On the brink of collapse? What makes a company insolvent?

One of the things that brings fear into the hearts of all investors is when a company fails to release it's results until after hours on the last day before it would be suspended from trading.

That's exactly what a company called Premaitha Health did yesterday (Friday 28th September). Their full year results and details of a proposed placing were released at around 6pm. Gulp! Were investors right to be fearful. You bet they were! In short this company needs massive cash injections just to keep the lights on. I'm not an accountant, but I do wonder if the company is even solvent? I'll explain below.

I've mentioned Premaitha before in a blog post last year as "one to avoid at all costs." Even more reason to avoid now since one of two things will happen. Either the company will fall into administration or shareholders will be diluted into oblivion. Neither option is palatable.

Where do we start? Let's start with the balance sheet.

Cash was around £300,000 and borrowings around £12,000,000 at the end of March. Wow!

Total assets were around £14.6m, and total liabilities £17.2m. That's £2.6m of negative asset value.

It gets worse since £8.4m of NIPT's assets are goodwill and intangibles i.e. unquantifiable and worthless in a fire sale. Strip these out and that's a staggering £11m of negative asset value. Blimey!

Losses for the year totalled £9.6m and cash used by operations around £9.5m.

I don't know what makes a company insolvent, but surely those figures do? Absolutely awful.

It's difficult to see any positives at all. They're frantically trying to raise cash, and are hoping for an extra £2.5m at 10p per share following on from a cash call as recently as May this year which raised £3m at 4.5p.

The cash call will barely keep the company going for a month or two given the perilous state of the balance sheet.

NIPT has had litigation to deal with, but even stripping those costs out of recent results, the situation isn't demonstrably much better.

What of NIPT's growth prospects? What's happened in the 6 months since these full year results?

In the trading update it says this:-

"Six month revenues to 30 September 2018 expected to be up approximately 40% to £3.8m (H1 2017: £2.6m)"

However this is not the measure to look at. This is not a seasonal business. What you should be comparing is growth from H2 March 2018 to H1 September 2018. That's far less impressive. In fact growth went from around £3.6m to £3.8m i.e. £200,000 (around 5.5%). Nowhere near enough to survive without a massive injection of further funds.

Unbelievably the company will have a market cap around £50m if they succeed with the proposed £2.5m fund raise. I kid you not!! It takes your breath away.

All in all the situation looks perilous, and that's an understatement. The company admits that the latest fund raise is a stay of execution and they'll need further funds to survive.

If you're not convinced then read the notes at the bottom of the report. Here's what the auditors say at the very end of the report:-

"Auditor's report: material uncertainty relating to going concern
The Auditor's report includes a material uncertainty relating to going concern.  Extracts from the Auditor's report are reproduced below. In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 1 of the financial statements concerning the group's and parent company's ability to continue as a going concern. The group incurred a loss in the year of £9,482,927 and, at that date, the group had current assets of £4,268,649 and current liabilities of £4,640,943. In their assessment of the group and parent company's ability to continue as a going concern, the directors have focused on the potential for future fundraising, assessing both the expected outcome of the fundraising round in progress at the time of signing the financial statements, and the requirement for a further fundraise in the coming months. The directors have also focused on the rate of growth of revenue in making their assessment. These considerations, in particular the assumed successful outcome of the fundraising currently in progress and the assumed successful outcome of the next fundraising round to be completed within 12 months, along with the other matters explained in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the group's and parent company's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group and parent company were unable to continue as a going concern." Please note well, "indicate the existence of a material uncertainty which may cast significant doubt about the group's and parent company's ability to continue as a going concern." As ever, this is a blog with my thoughts and is not intended for advice. However, I personally wouldn't touch this with a bargepole now or anytime in the future, and if I already held shares I'd be heading for the exit first thing Monday morning. As ever, AIMHO.