"Didn't the response address these concerns?.. How do you increase sales like they have without inventory?
The short answer to these and similar questions: It is entirely possible to have an inventory shortage and achieve record sales in the same period and the company very likely did just that in that order in Q1 CY21 (Q3 FY21). It is also entirely possible to mismanage inventory and suffer reputational damage in one territory while also achieving record sales in another.
As I wrote yesterday, one only needs to review the H1 FY21 accounts to see how this could have played out. During the results period inventory fell from around $1m to less than $200k, while receivables quadrupled from $1m to $4m. Cash fell from over $3m to $1.6m despite having closed a ~$2.5m SPP in the period.
Net cash outflows from operating and investing activities of ~$4m after having posted net cash outflows of ~$2m for the whole of FY20. Breaking this down, operating CFs went from +$900k in FY20to -$2.3m (-$3m before govt subsidies) for H1 alone.
So by the end of CY2020 it appears the company had only around 2,000 units on hand(assuming a unit cost of, say, $100 per unit). Could be more, could be less. The important thing is that the company had almost run out of inventory by the end of the CY, while cash had almost halved and receivables had quadrupled,all while the operating costs were ramping up dramatically compared to prior periods.
This in itself is indicative of the company’s working capital position being pushed to an extreme – poor working capital efficiency evidenced through a substantial reduction in inventory, substantial build-up of receivables while operating costs are also increasing, leading to a material reduction in cash and limited capital/capacity to restock.
We have little further insight from end CY20 to know how quickly the company was able to shorten its collection period and improve working capital efficiency to reduce receivables, replenish its cash and restock.
The $5m loan facility was not established until mid-March and draw-down of the $3m tranche was not announced until late March. Establishment of this facility seems to have followed in recognition of and response to the working capital challenges the company was facing, particularly in the early part of Q1 CY21. it seems likely the Telstra partnership would not have occurred without the extra funding. The two transactions were announced on the same day in March.
Even before yesterday’s revelations, it had been apparent to me that there was every prospect that these balance sheet challenges not only led to a hampering of the company’s growth (yes, results could well have been even better with better operational and financial management), but also reputational issues were likely as the company was allocating its limited inventory before it was able to restock and particularly as it was looking to enter into material new distribution partnerships and operating in different territories.
Yesterday’s revelations provide confirmation of what many, including me, already suspected.
My point is that shareholders should be appropriately alert to supply chain and inventory issues as the company continues to grow. It is in their interests to think critically and independently challenge what is presented to them by the company given this management's relative lack of experience and propensity for own goals that they repeatedly demonstrate. These issues won’t go away as the company grows, or because the company grows.
If anything, the opportunity for this management to stuff things up are more likely to increase as the business grows into new territories, takes on more people, continues to see turnover amongst its senior management, has many more moving parts, and especially if it fails to build a reputation as a destination employer (something MF has failed to do over 20 years).
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