Accounting is not complicated, but knowing the tricks of the trade really help when doing financial analysis.
One thing that confuses most laymen is that a company can generate net income but bleed cash like crazy.
This describes BBTV’s (TSX: BBTV) second quarter report.
They reported a $3.7 million net income, but still are bleeding cash like crazy. It is because they restructured a piece of debt for a non-cash gain:
On June 20, 2023, UFA Note had another amendment whereby UFA provides the Company with an option (the “Discounted Payout Option”) to discharge the Convertible Promissory Note at 10 cents for every dollar of outstanding principal and accrued interest if that Discounted Payout Option is exercised at the earlier of (i) September 15, 2023 and (ii) 5 business days following the closing of any financing that provides the Company with the option to exercise the Discounted Payout Option. If the Discounted Payout Option is exercised, the Company would be subject to a covenant for the next six months from the effective date of this amendment whereby the Company would need to increase the payout (the “Increased Amount”) to UFA if the Company discharges certain other financing debts at an amount that is more than 8 cents for every dollar of outstanding principal and accrued interest. The Increased Amount is calculated using a formula specified in the amendment, subject to various limitations. This amendment is considered a substantial modification under IFRS, resulting in a gain of debt modification of $18,337 for the period ended June 30, 2023.
… essentially they want the company to suck up blood from a stone and try to suck up as much cash as possible while they can.
Also you do not want to be reading this paragraph on Note 1 of the financial statements:
As at June 30, 2023, the Company had a working capital deficiency of $44,303 compared to a working capital deficiency of $44,876 as at December 31, 2022. For the six months ended June 30, 2023, the Company incurred a loss of $10,757 (June 30, 2022: $26,783) and used cash in operations of $14,738 (June 30, 2022: $14,365). As part of the Company’s working capital and cash flow management, the Company has a receivables purchase agreement as described in Note 5. On February 14, 2023 the Company obtained additional loan financing of CAD$21,485 and received proceeds of CAD$20,926 (net of transaction costs). Immediately after the closing of this loan financing, the Company used part of the proceeds to pay off the balance in its overdraft facility and subsequently, the aforementioned overdraft facility was terminated. The loan financing arrangement includes an earnings performance target covenant for the six months ended June 30, 2023 and as a result of the Company not meeting this performance target, it is required to repay US$6,000 to the lender originally by August 18, 2023 and subsequently extended to August 31, 2023. The Company is in discussions about further extending the timing of the US$6,000 payment until such time that it can be settled in accordance with a signed non-binding proposal from a new third party investor. The Company presently remains in good standing with the Term Loan (Note 8). Subsequent to the quarter end, the Company received a shareholder loan of $4,000 (Note 22).
Needless to say, the balance sheet is in need of restructuring and I can’t see an escape route considering they can’t seem to stem the cash bleeding – about $15 million gone in the first half of this year. Even the most elementary of financial statement analysis, current assets over current liabilities, indicates that with $28.9 million of current assets, over $73.2 million in current liabilities, at 39% this is just not good news for shareholders. Most of the liabilities consist of payments to content creators – and if your business is about content creation and if you’re not paying them, they’re not that likely to stick around!