Update: OneSoft Solutions

OneSoft Solutions just released their Q2 results and I wasn't too impressed with the results. I've also become more turned off by SaaS companies over the last few weeks as I've begun to learn more about the industry. I will be making an educational article on this topic in a few weeks when I'll have more free time. In short, I just find the SaaS model is overrated. Companies have to spend money right away to acquire clients who will gradually contribute to revenues, taking months or even years for those clients to become profitable. The cash burn keeps on so long as the company continues to grow at a reasonable rate. The only way around this is to have an extraordinary CLV/CAQ (customer lifetime value to customer acquisition cost) ratio like in Ackroo's case. Heck, the pioneer of the SaaS model (Salesforce.com) hardly turns a profit.

Getting back on topic, here are my thoughts in bullet point form:

  • The company will be raising money soon as per the MD&A:"The Company’s net working capital position on August 31, 2015 was $946,568. Management believes that this provides approximately six months of working capital on hand from period‐end, based on current revenue and expense experience. However, Management intends to address this matter by accelerating revenue growth and reducing expense s where possible, while concurrently seeking cash injections, potentially from debt financing, the exercise of outstanding warrants, additional financings, and/or a combination of these sources, as may be required." My investment thesis was based on them not needing to raise further funds. Management seems to have changed gears and I think the dilution from another raise at these prices would offset any shareholder value built either by making an acquisition or growing organically.

  • Revenue growth isn't exactly what I expected. I thought with the acquisition and the OneNFP business that top line growth would be significantly higher. Management has even acknowledged the paucity in growth: "The OneNFP business unit is still in the initial phases of implementing its cloud subscription business model. Revenue growth has lagged expectations, and the expenses incurred are limited to w hat is required to operate the business and continue to develop the Company’s products into highly compelling market offerings".

  • They still are posting a gross profit loss and they expect the situation to rectify in Q3. The reason is that they have a 3rd party who they pay to do the implementation and so the cumulative revenues of the company aren't high enough to cover the 3rd party's fixed monthly fee.

Based on these facts, I've already started selling the stock and I should be done selling really soon. Fortunately, my cost basis is still low enough where I will probably still making money or at the very least breakeven. I will still be monitoring the company for future developments, but I no longer find the risk/reward compelling and so I decided to re-organize my portfolio. It's important to spot your mistakes quickly in investing because there's an opportunity cost to leaving your money tied up in companies that risk not performing.