Warrantee Targets $15 Million U.S. IPO For Japan Expansion (WRNT)

A Quick Take On Warrantee

Warrantee (WRNT) has filed to raise $15 million in an IPO of its American Depositary Shares representing underlying common shares, according to an F-1 registration statement.

The firm provides market research and sponsored product warranty facilitation services for companies in Japan.

While the IPO may produce significant trading volatility for day traders due to its low nominal price, I’m on Hold for the IPO.

Warrantee Overview

Osaka City, Japan-based Warrantee was founded to develop a suite of marketing services and related product warranty offerings (that it purchases from licensed insurers) for companies seeking to grow their business in Japan through providing consumers with product warranties in return for their data.

WRNT generates revenue from fees that it charges companies, who provide customers with sponsored product insurance services.

Management is headed by Founder and Chief Executive Officer Yusuke Shono, who has been with the firm since inception in 2013 and has experience in data marketing and programming.

The company provides its services in various industry verticals, such as consumer durables and consumer healthcare.

Warrantee has booked fair market value investment of $3.6 million as of September 30, 2021 from investors.

Warrantee – Customer Acquisition

The firm seeks to add more enterprise customers focused within Japan via a direct sales and marketing team.

WRNT had only four corporate sponsors (clients) as of the date of its prospectus filing and had only three for the fiscal year ended March 31, 2021.

Selling, G&A expenses as a percentage of total revenue have fluctuated as revenues have increased, as the figures below indicate:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended September 30, 2021	141.4%
FYE March 31, 2021	101.2%
FYE March 31, 2020	166.3%

(Source)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, fell to 0.1x in the most recent reporting period, as shown in the table below:

Selling, G&A	Efficiency Rate
Period	Multiple
Six Mos. Ended September 30, 2021	0.1
FYE March 31, 2021	0.7

(Source)

Warrantee’s Market & Competition

According to a 2020 market research report by Allied Market Research, the global market for extended warranties was an estimated $121 billion in 2019 and is forecast to reach nearly $170 billion by 2027.

This represents a forecast CAGR of 7.4% from 2020 to 2027.

I include this category as its size and growth rate are indicative of the potential for providing consumer warranty services in return for consumer data.

The main drivers for this expected growth are a growing demand for electronic products of all types as well as increasing prices paid for such items leading to consumer demand for ensuring they get the greatest value from their investments.

Also, the industry is segmented into ‘automobiles, consumer electronics, home appliances, mobile devices & PCs, and others.’

Warrantee’s Financial Performance

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

• Growing topline revenue

• Increasing gross profit and higher gross margin

• Variable operating loss and negative operating margin

• Growing cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended September 30, 2021	$ 766,906	21.9%
FYE March 31, 2021	$ 1,568,800	267.6%
FYE March 31, 2020	$ 426,788
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended September 30, 2021	$ 759,647	26.8%
FYE March 31, 2021	$ 1,382,720	263.3%
FYE March 31, 2020	$ 380,575
Gross Margin
Period	Gross Margin
Six Mos. Ended September 30, 2021	99.05%
FYE March 31, 2021	88.14%
FYE March 31, 2020	89.17%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended September 30, 2021	$ (324,505)	-42.3%
FYE March 31, 2021	$ (205,380)	-13.1%
FYE March 31, 2020	$ (329,167)	-77.1%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
Six Mos. Ended September 30, 2021	$ (339,246)	-44.2%
FYE March 31, 2021	$ (190,905)	-24.9%
FYE March 31, 2020	$ (357,672)	-46.6%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended September 30, 2021	$ 225,271
FYE March 31, 2021	$ 15,118
FYE March 31, 2020	$ (523,202)
(Glossary Of Terms)

(Source)

As of September 30, 2021, Warrantee had $23,428 in cash and $1.1 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2021 was $141,643.

Warrantee IPO Details

Warrantee intends to raise $15 million in gross proceeds from an IPO of its American Depositary Shares representing underlying common shares, offering 2.1 million ADSs at a proposed midpoint price of $7.00 per ADS.

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

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $76.1 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 17.6%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds for hiring additional employees including sales and marketing personnel, conducting promotional activities, including outbound marketing, expansion of agency network referrals, and general advertising and promotion, associated with expanding corporate sponsors and attracting participant users for our campaigns, and working capital and other general corporate purposes.

(Source)

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

Regarding outstanding legal proceedings, management says the firm is ‘currently not a party to any material legal or administrative proceedings.’

The sole listed bookrunner of the IPO is Network 1 Financial Securities.

Valuation Metrics For Warrantee

Below is a table of relevant capitalization and valuation figures for the company:

Measure (TTM)	Amount
Market Capitalization at IPO	$85,013,999
Enterprise Value	$76,071,203
Price/Sales	49.81
EV/Revenue	44.57
EV/EBITDA	-86.41
Earnings Per Share	-$0.07
Operating Margin	-51.58%
Net Margin	-51.65%
Float To Outstanding Shares Ratio	17.64%
Proposed IPO Midpoint Price per Share	$7.00
Net Free Cash Flow	$141,643
Free Cash Flow Yield Per Share	0.17%
Debt/EBITDA Multiple	-0.72
CapEx Ratio	3.59
Revenue Growth Rate	21.92%
(Glossary Of Terms)

(Source)

Commentary About Warrantee’s IPO

WRNT is seeking U.S. public market investment to scale its operations across all aspects.

The company’s financials have produced increasing topline revenue, growing gross profit and higher gross margin, fluctuating operating loss and negative operating margin and increased cash flow from operations.

Free cash flow for the twelve months ended September 30, 2021 was $141,643.

Selling, G&A expenses as a percentage of total revenue have varied as revenue has increased; its Selling, G&A efficiency multiple dropped to only 0.1x in the most recent reporting period.

The firm currently plans to pay no dividends on its shares and anticipates that it will use any future earnings to reinvest back into the business.

WRNT’s CapEx Ratio is low 3.6x, indicating the firm is investing heavily in capital expenditures as a function of its operating cash flow.

The market opportunity for providing data marketing services to companies seeking to trade consumer warranty for consumer information is difficult to determine, although the market for consumer warranty protection is quite large.

Network 1 Financial Securities is the lead underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of negative (81%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

As for valuation, management is asking investors to pay an EV/Revenue multiple of nearly 45x for a company with no real technology, a tiny revenue and customer base and an inability to achieve breakeven.

So, the IPO appears priced for perfection, and management hasn’t demonstrated that it can grow a non-technology business profitably.

While the IPO may produce significant trading volatility for day traders due to its low nominal price, I’m on Hold for the IPO.

Expected IPO Pricing Date: To be announced.