Ann: March QTR Results, COVID-19 and Withdrawal of Guidance, page-9

Good to see shareholders are happy with this announcement and even though it hasn't been a high volume day, the share price has reacted well, which is pleasing. I'm not in the camp that views this as a positive announcement but there are some positive elements in there and I can see why there is some excitement. I'll gladly take it though

For me, my view on the stock hasn't change. Things remain painful and will get worse before they get better, BUT, the upside potential is significant such that FY2021 will be a watershed year. Also, the downside from these levels is somewhat protected by the NTA of the firm (~8c as at Dec 2019). Essentially, potential shareholders could be looking at ~30% downside vs 4-5x present levels in ~18 months (all IMO opinion of course). That's a fair risk v reward.

There's a few key things to take out of this announcement and depending on your view, there's a glass half full approach to looking at this or a glass half empty approach.

Glass half full:

• App sales remain very strong - this is and remains a great differentiator of the company and provides an alternative and ongoing + scalable source of cash
• Sales held up relatively well. It was quite telling that unit sales were down but retail sales were up. More on that later
• The increase in cash vs last period shows that debtor collection occurred which was much needed. Debtors at Dec was $4.16m so a large portion of this is now used given cash went up just over $1m (you also need to account for quarterly cash burn)
• FY2020 will be weak and there will be a sticker shock from another net loss - BUT, as that becomes the baseline, growth in FY2021 will be even higher given growth will resume, there will be new product launches, retailers need to restock and there are likely to be more distribution agreements signed. It's hard to get a read on what it will be as I don't know when CV19 + lockdowns will end but growth will be significant
• Schools will likely outperform the original guidance and has benefited from CV19
• Management have done the right thing and right-sized the business - including the top team taking a hair cut. Hopefully management don't issue a whole heap of options to compensate for this later down the track

Glass half empty

• I'm loathe to say this but there is now a 50/50 chance that the business will need to do a small cap raise in the next 6 months. $6m plus some debt capacity may not be enough to fund operations, restock in seasonally strong periods plus fund stock for the new product. While this will lead to tremendous sales growth, these costs are incurred upfront and collected later which impacts liquidity.
• Q4 will be very very weak and sticker shock from the FY2020 net loss could be a negative catalyst (but this remains a FY2021 story anyway)
• There's a reasonable chance that the seniors watch will NOT be launched in June - unless it's a soft launch. Why launch if we're still in lockdown?

I touched on that things are likely to get worse before they get better. We have a weak Q4, net loss and potential cap raise coming up but while these things are bad, to some degree they are likely priced in and it does not necessarily mean that the share price will decline during that time.

Why is that? Well shares are based on expectations. And expectations for MWR are really bad right now. Management have disappointed, the CEO has had to sell shares, there's been a profit downgrade followed by a withdrawal of guidance and per my numbers, there's the potential for a small cap raise to fund stock in 1H21. BUT, when expectations are bad, any good news can materially impact the SP. And there will be good news. New product launches and a seasonally strong period with Christmas all but guarantee that growth rates will be HUGE.

If you can look ahead to that and have a longer term horizon, then I think holders will be rewarded. Patience is still required. GLTAH