Seeing Machines at a crossroads

Regular readers of this blog will know I’m very keen on Seeing Machines. However, its would-be spin-off, Fovio has been delayed for a few months now (it was intended to spin it off by July 1, 2016) and the costs are still being borne by the main business. Therefore, while Monday’s results show great progress in many areas I wanted to concentrate on the likelihood of its being ‘forced’ to raise cash in the very near future.

From my discussions with management it appears that the cash position is now A$11m. The present cash holding will be boosted by an in principle agreement with CAT to bring forward  US$7M by Christmas (for although the revenue was recognised in the 2016 accounts, the actual cash is spread out). In addition, there should be around A$4-$5m coming in from fleet sales to assist working capital.

Even if SEE were to carry the full cost of auto, which is estimated by the Lorne Daniel, analyst at house broker finnCap as A$14m, overall net spend will be A$25m in FY 2017. This means that although finance would be tight by next June the company isn’t compelled to fundraise immediately. 

According to SEE’s interim CFO, James Palmer: “The plan is still to spin off Fovio by Christmas. However, we can comfortably carry Fovio until June 30, 2017, which would give us ample time to go to a plan B if we need to. That is if plan A wasn’t working in the best interests of the shareholders and we had to look at an alternative structure.”

Chief Executive Ken Kroeger stressed: “The only thing that would change that is if we decided that a spin-out isn’t the best thing for current shareholders. We have invested another A$4m into automotive since year end and we’re not necessarily going to get more equity for that. In parallel to that, that $4m has delivered a whole lot of outcomes that we might not want to give away to somebody else and we are out there pursuing business that we could win between now and Christmas that would increase the value of the company, and which we might not want to give away at the current valuation.”

“Our view is that the delay, while consuming cash, is increasing the value of our business and unless that is properly recognised in the spin out, we have the ability to reshape that if we choose to,” added Kroeger.

Certainly, SEE seems keen to let potential investors know that it isn’t desperate for cash and its trump card is that the auto industry is desperate for its technology. Indeed, among auto OEMS, I understand that it’s only the Koreans that are not using its DMS technology. All the rest they are doing something with.

Fleet

Fleet is very important as aside from CAT it is the only part of the business currently generating revenues. In the year, ended 30 June 2016 it sold 1,666 units and already in the first quarter of its 2017 financial year it has managed to ramp up sales by approximately 3000 units, with a cumulative total of now 6,000 units sold.

Moreover, its pipeline of assessments continues to grow. At the end of June it had 34 on the go but when I sat down with Chief Operating Officer Paul Angelatos this week he joked: “We’ve not been sitting on our hands since the year end and in fleet we now have 45 assessments underway.” The total number of units this potentially represents is roughly 160,000. 

In addition, part of the strategy is to work with telematics providers in order to get sales in very large volumes as he explained: 

“Most of the large fleets we are working with already have a telematics solution installed, (tracking the vehicle, tracking driver behaviour in terms of harsh braking, cornering, acceleration, etc., with GPS and an ability to transmit data)…Our product development is now focused on being able to integrate with the existing technology, stripping further cost out of our product, reducing the complexity of installation but more importantly allowing us to access existing customer bases with these partners.”

SEE now has memorandums of understanding (MOU) with 3 telematics providers and is having preliminary discussions with a fourth. As Angelatos commented: “The strategic telematics partners that we are now talking to effectively give us access to an installed base of over 2m vehicles.”

“We should be able to return some revenue from these strategic partnerships this financial year. It won’t be significant but it does set us up for FY18, where we have the new product, we’ve proven the integration, we’ve proven that our technology works together, so we’ll be able then to access that volume market.”

In this financial year (2017), fleet revenues will be derived largely from direct sales and distributors.

“Typically our model now is selling as a service, so we are looking at a bundled subscription fee per vehicle each month which is in competitive with other Mobile Resource Management (MRM) solutions. This provides a customer with a hardware solution and the full suite of analytics and monitoring of their fleet,” added Angelatos.

“We have expectations of a certain number of units this financial year and next financial year it is an exponential increase based on the fact that we are going to be able to access some existing installed base with those partners plus new sales, ” he concluded.

Conclusion

It appears to me that that there is a possibility that if SEE doesn’t get the deal it wants for the auto spin-off very soon, one option could be to fund this division itself with a smallish capital raise in order to retain more value and control.

While this might appear fanciful, if revenues from Fleet continue to increase over the next few months, the amount to be raised for auto needn’t be hugely dilutive to existing shareholders. 

There certainly wouldn’t be any shortage of Silicon Valley VC capital willing to invest in SEE itself, not to mention mutual funds and private investors.

Moreover the upside it would be capturing and retaining for investors might well outweigh the short term effect of any dilution. Indeed, if a fund or company bought in at a premium that would be a very bullish sign.

What I would hate to see would be a dilutive fundraise followed by a share consolidation that wipes out long term private investors such as myself. Yet, I get no indication such a move is on the cards.

Certainly, concerns over cashflow have been holding it back for a good while now and it makes strategic sense to keep Fovio in-house, in my opinion.

An eventual flotation of the whole company on Nasdaq could then set it up for a meteoric rise. For example, just look at the mouth watering (US$9.2bn) valuation of Mobileye and ask yourself where SEE is likely to be a year from now.

This last thought is pure speculation on my part and there are a lot of hurdles to be surmounted before then. Still, whichever plan SEE chooses to  follow it is very much undervalued at its current share price.

As always, I’d advise that investors do their own research and not rely on the thoughts of others.

The writer holds stock in Seeing Machines.