Things are kicking off at Marka Holding, the beleaguered retail holding company that we’ve written about here, here and most recently here.

Marka held a board meeting at the end of April and subsequently published its Q1 2018 financial statements. How do we put this?

It’s not looking good.

We first pointed out how Marka was a sell back in September 2016, highlighted in the chart above. At that time the stock was trading around AED 1.1, today that number is AED 0.28, equivalent to a 75% loss.

Marka’s founding shareholders are the Who’s Who of UAE business. Talk about lose money for an entire country’s business elite!

Financial Statements

As predicte, Marka has finally defaulted on its bank debt. Their auditor, PWC, had the following to say in the recent Q1 2018 financial statements:

The Group incurred a loss of AED 8 million during the three-month period ended 31 March 2018 and, as of that date, the Group’s current liabilities exceeded its current assets by AED 65 million. Accumulated losses amounted to AED 458 million as at that date (31 December 2017: accumulated losses of AED 450 million). Furthermore, the Group had a negative cash flows from operations of AED 261 thousand during the period ended 31 March 2018. The Group has experienced a shortage in cash resources and as a result, interest and principal on loans of AED 6.7 million and AED 144.5 million respectively on the Group’s borrowing with the banks remained unpaid as at 31 March 2018. The carrying amount of the loan payable in default as at 31 March 2018 is AED 199 million. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern.

Out of the due principal of AED 144.5 million, a balance of AED 115 million relates to the sale of a subsidiary which is held in an escrow account for the repayment of a bank borrowing. In addition, the Group is currently negotiating with the two banks to restructure their facilities for extended payment terms.

At the end of Q1 2018 Marka had just AED 3.4mn in cash but around AED 170mn in receivables. We wondered why Marka had struggled to collect its dues. The receivables had rapidly increased around a year ago in Q2 2017.

This was the quarter in which Marka sold one of its disastrous acquisitions, Retailcorp, for AED 200mn to GMG Holding. However at the close of Q2, GMG Holding still owed Marka AED 115mn. Note 27 of Q2 2017 financials stated that the sale comprised of AED 85mn in cash, with the outstanding balance paid “after obtaining consent of the lessors to the relevant change of control and respective renewal of lease agreements.

Q3 2017 saw no change in this position. By the end of Q4 2017 things had started getting ugly. This time, Note 27 detailed a legal investigation and a request in October by GMG Holding for arbitration, claiming Marka had breached the Sale & Purchase agreement as Marka had failed to obtain consent from one of the landlords, in which Retailcorp operated, to transfer lease agreements to GMG Holding.

Marka had apparently managed to obtain consent for one lease transfer to GMG Holding, amounting to AED 25mn of the AED 115mn total, with the AED 90mn balance pending negotiations with the landlord. According to the SPA, these transfers were supposed to be obtained within 150 days of the sale date.

GMG Holding accuses Marka of also failing to release the shares of Retailcorp that were pledged to a bank. Marka then counter-sued, seeking the release of the pending AED 115mn from escrow together with interest expense associated with the loan it had taken to acquire Retailcorp in the first place. And there we end 2017. By the end of Q1 2018 nothing had changed. Even in exiting a business it appears Marka Holding screwed it up.

With such a weak liquidity position no wonder PWC had questions on its ability to remain a going concern. Accumulated losses amounted to AED 458mn over the less than 5 years of its existence. Marka made losses in every single quarter of its trading.

Related Party Balances

Previously, in late 2016, Marka had sold another subsidiary, Cheeky Monkeys which it had a 60% stake in. The sale was to a related party, Evolvence Knowledge Investments, controlled by Mr. Khaled AlMheiri, the Vice Chairman of Marka at the time.

15% of Cheeky Moneys was sold in September 2016 for AED 21mn. Another 15% was sold in December 2016 for AED 21mn, leaving it with a 30% stake. In March 2017 the remaining 30% was sold for AED 42mn (at the time Marka happened to violate UAE Securities law with this transaction as it had not obtained prior approval to make a sale to related party that exceeded 5% of its issued capital, but lets not digress).

In total the sale of Cheeky Monkey was to see Marka receive AED 84mn from Evolvence. In Q4 2017 and Q1 2018 Marka received AED 37.8mn and AED 12.18mn in cash, respectively. According to Note 26 of Q1 2018 financial statements, as of the end of the quarter an outstanding amount of AED 34.02mn is classified as overdue, “however, management believes that the amount will be fully collected during the remaining quarters of 2018”.

This will be interesting to follow. Will Evolvence make good on its obligation to inject AED 34mn into the sinking ship that is Marka. The “cheeky” thing would be to procrastinate, after all, there’s no benefit in throwing good money after bad.

Board Meeting

Marka’s Annual General Assembly convened on the 30th April 2018. The resolutions of the meeting are interesting.

The board approved the accuracy of the financial position as of 2017 end.

The board did not approve the auditors report for the year ended 2017.

And then…

“The board have requested an “independent expert to examine the previous acquisition and divestment transactions of the Company prior to May 2017. The Report is to cover the legal and accounting aspects of the transactions. The Report is to be submitted to the Board of Directors and then notified to the shareholders of the Company with its contents.”

The next part is interesting…

“Discharging the Company’s board members of the liability for the financial year ended on 31/12/2017 Mr. Khaled Al Muhairi and H.E. Jamal Al Hai’s discharge is subject to the submission of the expert report.”

That could be read as though shareholders may be seeking to hold Al Mheiri and Al Hai accountable for the terrible deal-making that resulted in Marka accumulating over AED 450mn of losses. This would be a very interesting development if it happened, and something rarely seen in Gulf public markets.

The board resolutions go on to include request both a share capital reduction, and then, wait for it…. approval for a subsequent fresh capital raise of AED 250mn.

Seriously, do people ever learn?