IPO Update: Asset Entities Proposes $7.5 Million Micro-IPO Terms

A Quick Take On Asset Entities

Asset Entities (ASST) has filed to raise $7.5 million in gross proceeds from the sale of its Class B stock in an IPO, according to an amended registration statement.

The company provides software and services for Discord and other social media platforms.

While the low nominal price of the stock at IPO may attract day traders seeking price volatility, I’m on Hold for the ASST IPO.

Asset Entities Overview

Dallas, Texas-based Asset Entities was founded to provide social media content services for stocks, real estate, cryptocurrency, NFTs aimed at Gen Z demographics on various social media networks such as Discord, TikTok, Twitter, Instagram and YouTube.

Management is headed by co-founder and Chief Executive Officer Arshia Sarkhani, who has been with the firm since August 2020 and was previously CEO of Sarkhani Inc. and Shiazon Inc.

The company’s primary offerings include:

• Investment information to Discord communities

• Social media influencer campaigns

• Develop and manage Discord servers

As of June 30, 2022, Asset Entities has booked fair market value investment of $425,000 as of June 30, 2022 from investors including Asset Entities Holdings, GTMC, KD Holdings Group, Trojan Partners and others.

Asset Entities – Customer Acquisition

The firm aims its services at customers seeking exposure for their stock, crypto, NFT and in the future, metaverse projects on the company’s Discord servers.

Asset Entities is developing a network of independent content providers it calls ‘SiN’, for Social Influencer Network.

General & Administrative expenses as a percentage of total revenue have risen as revenues have fluctuated, as the figures below indicate:

General & Administrative	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2022	120.6%
2021	14.4%
August 1, 2020 to December 31, 2020	60.8%

Click to enlarge

(Source – SEC)

The General & Administrative efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative spend, fell to negative (0.9x) in the most recent reporting period, as shown in the table below:

General & Administrative	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2022	-0.9
2021	6.2

Click to enlarge

(Source – SEC)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ASST’s most recent calculation was negative (217%) as of June 30, 2022, so the firm needs significant improvement in this regard, per the table below:

Rule of 40	Calculation
Recent Rev. Growth %	-51%
EBITDA %	-166%
Total	-217%

Click to enlarge

(Source – SEC)

Management did not disclose the firm’s dollar-based net revenue retention rate.

The net revenue retention rate metric measures how much additional revenue is generated over time from each cohort of customers, providing investors with visibility into product/market fit and sales and marketing effort efficiency.

Asset Entities’ Market & Competition

According to a 2021 market research report by MarketsAndMarkets, the global market for social media management was an estimated $14.4 billion in 2021 and is forecast to reach $41.6 billion by 2026.

This represents a forecast CAGR of 23.6% from 2022 to 2026, a very high growth rate.

The main drivers for this expected growth are an increase in focus by customers on market and competitive intelligence, growing need for search ROI in the social media context and the enhancement of customer experience in social media touch points.

Also, regulatory and compliance requirements may act as a damper on growth while a lack of standard measurement metrics will be a continuing challenge for service providers.

Major competitive or other industry participants include:

• Xtrades

• WallStreetBets

• Eagle Investors

• @fourtoeight

• @DanneyDevan

• @moneylinmark

Asset Entities Financial Performance

The company’s recent financial results can be summarized as follows:

• Contracting topline revenue

• A swing to operating loss

• Significant cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$ 198,723	-51.5%
2021	$ 829,618	854.6%
August 1, 2020 to December 31, 2020	$ 86,903
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2022	$ (329,339)	-165.7%
2021	$ 14,871	1.8%
August 1, 2020 to December 31, 2020	$ 3,266	3.8%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
Six Mos. Ended June 30, 2022	$ (329,339)	-165.7%
2021	$ 14,871	7.5%
August 1, 2020 to December 31, 2020	$ 3,266	1.6%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2022	$ (293,702)
2021	$ 23,370
August 1, 2020 to December 31, 2020	$ 10,361
(Glossary Of Terms)

Click to enlarge

As of June 30, 2022, Asset Entities had $115,424 in cash and $156,369 in total liabilities.

Free cash flow during the twelve months ended June 30, 2022, was negative ($302,606).

Asset Entities IPO Details

ASST intends to sell 1.5 million shares of Class B stock at a proposed midpoint price of $5.00 per share for gross proceeds of approximately $7.5 million, not including the sale of customary underwriter options.

Selling shareholders will also offer 1.5 million Class B shares for sale ‘from time to time’ via a Resale Prospectus. The company will receive no proceeds from such sales.

No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.

Class A stockholders will be entitled to ten votes per share. Class B shareholders will have one vote per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $54.4 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 12.24%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

5% of the net proceeds (approximately $0.3 million, or approximately $0.4 million if the underwriters exercise the over-allotment option in full) for investment in corporate infrastructure;

20% of the net proceeds (approximately $1.3 million, or approximately $1.5 million if the underwriters exercise the over-allotment option in full) for marketing and promotion of Discord communities, social campaigns, and AE.360.DDM services;

8% of the net proceeds (approximately $0.5 million, or approximately $0.6 million if the underwriters exercise the over-allotment option in full) for expansion of SiN, our social influencer network;

18% of the net proceeds (approximately $1.1 million, or approximately $1.3 million if the underwriters exercise the over-allotment option in full) for increasing staff and company personnel;

49% of the net proceeds (approximately $3.1 million, or approximately $3.6 million if the underwriters exercise the over-allotment option in full) for general working capital, operating, and other corporate expenses.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says it is ‘currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition, or operating results.’

The sole listed bookrunner of the IPO is Boustead Securities.

Valuation Metrics For Asset Entities

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]	Amount
Market Capitalization at IPO	$61,250,000
Enterprise Value	$54,350,826
Price / Sales	99.01
EV / Revenue	87.86
EV / EBITDA	-161.67
Earnings Per Share	-$0.03
Operating Margin	-54.35%
Net Margin	-54.35%
Float To Outstanding Shares Ratio	12.24%
Proposed IPO Midpoint Price per Share	$5.00
Net Free Cash Flow	-$302,606
Free Cash Flow Yield Per Share	-0.49%
Revenue Growth Rate	-51.50%
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ASST’s most recent Rule of 40 calculation was negative (217%) as of Q2 2022, so the firm has performed poorly in this regard, per the table below:

Rule of 40	Calculation
Recent Rev. Growth %	-51%
EBITDA %	-166%
Total	-217%

Click to enlarge

(Source – SEC)

Commentary About Asset Entities

ASST is seeking public capital market investment to fund its various growth initiatives.

The company’s financials have produced lower topline revenue, a swing to operating loss and substantial cash used in operations for the firm’s level of revenue.

Free cash flow for the twelve months ended June 30, 2022, was negative ($302,606).

General & Administrative expenses as a percentage of total revenue has trended higher as revenue has varied; its General & Administrative efficiency multiple was negative (0.9x) in the most recent reporting period.

The firm currently plans to pay no dividends and to reinvest any future earnings back into the company’s growth initiatives.

The company’s Rule of 40 results have been substantially negative, indicating the company is producing negative growth and operating losses.

The market opportunity for social media management software and services is large and expected to grow at a very high rate of growth over the coming years, so the firm enjoys a very favorable market backdrop.

Boustead Securities is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (57%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook are its thin capitalization, tiny size and loss-making history.

As for valuation, management is asking IPO investors to pay an EV/Revenue multiple of nearly 88x for a tiny firm with sharply dropping revenue.

While the low nominal price of the stock at IPO may attract day traders seeking price volatility, my outlook on the ASST IPO is Hold.

Expected IPO Pricing Date: To be announced