We are entering into Earnings Season and we start this with my review of Enphase. Revenue came in at $79M with a loss of $0.30 per share. This was in line with what was estimated in the last conference call. There was nothing that has changed my Break Even analysis from last quarter, so I expect that to remain the same. To give you the short version, break even for the company is somewhere between $120M and $150M per quarter unless there are some Operating Expense reductions. As you can see this would require dramatic Revenue Growth, which is antithetical to Operating Expense Reduction.
But enough about the Income Statement, this review is going to be all about the Balance Sheet. The Income Statement is all about the Operating Performance of the Business. The Balance Sheet is more like looking at the Bank Account. In this case, the company finished the quarter with $8M in cash. Given the current level of losses, this is clearly not enough. However, just after the close of the quarter, they took out debt financing (in other words a loan) for $25M. The company that they got the loan from is called Tennenbaum Capital Partners, LLC. The loan came from the “Special Situations” portion of the business. This has a description with the following information: “We provide rescue financing to companies that do not have easy access to conventional capital sources and generally require capital to avoid a restructuring or insolvency.” Well, that is comforting if you are an equity investor. They just took out a loan with the term Rescue Financing listed as its description. But it is an apt description. The company is in serious trouble financially.
Let’s take a bit of a look at the loan itself. The loan comes with a number of one-time payments which are significant and an interest rate that is designed to be at least 10.25%. On top of that, the loan is a secured loan. To quote from the SEC filing of the Loan: “The term loan is secured by a second-priority security interest in substantially all assets of the Company except intellectual property.” That means that if the company goes bankrupt and there is a sale of assets, then these debt providers are basically going to be taking their part right off the top. From a shareholder perspective, this is a bit scarier because it means that the company will have difficulty getting additional debt. The good news is that there is an existing credit facility available that can help beyond this. This is important because the $25M will not buy the company a lot of time. Perhaps 6 months total.
What is left to the company after that is likely Factoring? This is selling the receivables at a discount in order to get a direct cash infusion. This can come at a relatively heavy price and should be a signal that the company has entered utter desperation mode.
What does all of this mean? The company needs to sell itself immediately for almost any amount anybody is willing to offer. Look trying to double the Revenue by the end of the year seems like a huge stretch. We are talking about Revenue levels that the company has never gotten to before. It has to do all this with finding a way to reduce spending in any way possible. This must be the plan because the company spent less on Sales and Marketing and more in Research and Development than a year ago. The only rational way that this can be the plan is if the company believes its technology needs to keep advancing to attract the right price from buyers. From an ongoing business standpoint, it makes no sense at all.
So there you have it. Enphase buyout in 6 months or less. If I was a buyer, I would be not bidding much at all. The company will be more challenged as time goes on and so the deal will be better later rather than sooner.
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