MARKET WATCH: A Closer Look at Adrenalina

Jeff Harbaugh

• May 06 2009
• 1,521 views
• 7 comments

Adrenalina made its play for PacSun, then went away, and is now back with an unsolicited offer to buy West49. On May 5th West49 rejected the offer.

The rejection was hardly a surprise given the information available on Adrenalina, and I thought it might be interesting to take a closer look at what we know about them.  We can do that because the stock is publically traded under the symbol AENAE.OB.  It’s quoted this morning (May 6) at $0.13 a share.

I went to look at their current financials. The most recent filing I found was an 8K dated April 29 that stated the following:

“On April 28, 2009, Adrenalina announced that, in light of its ongoing evaluations of its assets, business and cash requirements, it is unable to file its Form 10-K for the period ended December 31, 2008 within the prescribed period of time.  The Company is researching strategic alternatives to enhance operating performance and stockholder value, including restructuring its balance sheet, reducing costs and negotiating with its creditors to address the Company’s liquidity issues and implementing a revised strategic plan. There can be no assurance, however, that these initiatives will be successful.”

Ok, that doesn’t sound exactly good, but it certainly got my attention. I had to go back to their 10Q for the quarter ended September 30, 2008 for the last financial statements filed.

For the three months ended Sept. 30, the company had total revenue of $1,449,268 and a loss of $1,929,925.

The figures for nine months are revenue of $3,760,825 and a loss of 6,198,213. During those nine months, interest expense alone was $1.72 million, which suggests that the balance sheet should be intriguing to peruse.

It is. Current assets are about $3 million and current liabilities are $5.1 million at Sept. 30, 2008, yielding a current ratio of 0.59. Just to review, current assets are what you use to pay your current liabilities in the normal course of running a business, and you generally need more of the former than the later to operate reasonably.

Those current liabilities include “Shareholder advances” of $1.14 million and “Current portion of convertible debentures” of $1.16 million. The company’s CEO, Mr. Ilia Lekach, beneficially owns 66.3% of the share of the company, so it may be that current or not, the shareholder advance doesn’t have to be paid urgently.
Under certain conditions, Adrenalina has the right to pay both principal and interest on the convertible debentures in its common stock, so this also may not be quite the cash drain at first glance as the balance suggests. Assuming these two items aren’t really current liabilities, even though they are categorized as such, the current ratio is 1.06. That calculation includes $1.9 million in inventory on the balance sheet for a company that had retail sales of $3.4 million over nine months.

Total liabilities are $11.3 million and equity only $618,000, for a total liabilities to equity ratio of 18.3.
Note 2 to their financial statements is called “Going Concern.” It says, in part, “The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company continued to incur significant operating losses through the nine months ended September 30, 2008 which raise substantial doubt about the Company’s ability to continue as a going concern. “  The note goes on to describe how the company has been funded “…through related party borrowings, contributed capital and convertible debentures.”

They describe the company as “…a retail, entertainment, media and publishing company that is focused on the nature and lifestyle surrounding extreme sports and outdoor adventures. We are also the nation’s first and only retailer that has enhanced the retail shopping experience, with our particular mix of shopping and entertainment that includes the FlowRider®. Currently we have three stores open and are in the process of opening [six] additional stores during 2008 and the first quarter of 2009.” For nine months, 91% of revenue was from their retail operations.

At September 30, 2008 they had three stores open and were planning to open six more through the first quarter of 2009, but they didn’t have “…sufficient financial capacity to fund their openings.” They’ve also got a section called Internal Control over Financial Reporting where they state, “We continue to have the following material weaknesses in our internal control over financial reporting…” and then go on to list 11 of them. They also state that they have moved to remediate them.

You know, maybe Adrenalina has a great retail concept and the slow economy and poor credit conditions have just clobbered them. They wouldn’t be alone. I’m even intrigued by - and maybe admire a bit - the financial creativity that’s going on. We need entrepreneurs that can imagine and try to pull off deals like this.

But I would have made the same call PacSun and West 49 made. Even ignoring the size discrepancies, lack of financing, and lack of financial success (so far) of Adrenalina’s retail concept and the going concern note, the “material weaknesses in our internal controls over financial reporting” would make me run in the opposite direction.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.