOT and Simon Kantor. The filing alleged that although Kantor was a 51% shareholder of ROAM Systems he was still required to seek shareholder approval before selling parts of the business including ROAM’s intellectual property. The remaining shareholders of ROAM Systems argued that they received no consideration for their share of the IP that was transitioned into the IOT Group with the sale of ROAM. IOT advised that the court case was unlikely to have a material impact on the assets of the company however requested Kantor to step down from his role as CEO. Kantor refused to resign and was eventually forced out via shareholder action. The case was settled between ROAM Systems and IOT, with costs of $0.7m being born by IOT at the end of the year. A hot trend was emerging in “hoverboard” devices which IOT was keen to capitalise on. IOT announced an agreement to takeover a manufacturer of such hoverboards in October 2016 before cancelling the agreement and walking away from the deal in November. In January 2017 fresh concerns were raised about the licensing of IOT Groups IPTV product. This lead to Intervision IPTV and OK watches being subsequently shut down as IOT sought to focus on it’s core drone opportunity. Cash continued to burn at IOT, with high management costs and aggressive marketing budgets outweighing nonexistent sales. Management announced purchase order agreements for unknown quantities of product from re-sellers across the globe through early 2017, however sales and revenue figures remained wanting. The end may be near however with IOT entering into a trading halt on Friday 16th of June as it aimed to structure an injection of further capital.

Final verdict

Little Hedge places a SELL rating on IOT at today’s market price of $0.017. We have been watching the IOT Group for some time as a true “Internet of Things” company would be something that may interest us for an investment in the future. However in terms of the outlook for the IOT Group from here, it is hard to imagine the company lasting any longer than any of Duffell or Neylon’s earlier ASX listed ventures. In an interview in 2004 Ian Duffell was asked about relaunching Olivia Newton-John’s Koala Blue business and he said the following… Australians really don’t think badly if you’ve gone out of business and you come back, it’s kind of `good on ya’ I don’t think the shareholders of IOT feel the same way Mr. Duffell…