The failure of Buddy Technology an IOT Company was expected, as early as February 2021, due to bad management and expenditure in the early days of the role out of their LIFX smart light bulb technology that the business could ill afford.
Then came poor management of the manufacturing process, which resulted in the Company being forced to find new suppliers when they failed to pay their bills.
This was followed, by a desperate money borrowing exercise that saw another level of liability layered onto Buddy Technology’s books. They were also struggling to sell down old stock.
The big question now being asked was this Company trading while insolvent?
I have been around distributors and the technology industry for decades and a visit to the LIFX offices in Richmond Victoria painted a clear picture that these guys were living beyond their means compared to many of their competitors.
Money was no problem, the warehouse loft offices, an abundance of people, a woke mentality, and management who thought they were god’s gift to the IOT industry.
The business tended to spend money before they had market share to justify the expenditure on flash offices and people, who they ended up cutting back on as things became desperate.
Yes, they had smart packaging that worked on retailer’s shelves, however the calling in of administrators today proved that this was not enough.
What the Company lacked was cashflow from the sale of their products to support their borrowings, payment of suppliers, and in particular the high number of staff the Company had to run the business.
They acted big when they had investor cash pouring in, when in reality they were a start-up operating in a highly competitive home automation and IOT smart home technology market that has a lot of competitors both in the consumer and pro install markets.
By early 2021 it was blindingly obvious that these guys were not going to make it.
Brands such as Cygnett, and Laser Corporation were getting shelf space at the same retailers as Buddy Technology and their LIFX lighting.
They were also having to compete with Lenovo, Philips Hue, and Brilliant, these are cashed up Companies who products deliver the same functionality but were cheaper than the LIFX offering.
So, what now for Buddy Technology?
The IOT SmartHouse market is brutally competitive, with several new brands set to enter this market.
The LIFX product is well designed and highly functional, they have distribution across several major retailers such as Best Buy in the USA, JB Hi Fi and The Good Guys and that is a plus.
LIFX are simply another brand in a crowded market, which is facing new entrants and anyone investing in this brand must be careful what they buy.
No one with knowledge of this market should take on the Buddy Technology debt.
The two biggest assets are the R&D teams and the brand name.
Back in June 2021 the business was achieving a 30% margin, now they are getting 43% due in part to better purchasing.
As of the day that the administrators were called in the business had financial borrowing from Partners for Growth of $16,098,518 but with interest this rose to $16,511,969. The maturity dates for these loans are December 2023 and May 2024.
During the past 8 months the business has reduced their operating expenses by more than 30%, they have also lifted the price of their products resulting in a “substantially higher” margin.
The problem for a potential buyer is that the Companies revenues decreased for the period ending 31 December 2021 and are down running into 2022 according to retail sources.
While there will be a cost to buy existing stock in the channel, the business will also need funding for new stock and any new products in development.
Globally the brand could be attractive to a Chinese Company looking for retail distribution and a brand name to stick on their own products.
Whoever buys this Company the real asset is in their R&D teams and the global retail distribution they have in place.
When the business last traded Buddy Technologies shares had a market capitalisation of $21.07 million.
Buddy Technologies is now down 57% in 2022 so far and 85% over the past 12 months.
Yesterday the company put out a press release.
They confirmed that Christopher Hill and David McGrath of FTI Consulting were appointed joint and several Receivers and Managers… of Buddy Technologies… pursuant to security held by Partners for Growth VI, L.P (‘PFG’).
The administrators are set to seek indicative offers from interested parties on the 2 May 2022.
The effect of the appointment is that the Receivers are now in control of the Company’s assets, shares in its subsidiaries, undertaking and operations.
While PFG has provided BUD with a limited funding facility to allow the Group to continue to trade in the short term the chances are they are going to struggle to get their money back in full.
It is the Receivers’ intention to draw down against this facility as and when required and to provide those funds to the subsidiaries so that day-to-day obligations can be met.
The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’
They claim it is only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Buddy Technologies Limited (ASX:BUD) makes use of debt.
But the real question is whether this debt is making the company risky.
The answer to this question was yes because it tipped the business into a situation where sales were declining, cashflow was slowing and the costs associated with Buddy Technologies borrowings was the deadweight that finally pulled them under.
