The risks of investing in unprofitable tech stocks with elevated valuations were underlined today when Reffind Ltd (ASX: RFN) released its quarterly report to the market, causing shares to drop as much as 20%.

Here’s what you need to know:

  • Revenue rose 25% to $142,000
  • End user numbers grew 72%
  • Signed new organisations including Nestle, Adobe, Charter Hall, Konekt, and Super Retail Group to its employee experience platform
  • Average revenue per Reffind customer of $13,388 per annum
  • Cash outflows of $1 million
  • $3.7 million cash at bank, plus additional $2 million that was recently raised for $5.7 million total

The biggest disappointment to the market today was clearly the revenues, which are anaemic and haven’t seen the kind of step-change necessary to justify recent valuations of the company. As it stands, a $10 million market cap may still be too high for a company making around $700,000 in annualised revenues.

Yet the company’s cash position likely also attracted scrutiny, with approximately $5.7 million cash at bank. Reffind burned through just under $1 million in cash during the quarter, and today’s cash balance is enough for less than 18 months of operations even before the ramp-up of expenditure to $400,000-$450,000 per month commences. Future capital raisings could be devastating for shareholders, given the depressed share price.

A positive is that Reffind intends to focus on sales and marketing rather than product development in future quarters, and this is expected to drive revenues and customer numbers in coming months. Under a new pricing model, the base annual revenue per client is expected to be around $30,000, just over double the current average.

A number of other unprofitable tech businesses like Newzulu Ltd (ASX: NWZ) and 1-Page Ltd (ASX:1PG) have also come under heavy scrutiny recently as a result of their constant cash outflows and limited revenues, and Reffind is cast from the same mould. This article here clearly illustrates the risks of purchasing unprofitable tech stocks.

Today’s update was disappointing, and I’m fence-sitting on whether to sell my remaining Reffind shares. The company needs a step-change in earnings in order to justify its expenditure, and if it can’t deliver one soon I will likely sell out before the company can attempt to raise capital again.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget about Reffind!  These 3 "new breed" blue chips pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

What are you waiting for? Just click here now for your copy.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Sean O'Neill owns shares of Newzulu Ltd and Reffind Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.