Bit Brother: Complete Transformation, But The Road Ahead Is Unclear

Summary Bit Brother, a Chinese specialty tea distributor and blockchain business, has experienced a significant decline in its stock price, dropping by 94.5%. The shift in focus from tea distribution to its blockchain business has led to selling off its key revenue-generating business line and raising funds through direct offering. While its balance sheet still looks good, high and potentially rising expenses for its non-revenue generating blockchain business and a non-compliance notice from NASDAQ make it unattractive right now. China's specialty tea distributor and soon to be blockchain business, Bit Brother ( BTB ) has had an awful 2023 at the stock markets, with a share price decline of 94.5%. It's in the middle of a complete overhaul of its business, so volatility is not surprising. But it's not good for its stock price either. Here I look at what's going on with the company, its share price and what could come next for it at the stock markets. Total transformation The company was earlier called Urban Tea, which is a reflection of its tea business conducted under two lines of business. The first was distribution of dark tea and the other was its tea chain shops. But in 2019, the company decided to foray into blockchain development and cryptocurrency mining, leaving its past identity behind. This is reflected in the fact that it disposed its tea distribution business last year, which brought in 92% of its revenues. It's now planning to a range of cryptocurrency products and services like a service centre for mining virtual currencies, a currency trading platform and a crypto wallet. Why has the price crashed? The stock price started the year on the right note, but it saw a sharp fall in mid-January, around the time it raised capital through a registered direct offering. At its peak in 2023, Bit Brother's share price was at USD 11.5, but within a week it had fallen to less than a fifth of that level. Source: Seeking Alpha The company's offering was made at a price of USD 4.5 per share, which was way lower than the average of USD 10.5 the stock had traded at in January up to the announcement of the offering. Investors were clearly not happy, potentially seeing it as a sign of weakness in the company's ability to meet its funding needs, resulting in the share price decline. Challenged financials If they had any doubts about the company's current challenges, they were likely removed with the release of its results for the first half of the current financial year ending December 2022 (H1 FY23, the company's financial year runs from July-June), in March this year. With a big chunk of its business sold off, the company's no longer making the kind of revenues it did up to 2021. This is of course part of is transformation. But as yet, its "Blockchain business", as it terms the new business in its financial statements, it's not earning any revenue either. So the only source of revenues right now is the tea chain shops business. This reflected in its revenues, which saw a sharp decline of 51.5% year-on-year (YoY). Segment wise financial snapshot (Source: Bit Brother) At the same time, the blockchain business already accounts for 37% of its operating expenses for the six months ending December 2022. This has resulted in a 1.5x increase in its net loss for the period. Non-compliance notice The stock price, which had so far been trading comfortably above USD 1, fell fast after the results, opening up another challenge for Bit Brother. With the price at sub-USD 1 levels for over 30 days, it received a non-compliance notification from NASDAQ, where it's listed. It has until November 13 to become compliant now, which would require its price to be above USD 1 for 10 consecutive days. Dire as this sounds, the fact is that Bit Brother has been down this road before. It got such a notice in 2021 too, but a reverse stock split in December 2022 later, it regained compliance. Until May 2023, that is. It has since entered into another direct offering in July, at an even lower price of USD 0.25 per share, which is half the current share price. Needless to say, this impacted the price too. Supporting growth This is not a sustainable way for any publicly listed company to continue, of course. But while it builds up its blockchain business, there is some comfort to be found in its healthy balance sheet. At the time it first raised capital through a direct offering, the company said it intends to use the proceeds to "fund the development and commercialisation of our projects and the growth of our business, primarily working capital, and for general corporate purposes.". A look at the company's balance sheet up to FY22, however, reveals that it was already in good shape. It had a working capital ratio of a huge 42.5x. This working capital, at USD 45.6 million, is enough to fund its operating expenses for the next four years, if these expenses stay at the same level. It's also notable that Bit Brother barely has any debt on its books as well. Source: Bit Brother Also, it can help that on its own, the tea chains business has done very well, with a 512% increase in revenues in H1 FY23. The segment also showed a healthy gross profit margin of almost 42%, though the company was in the past and remains loss making on an operating basis. I would speculate that this business too would be sold in the foreseeable future for the complete transformation of the company. The risks The transformation can't be taken for granted, though. The future of cryptocurrencies is riddled with challenges, the key among them being regulatory ones. The People's Bank of China has already r egulated the usage of these currencies, and it's conceivable that there could be a flat out ban on them. Also, if for whatever reason the company is unable to undertake a reverse stock split, it will get delisted. What next? It's clear that now is then not a good time to buy the stock. There's too much change in the offing, and too little clarity about its future right now. The company's balance sheet looks good, as does the growth of its existing tea business. But the blockchain business is yet to commence operations, and in the meantime requires a lot of expenses. It doesn't help that Bit Brother's share price keeps dropping below the compliance floor for extended periods. There's really nothing to hold on to right now here. China's specialty tea distributor and soon to be blockchain business, Bit Brother ((BTB)) has had an awful 2023 at the stock markets, with a share price decline of 94.5%. It's in the middle of a complete overhaul of its business, so volatility is not surprising. But it's not good for its stock price either. Here I look at what's going on with the company, its share price and what could come next for it at the stock markets. Total transformation The company was earlier called Urban Tea, which is a reflection of its tea business conducted under two lines of business. The first was distribution of dark tea and the other was its tea chain shops. But in 2019, the company decided to foray into blockchain development and cryptocurrency mining, leaving its past identity behind. This is reflected in the fact that it disposed its tea distribution business last year, which brought in 92% of its revenues. It's now planning to a range of cryptocurrency products and services like a service centre for mining virtual currencies, a currency trading platform and a crypto wallet. Why has the price crashed? The stock price started the year on the right note, but it saw a sharp fall in mid-January, around the time it raised capital through a registered direct offering. At its peak in 2023, Bit Brother's share price was at USD 11.5, but within a week it had fallen to less than a fifth of that level. Source: Seeking Alpha The company's offering was made at a price of USD 4.5 per share, which was way lower than the average of USD 10.5 the stock had traded at in January up to the announcement of the offering. Investors were clearly not happy, potentially seeing it as a sign of weakness in the company's ability to meet its funding needs, resulting in the share price decline. Challenged financials If they had any doubts about the company's current challenges, they were likely removed with the release of its results for the first half of the current financial year ending December 2022 (H1 FY23, the company's financial year runs from July-June), in March this year. With a big chunk of its business sold off, the company's no longer making the kind of revenues it did up to 2021. This is of course part of is transformation. But as yet, its "Blockchain business", as it terms the new business in its financial statements, it's not earning any revenue either. So the only source of revenues right now is the tea chain shops business. This reflected in its revenues, which saw a sharp decline of 51.5% year-on-year (YoY). Segment wise financial snapshot (Source: Bit Brother) At the same time, the blockchain business it already accounts for 37% of its operating expenses for the six months ending December 2022. This has resulted in a 1.5x increase in its net loss for the period. Non-compliance notice The stock price, which had so far been trading comfortably above USD 1, fell fast after the results, opening up another challenge for Bit Brother. With the price at sub-USD 1 levels for over 30 days, it received a non-compliance notification from NASDAQ, where it's listed. It has until November 13 to become compliant now, which would require its price to be above USD 1 for 10 consecutive days. Dire as this sounds, the fact is that Bit Brother has been down this road before. It got such a notice in 2021 too, but a reverse stock split in December 2022 later, it regained compliance. Until May 2023, that is. It has since entered into another direct offering in July, at an even lower price of USD 0.25 per share, which is half the current share price. Needless to say, this impacted the price too. Supporting growth This is not a sustainable way for any publicly listed company to continue, of course. But while it builds up its blockchain business, there is some comfort to be found in its healthy balance sheet. At the time it first raised capital through a direct offering, the company said it intends to use the proceeds to "fund the development and commercialisation of our projects and the growth of our business, primarily working capital, and for general corporate purposes.". A look at the company's balance sheet up to FY22, however, reveals that it was already in good shape. It had a working capital ratio of a huge 42.5x. This working capital, at USD 45.6 million, is enough to fund it operating expenses for the next four years, if these expenses stay at the same level. It's also notable that Bit Brother barely has any debt on its book as well. Source: Bit Brother Also, it can help that on its own, the tea chains business has done very well, with a 512% increase in revenues in H1 FY23. The segment also showed a healthy gross profit margin of almost 42%, though the company was in the past and remains loss making on an operating basis. I would speculate that this business too would be sold in the foreseeable future for the complete transformation of the company. The risks The transformation can't be taken for granted, though. The future of cryptocurrencies is riddled with challenges, the key among them being regulatory ones. The People's Bank of China has already regulated the usage of these currencies, and it's conceivable that there could be a flat out ban on them. Also, if for whatever reason the company is unable to undertake a reverse stock split, it will get delisted. What next? It's clear that now is then not a good time to buy the stock. There's too much change in the offing, and too little clarity about its future right now. The company's balance sheet looks good, as does the growth of its existing tea business. But the blockchain business is yet to commence operations, and in the meantime requires a lot of expenses. It doesn't help that Bit Brother's share price keeps dropping below the compliance floor for extended periods. There's really nothing to hold on to right now here. I'm going with a Sell rating.