Small Cap Value Report (Tue 1 Aug 2017) - RGD

Good afternoon, it's Paul here!

I was burning the midnight oil last night, adding 3 more sections to Graham's report yesterday. So please see this link for my additional comments on Utilitywise, Software Radio Tech, and Revolution Bars.

Let's start with a profit warning!

Real Good Food (LON:RGD)

Share price: 21.9p (down 37.6% today)
No. shares: 78.4m
Market cap: £17.2m

Two announcements today from this food manufacturing & distribution company. The first states that a NED, Peter Salter, has resigned from the Board with immediate effect.

The second announcement looks like quite a bad profit warning;

The Company announces that during the audit process of its full year accounts for the year ended 31 March 2017, two substantial anticipated claims regarding its sugar purchase arrangements have not yet materialised with the effect that it will not meet its previously forecasted profit figures.

They've also been too aggressive in capitalising costs;

In addition, the Board has concluded that certain development costs, which had previously been capitalised in FY 2017, should more appropriately have been expensed.

The Board expects the total of these adjustments and further accrued expenses will have the effect of reducing the anticipated EBITDA to approximately £2.0 million for FY 2017.  This number is still subject to final audit.

Checking back to a FinnCap note from late Jun 2017, they were forecasting £5.2m EBITDA. So today's warning means that forecast EBITDA has more than halved. Not good at all.

What makes things even worse, is that the company raised £15.5m in fresh financing (a mixture of loans & new equity) just one month ago. The companies which provided that finance must be feeling well & truly stitched-up now.

They're also lowering forecasts for FY18;

As the injection of expansion capital was agreed about three months later than anticipated this has resulted in some delay in the implementation of these projects, particularly at Renshaw. This, combined with slightly softer trading conditions in Q1, has adversely affected the Board's expectations for the financial year ending 31 March 2018 with the result that EBITDA is now anticipated to be approximately £2.3 million lower than previously expected. However, the anticipated benefits of these projects remain robust and are expected to be fully realised in the financial year ending 31 March 2019.

To finish off, they also note that some related party disclosures were not made in the previous accounts. Although this has no financial impact.

My opinion - shareholders really shouldn't tolerate this sort of situation. I would consider the positions of the CEO and FD untenable, after this catalogue of incorrect accounting.

Certainly the shares are completely uninvestable, in my view.