Xeros Technology (XSG) – Washing shareholders of their cash
Xeros Technology is another example of an AIM company that does a magic trick with shareholder cash. In January, it announced it would raise more funds in 2018 and dilute shareholders further. Obviously the directors aren’t stuffed full of shares with only one owning 1.5%, and the price has gone from near 300p to a current price of 40p. Anyone buying there only needs approximately a 650% return back to breakeven!
The company has technology to provide a washing machine that uses beads and saves drastically on water. You can see the appeal – saves customers money, better for the environment, sustainable, and so on, and yet they recently released an RNS saying they’d sold 16 washing machines. I’m very sure my local Dixons sells more.
One of the things I like to look for in a short is ridiculous amounts of cash burn, and it’s a shame Xeros can’t invent something to stop it rinsing through so much cash. Unless there is a tremendous amount of revenue growth it often takes many companies longer than expected to reach profitability, and they then need to get the begging bowl out and raise some more cash. In Xeros’ case, it can’t even generate positive trading margins.
LHS: H1 2018. RHS: H1 2017. Aren’t you supposed to benefit from economies of scale when selling more?
One of the ways Xeros could shorten the route would be to license its technology, which it already appears to be doing. This would reduce capex and increase revenue quicker, although its profits would be eaten into. This may not be a bad thing for shareholder value as until the company is profitable, it will always require further funding. Sometimes it’s better to have a small slice of a large pie than a large slice of a pie that doesn’t even exist.
The first licensing deal Xeros has signed is in China. This could be brilliant as China is a huge market, but they are also not that big on recycling. It would be hard to imagine anyone would care that Xeros’ technology saves 80% less water unless it also cuts costs significantly. Given the lack of uptake in previous years, one must assume that it doesn’t just yet. Along with China’s reputation for fakes and intellectual property theft it’s not hard to see how this could go badly wrong.
Xeros Technology might be a long at some point, but certainly not before it has 1) raised cash (it’s incredibly rare that placings are done at a premium and not a discount to the prevailing stock price), and 2) reached the inflection point (still a long way off). Xeros is in talks with two global OEMs (see the Symphony project) but until those talks are finalised it could be talking for a few more years yet. When the directors aren’t rushing out to buy, then I don’t see why we should be either.
21 Sep Update
Xeros updated what I can only assume to be a pre-placing pump today with a ten year contract with a Mexican tannery. It mentions that Xeros anticipates its technology to be used after March 2019 – another six months from now at least! As the price gently started to creep up I closed my existing short position, but failed to go long despite thinking shorts may be squeezed. Well, I never claimed to be clever. I no longer hold a short position, but still believe the risk/ reward is even more firmly skewed to the downside given it will raise cash within the next three months.
If anything, this highlights the dangers of going short on illiquid stocks that have already made serious moves to the downside. I’m sure it was mostly shorts as at 08:10 no bulletin board heroes were claiming Xeros was going to acquire Bosch – that came as they chased the spike. When shorts all attempt to cover and get squeezed, it can push the price up illogically high. Be careful.