fyiStockhouse threatens suppliers with bankruptcy
2009-09-03 11:53 ET - Street Wire
by Stockwatch Business Reporter
Stockhouse Inc., a stock market website company, reveals in notes to its second quarter financials that it is pressing its long-suffering information suppliers for debt forgiveness -- or bankruptcy may loom on Oct. 31, 2009. That is the date upon which a $557,000 (all figures U.S. except stock prices) debenture comes due, and the company does not have the money to pay it out.
Note 1 to the financials for the quarter ended June 30, 2009, filed on Aug. 28, 2009, states: "Management plans to renegotiate with the holders of the company's $557,000 in debentures to extend the October 31, 2009, due date. Management approached all of the company's significant vendors with proposals to settle the company's outstanding liabilities to the vendors for significantly reduced amounts. Management believes that success in settling its liabilities with its vendors for significantly lower amounts will significantly reduce the company's working capital deficit which will allow the company to successfully renegotiate an extension to the debenture due dates."
The implied threat for suppliers is unless you help us reduce our working capital deficit, the debentureholders will not accommodate an extension.
The most recent financials reveal more of the same money-losing pattern Stockhouse has had for years. As of June 30, 2008, the company had a working capital deficiency of $623,000, which by June 30, 2009, had ballooned to $3.71-million (including the one-year debenture of $557,000, issued Oct. 31, 2008). During this one-year period, the company lost $3.7-million. Cash reserves suffered accordingly, falling from $3.49-million in June, 2008, to $353,000 in June, 2009. A portion of this money went to software development. To save on expenses, Stockhouse laid off 19 employees, including three executives, on top of the 13 it had let go in June, 2008.
On Oct. 31, 2008, in an effort "to increase working capital," the company sold $557,000 of one-year-term debentures with an 18-per-cent interest rate, secured by assets of its chief subsidiary, Stockgroup Media Inc. There were six subscribers but Stockhouse has disclosed only one, Yvonne New, the wife of Stockhouse's president, Marcus New. She bought $200,000 (Canadian) worth.
Subsequent to June 30, 2009, Stockhouse disclosed in a U.S. filing dated July 21, 2009, that it had discontinued its wireless and pager product line, which had supplied $569,000 of the company's $2.15-million revenue in its first quarter of 2009, because of market conditions and a lack of profitability. This information remains undisclosed in Canada.
To date, Stockhouse has been surprisingly successful keeping its supplier/creditors at bay. The company does not disclose its creditors, but it lists Comstock Inc., Comtex News Networks Inc. and Hemscott Inc. on its website as information suppliers.
The large amount Stockhouse owes its patient suppliers might surprise many companies, but there is a likely explanation. These suppliers all provide information, and except for a small communication charge, the incremental cost of supplying an additional customer is arguably zero. Using this logic, it is in the suppliers' interest to carry an ailing customer until conditions improve, he repays the debt and the profitable relationship resumes.
Having been kept in business thus far by its supplier/creditors, it appears Stockhouse is rolling the dice for further concessions, and using the maturing debenture as a pursuader. No further largesse, and the debentureholders, including the president's wife, will demand full payment plus 18-per-cent interest by Oct. 31, 2009. This would drive the company into bankruptcy and the debentureholders could seize the assets before year-end.
The documents Stockhouse has filed with the Securities and Exchange Commission indicate Mrs. New may be open to receiving shares for the debt, but there is no word on whether the remaining five debentureholders are as open to the idea. In the first of three proxy statements for the upcoming AGM, Stockhouse proposed to issue shares for the debentures, providing shareholders approve the transaction at the AGM. In some places the U.S. documents refer to Mr. New as the debtholder, and elsewhere it refers to Mrs. New. The company explains the bearer of the debt as follows. "As of Dec. 31, 2008, the company owed Marcus New, our president and chief executive officer, $200,000 (Canadian) for money loaned to the company. The majority of the debt is evidenced by debentures secured by a general security agreement over the assets of the company's wholly owned subsidiary, Stockgroup Media Inc., held by Mr. New's wife, Yvonne New, that bear interest at the rate of 18 per cent per annum."
The first proxy statement said it would issue four million shares at five cents for the $200,000 debt. This would increase Mr. New's shareholdings to 9,567,977, making him owner of 23.2 per cent of the outstanding shares.
As time went on, however, Stockhouse's stock dropped further. On Aug. 25, 2009, in the third and so far final proxy statement, four million shares at five cents became 6,666,666 shares at three cents. This possible transaction went unmentioned in the most recent financial statement on SEDAR.
Recently Stockhouse voluntarily ended its registration with the Securities and Exchange Commission, explained as a cost-cutting measure. The proxy material for the upcoming AGM were the last documents filed with the SEC.