- BrainChip (BRN) is centred around the development of its high performance yet ultra-low power Artificial Intelligence or “AI” chip called “Akida”
- In the past two years, BrainChip’s share price has multiplied more than 31 times – tripling in the first three weeks of 2022 alone, but this has caught the attention of the ASX
- Up until 2020, BRN has recorded a mere $US1.5 million of revenue, compared with combined losses of more than US$100 million
- BRN’s favourite method of generating cash lately has been issuing cheap share options to investors and employees, in particular LDA capital, a US-based investor that refers to BRN as a portfolio company
- However, the ASX is concerned about BRN’s continuous disclosure, as some information that moves its share price has not been released to the ASX
Technology shares are alluring to many investors, who want to make big gains, investing in the world’s next Google or Tesla.
One technology company that is buzzing recently is BrainChip, ASX Code BRN.
BrainChip is centred around the development of its high performance yet ultra-low power Artificial Intelligence or “AI” chip called “Akida.” The company boasts to be the world’s first commercial producer of these “neuro-morphic” or brain-mimicking AI chips.
BrainChip recently made headlines with news that Mercedes-Benz is looking to use the Akida chip in a future generation of electric cars which, they admit, are still in concept stage, but have the potential to give Tesla a real run for their money.
In the past two years, BrainChip’s share price has multiplied more than 31 times. And it’s tripled in the first three weeks of 2022 alone, having early investors celebrating.
But this most recent movement has also caught the attention of the ASX, who called upon BRN to ‘please explain’ the rapid share price increase, at a time when the company had not released any price sensitive announcements to the market.
BRN went on to deny it knew exactly what was causing all the buzz, pointing to the growing ‘editorial tech media coverage’ about the AI industry in general.
This is not the first time BrainChip has come to the notice of the ASX. Just three months ago, the ASX also enquired about an announcement BRN made about the grant of a patent. They wanted BRN to clarify that it hadn’t become aware of this information any sooner than it had publicly announced it to the market.
And back in March of last year, media reports criticized BRN for not providing an ‘accurate and complete’ explanation for the sudden departure of ex-CEO, Louis DiNardo. In the end, there was nothing concerning about Mr DiNardo’s departure, but BRN’s initial statement raised more questions than answers.
Continuous Disclosure
What’s common in all three of these cases, is the meaning of “Continuous Disclosure”.
Companies listed on the ASX have to ‘continuously disclose’ information which may have an effect on its market price or value. It’s important because all investors should have equal and timely access to information, so that the free market can operate efficiently, and to protect investors.
ASX listing Rule 3.1 says that:
“Once an entity is or becomes ‘aware’ of any information concerning it that a reasonable person would expect to have a ‘material’ effect on the price or value of the entity’s securities, the entity must ‘immediately’ tell ASX that information”.
Companies that breach this requirement face both criminal and financial penalties. They also open themselves up to potential class action lawsuits by investors.
So the ASX takes continuous disclosure very seriously. Hence the enquiries into BRN are a concern.
Nonetheless, for these last two enquiries, the ASX seemed satisfied with BRN’s responses. For now.
But just why would a company open itself up to criticism that it’s being sloppy in its disclosure in the first place?
Well, there are several reasons.
One obvious one would be human error. Did they simply not know or not believe that the information they had was market or price sensitive? If so, the company’s management has some work to do.
The ASX does acknowledge that this is a grey area. Sometimes it’s obvious what information investors would react to. And other times, not.
Another explanation that BRN actually used in response to the query last year, is that it’s just a matter of timing. For instance, the patent application was approved in the US, while the ‘recipients of the advice’ reside in Western Australia.
It was simply a time zone issue.
But what the ASX particularly looks out for, are cases where withholding information is intentional. So those with inside knowledge get financial gain – also known as ‘insider trading’.
Now supporters of BRN argue that the AI technology industry relies heavily on access to confidential information to maintain competitive advantage.
The ASX (3.1a.2) does allow for confidential information to be exempt from continuous disclosure rules. Which could explain BRN keeping its cards close to its chest.
A dive into the financials
But with the case of BRN, it’s helpful to dive into their financials to tell a more complete story.
Since 2015 their end goal has always been commercialising, producing and selling their AI technology. But also since then, they’ve have made very minimal revenue, compared with their exorbitant expenses.
For instance, up until 2020, BRN has recorded a mere US$1.5 million of revenue, compared with combined losses of more than US$100 million. And in those same 5 years, they spent over US$17 million dollars on research and development costs alone – significant costs into technology which hasn’t yet been proven to be commercially viable or widely adopted.
Looking at their latest annual results for 2020, their revenue for the year was only US$121,000. Yet their expenses were over a whopping US$11 million. Their losses before tax were more than double that of the previous year.
Then in their latest half year report for June 2021, while their revenue is much more impressive, their expenses still increased by over 52 per cent, causing their losses to increase yet again.
Now of course this doesn’t mean that there isn’t more revenue or profits to come
Their announcement last November about their licencing agreement with MegaChips is anticipated to bring in US$2 million of revenue
But you don’t have to be a scientist to see that BRN, like many other tech companies, has not yet proven to be a sustainable business on its own. They have had to raise some serious cash to continue funding their increasing costs and, yes, multi-million dollar losses, year after year.
But despite its losses, BRNs has a brimming cash balance of nearly US$24 million as at September last year. Just where have they gotten most of their cash from? Clearly not from paying customers.
Rasing capital
BRN’s favourite method of generating cash lately has been issuing cheap share options to investors and employees.
A major source of capital has been with their agreement with US-based investment group LDA Capital back in August 2020.
Now, this is where things get juicy.
In a very clever corporate finance deal, BRN entered a ‘put option agreement’ with LDA capital whereby LDA would be forced at various times to inject cash into the business in exchange for shares.
What’s key, is that the amount of cash they raise each time they make a call to LDA is determined by the share price at the time.
So the higher the share price goes, the more cash they get, sooner.
What’s more, the agreement allows LDA capital to almost immediately sell their newly bought shares, whenever they like. Who wouldn’t want to make a hefty profit from increasing share price?
So, what’s this all go to do with continuous disclosure you may ask? Why would a business want to withhold ‘positive’ information to the market? Wouldn’t they want to announce MORE good news to pump the share price up even further, to raise more cash?
Well, that’s exactly what they did. On 9th November, with a statement, the company said that they had completed testing of their Akida product, which, if you look closely looks more like a sales pitch than an information announcement. Testing is not the same as actual production or commercialisation. The Akida chip has been in proof-of-concept stage with companies like Ford, NASA and yes Mercedes for years as part of its Early Access Program.
Our question is, if BRN has shown themselves to not be the most ‘transparent’ with their information before, is there anything they know that we don’t? ASX rules say disclosure not only applies to favourable price information but even those that could have a ‘materially negative impact’ on the share price.
Also, how can we trust that if there is positive information, they will release in it a timely manner to avoid the risk of any insiders swooping in on it? And no, Press releases aren’t the same as official market announcements.
Recent news, including their Megachips and Mercedes deals have a good segment of shareholders excited for what’s to come.
Even if the ASX is keeping a laser eye watch on their share price and their announcements.
As for us, we’ll also be looking out for their full 2021 results, due to be released in the next few weeks – particularly revenue, profitability and cash received from actual paying customers.
We’ll wait to see whether their hopes to migrate from proof of concept to wide-scale production will finally be fulfilled.