Yes you are right @UlladullaDave , most of the cash is up front for the Operator XR (Enterprise business), which is currently around half the receipts figure. Wayne said contracts are 3 years, cash up front, except the DoD contract which is pay as they go and should work out around $750k cash each quarter.

Hence your point of concern is valid, if they can't add at least 4 customers a quarter their operating cashflow would flat line and probably go backwards at under 3. Which is not a good thing given the high level of debt.

However, they have been delivering and the fact they have sold to the FBI, DoD and LA SWAT shows serious interest and provides street cred when they approach Police Departments. The opportunity pipeline is very strong with 216 leads with a potential value of $27.3m, but as always you can't bank that, so monitoring the number of customers added each quarter is going to be a significant tell on progress.

I also agree the ARR is not particularly helpful for cash purposes (more p&l, which is going to lag), that is why my analysis focused on customer numbers and how the differed revenue balances would move. LTV is a bit more interesting, but I want to see both grow nominally at a rate around the last 3 quarters or more and both are dependent on customer additions as the key driver currently, but I would also like to see current customers spending more (land and expand) as time goes on.

The Entertainment part of the business provides positive cash flow currently, mostly from iFly with FREAK not adding much in free cash flow and it is up for sale. If they can get some cash for FREAK and retire a good portion of their debt, a lot of cash flow risk will come out of the business, but currently it's still in a danger zone which it needs Operator XR customer additions of 6+ (about) each quarter to get out of.

The P&L is going to look ugly for a while, so the market may not take an interest for another year or two, but I am following the cash and customer uptake and expect the value to grow in line with these.

Disc: I own RL+SM

The P&L is going to look ugly for a while, so the market may not take an interest for another year or two, but I am following the cash and customer uptake and expect the value to grow in line with these.

I don't think the P&L is relevant right now, tbh. The bigger issue is the state of the balance sheet. There's the debt, obviously, but there's also a $4.4m in deferred revenue and another $1.1m in provisions (ex employee entitlements). And that's backed by ~$2.3m in cash...

You are right though, if that pipeline of work does come through then this is all academic and the business will do well. Maybe they plan to divest the indoor sky diving business at some point too? That would tidy things up and given the growth in the VR business would make sense at some point in the near future.

Liabilities

Thank @UlladullaDave for the perspective and points, its good to be prompted to dig deeper on these issues.

I agree the P&L isn’t relevant now, its about the cash flows. I only mention it because for many in the market it will be what they focus on, the loss turning may off, hence it will be a drag on share price performance until it shows a profit (ie market will undervalue the company until P&L catches up with cashflow).

Regarding the balance sheet, if the music stops (Enterprise customer adds stop), then deferred revenue (4.4m) is going to be a problem. However, at 70%+ gross margins, the cost to deliver should be around $1.3m, not good but not a killer.

Of the provisions ($1.1m), most is a bank guarantee $621k which has an offsetting asset (guarantee held on deposit is my take), there is also $232k in make good provisions which are only an issue if they exit the lease (more below on this). The $305k Red Cartel provision, I am not sure on, possibly contingent payment relating to the acquisition, but not big enough to be an issue.

The borrowings are to me the main concern, particularly the Causway debt facility which has a maturity date of this September. If they continue to add Operator XR customers at the current rate, then I am sure that much of the facility could be paid off and a smaller facility set up. If however the music does stopped – then this is a major issue.

The Birkdale Holdings loan I rate as very low risk. This company is an associate of Steve Baxter, a former Director and from what I can tell the largest shareholder. I highly doubt he would let the company fail on account of this loan and may even lend more if needed.

Leases

Just a few points on leases, due to the financial obligations they impose (ignoring the painful accounting treatment of these). The 2 leases for the iFly businesses are very long term (20yr with 2x10yr options, 2014 start year) and virtually all the fixed assets of the business relate to the iFly business which is running profitably and cash flow positive. Hence they are unlikely to be forced to make good on these premises or suddenly need to settle any significant liabilities regarding them, but may have capital replacement costs at some point.

The FREAK business is a whole different story. These are 3 short term shopping centre leases, so make good costs are an imminent threat. However these sites have quite sparce fit outs, basically being open space for VR games, so I can’t imagine make good on these being significant. Also they are looking to sell the FREAK business, so I hopefully this will be a potential cash problem turning into a cash solution.

There are 2 other corporate leases, of which I don’t know the detail or potential fit out, but I don’t expect it to be significant. They were however up for renewal late last year according to the last annual report. Given the corporate lease property market currently, I don’t think they will have problems continuing where they are or finding cheaper alternatives.

Will they divest iFly? Not sure, would like to ask Wayne. This is where the business started, so there may be some sentimentality for it. Also, it’s doing well, why sell a cash cow unless you get offered a great price. I think they will wait until they exit FREAK and the Operator XR business is well established before they look seriously at selling iFly.

Disc: I own RL+SM

@Tom73 FWIW the make good costs for the FREAK stores would be circa 30k a site excluding whatever they need to do with the equipment.

Assuming if they sold the business then none of these costs would be a concern.

In the event that they had to make good the tenancies I’d imagine the costs would just be to relocate the equipment to a new location and/or storage. Either way given the nature of the equipment I’d expect those costs to exceed the make good costs.