NIMA LLC (No. 346)

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marioortizmarioortiz Reputation: 52
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Automatic Claim Number - cla1571939031

Quote - n any given month the company is cash flow negative, total salary expenses to NIMAwill be reduced to cover other operational limited to (employees’ salaries, Licensing’s) but will be converted as first position debt with an interest rate of 12% when the company regains a positive cash flow and must be paid back not exceeding of 60% of EBIT per month but not less than 30% of EBIT

Claim

Would the interest rate used to calculate the debt the LLC would incur be calculated annually, monthly? Is it simple or compound? Not only is this not clear, but highly worrying due to the adverse effects on the future operations of the company. If the interest is to be compounded monthly, we're talking about 144% APR debt when the company may be struggling with negative cashflow, and it would be in first position to be paid sacrificing operating cash flow (up to 60%) given this point.

Even more worrying is that negative cash flow doesn't inherently mean that the company is struggling - it might be investing heavily in future growth, and/or in the beginning stages.

This point is not particularly in the best interest of the comapny or its shareholders due to the conflict of interest that could arise from such provision. What's stopping the executive team from entering a negative cash flow period so that they might collect interest in their deffered salary in the future? Also taking into account that the same team behind such decision is the one deciding WHEN such first position debt is repaid.

If this were the case, the company should incur in corporate bonds or short-term credit from financial institutions to cover operating expenses and not self-impose arbitrary interest rates that would hinder operations in the future at best, or create a liquidity trap at worst.

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Good point... the document will be adjusted is calculated per year 12%. by karl on 2019-10-27 04:29:49

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marioortizmarioortiz Reputation: 52
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Automatic Claim Number - cla1571939388

Quote - Nima Sports sells Bluetooth speakers which include models that vary from football helmets to baseballs and basketballs. The speakers have been tested against competitor models at higher price points and have come out on top, offering the most superior quality of sound. The quality of the speakers is based on patented technology, offering 360-degree surround sound.

Claim

Does the presenting party have any technical evidence to support this claim? Beyond licensing and possible team merchandising, what supports the business model? What's innovative about the products, and how sensitive is this particular technology to its presentation?

E.g. is the 360 sound quality the same over the spectrum of headgear, like closed-back headphones, open-back headphones, earphones, airpods, etc?

Is this company about innovating the sound peripheral industry or merchandising using licensing agreements with high-impact leagues and teams?

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we asked the company to release test results by karl on 2019-10-27 04:31:02

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marioortizmarioortiz Reputation: 52
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Automatic Claim Number - cla1571939671

Quote - 3)The total payments including expense reimbursement, as well as corporate cars and similar items to Nima Saati and/or his Family membersas well as related enterprises(ownership over 20% by Nima Saati) cannot exceed$34,000 dollars per month.

Claim

How does this compute with the point made in clause 6 about negative cash flow? What is the mandate behind these expenses and the procedure to be followed when faced with the negative cash flow clause?

It's important to determine how these items interact with the overall operation of the company to, again, discard conflicts of interest between the management and these clauses. Taking into consideration these expenses could amount up to $408,000 annually.

More clarity is paramount.fec10ff42f931164f61fbe8d73641968
PierreAlexandreHPierreAlexandreH Reputation: 52
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Automatic Claim Number - cla1571993341

Quote - the confidence of the initial investors is still strong and isdemonstratedby the fact thatthe company was able to convert all of its major debt liabilities

Claim

This is potentially a misleading statement and requires more support to be considered true. It is quite common that a debt to equity swap (ie. the conversion of the stake of debt holders to equity) results from financial difficulties from the company which is not able to meet its financial obligation. In these situations instead of a demonstration of trust from the debt holders, this is rather a solution to avoid that the company files for bankruptcy which would likely mean for the debt holders the loss of most of their investment.
Moreover, the fact that the paper did mention that "he company overextended and became too reliable on gaining future funding from third-party entities which sadly did not come to realization due to problems within the third parties." reinforce the opinion that the debt to equity swap was possibly more a necessity than a sign of trust.

To support this claim I can quote several sources :

"Debt for equity bargains frequently happens when expansive organizations keep running into money-related inconveniences and regularly result in these organizations being taken over by their key loan bosses. This is for the reason that both the debt and the rest of the benefits in these organizations are significant to the point that there is no favourable position for the lenders to drive the organization into insolvency. Instead, the lenders want to assume responsibility for the business as a going concern. As a result, the first investors' stake in the organization is commonly altogether weakened in these deals and might be wholly disposed of."
"Debt to Equity Swap is a method of restructuring the financial system from the area of debt restructuring. It usually is applying in situations when an organization is looked with economic issues, when over-indebted, can't reimburse existing advances on time, has diminished liquidity and when there is no plausibility for additional indebtedness. The critical point is to trade the current debt for proprietorship share, by what the past lenders turn out to be new co-proprietors of the organization."

Source : http://www.mondaq.com/x/807910/Insolvency+Bankruptcy/Overview+Debt+To+Equity+Conversions

"A debt/equity swap is a refinancing deal in which a debt holder gets an equity position in exchange for cancellation of the debt. The swap is generally done to help a struggling company continue to operate. The logic behind this is an insolvent company cannot pay its debts or improve its equity standing. However, sometimes a company may simply wish to take advantage of favorable market conditions. Covenants in the bond indenture may prevent a swap from happening without consent."

Source : https://www.investopedia.com/terms/d/debtequityswap.asp

"This type of transaction most commonly occurs when a company is undergoing some financial difficulties so it isn't easily able to make the payments on its debt obligation. The financial difficulties are anticipated to be long term so an immediate fix is necessary to restore financial equilibrium. A company might also want to improve its cash flow by converting debt to equity.

In some cases, lenders might suggest or request a debt-to-equity swap, while the corporation might ask for one in other situations. "

Source : https://www.thebalancecareers.com/what-is-a-debt-to-equity-swap-129054108c8801423480b3235c1a406f41337ea
PierreAlexandreHPierreAlexandreH Reputation: 52
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Automatic Claim Number - cla1571994346

Quote - $7.5 million into35% of equity valuating the company at $21.5 million. Minor debt from $1 million has been extended at favorable rates by other investors.

Claim

There appears to be a confusion between Equity Value and Enterprise value. As a reminder, Equity Value + Net Debt Value = Enterprise Value or Firm Value ( Net debt = Debt less Cash).
In this case, if 7.5m is converted into 35% of equity, the EQUITY value is $21.5m (ie 7.5/35% ). Since the paper also mentions $1m of debt outstanding and assuming no cash held by the Company, this would give us a company valuation of $21.5m - $1m = $20.5m.
Please note that the $20.5m firm value computed in this claim is for the sake of the demonstration and cannot be confirmed with 100% accuracy from the information available since the amount of Cash held by the company is not mentioned anywhere.

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Thanks paper will be adjusted by karl on 2019-10-27 04:34:12

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PierreAlexandreHPierreAlexandreH Reputation: 52
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Automatic Claim Number - cla1571995760

Quote - We predict potentially 3 investment rounds ( Round 1 now for 3 Million for 14% of equity,

Claim

This seems to confirm my claim cla1571994346 where I was highlighting a confusion between equity value and firm value.

Please note that this claim assumes that "investment round" means "capital raise" or "funding round". If it meant "buyout", ie. if the intention was for an investor to buy shares from an existing shareholder, this claim does not hold. However given that the paper mentioned the need of liquidity of the company I think it it safe to assume "investment round" in this context means Capital Raise (ie. investor invest money into the company and new shares are created).

To sum up, the paper mentions that $7.5m of debt were converted into 35% of equity. This is equivalent to say that the debt was converted at a $21.5m EQUITY value.
The paper then states that investment Round 1 expected to happen now as per the quote should be under the following condition : $3m raised in exchange of 14% equity. $3m/14% = c. $21.5m. In other words, a round under these conditions would value the EQUITY of the company at $21.5m but POST-MONEY which translates to a valuation PRE-MONEY of 21.5- $3m = $18.5m. In other terms the funding round would occur at a valuation more favorable to new investors than the valuation at which the Debt Holders just converted to equity. I do suspect that it is not the intention of Management and that it only results from a confusion between Pre-money, post-money, Equity and firm valuation.

To explain the above another way and in a summarised version and assuming the company currently holds no cash:
Conversion of 7.5m of debt to 35% equity with 1m of debt outstanding :
Equity value = 7.5/35% = 21.5m. Firm value = 21.5m + 1m = 22.5m
Now the company raises 3m of cash. The new investors hold 14% of the equity. Net debt = 1 - 3 = -2
Equity value post money = 21.5m. Firm value = 21.5m - 2m = 19.5m
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PierreAlexandreHPierreAlexandreH Reputation: 52
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Automatic Claim Number - cla1571996085

Quote - $7.5 million into35% of equity valuating the company at $21.5 million. Minor debt from $1 million has been extended at favorable rates by other investors

Claim

ERRATUM on claim cla1571994346:

I mentioned "Since the paper also mentions $1m of debt outstanding and assuming no cash held by the Company, this would give us a company valuation of $21.5m - $1m = $20.5m"

I obviously should have written "this would give us a company valuation of $21.5m + $1m = $22.5m, consistent with the formula Firm value = Equity value + Net debt Value".
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PierreAlexandreHPierreAlexandreH Reputation: 52
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Automatic Claim Number - cla1571996623

Quote - Any investor has audit rights at investors expense once a year

Claim

The "s" at the end of "investors" has its importance. Is the cost supported by ALL investors when ONE investor claims his right to audit, or is the audit cost only supported by the investor who required the audit?

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Spelling mistake investor expense once a year by karl on 2019-10-27 04:35:34

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"Any deviation from any expenses over 10% of any item as outlined in the projection have to be approved by investors, 60% majority of all shareholders(calculated in percentage of ownership)"

It would be interesting to see the projections and understand what lines of cost fall under this restriction.
This could be problematic in managing the company notably if the company over-achieves on his sales objective, mechanically most of costs will also be higher than expected. And if at some point any additional expense needs to be validated by shareholders this could become problematic in the management of operations.

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"NIMALLC cannot spend more than 10% of last month’s EBIT in advertisement or entertainment"

This sounds like a measure that could be counter-productive. If the company, for different reasons ( Seasonality, Higher Capex (thus increasing D&A), one-off high costs etc.) ends up with one or several negative EBIT, this condition forces the company to stop advertisement, possibly creating a vicious cicle

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Automatic Claim Number - cla1571998752

Quote - MonthEBITValueFirst round/500kSeed$ 21,500,000.002.33%Month 1$ 8,333.33$ 21,500,000.002.33%Month 2$ 29,166.67$ 22,750,000.002.20%Month 3$ 52,083.33$ 24,125,000.002.07%

Claim

This table provides unclear information.
The Value column seems to reflect a projection of Equity value based on EBIT. How is this calculated?
What does the "First round / 500k" column means ? It seems be equal to 500k/ Valuation, however it is inconsistent with the rest of the paper. The paper mentions $3m first round, not $500k.
Moreover, why do the projection start with a $0 EBIT ? My understanding was that the company is already in operation and commercially successful (which supports the 21.5m valuation) but the projection ressemble projection of a new venture / new product. Is it to understand that projection shown only reflect EBIT generated by new product launch ? (as stated in the paper " the company is now ready to capitalize on the passion of fans in other popular sports"). But if that understanding is correct, it raises the key question of how the EBIT has been calculated for these projection. Indeed, calculate an EBIT for a line of new product inside an existing company with other existing product is a highly subjective work with the need to allocate several lines of fixed, indirect costs and D&A.c6937982082142c89c0e76666176f884
PierreAlexandreHPierreAlexandreH Reputation: 52
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Automatic Claim Number - cla1572000189

Quote - In any given month the company is cash flow negative, total salary expenses to NIMAwill be reduced to cover other operational limited to (employees’ salaries, Licensing’s) but will be converted as first position debt with an interest rate of 12% when the company regains a positive cash flow and must be paid back not exceeding of 60% of EBIT per month but not less than 30% of EBIT

Claim

Given the importance given to Monthly Cash Flow and EBIT throughout this paper, it will be highly important to agree on a detailed definition.
For example, does cash flow include Debt reimbursement? Is it simply defined as the movement between two dates of the cash position of the company as per bank statement ? Does the definition mention a normalised level of Net Working Capital ?
And regarding EBIT, what are the costs / revenue included or not included in EBIT ? What about exceptional items? (eg the costs of raising fund ). What about FX gains / loss, if any?

It is in the best interest of shareholders to keep in mind that based on how things are defined they can more or less easily be manipulated.
For instance the paper mentions that "If NIMALLC gains cash flow, positive results for the duration over 1 year, point 1 through 5 will become mute forever".
Playing the devil's advocate, what refrains the company to build a bit of overstock, slow down payments from customers and further manipulate Net Working Capital just to ensure 12 month of positive cash flow?
Also what refrains Management to build on provision and release it at the right moments to avoid a negative EBIT, or increase EBIT on a given month to be able to increase Marketing spend the next month?

All the restrictions and rules described on this paper serve a purpose and it is key to make sure that the definitions of EBIT, Cash flow and other items used as key indicator allow the right implementation of this purpose09e3551e63eb9549426464be245fe60f

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