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By Cynical Bear | Friday 7 September 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.
Woodford’s month from hell has got off to a strong start with an immediate dog’s dinner of a revenue/profit warning from uber-dog RM2 International (RM2) this morning. Let’s take a closer look and count up all the negatives.
By way of background, I should preface this with that Woodford is now the pretty much the sole backer of RM2 having funded the vast majority of the $18 million rescue financing earlier this year. His funds own 67% of the business at the moment. I did warn him at the start of this year, imploring him to stop throwing other people’s money at this debacle. I pleaded as follows:
“I just wonder if Woodford is getting tempted / persuaded to have one last roll of the dice. My advice: don’t do it, Neil, save your money; learn from the RM2 experience - what would you do for example if your investment empire was going to implode in the next few months and these were your last remaining pennies to invest?”
He didn’t listen of course, so let’s see what RM2 had to tell us in this morning’s announcement.
First, I had to smile at the title of the RNS: “Trading Update and New Board Appointments”. Well, in fact there were no new Board appointments, but it is finalising the process for the appointment of two high calibre individuals apparently. It doesn’t surprise me that this is taking longer than hoped bearing in mind the performance of the business. On to trading, the good news is that it has completed a 100-unit trial and other trials are ongoing. These trials seem to have been going on for some time and 100 units doesn’t feel like many pallets to me but let’s not quibble over the limited positive news. That’s the good news out of the way though and now on to the bad.
First, the massive Fortune 500 deployment announced in April was delayed but apparently underway now. Secondly, it wants to transition to using CAT-M technology, whatever that may be, but it is tricky to get supply as the chipsets are in such demand so that may delay things too. Thirdly, as a consequence of the above, most notably that the commercial deals are taking longer than anticipated to finalise, the absolute pipedream of a target of positive EBITDA in 2019 may be challenging. I would never have guessed!
In terms of funding, the second tranche of $18 million is due once certain milestones have been met. These milestones relate to the following (I have added my commentary in italics):
- Reducing operating costs to a pre-determined level – achievable I guess although depends on the level.
- Launching the next generation CAT-M pallets – it will need some of those CAT-M chipsets first!
- Achieving commercial deployments of the pallets – no evidence that this is likely any time soon.
- Reviewing the governance of the company – let’s hope those two new Board members join soon then.
The CEO talks optimistically about meeting all those milestones by the end of the year although accepts that determination is to be made by Woodford. The evidence of history would suggest that the company might still be waiting for the commercial deployments by the time the next tranche of funding is required. One will have a better idea of the current cash balance when interims are reported next Friday but I assume the company will be looking to draw down the funds for use in 2019 now that it is unlikely to be EBITDA positive.
It feels to me that Woodford is going to end up with the choice again in a couple of months’ time as to whether to turn off the life-support machine here. Do the humane thing, Neil, put this dog out of its misery and, having wasted the first $18 million in no time, for the love of god, stop spending other people’s money just to delay the inevitable.
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