Ann: March QTR Results, COVID-19 and Withdrawal of Guidance, page-20

Hi Burner, I'll try my best to walk you through it & my thinking on this

"I do like a balanced con vs pro comparison and would totally agree with you on most things if we were dealing with a share price that had factored in their future growth say MWR @ 40c a share, but at 8-10c a lot of your cons probably aren't warranted and are already well and truly factored into the share price"

I think we're on a similar page on this and I stated that a few times in my OP. I don't think a CR is factored in though given this is not widely tracked stock and volumes have been weak. Either way, there remains more upside than downside.

"In terms of them not releasing the seniors' product in June say that you might be dreaming. Why hold back a revenue making product? They released Spacetalk solely on their owned online platform and grew from there.. just because B&M stores are closed doesn't mean retailers don't want new products on their online platforms. Also with seniors in isolation, communications product are more in focus than ever and should be received very well. This product will most likely receive large free media coverage due to the relation with the current covid situation."

Perhaps. I'm not a marketing expert and you've certainly raised some good points. My main point was when you launch you want as much bang for your buck as possible. If retail stores are not opened then perhaps they hold off. Let's see how this plays out. The key bit is they need a good runway for Christmas, which even if they launch in August doesn't really matter.

Ok on the cap raise there are a few things you need to consider. Firstly you need to consider key sources and uses over the next 6 months, how seasonality works with this business and the cash conversion cycle for the Group. Then you have to add on costs to stock the seniors watch, which is presently at zero. Finally you need to consider that cash burn will increase not decrease because sales will fall by more than the cost reduction.

$6m plus receivables plus $250k sounds a lot for a business like this but these are not normal times.

I see you've used $4.1m in receivables as your starting point but that is likely to be materially lower given cash went up $1m in the March quarter and sales were lower vs Q4, so it won't be replaced with as much debtors that were collected. Also, the business has been 'investing' for growth so their cash burn was higher up until recently. So while we don't know what receivables is we certainly know it's lower than $4.1m

In terms of revenue we have three sources: units, the app and schools. App and schools are smaller so let's start there

App
App sales should still do well but it's still small. It's likely to be between $400k and $500k for the quarter. They should collect relatively quickly too, which is a positive. If we use $500k per quarter, let's say a rough $1m for 6 months.

Schools
Schools is doing well but Q3 is when they issue a lot of their invoices. This one is a hard one to estimate. They're almost on original guidance now with one quarter to go and messaging will likely be strong in Q4. Let's say $1.2m for 6 months

So let's say they make $2.2m in sales from the above and just to be generous, collect the same amount.

So my pro-forma liquidity position becomes $6m + $2.2m + $250k con note capacity = ~$8.5m. (Note: unless the company stops selling there will always be a receivables balance but per my point above it will be lower given cash has increased in Q3)

Units

• How much do you think sales will drop in 4Q20? It is the most seasonally weak quarter in the year for the Group even without CV19 but with store closures and lower foot traffic it will be very very weak. The March quarter was only impacted for about a month, but Q4 is likely to be impacted for the whole quarter. I have a significant reduction. Interested in what you think it might be
• 1Q21 could be ok, but this will be a cash cost for them as retailers restock and payments are collected later.
• Overall unit sales for the next two quarters will not be great, so the key cash inflow in the short term will be collecting a decreasing receivables balance. Let's be conservative and use $2m
• You also need to consider that SIGNIFICANT stock needs to be ordered for the Christmas period and by then they will have multiple product lines.
• To give you some context on what needs to be ordered - remember they will wind down existing inventory as they will have the new 4G watch and Seniors watch that will need to be stocked for Christmas. In 1H20 they sold 25,000 units for the ONE watch. By Christmas they will be selling TWO watches to TWO different customer markets, so no substitution. Also, you need to consider that the UK launch was late and that 25,000 number was a MISSED number i.e. it should have been much higher per their original forecast plus the TAM is growing and they've also signed more distribution agreements since. So it's not unreasonable to suggest that they may need to order anywhere between 40,000 and 70,000+ units in total
• In terms of cost, let's use a cash cost of $100 per unit - that's, $4m to $7m JUST ON STOCK. The avg retail price is $230 so it's a fair assumption on the cash cost if you look at what their gross margin should be. Even if you use $80 per unit and 40,000 units that's still $3.2m
• In the meantime, you still have a business to run. They said that they're reducing wages by 20% between April and Sep. Employee costs for 1H20 were $1.42m so 80% of that is still $1.14m. They'll still need to pay interest, overheads, and admin. Advertising and marketing should be lower but they have a seniors watch to launch and this costs money too. Let's say they make a 20% saving on that which also includes a launch, so $1m. Corp and admin, let's drop that by 40%, so that's still $1.2m. Interest costs should still be incurred but it's only $50k (or perhaps more if they draw down on the $250k capacity) and there will be some one-off costs due to redundancies.
• That's $1.14m + $1.2m + $1m + $0.1m or roughly $3.4m in costs.
• So pro forma liquidity of $8.5m plus new sales + reduced receivables of ~$2m gives me roughly $10.5m of fire power. Less cash costs of ~$3.4m leaves me roughly $7m to fund restocking costs for retailers that have wound down inventory PLUS Christmas inventory for two watches. This is where opinions may vary and I accept that.

1H20 P&L


So in my mind, it comes down to what you think the Christmas volume will be and also how conservative the board is. It would be extremely negligent of them to have a cashflow forecast that at any time gets to less than $1m given how uncertain things are. You'd probably want to maintain a buffer of $2m or more because the lockdown could last longer. There are much better businesses than MWR with much stronger balance sheets than MWR going to the market. Is ~$7m enough to maintain a buffer and fund all that inventory?

So while there's a path where they COULD avoid a raise and I'm sure you can argue on some minor details, my optimism around Christmas volumes is what is driving my 80% probability of a raise.

But most importantly, and I was going to post this in the valuation thread, the glass half full is that Christmas volumes will likely be huge which will in time provide a significant revenue and cashflow benefit.

This is the thesis and why I'm retaining my position even though there is a chance they could need capital in the next 6 months. A small raise vs the sales that they will generate will lead to many bags on the present share price - all IMO of course