bReason for comment/bbrbr
On 10 September 2009, the company provided details of four new Manufacturer’s Representatives added to its sales organization, some operational detail and further information on its financing intentions.

pThe new territories with representatives in parentheses are: Washington DC, Virginia (Energy Advanced); Southern New York State (Accardi Companies); Connecticut (Analytics Combustion Services); and Kansas, Iowa and Missouri (Hughes Machinery Equipment).

pManagement notes that the rep training programme has been enhanced and that the three day programme in August with Canromex, its new Mexican rep, was a success.

pSofame also disclosed that it had “approved a private placement of equity securities up to C$2m Canadian Dollars to accredited investors resident in Canada and elsewhere”. This is in addition to the debt financing agreement with Township Capital previously announced for a like C$2m.

pThe press release goes on to state that Sofame is involved in discussions with several potential lenders and investors concerning the funding of sales and marketing initiatives as well as the working capital required for growth and continuing operations.

pBObjective’s view:/BBRBR
pWith a share price currently at around C$0.065 and an equity capitalization of C$6.5m, the likely pro-forma effects on share capital, estimated book value and earnings, should a further C$2m additional share capital be raised at this level would:

iEffect on share capital/i

brAssuming C$2m is raised at C$0.065 per share (ignoring costs), this would involve issuing 30.8m new Sofame shares and increase the basic issued share capital from 99.9m shares, to 130.7m shares (these numbers exclude potential warrant and option conversion). The ‘new’ shareholders would own 23.5% of the enlarged issued share capital.

piEffect on book value/i

brPro-forma September year end book value would improve from an estimated C$777k to C$2.8m and total assets increase from C$3.1m to C$5.1m.

pThe estimated book value per share and total assets per share are C$0.021 and C$0.039, respectively. The new price to book value would be 3.1 x

pIt should be noted that if there is no further equity raised, estimated 30 September 2009 year end undiluted book value would amount to only C$0.008 per share with total assets of C$0.031 per share. Estimated current undiluted price to book ratio is therefore 8.4 x.

piEffect on earnings/i

brAssuming that the company will now be in a position to successfully convert its project pipeline as per our core estimate, the new PER ratios for 2010, 2011 and 2012 are 350.6x, 7.9x and 4.0x respectively.

pThe reason the PER is so high in 2010 (despite a more than doubling in estimated turnover) is that because of the company’s cost structure, reported profit will be small; accordingly, meaningful profit is likely to be deferred until the following years.

pThe raising of sufficient working capital is Sofame’s most pressing corporate issue.
Institutional investors, or conceivably a trade partner, might be interested in taking a stake in an enlarged business and this could solve Sofame’s financing impasse.

BRBR
For all our previous comments on this company visit:
A href=http://www.objectivecapital.co.uk/SDW.V.asphttp://www.objectivecapital.co.uk/SDW.V.asp/a

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