Description

After toying with this lockup expiration short since late June, it’s time to write some thoughts before it fully crumbles… There is still plenty of downside, with the overhang increasing later this year.

With just $200k in sales, its two employees working out of a strip mall in Hawaii are counting the days until November 7^th when they can sell out of their newly IPO’d stock which has a totally unjustified market cap of over $200m.    

It’s not a company that deserves to be public, but thanks to Burnham Securities which did a 1m share IPO for them at $5 per share on May 19^th, this is now publicly traded with a tiny float and 12.68m shares outstanding… plus a coming conversion of $1 warrants, 3.3m insider share unlock on Nov 7^th, and the rest of the ~9.38m outside investor’s shares unlocked.   I’ll note it seems sleazy that the two insiders get a one week head start on selling ahead of their outside investors, but I want to be clear that I see nothing illegal here and am not alleging fraud… just a valuation that is absurd on what seems to be a pumped up stock that has yet to be fully dumped.

Code Rebel has a niche software product called iRapp which allows multi-user access to a remote Mac computer from any device, including from local Windows desktops.   Note that this functionality can be had with many software providers, including some at bigger companies such as Citrix (the leader in remote desktop solutions) as well as VMware, Red Hat, Microsoft, et al, plus through the cloud offerings from various companies.  Some of the alternatives enjoy the full support of Apple or Microsoft, while Code Rebel is simply an authorized Microsoft RDP Licensee (Remote Desktop Protocol program), which anyone can become for a $10k licensing fee, but that doesn’t mean your customers receive help-desk software support from the mother-ship.

Their $200k in sales breaks down as follows… The company says it charges a license fee of $179 per user, per server to Enterprise clients, and $79 to Single Users. It also offers a free 14 day trial.  These are one time and then support & maintenance is charged at 20% annually.  Resellers, non-profits, & educational institutions get a 25% discount.

The problem is most customers are Free of charge.  At Q1-2015 they had 2,131 paid customer licenses (cumulatively since 2007 product launch), and 17,097 free of charge licenses for trial use. They assume a 10% conversion rate to paid.  Of the paid licenses, 1786 are Single User, and 345 are Enterprise/Corporate licenses supporting up to 60 users each on average.  Their five largest customers are an impressive group including Bloomberg LP, Wells Fargo, Morgan Stanley, USAA, and IBM.  Plus they have licenses with University of California, University of Texas, and University of Missouri.  Cumulatively this and all others produced a whopping $36,700.00 of Q1-2015 revenues with no deferred revenue booked. This was down 17% from the prior year’s first quarter, so it’s not a growth story.

We do have a view of their licensing progress for the month of March 2015 due to disclosures based on March 1 users in the prospectus compared with the 10Q as of end of March.  During that month, paid users increased by 265 licenses (of which 170 were Single User) and free of charge licenses increased by 215 units indicating a slowdown, but we’ll allow them the benefit of doubt given the short period and likely collection/conversion efforts at quarter end before an IPO.

Although at Q1 they had in place a network of 17 resellers in nine countries which had been selling their product for quite some time, they seem to have sold the idea that they will now “launch” their product.   Subsequent to the May IPO they have announced two new resellers, Rainbow Solutions in Europe and Datalink in the US, and are now pursuing a strategy of addressing the national reseller market which in 2014 was 46% of their revenue.  However, to date there is nothing to be found on Datalink’s website, and iRapp is listed among product offerings at Rainbow Solutions for €70.  While these new relationships are a positive, I sense they are a modest incremental positive and highly unlikely to produce a cumulative $1m in revenue for Code Rebel in the foreseeable future. 

The insiders have a number of non-arms length transactions on the books to affiliates under their control (which isn’t particularly alarming given this was recently and probably still should be a private company).  The insiders have a website development company called Bump Networks at the same address to which related party payables are owed for rent, administrative, and technical services. This payable was $444,405 at 12/31/14 amounting to nearly 2x 2014 sales.  In addition, the company is dependent on Bump Networks providing continued services to operate, including key personnel who do not have employment contracts.

Software is a tricky technical business, and they have had their share of problems.  In 2013 they had issues with a graphics processing algorithm in iRapp that resulted in content not displaying properly, hidden sessions not functioning correctly, and remote printing problems.  The company considers these issues now solved and has a new edition of iRapp software.  Given the limited resources of this company to fix such problems, to deter hackers, and to stay current with Apple and Windows releases, this can be considered an ongoing vulnerability. 

We live in great country where a couple of guys can program a software fix because they don’t like the user experience offered by conventional remote access technology, sell a few licenses at a loss, and turn it into a multi-hundred million market cap company… Well, this can fall to earth as well, and reminds one of a late 90s dot.com stock without material revenue.  While I have no idea who is pumping this situation to such heights, there is an obscure website called Dakota Financial News that has put out erroneous press releases about the company including “Code Rebel Corp (CDRB) to Issue Quarterly Dividend of $0.45” to which the company promptly issued its own press release denying this dividend had been issued and alerted the SEC.  The only other thing that might have contributed to this stock’s moonwalk is the June 12^th announcement that it would be added to the Russell 3000 Index at the annual reconstitution on June 26^th.

Catalyst

- Realization that the resellers 'launch' is a bust

- IPO stock overhang with 3.3m insider shares unlocking Nov 7

- Inability to generate material revenue