GREY:LGLTF - Post by User
Comment by
Trelawnyon Jun 18, 2015 9:05am
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Post# 23843115
RE:RE:RE:RE:RE:Internalaudit68- You said everything that I believe too.
RE:RE:RE:RE:RE:Internalaudit68- You said everything that I believe too.TheRock,
that working capital deficiency is not some quirk of accounting.
They have breached working capital covenants:
Which means they owe over $8.9mm right now to the bank.
In addition, they have payables of over $6.6mm.
There is problem with the deferred revenues currently.
The way deferred revenues work is that a client pays for a service or good which will be delivered in the future (a magazine subscription is an example, or in this case classes).
So let's say tuition cost $5,000. on the balance sheet you would see an asset of $5,000 in cash and a liability in deferred revenue (you still have to deliver the service).
In the case of LOY they have high costs to deliver the classes - so this deferred revenue is a true liability, because they still have high costs to deliver their service.
As the service is delivered you can then reduce the deferred revenue liability and recognize it as revenue. But bear in mind the cash component will be lower as the gross margin is low.
Essentially deferred revenue "bleeds" from the Balance Sheet to the Income Statement over time.
What is alarming is that deferred revenue is $12mm and cash is only ~$5mm.
That means they have already spent the money prior to delivering the services, this in and of itself is not uncommon, what is a problem here is that cash is low compared to deferred revenue and LOY is a low margin business (meaning they have high costs to deliver services).
So they probably do not have enough cash to deliver the services for which they have been paid.
This problem in conjunction with the massive increase in payables means that they may already not be delivering services.
Deffered revenue is less of a liability when Gross Margins 70% and above. LOY is a low margin business therefore deferred revenue is a true, real, big liability.
These are not accounting tricks or quirks - this company may very well go bankrupt.
It looks like they need between $10mm to $20mm to stay afloat. I don't think they will get it.
And if they do get the money - current shareholders will be wiped out.
Best regards,
Trelawny