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Uh Oh….more bad news for Neil Woodford as Idex releases Q3 numbers

By Nigel Somerville | Thursday 8 November 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.

We have news this morning of Q3 numbers from Norwegian biometrics play Idex (OSE:IDEX). No doubt Neil Woodford’s team will extoll the virtues of the progress being made here, but I can’t help myself: look at the cash position!

And so we are told Biometric card market at inflection point….Significantly expanded customer base….Idex’s contactless sensor for dual-interface card is ready for the market and adopted by customers and so on. And further, that Imminent commercialization expected. It all sounds wonderful and investors in Woodford’s Equity Income Fund (1.35%) and Patient Capital Trust (2.14%) can look forward to a spectacular returns – after all, those holdings add up to around 25% of Idex.

The problem is that Idex seems to be having a small spot of bother on the cash front: for all the glorious headlines, Q3 revenues were just NOK 1.08 million (around £100,000) and for the first three quarters is was NOK 3.2 million – around £300,000. In 2017 those numbers were NOK 3.5 million (c. £322,000) and NOK 15 million (c. £1.38 million) – so revenues have collapsed.

At the same time we see operating expenses sitting at a whopping NOK 58 million for Q3 alone and NOK 177 million for the first three quarters of this year (c. £5 million and £16 million respectively) and pre-tax losses of NOK 60 million for Q3 and NOK 182 million for the first three quarters of the year (c. £5.5 million and £16.7 million respectively).

So Idex is burning cash at a prodigious rate.

As at 30 September Idex had cash and bank deposits of NOK 130 million – down from about NOK 360 million a year ago and net current assets came in at just NOK 126 million – or about £11.5 million.

Now it doesn’t take a genius to foresee a wee bit of a problem here, for if it carries on burning cash at that rate the coffers will run dry in less than six months! But of course is it November now, and these numbers are as at 30 September so let’s say it has until the end of Q1 next year before it has to bang down the doors of its largest shareholders in order to raise cash.

To underline this point, the Annual Report for 2017 told us under Going Concern that:

The Company has a strong balance sheet and adequate liquidity and equity under current planning assumptions for a period longer than 12 months from the date of these financial statements. The group does not have any debt to financial institutions or lenders. The board therefore confirms that there is adequate basis for the going concern assumption and that this assumption has been applied when preparing the annual financial statements for 2017.

However, the Going Concern statement in this morning’s Q3 statement is that:

The going concern assumption has been applied when preparing this interim financial report. IDEX has commenced earning revenue, but continues to operate at a significant loss. The company expects to increase revenue generation through sale of sensors and monetization of Intellectual Property. The company does not have any debt to financial lenders. As an ongoing activity the company monitors liquidity, and will take appropriate measures if required.

Er… it needs to raise cash!

If we assume that the company will be out of wonga by the end of Q1 and it is still losing around £5.5 million every quarter that does rather suggest that it will need to find perhaps £20-25 million of cash to get signed off as a going concern when it releases its FY18 report. And that means knocking on Neil Woodford’s door, as a 25% shareholder.

Of course, his old mates over at Invesco Perpetual might be persuaded to chip in – if they have forgiven Neil for backing the other side over at Stobart (STOB) as they seem to be sitting on around 16%. Or they might not….

And for Neil, of course, the issue of cash is very real as we remember the bank borrowings in his Patient Capital Trust. Indeed, even the Equity Income fund (which also holds this cash-guzzler, although I have no idea why) seems to be overdrawn, given the minus 1.54% of the fund noted as being in cash and near cash as at 30 September.

Of course, the other issue is that since he already holds around 25% of Idex equity, I wonder if that will limit any future contributions to the bottomless pit: does Norway have the same rules about a 30% holding triggering a mandatory takeover offer? Well, there’s always the whitewash I suppose….

Oh, one other thing: Idex is currently down 11% to NOK 4.67 to buy – around 43p. If it needs £25 million, that’s 58 million shares which is a bit over 10% of the company. The good news is that any subscription at a premium would boost the NAVs of Woodford’s two funds and knock down the total percentage of the company he holds.

But even if Neil can raise the cash needed, surely he wouldn’t buy new shares at more than twice the market price….would he?

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