N2H2 (censorware co) - financially "dead company walking"

I've finally finished ploughing through N2H2's recent financial report and attempting to figure out just how near they are to death's door (approaching? threshold? already through?). I think it's a matter of "dead company walking".

I've finally made sense of their announced "cash flow positive" quarter. Remember, N2H2 loses around $1.7million each quarter

Now, look at the N2H2 Balance Sheet

Note how "Cash and Cash Equivalents" takes a big jump up on Sep 30, 2002.

But projecting, the estimated numbers would be (in thousands)

That is, the next number in the series for "Cash and Cash Equivalents" should be down "1,something" , giving less than 1,000 remaining, around 728 from projecting from the drop in "Cash and Cash Equivalents" - "Net Tangible Assets"

Instead, they record a total "Cash and Cash Equivalents" UP to +4,684. That's an overage of (4,684 - 728? = 3956?). Where are they getting that extra 3956 or so ?

Note nothing dramatic has changed in terms of income and expenses for all of N2H2 fiscal year 2002 . So their recent layoffs can't be the cause of this dramatic change.

Look at the "Other Current Liabilities" line. They have a big change in going from 4,475 to 8,179 = 3704. That seems to be the jump.

The "Cash Flow Statement" agrees

Income hasn't changed much. The cash jump is from "Changes In Liabilities".

What's this 8,179 liability?

Searching the annual report, under
"LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)"
They have "Deferred revenue" of 8,179

What's this "Deferred revenue"? The only reference I can find is (my emphasis)

"Subscription agreements and most maintenance services are evidenced by signed contracts, which are generally 12, 24 or 36 months in duration. Subscription and maintenance revenues are recognized on a straight-line basis over the life of the contract. Contracts billed in advance of services provided are recorded as deferred revenue.

Hmm? What's going on here?

It appears they counted much of *expected Financial Year 2003* revenue, as "deferred revenue" for the last quarter of Financial Year 2002. And listed what they billed as part of "Cash and Cash Equivalents".

That is, the only reason they're "cash flow positive" is that they have gotten substantial billed money in advance of the services.

There's another obscure line where they list current "Working capital" as being -2,193 , with a footnote of "(3) Includes current portion of deferred revenue."

In brief, it's if someone were in debt, and took out a loan, and trumpeted having a "cash-flow-positive" event because the loan was money received now (that it'd have to be paid back later was irrelevant).

It's like the old saying about losing a little money on every sale, but making up in volume.

By Seth Finkelstein | posted in censorware , infothought | on December 29, 2002 04:27 PM (Infothought permalink) | Followups

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