Financials looking ugly These financials are even worse than I was expecting.
Highlights include:
$97K of revenue vs a $1.8M loss. Revenue down 4% from the previous quarter so there goes any thought that scans are growing, or if they are, the revenue on them is piddly at these levels or the recent acquisition is badly tanking. Even though $1.5M of that loss was due to a writedown, that's offset by nearly $1M in an accounting gain on the convertible debt which is not really a good thing because all that means is that the price of their securities decreased during that time. So the real operating loss is still $1.3M.
Interest expense was over $200K and cost of sales was over $600K so their gross margin is something like -600% and their revenue isn't even enough to pay off the interest on their debt.
As bad as the income statement is, the balance sheet looks even worse. They have $170K in cash vs nearly $900K just in accounts payable and that grew from $250K just in June. Never mind the $5M in debt or $60K interest payable on it, it looks like their suppliers will be knocking on their door very soon as creditors, not just the debtors themselves.
Goodwill Impairment Provision
At December 31, 2012 the Company booked a further $1,500,000 goodwill impairment provision to reflect
a decline in the estimated recoverable amount of the mHealth operating division in response to revised
post-acquisition internal operating forecasts and future development expenses. At September 30, 2012
the provision was $1,764,854. Note 7 to the accompanying unaudited interim financial statements
outlines the Company’s methodology for goodwill valuation
They just bought the thing and they are already writing it down?
The Company’s Convertible Debt has multiple principal and interest conversion privileges. Amounts
included in the above table assume that interest is paid in cash when due, and neither the Company, nor
the holder of the Note, exercise any redemption or conversion rights. Future cash flows regarding interest
and principal repayment may be materially reduced should certain conversion events take place. In
addition, on the maturity of the Senior Secured Demand Notes, the Company may be obligated to pay a
forbearance fee on the principal amount of the Notes.
In the absence of immediate new capital financing, the Company does not expect that cash on hand, and future cash flows generated from operations, will support the repayment of these financial liabilities when they are scheduled to come due.
Although any forecast of future cash inflows or outflows is subject to a certain amount of uncertainty, and
despite the new capital raised in July and December of 2012, it is a certainty that it will be necessary for
the Company to immediately raise additional capital to meet its business objectives and longer-term - 14 -liquidity demands. If the additional capital is raised at current share prices through the sale of equity or
convertible debt securities, this would result in significant dilution to the existing shareholders
On December 14, 2012 the Company closed a $154,000 first tranche under its $1,000,000 Senior
Secured Demand Note debt facility (‘Facility”). To date, no further funds have been advanced by the
Lenders.
Now the company is basically saying to everyone what I said several weeks ago. So they will need extra money, pretty immediately and desperately. No further funds have been advanced by the Senior secured demand note. Maybe they are refusing because they know how bad financial shape the company is in? Why put in money that will just be used to pay off suppliers? That money won't even be used to try to grow the existing business but just to pay off the debts created to get that massive $100K/qtr revenue.
I expect a CCAA NR pretty soon. Remember the $170K cash balance was from 2 months ago. They probably blew through the bulk of that just operating and still have nearly $1M worth of supplier debts to be paying off.
This was a pretty apt release for a Friday evening. You know what they say bad news always comes on a Friday so everyone has the weekend to digest it. It wouldn't surprise me if this trades at half a penny tomorrow. It certainly deserves to.