Good Life Networks (GOOD.V) has been a wild ride. I started my initial position at $0.14 and bought another block while on the way up to $0.55. At one point GOOD was my largest position but it wasn’t meant to be, not for me at least. I exited my GOOD position by selling at $0.145 resulting in a loss of 23.6%. Too many red flags have popped up. I have tried to be patient and hold my position as I think there is a lot to like about GOOD and the industry, however, the risk has outweighed the reward and I feel there are better companies I can invest in.
For my initial thoughts on GOOD.V see my first post as well as a follow-up post examining some of the issues I had with GOOD
There is a lot to like about Good Life Networks. They own a high-speed digital ad exchange that operates at faster speeds than the IAB (Interactive Advertising Bureau) standards. The digital advertising space is a quickly growing industry. This bodes well for GOOD as they try to capture a larger piece of the digital advertising marketing spend. I also like how GOOD does not collect personally identifiable information (PII). Online privacy is becoming a larger concern all over the world. GOOD has made it a priority to not collect PII. This could be a big benefit in the not too distant future.
GOOD is also developing an accounts receiveable blockchain solution. Getting paid in the digital advertising industry is an issue for a lot of companies. If GOOD can execute and launch a successful AR blockchain solution this could be a huge advantage for them.
GOOD.V and Why I Sold
As I have followed GOOD there have been certain things that I did not like. I outlined many of those issues in my Good Life Networks Part Two Analysis. I was contacted by VP Cliff Dumas. He encouraged me to reach out to the GOOD team with my questions. I did and received an answer to my questions from advisor Ron Shuttleworth. His answers were thorough enough ease my concerns for the time being but recent actions have again raised red flags. I will outline the reasons why I have exited my position in GOOD even though I do still see the potential.
VP of Technology Chris Bradley
Vice President of Technology Chris Bradley is responsible for building the Good Life Networks platform. VP Bradley is also responsible for building their yet to be released blockchain accounts receivable solution.
At the Good Life Networks presentation at the Cantech Investment Conference CEO Jesse Dylan discussed how VP Bradley built their entire ad tech platform. He joked that Bradley had to work for the company for the rest of his life.
In the Good Life Networks presentation at the TSX VP Bradley was also prominently featured. He explained all their ad technology as well as the blockchain AR solution. VP Bradley appears to be a critical team member of Good Life Networks. He is the technological expertise behind their ad tech and blockchain platforms. As a result, if he were to leave the company their ad tech platform and blockchain solution could stop progressing and fall behind in a quickly changing industry.
Self Promotion & Lack of Insider Buying
Another red flag I have identified is the stock price promotion by CEO Jesse Dylan. At the Cantech Investment Conference in February of 2019, CEO Dylan quoted research done by Tormont Group. The Tormont research estimated the fair value of GOOD’s shares to be $1.00. CEO Dylan also mentioned a Tormont projection of $3.25 by the end of 2019.
I understand why GOOD wants to maximize the purchasing power of their shares by boosting the share price. GOOD is an acquisitive company and having a higher share price is important. This allows them to raise capital at a less dilutive price or purchase companies using their shares.
My issue with this sequence is two-fold. If you are going to stand up at an investment conference and present projections, make sure the projections are your own. In my email with Ron Shuttleworth he confirmed that the Tormont research was done independently. The research report was presented to GOOD to check for accuracy. This seems like GOOD built in an excuse when they miss projections or their share price doesn’t climb to $1.00. They can claim the projections were not their own
My second issue with this clip is the corresponding insider purchases. On January 29th, 2019, when the Cantech Conference was held in Toronto, GOOD’s share’s closed at $0.33. Here are all the GOOD insider purchases from Sedi:
GOOD.V insider purchases do not match what management is saying. CEO Dylan and VP Cliff Dumas made significant purchases in June of 2018. They have not made any purchases on the open market as of August 22nd, 2019. If CEO Dylan truly believed in the Tormont research then the fair value of their shares ($1.00) would mean a 200% return. To get to the projected share price of $3.25 by year-end 2019 this would be an 884% return.
CEO Dylan felt confident enough in the Tormont research to quote it at a significant investment conference however he did not feel confident enough in his company to buy shares on the open market. He claimed at Cantech that they are one of the most undervalued companies in North America. This seems like a no brainer investment. This signals a lack of confidence in their company to investors. If you want to stand up at say your shares are undervalued by half with a possible 11-month return of 8x then you better back it up with your own cash.
GOOD.V Management Compensation
In 2018 CEO Jesse Dylan was compensated $1,122,504. $568,940 of that was in bonuses alone. VP Cliff Dumas was compensated $671,096. $321,136 of that was in bonuses. Between the two of them, they were issued $890,076 in bonuses in 2018. Based on these bonuses you would think that GOOD.V had a wonderful year. Instead, GOOD had a loss of $2,264,855 in 2018.
So, what framework does GOOD use to award executive compensation?
CEO Dylan and VP Cliff Dumas both use the same bonus structure. Their bonus structure is solely focused on increasing gross revenue after the reveres takeover bonus kicked in. I see very little alignment between gross revenue and creating shareholder value. By solely focusing on gross revenue management only has to focus on growth at any cost. They can grow gross revenue with no thought to actual profitability. Long term stock price appreciation is built on earnings per share growth, not gross revenue growth.
This type of bonus structure encourages the management team to continually seek out acquisitions, even if they aren’t in the best interest of shareholders. GOOD.V has taken on a significant amount of debt to fund acquisitions all the while CEO Dylan and VP Cliff Dumas have rewarded themselves handsomely.
The compensation doesn’t end there.
In 2018 CEO Dylan was issued 1,375,000 stock options with a five-year expiration date. 250,000 of these options were 25% in the money the second they were issued ($0.15 exercise price on a $0.20 share price).
GOOD’s fully diluted shares have greatly risen since they became public from a series of equity raises and executive compensation. MicroCapClub founder Ian Cassel believes that dilution is the biggest enemy of the microcap investor. I don’t see share dilution ending anytime soon for GOOD. GOOD may not return to the equity market to raise money (they may not need to hopefully, or they may not be able to) but I highly doubt they will throttle back on generous stock-based compensation.
Executive Compensation Comparable
In GOOD’s recent investor presentation they compare themselves to a series of other ad technology companies, including Acuity Ads (AT.TO). Acuity Ads is another Canadian ad tech company that trades on the TSX. By market cap comparison Acuity is 2.73x bigger than GOOD.V.
CEO of Acuity Ads, Tal Hayek, was compensated $333,750 total for 2018. This included his share-based awards as well. GOOD CEO Dylan was given $1.12 million in cash compensation and an additional 1.37 million in stock options. Subtracting CEO Dylan’s one-time bonus for a reverse takeover offering ($281,250) CEO Dylan made $841,254. This equates to 3.36x and 2.52x salary comparable. Again, this does not include CEO Dylan’s stock options.
For another quick comparison, TechTarget Inc. TechTarget was another listed comparable in the recent GOOD investor presentation. They have a market cap of $584 million and $162 million in revenue.
The CEO of TechTarget, Michael Cotoia made $1,085,066 USD in 2018. This number includes a base salary of $600,000 and $253,566 in stock-based compensation. CEO Jesse Dylan made $1.12 million cash and stock options on top of that. To say CEO Dylan and VP Cliff Dumas are compensated handsomely is an understatement. CEO’s from two larger companies that GOOD identifies as comparables make significant less (Acuity Ads) or similar pay (TechTarget).
mPlore Acquisition and Failed Equity Raise
On April 10th, 2019, GOOD announced they had signed a letter of intent to acquire mPlore. mPlore is a mobile content delivery platform which would give GOOD direct access to mobile device users around the world. The terms of the acquisitions were as follows:
In my previous post regarding GOOD, I sent an email to the company asking about their upcoming liabilities. I asked specifically about having money on hand to complete the mPlore acquisition. Advisor Ron Shuttleworth replied to my email. He said, “By the time mPlore closes, the company should have sufficient working capital available to meet the $2.85M obligation.“
This didn’t turn out to be the case after all. On June 3rd, 2019, GOOD announced they would be raising $5 million through a private placement at $0.27 a share. Shares opened on June 3rd, 2019, at $0.24 a share. I had immediate concerns that GOOD would be able to fill the private placement at a price 11% higher than the market price. GOOD’s share price has only declined since then. I don’t believe Mr. Shuttleworth was including the equity raise in this response or GOOD would have timed their equity raise with a stronger share price. Around April 10th GOOD was trading in the $0.35 range.
mPlore Acquisition and Equity Raise Part II
First, let’s look at the amended mPlore acquisition terms. I found it odd that a company would alter its terms in the acquirer’s favour. GOOD only has to pony up $850,000 upon closing compared to $2,850,000. mPlore owners will now receive the remaining $2,000,000 in performance earn-out, meaning there is a chance they don’t receive it at all. The warrants are not mentioned on the second release so I would assume they are no longer included.
When I try and look at this from mPlore’s perspective I don’t quite understand why they would agree to these terms. They are postponing a $2 million dollar payment by two years with the possibility that they are never paid. mPlore must really want to be part of GOOD to alter their terms so favourably in GOOD’s direction. This signals weakness in the true value of mPlore’s assets.
In order to finance the mPlore acquisition GOOD also changed their offering. They lowered the private placement price by 26%. My worry that the private placement would fail at $0.27 was accurate. On the bright side, CEO Dylan purchases 250,000 shares along with a large purchase by Director Praveen Varshney.
The whole mPlore acquisition seems odd along with the failed equity raise. The information provided by Ron Shuttleworth was they would fund the acquisition using internal funds. Then they proposed an equity raise at $0.27 to fund the acquisition. The equity raise failed so mPlore lowered their acquisition price so GOOD could lower their private placement price. The deal is better for GOOD and their shareholders so that is something to be happy about but the whole sequence gives me a bad feeling.
GOOD.V Balance Sheet
Lastly, and most importantly, let’s look at the GOOD.V balance sheet and the obligations it has coming due. As of Q1 2019 GOOD has $1.6 million in cash on their balance sheet.
The debt on the balance sheet is what really scares me. I project GOOD will turn cash flow positive again in 2019, possibly as early as Q2. If they can keep their costs in line with Q1 and maintain gross margins GOOD can strengthen their balance sheet. The issue then becomes how long does it take to collect their revenue. Accounts receivable is a major issue in the digital advertising space. It can take sometimes as long as 120 days to collect payment.
In addition to bank debt GOOD.V has significant obligations to both 495 Communications and Impression X as a result of their acquisitions.
If Good Life Networks and their acquired companies perform up to expectations they have $11,795,683 in contingent considerations to pay. $6,600,000 has to be in cash. If GOOD and the two acquired companies do not meet the earn-out milestones then they won’t be paid. This could alienate Matt Hopkins (Impression X) and Bret Polansky (495 Communications). Hopkins and Polansky are integral to GOOD’s success as they still operate their respective businesses.
GOOD also has $6,000,000 in share/cash earn-out due to 495 based on hitting performance benchmarks. If GOOD doesn’t have the cash to pay the earn-out we are looking at another significant amount of share dilution to cover the $6 million.
Cancelled General Meeting
On August 14th, 2019, GOOD announced that they were cancelling their annual general meeting. The meeting was cancelled while the Company explores and evaluates various position changes within the board and key management.
What does this mean? I don’t know. My speculation is there are issues arising from performance benchmark payments to 495 Communication and Impression X. As I mentioned earlier Matt Hopkins and Bret Polansky are important pieces in the GOOD ecosystem and a failure to pay their performance benchmarks could cause significant friction. Again this is just speculation.
This isn’t the first time that GOOD has postponed their AGM. The meeting was initially scheduled for May 13th, 2019. This has actually been the 4th change to the annual general meeting date. GOOD did not give a reason for the prior changes however the mPlore transaction has been pending this whole time. The market doesn’t like uncertainty. The numerous changes to the annual meeting and now possible management changes create far too much uncertainty.
Good Life Networks has been a learning experience for me. As I wrote my previous piece on GOOD.V I said to myself “I should be selling this company”, that was at $0.40. I preach patience and was trying to practice what I preach. However, when you lose faith in management and their ability to act in a way that is best for shareholders then it is time to get out.
Like I said earlier GOOD has a lot of interesting things happening but the risks have become far too great. More experienced investors than myself were pointing out red flags but again I wanted to hold on to see if GOOD could execute. In hindsight, I should have trusted my thought process and acted on the red flags I identified and sold. Ian Cassel stresses “buy and verify” instead of buying and holding. I hope Good Life Networks succeeds as a company but their balance sheet and executive compensation look like it has the potential to cripple the company.
I no longer own shares of Good Life Networks (GOOD.V)
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