By Tom Winnifrith | Sunday 30 April 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
In its interim results for the six months ended 31 December 2016, AIM Casino posterboy MySQUAR (MYSQ) disclosed that it had prepayments under current assets of $174,428 and also prepayments recorded under non-current assets of $557,840 i.e. total prepayments of $733,268 or some 67% of total assets. Typically prepayments relate to payments made on property and related utilities or trade subscriptions for services covering a period extending past the year end and usually represent a tiny amount of total assets of a company and typically do not extend beyond one year.
This promoted the question what is going on? There was no additional disclosure about the nature of the prepayments in the interim results. In the final results for the year ended 30 June 2016 there were no prepayments disclosed in either period. The company did disclose under the caption non-current trade and other receivable:
“Share based payment for The Credit Facility from Rising Dragon Singapore Pte Ltd.* of $651,673 and $814,862 [for the year ended 30 June 2016 and 2015 respectively.]
“According to the facility agreement dated 13 May 2015 with Rising Dragon Singapore Pte Ltd., the Group issued 18,751,535 shares to Rising Dragon Singapore Pte Ltd. with the fair value of US$0.051999 per share (resulting in US$975,065 in share capital). The amount of US$975,065 is accounted as share based payment to Rising Dragon Singapore Pte Ltd., and is amortised as share based payment expenses over the 5-year term of the facility.”
It also disclosed the following amounts under the current trade and other receivables caption:
“Share based payment for The Credit Facility from Rising Dragon Singapore Pte Ltd within one year $163,189 and $141,953 [for the year ended 30 June 2016 and 2015 respectively].”
So it appears that the majority of the prepayments relate in fact to the share based payments recorded in the prior period. A number of things stand out about this agreement and its accounting.
First as disclosed note 21 on related parties, the CEO of MySQAR Eric Schaer is also the Chairman and CEO of Rising Dragon Singapore Pte Ltd. What isn’t disclosed is his financial interest in Rising Dragon.
Second is the size of the fee of $975,065 (see note 21) relative to the terms of the facility terms which are disclosed under note 16 and reproduced below:
“On 13 May 2015 and as varied pursuant to a deed of variation dated 25 May 2015, the Group and Rising Dragon Singapore Pte Ltd ("Rising Dragon), entered into a term facility agreement under which Rising Dragon agreed to make available, subject to the terms therein, a credit facility for a sum of up to US$ one million (the "Facility Agreement") in consideration for an arrangement fee satisfied by the allotment and issue of 18,751,535 Shares to Rising Dragon. The facility under this agreement is repayable on the date being the earlier of 30 June 2020 and the completion of a fund raise in the sum of US$ one million or more by the Group subject to the unanimous approval of the Board. The interest rate payable under this agreement is 12% per annum, payable monthly in advance.”
So the facility cost almost $195,000 per annum or circa 19.5% which makes the effective interest rate if MySQAR utilize the facility over 31%. Given that MSYAR had utilized $750,000 of this facility at 31 December 2016, this amounts to a very high financing cost.
Finally it appears that the accounting adopted by MySQUAR for the facility fees isn’t in accordance with its own accounting policies (which are compliant with IFRS accounting standards) which state:
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings, using the effective interest method.”
So the question arises why isn’t the cost of the facility deducted from the borrowing? The treatment adopted by MySQUAR increases the apparent asset base of the company by creating prepayments or receivables and it also avoids having to explain why the cost of the borrowing exceeds the actual amount borrowed under the facility when normally the arrangement fees would only be a fraction of any such borrowing. If MySQUAR followed its own accounting treatment then it balance sheet would be even more of a train wreck.
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