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Strat Aero - as GM looms will a refinancing be possible at all?

By Tom Winnifrith, The Sheriff of AIM | Tuesday 10 October 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.


On 17th October long suffering shareholders in Strat Aero (AERO) will be asked to approve a 1 for 10 subdivision of their shares in order to get a refinancing away. But the maths now look so bleak that one asks if the fat lady should pitch up to the GM as she could well be called on to sing very soon indeed. As a reminder...

On 22nd September Strat called the GM stating:

The purpose of the General Meeting is to receive and adopt the proposal for a sub-division and re-designation of ordinary shares which will be voted on by shareholders. Under UK Company Law, new shares cannot be issued at a subscription price which is less than the par value of shares of the same class. Strat Aero's existing ordinary shares have a par value of 0.1p per share. As the mid-market closing price of the existing ordinary shares on 21 September 2017 (being the last practicable time prior to the publication of this announcement) was 0.07 pence, the Company is not currently able to raise new equity capital. The Company anticipates that additional funding will be required in due course.

Ends.

The shares are now just 0.035-0.4p. In essence they have almost halved in the past three weeks. That Strat "anticipates" that additional funding will be required in due course is the understatement of the year.

At June 30 cash was $371,986 and trade receivables were $310,641 but trade payables were $727,260 and short term borrowings were $143,088 leaving net current assets of MINUS $187,707. The H1 cashburn was $985,020. I am prepared to give the company the benefit of the doubt and assume that cost cutting meant that Q2 was better than Q1 but there was still a cash burn every month. Worse still we were warned that:

The summer period saw a cyclical relative slowdown in work and this was expected as it is normal within the construction industry due to new budgets being finalised and summer holidays. We do expect this to recover in the second half of the year, especially during Q4.

In short Q3 will have been pants too. I am a nice guy so am overlooking long term liabilities of $769,850 although I suspect that those who are owed cash will not be as charitable as me.I am just a nice guy but do not tell anyone as I have a reputation to preserve. 

The bottom line is that Strat is utterly fecked and clearly needs a bailout placing PDQ. After 17 October it can issue shares at as little as 0.01p but anyone investing in this stock is going to demand a mega discount. Simply in order to clear net current liabilities the company will need to raise, I estimate, $500,000. In order to keep the lights on much past Christmas that is going to have to be c$900,000 (after brokers Cornhill, Belfort and SP Angel take their commission) so call that, at least, £800,000.

But at the current mid the market cap is just £700,000 and the discount on this sort of placing is going to have to be huge, shall we say 0.02p? And that is if there is any appetite for stock at all. At best this is the mother of all dilutions, at worst the Fat Lady will be called on to perform and perform very quickly. Strat needs cash as a matter of extreme urgency. The market can see that which is why the shares aree crashing and will continue to do so as the placing looms.


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