XOX: even more dilution

From The Star "Betting on a big name", some snippets:


Over the week, smallish firm XOX Bhd said it was proposing to issue 250 million new ordinary shares of 10 sen per subscription share to Macquarie Bank Ltd, as part of a fund-raising exercise to boost expansion of its Voopee mobile application.

That’s about 42.03% of the existing issued and paid-up share capital of the company.

“This would allow XOX to preserve cash flow for reinvestment and/or operational purposes; and is an expeditious way of raising funds from the capital market as compared to other forms of fund raising such as a rights issue exercise,” the company said.

On the surface, this begs the question, why would a global bank buy into a small firm? A loss-making one at that.

Investors would do good to not merely chase big names that seemingly emerge in firms.

While it is not impossible for such firms to attract quality investors, sometimes the investments are done on behalf of individuals using the bank as the conduit. If that were the case, then the money is really coming from individuals and not the bank itself.

Sometimes, a good name is all it takes to attract the attention of retail investors looking for a “good” buy. What follows after that is anybody’s guess.


I have written before about XOX, more specifically here:


... current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?



From the above article it seems that the loyal shareholders are "rewarded" again, this time with a dilution of 42%, again at a fraction of the IPO price.

Next to that is the issue which party is really behind the exercise, is it Macquarie bank, or one of its customers? Surely minority shareholders are entitled to know that.

XOX: Director resigns due to "other" commitments

Announcement by XOX:

I wonder, could the "other work and personal commitment which requires his full attention" have anything to do with the below article from Al Jazeera:

Maldives: How do you launder $1.5 billion?

XOX: from bad to worse ..... (3)

I wrote before about XOX:


XOX was a loss making company before its IPO, it is quite a surprise for me that it was allowed to be listed on Bursa. What probably helped was a rather optimistic (with hindsight) profit forecast that it issued in its IPO prospectus.

XOX was not able to hit the revenue and profit forecasts, it wasn't even close:

The above numbers are for the year up to 31 December 2011, while the company was listed on June 10, 2011 and knew already the numbers up to then. In other words, it only needed to forecast another seven months or so. And still it was able to overestimate its revenue by a factor 4, and instead of a forecasted PAT of RM 20 Million it booked a loss of RM 20 Million. Forecasting is probably not XOX's forte.



It looks like the Securities Commission was also not exactly "impressed" by XOX's forecast, and announced the following administrative actions: a reprimand for two executive directors of XOX and for AmInvest Bank as the principal adviser for the IPO of XOX.

Is a reprimand really enough, will it act as a future deterrent? I strongly doubt it.

XOX: from bad to worse ..... (2)

I wrote before about XOX's proposals, one snippet:


"In other words, current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?"


The official circular is out. It is a rather long document (108 pages), but what I completely miss is a proper discussion about the huge dilution that normal shareholders will endure if the proposal is approved. In my opinion, it should have been included in the following paragraph:

I find it dubious to mention enhancing of shareholders value without discussing the dilution that they will face.

If one follows all the numbers that are given in the document, then one should be able to work out the dilution. But why is this not transparently presented, accompanied by a proper discussion about the reasoning behind it all?

I have no problem with the rights issue (in which all shareholders can participate), but very much with the huge Restricted Issue (Private Placement) and the massive SIS (Share Issue Scheme).

The Directors will participate in the SIS, and are thus very much conflicted in this exercise (at least that is admitted in the brochure).

I hope that MSWG will be present at the EGM and will grill the Board of Directors about the huge dilution for the minority shareholders.

Bursa Malaysia and the Securities Commission should revisit the rules regarding Private Placements and ESOS/SIS schemes, and limit them to a decent maximum (like 5% or 10% of the outstanding shares of a company).

XOX: from bad to worse .....

I wrote before about XOX's corporate exercise to "massage" away its high accumulated losses. I will now give some more detail about this company, and its short but not so glorious past.

XOX is featured on Ze Moola's blog, which is often not a good sign, and this time it is no different.

In the last blog post we can see most of the directors smiling (except the person on the left) at the IPO ceremony at Bursa:

Not sure if the people who bought shares at the IPO price were also smiling, the board was distinctively red coloured, as can be seen on the right, not a single green number in sight.

The share plunged 35% on its first trading day, it must have been one of the worst performers of Bursa ever.

"Malaysian Shares" wrote two articles about the IPO, here and here.

Unfortunately for its shareholders, the share price has never recovered, in the contrary, it is now trading for RM 0.07, its lowest price ever:

XOX was a loss making company before its IPO, it is quite a surprise for me that it was allowed to be listed on Bursa. What probably helped was a rather optimistic (with hindsight) profit forecast that it issued in its IPO prospectus.

XOX was not able to hit the revenue and profit forecasts, it wasn't even close:

The above numbers are for the year up to 31 December 2011, while the company was listed on June 10, 2011 and knew already the numbers up to then. In other words, it only needed to forecast another seven months or so. And still it was able to overestimate its revenue by a factor 4, and instead of a forecasted PAT of RM 20 Million it booked a loss of RM 20 Million. Forecasting is probably not XOX's forte.

Over 2012 the company lost another RM 3.1 Million, over 2013 it lost RM 0.7 Million and over the first half of 2014 it lost another RM 1.2 Million. Not exactly shining numbers, and (partially) explaining the share graph.

To add insult to injury, on July 18, 2014 the company was reprimanded by Bursa for failing to take into account the necessary adjustments.

Which brings us to the present, and the multiple proposals that the company announced.

Apart from the earlier mentioned restructuring exercise, there are three other elements:

[1] A rights issue: this is considered to be a proper exercise to raise money, where all shareholders have the opportunity to participate (or to sell their rights if they don't want to do that).

[2] A huge large restricted issue. This is the kind of exercise that I don't like, since normal shareholders do not have the opportunity to participate.

[3] Establishment of a SIS (Share Issue Scheme) of up to 30% of the issued and paid-up capital for eligible directors and employees of XOX. My guess is that these directors and employees are substantially the same as before, in other words they were the same persons responsible for the disappointing results of the last three years, causing the share price to fall by 90%. Should they really be rewarded at this moment of time, at the expense of the minority investors? Would it not be better if the company first turns around, starts to book some decent profits causing its share price at least to equal its IPO price before the company even considers a Share Issue Scheme?

The total dilution can be seen in the following maximum scenario:

Current shareholders will have 166 Million shares after the share consolidation, and are entitled to the rights issue of shares and warrants, which will increase their shareholding (upon exercising of the warrants) to 498 million shares.

Holders of the proposed restricted issue will receive 190 million shares plus their rights issue and warrants, this might balloon to a total of 570 million shares.

Directors and employees might receive an additional 320 million shares.

In other words, current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?


Note to the authorities: I am of the opinion that corporate exercises like the above should simply be outlawed. Restricted issues should be capped at a maximum of 10% (preferably even 5%) of the outstanding shares. The same should apply to SIS, ESOS and the like, please cap them at 10% (preferably at 5%).

Please take also note of David Webb's "Project Vampire".

Cutting accumulated losses through financial engineering

[updated version, with a request at the end]

The Net Asset Value (NAV) of a company at a certain moment is defined as:

NAV = Assets minus Liabilities

That makes sense. But there is another way to look at NAV:

NAV = Equity plus Retained Earnings

With the Equity being the amount that has been put in the company by the shareholders (initially, and later possibly through rights issues or an IPO) and Retained Earnings being the accumulated Earnings minus the accumulated Dividends over the lifespan of the company up to that certain moment.

If we combine the two above formula's:

Assets minus Liabilities = Equity plus Retained Earnings

A simple and beautifully balanced formula.

Example 1

Assets             40M     Equity             10M
Liabilities       -15M     Retained Earnings  15M
NAV                25M     NAV                25M

However, there is one group of companies which might not be too happy with this formula, and that is the group of companies which makes persistent losses. For them things might look like:

Example 2

Assets             30M     Equity             40M
Liabilities       -20M     Retained Earnings -30M
NAV                10M     NAV                10M

It is rather obvious that future investors can see that this company might have a problem (especially if no or very little dividends have been paid out in the past, which is often the case).

Financial engineers (of the kind that I don't like, to put it mildly) have come up with a creative solution. What would happen if the Retained Earnings (or losses, as is often the case) could be lowered?

Since the Assets and Liabilities (and thus the NAV) would stay the same, the Equity has to be lowered. So this is the solution they came up with:

Example 3

Assets             30M     Equity             10M
Liabilities       -20M     Retained Earnings   0M
NAV                10M     NAV                10M

This suddenly looks a lot more healthy than example 2. The reduction of the equity is done by reducing the par value or a transfer from the reserves (accumulated profits).

Needless to say, I like this kind of financial engineering as much as I like a toothache. This is the kind of "innovation" that is not helpful at all, brings no economic benefit, is not transparent but only distracting and costs money and effort that should be used to build the business.

There are many examples on Bursa of companies which have used the above accounting "trick", for instance MAS.

The above is from the 2013 audited accounts from MAS:

• MAS had accumulated losses of RM 8.2 Billion as of January 1, 2013.
• It lost again money in 2013 to the tune of RM 1.2 Billion.
• One would expect accumulated losses of RM 9.4 Billion as of December 31st, 2013.

But through sheer "accounting magic", MAS "only" needs to report accumulated losses of RM 1.5 Billion. The reason is the RM 8 Billion capital reduction by transferring money from Share Capital and Share Premium.

Because of this, in my opinion, the meaning of the term "accumulated profits" (or losses) has completely lost its meaning, at least after any capital reduction exercise. The definition as used in Wikipedia, doesn't seem correct, there is no mentioning of the "accounting magic" which might distort the numbers.

One recent example is XOX Bhd, The Star wrote an article "XOX unveils plan to cut accumulated losses of RM50m" on their website.

When I read this headline, I thought (rather naively, I admit) that XOX would cut the losses by making profits. At least, that would make sense to me.

But I was rather surprised when I read the rest of the article:


XOX Bhd has announced several proposals to reduce its accumulated losses amounting to RM50.05mil as at end-June. The mobile virtual network operator, which has a market cap of RM33.2mil, told Bursa Malaysia that it was proposing to reduce up to RM32.73mil from its share premium account. “The credit arising therefrom shall be utilised towards setting off against the accumulated losses of the company,” it said. On top of that, it has proposed to halve the par value of its shares to five sen each, subsequently consolidating every two XOX shares of five sen each into one new XOX share of 10 sen. The par value reduction would give rise to a credit of RM16mil, which would be used to reduce its accumulated losses, it added.

XOX is one of the worst performing companies on Bursa, I will write soon a separate blog posting about all the issues.

Request: is there any accountant who can comment on this (anonymous is fine). I also would like to know: is the above a global convention?