Tapinator: A Small Mobile Game Company With Big Potential

| About: Tapinator, Inc. (TAPM)

Summary

Tapinator reported 2015 revenue growth of 159% to $2.4 million, all organically, and was EBITDA positive.

Three big games should launch in Q2 2016, including a game based on the famous Rocky movie and timed with the movie's 40th anniversary and the debut of Creed 2.

The company is cash flow positive and given its rapid growth and projected EBITDA for 2016, the stock could double in the next 18 months.

For the year ending December 31, 215, Tapinator (OTCPK:TAPM) reported revenues of $2.4 million versus $0.9 million a year ago, up 159%. EPS was reported as loss of $0.03, but was a non-GAAP loss of $0.01 once one-time charges and stock-based compensation is eliminated. The company achieved adjusted EBITDA of $523,000 and paid cash interest of $106,000 and no taxes.

Tapinator reported Q4 2015 revenue of $692,268, up 87% over Q4 2014, but down sequentially from the $728,128 in Q3 2015. Despite lower revenues adjusted EBITDA was $149,000 versus $73,914 in Q3 2105.

The company took a significant hit to earnings in the quarter by writing down its entire mini-game software development assets of $584,000. This one-time loss was responsible for $0.01 of EPS.

Tapinator continues to invest in new game development. The company introduced 30 new games in Q4 up from 26 in Q3 2015. This brought its owned and operated portfolio to 183 active titles. By the end of 2015, 42 titles had been downloaded more than 1 million times.

Tapinator's business model has also recently expanded to include a greater focus on licensed titles that leverage well-known brands. Tapinator has released games inspired by Discovery's Deadliest Catch and Nik Wallenda in Sky Balance and its biggest opportunity this year is ROCKY to be launched in June in coordination with MGM and the 40th anniversary of the original movie.

Also launching in Q2 are Combo Quest 2 and Big Sport Fishing 2, sequels to the most popular games to date. There are high expectations for their success.

The company is currently valued at an enterprise value of $16.4 million. The company has given guidance that EBITDA in 2016 should be near $900,000. Using an industry average of 19.6 EV/EBITDA, the stock would be worth $0.32 per share, and by looking at 2017 EBITDA estimates that could increase to $0.50 per share, up 100% from today's price.

Q4 2015 RESULTS

Tapinator reported Q4 2015 revenue of $692,268, up 87% over Q4 2014, but down sequentially from the $728,128 in Q3 2015. The decline in revenues was the result of softness early in the quarter but business picked up later in Q4 and is strong until today. There does not appear to be any particular reason for this softness. Despite lower revenues adjusted EBITDA was $149,396 versus $73,914 in Q3 2105.

A large one-time item affected results. Reported results showed operating expenses (ex the platform fees) were $1.1 million versus $235,000 last year and $688,000 in Q3 2015. The operating loss in Q4 was $640,000 versus a profit of $24,000 a year ago. However included in this year's operating loss was a write down its entire mini-game software development assets of $584,000. These assets were from an acquisition in 2014 of a B2B casino platform that management decided required too many resources outside its core business to be cost effective and it would not be marketed any longer. There are however some very small revenues still being generated from legacy customers. We do not believe this will affect revenues meaningfully going forward. This one-time loss was responsible for $0.01 of EPS. Without this charge, the operating loss would have been only $55,000.

The company reported debt discount amortization from the converts of $327,000 and interest expense of $81,000 resulting in a net loss of $1 million versus a loss of $23,000 last year. Without the write off of assets, the loss would have been $464,000. Loss per share was reported as $0.02 versus breakeven last year but the non-GAAP EPS loss excluding one-time charges and stock-based compensation rounds to $0.00 in Q4 2015. More importantly EBITDA in Q4 was a positive $149,000 versus $52,000 last year and $74,000 in Q3 2015.

Liquidity and Balance Sheet

Tapinator's cash balance was $1.49 million at year-end down from $1.79 at September 30, 2015. In June 2015, the company raised $2.0 million through the issuance of a $2.24 million 8% senior convertible note due January 1, 2017 (convertible at $0.205), with five-year warrants to purchase 10.9 million shares and five-year callable warrants to purchase 10.9 million shares (exercise price of $0.30). The note is convertible into 10.9 million shares and total warrants outstanding could add 29.1 million additional shares.

Q1 2016 Games

While the fast track business launched 25 new games again in Q1, the full-featured business was less active with only Miss the Moose launching on March 17, 2016. It was featured as a best new game in Apple's App store and has been doing well with a five star rating from 75 commenters. It is simple and addictive and consists only of a car driving around a track that can speed up to miss hitting a moose running by.

In simulation games, a new title launched March 30, 2016, Multi-Storey Parking 3-D, seems to be getting a very good reception.

GAMES

Tapinator continues to invest in new game development. The company introduced 30 new games during the fourth quarter. This brought its owned and operated portfolio to 183 mobile gaming titles. These games have cumulatively achieved over 100 million cumulative downloads to-date. At the end of Q4 2015, 42 titles had reached the one million download mark. To date no game has been responsible for over 10% of revenues, and the company has not suffered the boom bust of other hits driven businesses.

Tapinator's rising traction with gamers is reflected in its user metrics and growing base of user downloads, we believe. Tapinator's cumulative downloads reached 166 million, up 245% from the previous year. Average monthly active users of 8.8 million increased 104% year over year but was down 14% sequentially from Q3.

LAUNCH TIMELINE

Second Quarter:

  • Multiplayer VIP Poker was expected in Q1 but should launch early in Q2. We are also looking for more games launched in the casino category possibly later in the year.
  • ROCKY: game based on the legendary franchise should launch in June in anticipation of the movie's 40th anniversary on November 21. We believe the company is hoping for "seven figures" in revenue from this game alone and believe is has evergreen staying power. It will be on the OIS, Google Play and Amazon platforms.
  • Combo Quest 2: a freemium sequel to the original paid version hit, Combo Quest. It should launch mid-quarter.
  • Big Sport Fishing 2: a freemium sequel to the 15+ million downloaded, Big Sport Fishing Android game. It has been the company's biggest title to date. Expect the launch mid-quarter on all three platforms this time: Google Play (Android), IOS and Amazon.

Third Quarter:

  • Turn Left: quick fix game
  • Pavlov's Puppy: quick fix game
  • To Be Announced: game based on an upcoming major motion picture

Fourth Quarter:

  • Fusion Heroes: strategy game with match-3 elements

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RISKS

  • Competition continues to increase, which could make it difficult for TAPM to execute its growth strategy.
  • Industry spending on player acquisitions and marketing could push Tapinator to increase its spending, as well, which could have a negative impact on the company's results and cash position.
  • The company is not fully reporting.
  • The social casino gaming sector could prove more competitive and difficult to penetrate than management anticipates.
  • The company derived 72% of its revenues in 2015 from only four advertising networks and depends on renewals of contracts to maintain these revenues.
  • Its increased emphasis on licensed product could pressure overall margins as well as pose a bigger risk to earnings as development costs increase.
  • The company needs to either make large repayments of debt on July 1 and October 1 or have holders convert.

VALUATION

In valuing Tapinator we look to the valuations of others in the gaming industry. Most of the public companies are very large compared with Tapinator and deserve higher valuations based on that. They range from Activision at $25B enterprise value to Glu Mobile at $175 million. Even the companies that are growing in this group grow much more slowly than Tapinator and thus Tapinator deserves a higher multiple to its peers that those based on growth. If we look at enterprise value to EBIDTA and eliminate the companies that have negative EBITDA we see they are valued at an average of 19.6 times. If we apply that number to TAPM's estimated 2016 EBITA of $900,000 we calculate a stock price of $0.32 per share. Looking ahead to 2017 estimates that price rises to $0.50 per share due to its rapid revenue growth and expanding margins.

CONCLUSION

Tapinator has shown steady growth and has a solid strategy and pipeline to continue to grow. It has ample cash to execute its plans and trades at a reasonable valuation. If it continues to grow as expected, the stock price should increase with that growth even given no multiple expansion. Should any of the full-featured games become big hits, investors could enjoy even more upside. Using an industry average of 19.6 EV/EBITDA, the stock would be worth $0.32 per share, and by looking at 2017 EBITDA estimates that could increase to $0.50 per share, up 100% from today's price.

INCOME STATEMENT

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BALANCE SHEET

TAPM BS Click to enlarge

CASH FLOW

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I work as a Consultant Analyst for Zacks Investment Research. The article is written by me and is 100% my opinion. I receive compensation from Zacks for writing equity research reports and providing valuation analysis on this company’s stock and expect to do so in the future. Zacks receives compensation from the company. Please see the Zacks Disclaimer for further information: http://scr.zacks.com/Disclaimer/default.aspx

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