Hi, I'm newly registered here, but I have been following this board for a while.
Full disclosure - I have no financial interest in this stock, long or short. I became acquainted with this company through a friend that was considering becoming a franchisee, and I am an investor who generally follows (and occasionally comments upon) a variety of companies that I may or may not invest in. If I were to go one way or the other with respect to VEND, I would definitely be a short. That said, I try to be objective when reading the opinions of those with whom I may disagree, as I view the contrary point of view (when well-expressed and thought out) to be the one that best informs my own thinking.
I saw doesitreallymatter's post (which, Yates' criticism notwithstanding, I thought was fairly reasonable) and decided to take a look at the 10-Q myself. I also saw Sonata's post with Nick Yates' responses. I congratulate Sonata for having followed up with Yates twice now and posting here. That was a great idea. I also appreciate that Yates was willing to respond, but I find a few of the things he said to be questionable spin, as I'll explain below.
There's a lot of information to digest in the current 10-Q. I'll stick to the more troublesome aspects.
1. Cash.
This was Mr. Yates most egregious illegitimate spin. Here is what he said:
"Our cash of $408k does not include restricted cash of $4.6 million and receivables of $17.8 million (before accounting adjustments). Furthermore, they have not taken into account cash received from deposits on new sales."
Here's the problem - Restricted cash is just that, restricted. You can't pay your rent, your payroll, your R&D or a lot of other things with it. It doesn't do much to solve liquidity problems. I agree with doesitreallymatter - $409,000 seems awfully low for a company that has been burning through about $1.7 million a month for the last 6 months.
The receivables Mr. Yates cites are receivables from franchisees - who knows what the payment terms are and when VEND will see the cash?
Finally, he's correct, assuming he's referring to new sales that were concluded after December 31, but why would a December 31 balance sheet include that?
The company could have provided additional reassuring detail in its 10-Q, but given the disclosure that franchise sales have been slowing, I suspect that the additional info wouldn't be all that reassuring. The company does disclose that without additional funding, it may be forced to curtail production of new kiosks, so the 10-Q actually contains evidence supporting doesitreallymatter's point, not Nick Yates.
2. Inventory.
The company has an awful lot of liquidity tied up in inventory. Unfortunately, that's primarily raw materials, not finished kiosks or even work in progress.
Here's the problem, and, once again, it's liquidity. No one is willing to finance VEND's manufacturing process or purchase of necessary materials, not the manufacturers, not the banks, not their private lenders. VEND has been forced to sink its available cash into inventory in the hope that it can get some kiosks out and generate some revenue. And it looks as though VEND is at the end of its rope in funding those requirements.
3. Contract liabilities / deferred revenues
This amount has decreased over the last 6 months, which is actually not a good thing - It suggests that franchise sales and/or associated cash receipts have slowed.
4. Franchisee rescissions
The increase in rescissions is pretty bad. To put it in perspective, the company has gone from a ratio of about rescissions running at about 5% of deferred revenues to over 11%. Franchisees are bailing at an accelerating pace compared to new franchise sales.
And, as to Mr. Yates response, no franchisee loss is a good one, even at a lower sales point, but his spin that they will be replaced by new franchisees paying upwards of $50,000 to $57,500 per unit is not borne out by the 10-Q. The 10-Q reveals that the last 120 units were sold at an average price of $36,725. He is whistling past the graveyard on that one.
5. Cash flow
Even if you include the restricted cash, and include the cash raised through financings, the change in cash balances has been negative $9 million over the last 6 months. That looks bad.
6. Footnote 1 to the financial statements
- the installed kiosk count as of 12-31 was 188 units
7. Footnote 2 - Direct quote re inventory, production and financing
" The Company estimates current inventory balances of components are sufficient to manufacture approximately 150 – 200 fully-assembled robots. Given our current cash position, we may be forced to curtail our plans by delaying or suspending the production and purchase of robotic soft serve vending kiosks until such time that we may able to prepay for future robots."
8. Manufacturing
Here's the direct quote from Footnote 2:
"Our robotic soft serve vending kiosks are manufactured by one supplier and we will be transitioning to another single source supplier."
This suggests, contrary to other statements in the 10-Q and public announcements, that Stoelting will replace, not supplement, the efforts of Flex.
9. Footnote 10 - Illegal commissions on stock sales and lack of audit committee
Here's a fiasco in the making. So, VEND announced long long ago that it had illegally paid commissions to Yates and others for the sale of its common stock.
The initial disclosure indicated that the practices were discovered in April 2018, had ceased and were being investigated by "the Audit Committee". Just one problem - There was no such committee. The company finally appointed 2 new directors and formed an Audit Committee, but there's no word on the resolution of this problem that is now hitting its first anniversary. Meanwhile, Mr. Yates has "volunteered" to repay his illegal $332,000 in commissions, but only once the Audit Committee completes its work. That's rich. I wonder how hard they're working on that project.
10. Footnote 10- Curious consulting arrangement
On May 19, 2018, the Company agreed to pay a franchisee with 300,000 shares of stock for "consulting services". No explanation offered as to who that might have been (Mr. Mickelson, perhaps?) or what those services entail.
11. Material weakness in internal controls
This is a bit of legal/accounting jargon, but it's quite significant. According to its own report, the company lacks adequate internal controls. Here's some of what the company had to say:
"Based on its evaluation under the Internal Control - Evaluation Framework, due to the material weakness described above, management concluded that our internal control over financial reporting was not effective as of December 31, 2018. A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis by the Board in the normal course of their duties."
In other words, you can't count on the Board of Directors preventing a material misstatement because there are not sufficient controls in place. That's a pretty big deal.