Shares of the scoreboard and LED display maker Daktronics (NASDAQ: DAKT) fell 40% in a single session and they may fall further. The reason is that the company filed a document with the SEC that raises serious questions about the business's status as a “going concern”. A going concern is a business that has the resources to continue operating in a manner that will allow it to stay afloat. What this means for investors is a risk of bankruptcy but the fears may be overblown. While there is cause for concern, the underlying reason for the filing is supply chain and inflationary pressures that have the company’s cash flow in question.
Economic Conditions Squeeze Cash Flow At Daktronics
But the company is not just sitting down and letting its business stall. The board is seeking sources of liquidity that are as yet unsecured but may be forthcoming in the next few weeks or quarters. At the same time, a new board member was proposed to replace an outgoing member so it appears there is no immediate need to cease operations.
This is from the company press release:
“Ongoing supply chain disruptions and inflationary challenges in materials, freight, and personnel-related costs have and will continue to cause volatility in our cash flow, pricing, order volumes, lead times, competitiveness, revenue cycles, and production costs. Our ability to fund inventory levels, operations, and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, maintain or improve margins, to use funds from our credit facility, and to find other sources of liquidity.
Although supply chain disruptions have started to ease, and we expect our inventory levels to decline, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures. We will need additional liquidity to meet our obligations as they come due in the 12 months following the date of this Form 12b-25, and we cannot be assured that such liquidity will be available or the form of such liquidity, such as equity raises or debt financing. These conditions raise substantial doubt about our ability to continue as a going concern.”
There Is An Opportunity In Daktronics
Daktronics is no fly-by-night business but a well-established name in the scoreboard and public-display technology. Not only is there an opportunity in expanding efforts in International markets but the chance for deeper penetration of existing markets in the US. These include airports and airport terminals, highways, urban/advertising and public transportation markets among others. If the company can not secure satisfactory financing on its own there is another alternative and that is the sale of the business. One name that springs to mind is SGH (NASDAQ: SGH) which is a specialist in LED technology.
Shares of the stock have been under pressure for quite some time but hit a new low in the wake of the recent announcement. The new low has the stock at the lowest levels since 1999 and has it set up as a speculative buy for those assuming this issue will pass. If not, shares of this stock could continue to trend lower until more news comes out. The next earnings release will be on Monday, December 12th so that could be the day.
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