This is just a quick note for readers of my blog who may not have seen the discussion on Small Caps Live since this morning.

In today’s update Mpac say:

The Group had an improved H2 22 over H1 22 and expects to report full year revenue and underlying profit before tax in line with market expectations.

In fact Equity Development have upgraded somewhat.


These supply chain challenges resulted in longer Mpac project build time frames during the year, leading to higher levels of working capital in H2 than previously anticipated and accordingly impacting year end net debt.

According to an update from Equity Development, the forecast year-end cash falls from +£11.6m to -£4.2m excluding leases following this news. Shore have the fall from +£5.3m to -£10.1m including leases. That’s a forecast worsening of cash of between £15.4 and £15.8m since the previous update four months prior.

Where has the cash gone? There are only really two places: inventories and contract assets. The commentary makes it clear inventories have risen, but with typical levels of around £6m, of which less than £1m non-finished goods, it is logical to assume the majority went into contract assets. The commentary from Shore supports this view:

Given the organic development of the Group across all segments, we also note that contract assets (receivables) have extended to the year end.

This would mean contract assets had approximately doubled from £12.7m a year earlier. This is a fairly extreme state of affairs which I have been unable to obtain a satisfactory explanation for. One theory might be that this is another impact of supply chain difficulties, for example the product is all ready to go except for the microprocessors and so they understandably felt the revenue should be recognised. Unfortunately my understanding of IFRS 15 is that this is simply not an option because a) the customer cannot benefit from the machine unless it is complete (it is a bundle) and b) it has not been delivered / control handed to the customer.

Therefore (and I strongly encourage you to check my reasoning above) my honest belief is that the revenue claimed in the trading update would not survive an audit and the revenue eventually reported in the accounts will be of the order £10m lower than claimed today. This also raises questions of a) why did they take this “risk”? and b) have they done it before?

The second issue here is that the Freyr QCP delivery has been further delayed. The original contractual milestone for Factory Acceptance Test (FAT) was 30/6/2022. It was since reported that delivery would not happen until December 2022. This has now slipped to Q2 2023 (unclear if delivery or FAT) and it is reported that the customer specification is unstable. Firm orders for the gigafactory are unlikely until this is resolved and it puts the relationship between Freyr and Mpac at risk.

I had already been reducing my position due to the Freyr delays I’ve been discussing on Small Caps Live. I have now sold my entire position into what I see as illogical strength today. I may buy back if the share price starts to reflect the uncertainty over revenue and Freyr progress.

Edit 17/1/2023 12:18: Equity Development have replied with this thread that gives a number of important details which should allow you to judge by yourself whether this revenue can be recognised:

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