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Sprue Aegis – after “disputes the allegations made by BRK”, how’s a Settlement Agreement?

By Steve Moore | Thursday 10 May 2018

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 March, I noted shares in Sprue Aegis (SPRP) down 25% on the day, at 142.5p, on a distribution agreement ‘termination notice’ which was actually a “Termination for Breach Notice” and saw Sprue “disputes the allegations made by BRK” and “taking legal advice”. Today a “Settlement Agreement”

Sprue's September-announced half-year results included that “any remaining stock of BRK products held by Sprue as at 31 March 2018 will be repurchased by BRK at the price Sprue paid for the goods. It is expected that this will result in a cash payment to Sprue of at least £3.0m assuming that in the meantime, Sprue has not sold the remaining BRK stock”. It was subsequently updated “the gross book value of the disputed stock of unsold BRK products was £4.3m as at 31 March 2018” and the Settlement Agreement sees…

“BRK will purchase from Sprue all BRK inventory manufactured from 1 January 2017 for £1.02 million to be paid by way of deduction from payments due by Sprue to BRK under the terms of the distribution agreement, save for 3,097 units required by Sprue for its ongoing warranty purposes… Sprue will dispose of all BRK inventory manufactured before 1 January 2017 at its own cost, save for 4,857 units required by Sprue for its ongoing warranty purposes… a £3.8 million exceptional charge… £3.4 million to write down the book value of the remaining BRK inventory as at 30 April 2018 to £nil (as the company will no longer be selling BRK inventory), provisions of £0.2 million to cover the disposal (scrappage) costs of the BRK inventory manufactured before 1 January 2017 and £0.2 million to cover the group's legal and professional fees incurred since 22 March 2018 in respect of the dispute with BRK.”

Hmmm – this despite “disputes the allegations made by BRK? Additionally, “Sprue grants BRK a 12 month non-exclusive licence for its relevant intellectual property, including registered patents and design registration; and Sprue will pay the outstanding balance of payments, amounting to a total of £10,972,484.88 and $71,071, owed to BRK under the terms of the distribution agreement and the manufacturing and supply agreement in monthly instalments by 24 December 2018”.

It though argues the agreement allows it to move on without the risk of legal claims, including delayed 2017 results now expected to be announced 15th May and adds “the £3.0 million which was drawn down to increase its available short term cash resources under the 3 year revolving credit facility with HSBC Bank plc has been repaid in full to HSBC as it was not required during the 30 day draw down period”.

I noted on that, it raises working capital questions and that it will certainly be very interesting to see the full-year cash flow and balance sheet. The shares have currently responded higher, but to only 123.5p on this latest and, ahead of the greater detail of the results announcement and with also BRK having a 23% shareholding and the start of new manufacturing and sourcing suggesting presently elevated risk, they remain for now on the watchlist. At best.

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