| Wed 10 Oct 2007, 11:17 | | WLL - Wellco - Audited Consolidated Final Results |
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WLL
WLL
WLL - Wellco - Audited Consolidated Final Results For The Year Ended
28 February 2007
WELLCO HEALTH LIMITED
Registration No: 2005/005805/06
JSE code: WLL
ISIN: ZAE000071841
("Wellco" or "the Company")
AUDITED CONSOLIDATED FINAL RESULTS FOR THE YEAR ENDED 28 FEBRUARY 2007
Consolidated Balance Sheet
For the year For the year
Ended Ended
28 February 28 February
ASSETS 2007 2006
R R
Non current assets
Tangible fixed assets 986,651 1,212,136
Goodwill 0 13,548,702
Intangibles assets 13,941,886 12,765,740
Deferred tax asset 0 185,308
Total non-current assets 14,928,537 27,711,886
Current assets
Inventories 2,484,631 4,771,055
Trade and other receivables 4,860,955 3,401,968
Cash 315 14
Total current assets 7,345,901 8,173,037
Total assets 22,274,438 35,884,923
EQUITY AND LIABILITIES
Share capital and reserves
Issued Capital 9,208 5,683
Share premium 40,100,751 29,321,482
Accumulated Loss (35,472,603) (710,387)
Ordinary shareholders equity 4,637,356 28,616,778
Non current liabilities
Interest bearing borrowings 152,574 332,798
Non interest bearing loan account 479,130 -
Deferred tax liability 363,027 -
Total non-current liabilities 994,731 332,798
Current liabilities
Taxation 2,477,466 2,184,637
Trade and other payables 11,004,845 4,469,888
Current portion of borrowings 117,523 127,736
Bank overdraft 3,042,517 153,086
Total current liabilities 16,642,351 6,935,347
Total equity and liabilities 22,274,438 35,884,923
Net Asset Value per share - cents 5.03 50.36
Net Tangible Assets per share - cents (10.10) 4.05
Weighted average number of shares 92,083,686 56,827,842
In issue
Consolidated Income Statement For the year For the year
Ended Ended
28 February 28 February
2007 2006
R R
Gross revenue 16,975,822 14,538,057
Loss before interest, (13,287,857) (81,470)
taxation, depreciation ("EBITD)
Depreciation (492,553) (391,272)
Loss from operations (13,780,410) (472,742)
Net interest paid (1,100,223) (389,442)
Loss before impairment (14,880,633) (862,184)
Impairment of goodwill (13,548,702) -
Impairment of intangible assets (5,784,546) -
Loss before taxation (34,213,881) (862,184)
Taxation (548,335) 151,797
Loss for the year (34,762,216) (710,387)
Loss per share-cents -37.75 -1.25
Headline loss per share-cents -16.74 -1.49
Condensed Consolidated Statement of
Changes in Equity For the year For the year
Ended Ended
28 February 28 February
2007 2006
R R
Balance at beginning of the year 28,616,778 -
Issued share capital and share
premium 10,782,794 29,327,165
Loss for the year (34,762,216) (710,387)
Balance at the end of the year 4,637,356 28,616,778
Condensed Consolidated Cash Flow For the year For the year
Statement Ended Ended
28 February 28 February
2007 2006
R R
Net cash flow from operating (6,720,496) (4,612,854)
activities
Net cash flow from investing (7,240,121) (5,686,548)
activities
Net cash flow from financing 11,071,487 11,491,067
activities
Change in cash and cash equivalent (2,889,130) 1,191,665
Cash and cash equivalents at - (1,344,737)
date of acquisition of subsidiary
Cash and cash equivalents at (153,072) -
beginning of period
Cash and cash equivalents at end (3,042,202) (153,072)
of period
BASIS OF PREPARATION:
These audited financial results have been prepared and presented in accordance
with IAS34: Interim Financial Reporting, the Companies Act, No. 61 of 1973 (as
amended) and is derived from a set of Annual Financial Statements that are in
compliance with International Financial Reporting Standards (IFRS).
The accounting policies used in the preparation of these results are consistent
in all material respects with those used in the annual financial statements for
the year ended 28 February 2007. The condensed financial statements have been
prepared under the historic cost convention.
There are no standards that are currently in issue but not yet effective which
would result in a change in accounting policy.
These results have been audited by Deloitte & Touche and their audit report is
available for inspection at the Company`s registered office.
The report is modified due to a material uncertainty which may cast significant
doubt on the group`s ability to continue as a going concern. The modified
opinion reads as follows:
"Opinion
In our opinion, the annual financial statements fairly present, in all material
respects, the financial position of the company and group, at 28 February 2007,
and their financial performance and cash flows for the year then ended in
accordance with International Financial Reporting Standards, and in the manner
required by the Companies Act in South Africa.
Emphasis of matter
Without qualifying our opinion above, we draw attention to the report of the
directors with respect to going concern which indicates that the group recorded
a net loss of R34 762 216 (2006: R710 387) for the year ended 28 February 2007
and as of that date, the group`s current liabilities exceeded its current assets
by R9 296 450. The plans outlined by the directors are at an early stage and
include initiatives to inject fresh capital, improve cash flows and debt
rearrangements with major creditors which include the group`s banker and the
South African Revenue Service.
These conditions, along with other matters as set forth in the directors`
report, indicate the existence of a material uncertainty which may cast
significant doubt on the group`s ability to continue as a going concern."
COMMENTARY
The financial year ending the 28 February 2007 provided the executive team with
serious commercial challenges and the team were forced to manage many external
market influences and address certain structural inconsistencies, as well as the
non-added value responsibilities. The structural inconsistencies pertained to
the vagaries of not having sufficient critical mass in revenue base at this
start up phase of our development. The inherited unfavourable trading terms for
key customers, the difficult integration of the acquired business of Nutrimax,
maintaining an expensive outsourced distribution model and a staffing resource
that could manage the operations and enable future product development, all led
to pressure on our business model.
It is very disappointing when we consider that Wellco failed to meet
approximately 40% of its orders to the large retailers and had significant
`regrets`, being sales orders that they could not supply. In addition we
supplied 507,091 units of product this year as opposed to 416,890 units last
year, an increase of 21.6 %. This does not reflect in the results and
illustrates that we were subject to certain `over-trading` influences where we
were not able to maximise our true sales potential and experienced a high cost
for those sales.
In circumstances where a start up company is pursuing a strong growth agenda and
pushing its distribution boundaries, there is the potential for `over-trading`.
This environment places immense pressure on the working capital model and if
certain large customers do not perform per the agreed trading terms then a
credit squeeze arises. A major retailer that accounts for 35% - 40% of the
company`s domestic sales revenue exceeded their payment terms beyond 120 days,
the standard being 30 to 60 days. This is an `external` factor that is difficult
to address bearing in mind that the company must still protect its growth
channels and distribution footprint. Unfortunately the company was forced to
suspend the supply of product until payment had been received. As at year end
significant funds were still due from this customer and the company has had to
provide for an impairment based on the disputed items.
Performance
We believe that the reason for our poor performance was a function of the
difficulties experienced in addressing certain structural inconsistencies in the
business model and external market influences that unfavourably effected the
application of the group`s commercial strategy. We should also acknowledge that
in the pursuit of maintaining a JSE listed status we have been drawn away from
the pre-listing model of a `lean and mean` start up business and had to focus a
disproportionate amount of energy and resources on a non value added function.
In attempting to address the demands of this new status we have become a high
fixed cost based company with an infrastructure that is inordinately expensive
for the sales revenue base and resultant contribution at this early phase of our
development. The major portion of this fixed cost is in staffing resources with
a focus on the executive team. Directors of a listed entity come at a price.
This is commensurate with the perceived risk of the listed environment and the
uncertainty of a start up business. The staffing cost accounted for 43% of the
overall fixed overhead and the executive team accounted for 15% of the overall
fixed overhead.
The major structural inconsistencies that we have had difficulty in addressing
have been as follows:
Key customer trading terms:
When the holding company purchased the Wellco Brands subsidiary in June
2005 we inherited the trading terms and co-operative advertising base as
agreed to by the previous owners. It is very difficult to renegotiate
trading terms and often key customers threaten delisting product ranges if
the terms are reduced.
The company has incurred a significant loss of approximately R2m in its
trade support of a specific retail customer. This loss is a function of
unfavourable trading terms and fixed co-operative advertising commitments
that are prescribed by this specific retailer before distribution of our
products in their stores. The co-operative advertising commitments
represented approximately 40% of the total anticipated advertising budget
of R4.5m and could not be reduced during the year.
Nutrimax acquisition and integration:
In order to address the high investment cost in the operational and sales
support infrastructure the Executive sought to acquire potentially strong
brands and product ranges in the same wellness sector. This would result in
a lower cost to support a higher revenue base and ultimately lead to a
sustainable critical mass.
The company acquired the Nutrimax business in April 2006 with a view to
supplementing the revenue base of the company with strong growth and
mitigating the high infrastructural costs, however, the integration and
related restructuring of the Nutrimax product range placed immense pressure
on the company from a cash flow and a resource perspective. The product
range had to be repackaged and reformulated, resulting in major returns of
approximately R0.5m of non - compliant Medical Control Council stock
returned from the trade. In addition the time taken to complete the new
repackaging and reformulation meant that the Female range was only launched
in September (5 months after acquisition) and the Nutritional Bar range was
only launched in May 2007 (one year after acquisition and in the new
financial year). Instead of supporting the infrastructural investment, the
acquisition led to more pressures being placed on the business model.
Outsourced distribution model:
The start-up profile of the company encourages a stronger weighting to a
variable versus the fixed costing model. This enables the company to grow
as revenues grow. With a desire to reduce the fixed cost component attached
to sales related support costs, Wellco outsourced the logistics,
warehousing and distribution to a third party supplier. This outsourced
cost came at a high price and ultimately created many relationship
management issues with our key customers and led to decreased service
levels.
In addition to the non value added responsibilities and difficulties in
addressing certain structural inconsistencies in the business we have struggled
to realise the full revenue potential of our brands during this financial year.
The launch of the KGB export markets has not met the initial timelines
presented by the licensees in the United Kingdom, Brazil and the United
States / Canada. This has had an unfavourable effect on export revenues.
The planned launch of the Igugu Lempilo (African Traditional) brand in
Gauteng, Limpopo and Mpumulanga provinces through the multi-level (direct)
distribution channels has not been successful. Whilst we have established a
strong market position in KwaZulu Natal we have not been able to secure a
strong distribution model with our partners in these new provinces.
Despite favourable acceptance for our new phyto-botanical malaria product
range and a lucrative order from a European Humanitarian Foundation we have
not been able to fulfil this order due to the Foundation not complying with
the contractual terms of the supply agreement by paying the initial upfront
deposit.
Achievements for the Financial Year 2007
The most notable achievement of the February 2007 financial year has been the
successful repositioning of the Herbology brand and the approximate 21% volume
growth is testament to the strong and growing consumer franchise for this
product range. The launch of the exciting oils range within the brand will
further enhance the brand presence and solicit more of the target consumer`s
spend in this category. Unfortunately this growth led to certain `over-trading`
issues that had an adverse effect on our cash flow position.
We believe that the new licensing agreement will strengthen the distribution and
marketing of the brand, with the licensees strong cash position enabling them to
avoid the out of stock situation we experienced and further enhance forward
share on shelf space allotments, so sustaining the growth in volume sales.
During the year the group acquired the Nutrimax brand and whilst the integration
of the business, repackaging and reformulation of the product range took a
significant part of the financial year, we believed that the brand would provide
strong returns over future years. Unfortunately, as part of the turnaround
strategy, we have had to dispose of this brand after year end to focus on our
core brands, Herbology and KGB, and generate cash resources to reduce our debt
and negotiate more favourable terms with our creditors.
We continue to experience positive commercial engagement from potential domestic
and international licensing and distribution partners. These engagements have
led to initiatives that will realise revenue streams in future years. Most
notable of these initiatives is the anticipated launch of KGB in the United
Kingdom and Brazil in the coming financial year.
Prospects for the Financial Year 2008
We believe that the company is at a crossroads. Due to the difficult trading
circumstances that Wellco finds itself in, being in an adverse profit position
and tight cash flow constraints, the board of directors has started the
implementation of a turnaround programme that we anticipate will lead to a more
sustainable and profitable business model and will enable the company to
maintain its going concern status, as well as restore corporate value and
profitability.
We are confident that we have strong and innovative anchor brands and related
products that can compete successfully in the wellness categories; however, at
this early stage of our development we are limited by the lack of sufficient
critical mass to effectively leverage the distribution and sale of our products.
The model to be applied should recognise the strength in our intellectual
property, the brands, and the need to strategically partner with companies
(licensees) that possess this critical mass and are able to effectively
distribute our products within their established sales, marketing and
operational structures, with both parties earning a commensurate return on their
investment.
Going Concern
In terms of the JSE SENS announcement of the 12 June 2007 and 11 July 2007, the
board of directors is implementing a broad range of initiatives to raise cash
resources to support the turnaround programme discussed below. The cash raising
initiatives are as follows:
Share Placement
The turnaround programme requires the immediate injection of capital to
cover current working capital requirements and fund the credit gap that the
company is experiencing. The board is negotiating a share placement for R3
million for the 35 million shares remaining within its mandate and will
seek to increase this mandate at the AGM to leverage future international
licensing opportunities.
Disposal of Brands
The board has accepted an offer for the purchase of the Nutrimax brand for
an initial purchase consideration of R3.8 million, with the agreement being
subject to JSE regulations compliance and approval. In addition to this
sale certain other non-core brands are being considered for disposal and
may be sold to potential buyers who have expressed interest in their
acquisition. There has been interest in non-core brands at a financial
level of R0.9 million.
In the context of the successful procurement of the proceeds of approximately
R7.7 million derived from the cash raising initiatives discussed above and the
measures to be implemented per the turnaround programme discussed below, we
anticipate the company`s contracted royalty income and cash flow streams will be
sufficient to meet the required rescheduled debt repayment plans discussed
below.
These capital refinancing initiatives will allow the group to enter into
discussions with its major creditors to negotiate payment plans that will assist
the group to significantly reduce the group debt and effectively manage their
anticipated future cash flows requirements.
Bank Overdraft
The group continues to be mindful of its obligations to its bankers and
suppliers. With the refinancing initiatives being pursued, the group will
seek to reduce its overdraft facility with the bank from a peak of R3.0
million to R1.5 million. We are currently in discussions with the bank with
a view to agreeing on a payment plan for the outstanding balance to be
repaid over a term loan of 36 months.
Taxation
An amount of some R4.9 million which was owing to the South African Revenue
Services (SARS) in respect of Income Tax, PAYE, UIF and SDL at 28 February
2007 has been the subject of a debt arrangement. The Commissioner has
agreed to allow for this to be repaid, with interest at the official SARS
rate, with an initial upfront payment of R2.4 million and the balance over
a period of 2 years and this is likely to commence from 1 November 2007.
Whilst a formal agreement has yet to be concluded with SARS, we expect it
to be finalised by 30 September 2007. Interest and penalties have been
accrued on the liability.
Trade Creditors
The group continues to be mindful of its obligations to its suppliers and
trade creditors. With the refinancing initiatives being pursued, the group
will seek to reduce its debt to trade creditors from R6.9 million to R3.1
million. The directors are currently completing discussions with the major
creditors with a view to agreeing on a payment plan for the outstanding
balance to be repaid with an initial payment and then the balance over a
term of 36 months. The majority of creditors have provided verbal
undertakings to accept the revised terms and letters confirming these
arrangements are being prepared for formal acceptance.
The directors consider that these initiatives will allow the group to continue
to operate in the foreseeable future. Accordingly, these annual financial
statements have been prepared on a going concern basis which anticipates funds
will be settled in the normal course of business. These financial statements do
not include any adjustments which may be necessary to the valuation or
classification of assets or liabilities should the group not be able to continue
as a going concern.
Turnaround Programme
- The directors have continued with the turnaround programme initiated in the
latter part of the financial year. The board of directors believe that it
is necessary to continue to reduce the level of debt and the fixed overhead
structure of the group and thus have implemented the following initiatives
supporting this turnaround strategy:
- The executive to focus purely on developing a more intellectual property
and brand centric business model that will focus on business development in
international markets, new product development and to license out the
manufacture, distribution, marketing and sale of our brands both
domestically and internationally to licensees.
- Outsourcing all non core value added functions to regional licensees,
including sales representation on an agency model via our licensees, where
costs are variable based on net sales achieved. In addition the licensing
of the remaining brands to a strong third party distributor in South Africa
will result in them being responsible for all manufacture, marketing, sale
and distribution, with the associated cash flow investment, in the product
ranges being the responsibility of the licensees.
- A licensing agreement has been agreed with a major distributor on a set
royalty fee basis, starting at 7.5% of sales and reducing to 5.0% of sales
over a 3 year period. This rate is considered above normal market rates of
between 3.5% and 5.0%.
- This outsourcing exercise has begun and the retrenchment of all of the non-
core functional staff complement has been completed. Non-core staff members
were responsible for operations, administration, sales, warehousing and
distribution. The financial effect of which is a reduction of the fixed
overhead costs from approximately R0.9 million to R0.2 million per month.
- Review of all trading channels with our licensees and adopting the more
favourable trading terms of the licensees that command commensurate
critical mass with increased trade influence.
- Termination of all third party product developments (non proprietary retail
brands such as Woolworths) and a sole focus on proprietary owned brands.
- Refinancing of the short term debts to longer term loans and the adoption
of a more debtor based financing model.
The directors anticipate that the company will exhibit the full effects of the
turnaround from the 1 September 2007 (second interim financial period) on the
basis that the company has implemented the cash raising initiatives and
turnaround programme measures discussed above and will seek to achieve a
breakeven position by the 28 February 2008 financial year end.
Goodwill
As we find ourselves in a distressed commercial position at this time the
executive have decided to impair all the goodwill recognised in our balance
sheet of R13,548,702, together with an amount of R5,784,546 relating to
intangibles, to reflect the diluted value of goodwill and intangibles in the
business.
This is based on the recognition of the adverse profit position at this time,
the increased perceived uncertainty (risk) in our business with the turnaround
programme and the lower growth that we anticipate due to the new royalty based
revenue streams.
We believe the turnaround programme and resultant initiatives will return the
company to profitability and reduce risk in the medium term, approximately 18 -
24 months.
Post Balance Sheet Events
Except as disclosed above, there are no further events of a material nature that
have occurred between the accounting date and the date of this report
Headline Loss per share
For the year For the year
Ended Ended
28 February 28 February
2007 2006
R R
Headline Loss per share
Net Loss (34,762,216) (710,387)
Profit (loss) on sale of plant
and equipment 20,161 2,579)
Impairment of goodwill 13,548,609 -
Impairment of intangible assets 5,784,546 -
Profit on sale of intangible asset (7,800) (133,773)
Headline loss (15,421,236) (846,739)
Directors:
D Marais (CEO), Norman Preston (CFO),
B Shongwe*, T McKeever*
*Non-executive
Midrand
10 October 2007
Designated Advisor
River Group
Date: 10/10/2007 11:17:50 Produced by the JSE SENS Department.
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