Business Week e.biz -- Net Worth: Due Diligence
Quokka Goes for the Gold
The sports site is gaining fans and sponsors, but its burn rate could stop it short
Quokka Sports Inc. is one of my favorite sites on the Web. What I like is its incredibly deep coverage of mountain-climbing exhibitions, sailboat races, and events like the Marathon des Sables, a 140-mile, seven-day race on foot through the Sahara Desert. I can check out live video feeds, articles about the events, and first-person accounts from the athletes involved. This is why we have computers at work, right? And on Sept. 15, the main event starts: Quokka will begin covering the Sydney Olympics, in cooperation with NBC. "This is the largest sporting event in the world," says Alan S. Ramadan, the company's president and chief executive. "It's like five Super Bowls all happening at once."
Yet in what should be its finest hour, I'm worried about Quokka: It's facing the equivalent of a run through the desert with one canteen of water. A close look at Quokka's financial documents shows that it's suffering from a cash drought that threatens to cause the company to expire. At the end of June, Quokka listed $23 million in cash or equivalents on its balance sheet, and it ran through more than $9 million a month in the second quarter. Run the numbers, and the company has less than three months of cash at current burn rates. Quokka execs say they're ratcheting back to $7 million per month in the third quarter, but that only takes the company into October.
How serious is the issue? In the company's latest quarterly filing with the Securities & Exchange Commission on Aug. 14, Quokka noted that, because of its precarious financial state, it "may not continue as a going concern." That's the kind of language nervous auditors force companies to put into their financial documents when they feel irate shareholders may soon darken their doorsteps. "This is a red flag to investors that your ability to survive is in question," says Richard Leftwich, an accounting and finance professor at the University of Chicago's Graduate School of Business.
While Wall Street's ever vigilant analysts haven't given the issue much attention, shareholders certainly haven't missed it. Quokka's stock has tumbled about 65% from its peak in December, to $6.88. Several of the company's largest stockholders have bailed out in the past few months, notably money managers Franklin Templeton, Lord Abbett & Co., and Georgica Advisors. Those three sold all of their stock holdings, a total of 1.4 million shares, during the second quarter, according to the most recent financial filings. And some investors are betting that the stock is headed lower: Short interest in Quokka soared 74%, to 769,876 shares, in August.Home stretch? Ramadan downplays the significance of the crunch. For starters, Quokka is on track to boost revenues to $52 million this year, from $13.1 million last year. The company gets most of its revenues from corporate sponsorships, and companies like General Motors Corp. and General Electric Co. are flocking to Quokka because of its ties to the Olympics and other prestige events, such as the 100th U.S. Open at Pebble Beach. Sure, the company is projected to lose $110 million in 2000, says Merrill Lynch & Co. But Ramadan points out that when the company went public in July, 1999, it said it would need more capital in about a year. Now, he says, he expects to complete a deal to raise $50 million in a convertible-debt offering in the next few weeks. If he does, he figures Quokka will have cash to last until it reaches profitability, expected by June of 2002. "We're very much on track with our original plan," he says.
But the additional cash isn't a sure thing. When Quokka held its second-quarter conference call on July 27 and first told analysts about the $50 million debt deal, execs expected to be able to complete it in August. But August came and went. Les Schmidt, the company's chief financial officer, executive vice-president, and secretary, admits that the deal is taking longer than anticipated to close. "When you're working with strategic partners, sometimes negotiations take longer than you think," he says. "We're very confident we can [complete the deal]." Just in case, according to its latest SEC filing, Quokka has drawn up a "contingency plan" that "consists of reductions in personnel and marketing and capital expenditures."
Even if it raises the $50 million, Quokka will have to execute almost perfectly to make that cash last until it reaches profitability. If the company hits all its financial targets for the rest of the year, it'll end 2000 with about $35 million in cash and a burn rate of about $5 million per month. That means the company will probably have to raise more money next summer.
Where will Quokka get the next round of cash? Maybe, just maybe, from NBC. On Aug. 22, the company unveiled an agreement with the television network under which it can buy up to 10 million shares of the company's stock over the next few years for a total of $140.8 million. It works like this: NBC has a warrant with which it can buy 3.33 million shares of Quokka stock in June of 2000 for $8.89 apiece; another 3.33 million shares in June of 2002 for $13.34; and a third slice of 3.33 million shares in June of 2004 for $20 a share. The idea is that NBC will have an economic interest in building the value of Quokka.
That value clearly depends on the next few months. The company can't broadcast any live video from the Olympics, but it expects to use photos, articles, and limited delayed video clips to draw 10 million people to its Web site--a tremendous increase over the 1.6 million per month that visited during the second quarter. If Quokka can make its target, it'll have a better shot at attracting more corporate sponsors and cutting deals for more sports events. In other words, Quokka execs need a flawless performance at the Olympics to bring home the gold. I, for one, am pulling for them.By Peter Elstrom, Peter_elstrom@ebiz.Businessweek.comReturn to top