Ackroo CEO Letter to Shareholders- August 2016

Disclosure: I am long Ackroo (AKR.V). As of this writing, Ackroo represents 50% of my microcap portfolio.

The CEO of Ackroo recently sent out a Letter to Shareholders via the company's email newsletter. I am posting the full letter below in case you were not on the newsletter to receive. It appears that the company will be posting all newsletters online in the future at this link: 

http://ackroo.com/investor-relations/investor-newsletter-archive/

Ackroo Inc.

Letter to our Shareholders from the CEO

Dear Ackroo shareholders,

After taking over the role of CEO for Ackroo a little over two years ago, I sent an initial letter to shareholders to introduce myself, provide some insight into the business and to share some two year goals for the Company.  The intention was for that communication to be the first in a series of short communications to shareholders whereby once or twice a year I would provide expanded information over and above our MD&A’s, press releases and investor presentations.  These last two years have been intently focused on executing and keeping our heads down and while that is still the case today, I do believe it is time to provide another extended update with a more financial focus.  We also wanted to open up the communication to potential investors as well as current, in an effort to further educate and engage with any interested parties. As a result of this objective we added the investor newsletter sign up to our website. 

The below outlines some of the key metrics and discussions we as a leadership team and board use to assess our business.  This information should provide you some additional insight into how we have been progressing over the last 2 years since I took the CEO role and where we are YTD in 2016. 

Ackroo is at a very exciting and important time in our history. After the Company began operations and went public in 2012 we have spent the last four years validating our business and positioning it for success.  We are now at the doorstep of our business being able to really accelerate and scale and so these next 12 months become critical in us accomplishing many of our short and long term goals.  We couldn’t be more excited about the opportunity in front of us.
 
This update will provide some addition insight into how we have been progressing.  In order to better understand our progress I have broken the information into 2 sections:

  1. Financial Performance
  2. Capital Allocation

 

FINANCIAL PERFORMANCE

As you can see by the table above we have continued to show year over year growth while also reducing costs.  Our 2014 newsletter stated that our goal was to be above $700k per quarter by 2016 and although various factors have slowed our ability to get to that mark, the Company is not far off from that target and has line-of-site to getting there in the very near future.

At the end of 2014 the Company finished a 10-1 rollback taking the share count from 68,916,660 down to 6,891,660Less than 60 days later in January 2015 the Company then closed a $1.2 million private placement financing which added 8,364,165 shares and 8,364,165 warrants.  This capital was necessary to continue operations and brought the total share count to 15,255,825 shares.  This is the amount used to calculate revenue per share at the end of the period and not the pre or post roll back amount. At the midway point in 2016 (assuming we simply double our first half results) we are flat with the end of 2015.  History, along with general business modeling, tells us that revenues will increase in Q3 and Q4 over Q1 and Q2 and so by year end we do expect to see a revenue increase per share once again.

Although we have seen a steady increase in both the price per share and the revenue multiple year over year, the industry is typically trading at 4 times revenue on average and some even higher so we remain below a number of our peers in regards to revenue multiple.   That being said, our focus remains on increasing our overall revenue and revenue per share through organic growth and strategic acquisitions. As we continue to execute, the Company’s valuation will take care of itself.

The Company has put great focus on cost control which includes HR. We have reduced head count while increasing revenue per employee.  The goal moving forward is to keep increasing revenue per employee; however, we also have plans to add more employees into the business in an effort to more aggressively grow and scale.

CAPITAL ALLOCATION

After becoming CEO in May of 2014 the Company had $0 in the treasury, was burning approximately $125,000 per month from operations and was very close to being maxed out on our line of credit. I mention this in order to further clarify why we are not looking at the capital raised before I became CEO because as of May 2014 not only did we not have past proceeds to execute on we had debt from our LOC so the above represents a clean use of capital available to be allocated over the last 2 years. Over and above the aforementioned financing the Company has also benefited from various option and warrant exercises over the last two years contributing approximately $350,000 into the business bringing our invested capital over the period to approximately $2.6 million. 
 
The below represents our use of proceeds as well as additional shares and debt utilized for M&A in the past 2 years:

Inorganic cash relates specifically to cash amounts paid to acquisitions and does not include costs like legal, exchange fees etc. as those costs are within the operating expenses totals.  I call this out separately just so it’s clear that we have used a 3rd of the proceeds received towards M&A activities.  
 
Note: In 2015 we purchased PhotoGIFTCARD with $150,000 worth of shares as a part of the private placement financing that closed at $0.15.  Instead of adding the 1,000,000 shares to the amount of inorganic share capital the $150k is included in the total amount invested and is included in the inorganic cash expenses in 2015.
 
If you refer to the revenue growth from 2014 to 2016 (annualized based on June 30th 2016 results so first half results x 2) the company has increased revenues from $1,328,166 to $2,215,046.  That is an increase of $886,880 which is 33% of the capital invested.  So for every $1 invested the Company added $0.33 of revenue per year.  With a 70%+ gross margin and based on this 2016 revenue estimate it will take the Company approximately 4 years to break even on that invested capital.  Based on our current attrition of less than 10% we anticipate merchants to stay with us for at least 9 years so the first 4 years covers the initial investment and the next 5 years+ profit.  A good use of capital in our opinion especially with the additional upside of technology development, talent, operating model validation and partnership positioning.   
 
On top of the shares issued for financings the Company also issued 1,269,231 shares for M&A, which represents 6% of the current number of outstanding shares. After the financing in January 2015 the Company has issued an additional 5,630,811 shares (20,886,636 as of June 30th 2016 less 15,255,825 in January 2015) representing a 37% increase in shares.  Over that same period the Company increased revenue from $1,328,166 to $2,215,046 (annualized based on June 30th 2016 results so first half results x 2) which is a 67% increase in revenue.  The result is the Company increased total shares by 37% to increase revenues by 67%. 
 
The Company has also negotiated an unsecured debt agreement with one of the acquisitions where the Company will pay $800,000 starting in January 2017.  The amount will be paid monthly for 24 months at a 10% interest rate to the vendor.


SUMMARY
 
As you have read in the above we have made significant steps forward as a business from a financial perspective as all metrics point to us heading in the right direction.  We have also made great progress with our product and operational model.  I will spend more time on those aspects in my next letter and will continue to update our MD&A, press releases and investor presentations to provide insight into the progress we are making on those fronts.
 
With the successes there has also been challenges as we have made several operational pivots, have modified our product plan frequently, and have relied on investor support to help finance our operations longer then we would have liked. As a CEO I have made mistakes, including focusing too much on providing specific guidance early on when there were too many variables at play and closing a significant acquisition prior to having the necessary capital to support that acquisition.  The journey has been far from easy; however, we do believe we are leveraging those learnings and are at the doorstep of great success.  We are very well positioned with our partners and customers and have a business model that is built for scale.  The majority of the strategic pieces of the puzzle are in place and so we are very bullish on what the future holds for the Company and our shareholders.
 
Thank you once again for your continued interest and support. I look forward to continuing our dialogue as we position Ackroo to be a market leader in the gift card and loyalty rewards ecosystem.
 
Regards,   
 
Steve Levely
Chief Executive Officer | Ackroo
Tel: 613-599-2396 x730
Email: slevely@ackroo.com

Disclosure: I am long Ackroo (AKR.V). As of this writing, Ackroo represents 50% of my microcap portfolio.