In February, we highlighted a small-cap name with a big history called Real Networks ( RNWK). Yesterday, the company announced an equity raise priced at $2.70 and as of the writing of this update, the share price continued to fall. Since recommending the stock, the price peaked at $6.66 and then began falling in tandem with other small-cap names. However, since the equity raise came up, the fall in price has accelerated. We’re convinced the fundamentals of the company that attracted us to it in the first place haven’t changed all that much, and have indeed improved.

We wanted to provide our subscribers an update on our thinking about this name given the extreme volatility and the recent retreat in price of the shares. There are a lot of additional risks when dealing with small-cap stocks and as we said in our first article and would like to reiterate: there is more risk in small caps so be sure to make sure your positions are appropriately sized!

We remain bullish on this company and think part of the problem is that there is NO SELL SIDE coverage of this name. Expanding the float should help address that. The float was also exceptionally small, partially because the CEO, Rob Glaser, has put $10 million of his own money in.  We monitor all of our SFN picks closely and quite literally every single development we have seen on the product side is positive.

We’re not thrilled about how the equity raise was handled and think the valuation is low, that being said we do find the current price given the progress on the growth initiatives to be a steal. We’re hoping that the additional shares will help increase participation by a wider cadre of investors and potentially could result in sell-side coverage being initiated.

One thing we pointed out in our article was the cultural differences between entrepreneurship culture in Silicon Valley versus Seattle. This is at least part of the problem with Real Networks performance, in our humble opinions, but simultaneously speaks to a very modest management that rarely fields questions on earnings calls. We are thinking that this is significant particularly when taken into account with a pretty significant fact: one of the reasons this equity raise was necessary was because the CEO owned so much of the previous float himself. They recently guided that in 2022 and 2023 there will be “significant double-digit growth” from their AI businesses SAFR and KONTXT. This guidance struck us as bullish. The mobile gaming segment continues to produce solid returns.

There is a lot positive occurring on the SAFR side. Recently, the gaming industry in South Australia approved the platform for use. The platform also received a 3rd contract with the US Airforce since last publishing. Again, from our perspective we have only seen positive progress on their growth initiatives and this momentum appears to be building. Another sleeper product that gained traction over the pandemic and allows collaborative watching is being used widely.

In our estimation, the SAFR Computer Vision platform will be a very profitable and maybe even ubiquitous product. They are getting new use cases, recently got approval for use in the Gaming Industry and have several ongoing partnerships we view as positive. We view the recent capital raise as causing some short-term pain, however, we think the capital raise was probably made necessary by the rapid price appreciation observed subsequent to our recommending the name (not insinuating causation just that the name recently was trading at $6.66). . In order for the stock to be more stable, they needed to offer more stock and they did it. We view it as a net bullish. As far as the fundamentals and growth story we outlined, our call has not yet changed and we are very optimistic about the fortunes of this company! The company guided for meaningful double-digit growth in their AI businesses (SAFR and KONTXT) and everything we are seeing from the company indicates this is a realistic and attainable goal!

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