Kneat Claims Growth despite Heavy Progressive Loss Year on Year


Kneat Claims Growth despite Heavy Progressive Loss Year on Year inc. (KSI.V) (“Kneat”), a Nova Scotia-based company, has been operating with heavy losses from inception. Going by the current trend of the revenue, it wouldn’t take long before the company declares bankruptcy as the losses continue to accumulate.

Analyzing Kneat’s Revenue and Expenses

To fully understand Kneat’s current financial situation, we will have to look into their income and expenses for the last few quarters. For six months ended June 30th, 2018, Kneat recorded a revenue of $594,900. However, the net loss during that period was roughly $2 million. A year later, the net loss increased by $3.7 million during the first six-month period ended on June 2019. Further breaking it down, we will see that the company lost $1,477,600 in the second quarter of 2018. This figure went up to $1,750,289 during the second quarter of 2019.

Over the past four years, the operational performance of the company has been on a progressive decline. In 2016, the company’s revenue dropped by 17% from 2015. The following year, the revenue plunged by 50% compared to that of the year 2015. The company recorded a slightly higher revenue in 2018. However, the overall loss for the year 2018 was much higher than in 2017. In 2017 and 2018, the company recorded their operating losses of $4.28 million and $5.16 million respectively. Analysts now expect the operating loss for 2019 to reach $7 million.

During 2015 and 2018, the company generated$986,228 and $1,307.295 respectively, the revenue growth was about 31% over the period of 3 years, whereas the loss reported for 2015 was $986,228 and $5,168.575 for 2018, it was about 5 fold higher in 2018 compared to year 2015. The revenue and loss ratio indicates that the company is marching towards bankruptcy.

Kneat’s track record doesn’t promise a better future.

Remember, is not a biotech company and waiting for FDA approval to expect a step-growth after the approval, it is a small software company operating with the help of investors and short term loan. If a technology company cannot generate positive revenue in the first 5 years, it is very difficult to survive, remember Kneat is operating since 2007 as per their website.

If you know about the Asset turnover ratio, it is used to calculate the revenue generated by the company per 1$ invested in it. In the case of Kneat, this ratio has been on a steady decline over the past few years. In 2015, the figure was 0.440 per $1 but decreased to 0.113 in 2016. It dropped further to 0.064 in 2017. This financial ratio is an indicator that the company no longer has economic benefits and it is not worth to invest your funds in this company.

The Return on Capital Employed (ROCE), another financial indicator, highlights the economic strength of a company. For Kneat, its ROCE has also declined over the past few years (2017: -60%, 2016: -96% and 2015: -45%). The decline is an indicator that the shareholders of this company will not earn any dividends in the future.

Misleading Finances by Kneat

If Kneat continues to incur losses at its current rate, the company will not last beyond 2020. There are some uncertain activities behind the company. While the company has been recording losses, which it reports in its quarterly and annual earnings, it also receives funds from some unknown sources. Kneat tags these as ‘other comprehensive income.’ The unexplained income has added finances to the company and has kept them afloat for a while, making investors believe that things aren’t that bad.

However, the reality is that things are very bad for the company at the moment and they would have to liquidate shortly unless investors continuously invest in this money losing company. Any sentiment change with investors will lead this company into bankruptcy. According to the auditor’s report in 2017 and 2018, the statement regarding the uncertainty behind the business was highlighted.

As a software company, Kneat hasn’t done much to develop new products to meet the market demands over the past few years. The company hasn’t paid attention to research and development, which would help them develop new products. Despite not having new products on the market, Kneat has spent heavily on research and development over the past few quarters. In the first half of 2019, the company spent $1.4 million in its R&D. It spent a similar figure ($1 million) in the first half of 2018 in the same sector. Despite its vast outlay, the company didn’t make substantial growth in its software business. In 2018, the company’s revenue was only $130,426 from SaaS license and hosting operation. Thus, an indication that their software isn’t well-received by its customers.

Herein lies the biggest problem of Kneat.

The company spends a substantial on personnel and recurring expenditure while it isn’t making a profit from its primary business, which is a software license. At the moment, investors pumping funds into the company are helping it stay afloat as the investor funds are being used to run operations and other administrative costs including high management salaries.

Thus, Kneat investors shouldn’t expect any dividend from the company in the future. At the current run rate, they need to raise another round of at least $8M to continue the operation in 2020, if there is any change in the market sentiments and if they can’t generate additional funds for operation through further dilution, the company might not be around by the second quarter of 2020.

NB: All dollar signs in this article are in the Canadian dollar except stated otherwise.

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