A Fundamental View.
Here is what is not being discussed with all the pro forma fluff floating around:
I'll use the current quarterly for reference:
Sales were $209K
COGS were $323K
Ouch.
Gross Profit is an oxymoron at the moment. They had a gross loss of $114K for this quarter. Upon closer inspection we see the $323K in COGS is comprised of the following items:
Direct Product Cost = $138K
Direct Labour Cost = $127K
Depreciation $48K
Selling/Marketing = $2K
Other = $7K
The Depreciation is related to the Building, Tray's and Rigging and the verticrop system itself. While depreciation itself is a non-cash charge, it is certainly a real expense. All depreciation does is spread a real cost over the useful life of the asset. Trays will need to be replaced, equipment serviced etc ... So, while it doesn't effect cash flow in the reporting period it certainly must be accounted for in any analysis.
But stop for second and simply look at the sum of the Direct Product Costs and Direct Labour which sum to $265K. This sum exceeds the unit sales figures for the quarter all by itself. The Direct Labour appears to be too costly. This is a hint that something went wrong during the quarter. Higher than expected costs or lower than expected Sales. It's possible that expected orders didn't pan out. You can't make money taking inputs worth a $1 and selling outputs to the public for $.90.
This margin should be closer to +50%. Why? because you still have to pay for G&A, R&D, expansion, and interest on debt. So let's have a closer look at those additional expenses which we've yet to address.
Product Development cost are comprised of Site contractor Fees and Consulting Fees. They were relatively stable Q over Q. They are currently costing the company $125K per quarter. If the company is to expand, contractor fees etc will expand with that. I would guess these are related more to Epcot at the moment.
General and Administrative expenses were roughly $90K. See anything wrong with that? (see below for the answer) This category includes rent, travel, office, consulting etc . As the company grows these expenses are not going to shrink.
Next is interest on debt and royalties paid. This totalled $113K for the quarter. Some good news here will be the positive effect of the debt conversion to equity. This will lower their interest costs as debt was eliminated. However, you should understand how this all came about.
$3.4M was recently converted to equity. A logical question would be who in their right mind would give up a debt claim for a stock certificate offered by a company that had negative equity? The debt is a more senior claim.
Lo and behold upon inspection you'll find that of the $3.4M which converted, all but approximately $500K was done by related parties and Institute B. In other words, the friendly hands and the executives.
So, to sum up:
At the moment the companies sales must increase dramatically without incurring any additional expenses to have a shot of making money.
Good: Sales ................................. $209K
Bad: COGS .................................. $323K
Product development ................... $125K
G&A ................................... $90K
Interest .............................. $113K * will decrease next q due to conversion
All else being equal, sales would have needed to be greater than 3X what they are in order to create a positive bottom line without a penny of increase in additional expenses.
Finally, one last thing that Barunuuk clearly doesn't understand.
The expenses listed above are actually drastically understated. Why? Because Stephan Fane and Chris Ng are currently accruing a salary rather than actually being paid in cash. I applaud them both because I believe that past accruals are what they both just converted to equity and therefore they are eating their own cooking to some extent. However, it has cost the rest of the shareholder base significant dilution!
In 2012 Stephan's accrued salary was $336K. Chris Ng's was $176K for a combined total of $512K annually. That represents another $128K per quarter if the salary was actually being paid and not accrued. When they finally do take regular pay it will become part the G&A line item.
If executive salaries were actually being paid and included on the income statement, then the total sales hurdle per quarter would become roughly $780k before the shareholders got to spilt even one penny.
This is the reality of where Alterrus is currently at.
Pro forma blue sky projections are meaningless and this is why;
1) I get my back up when the board is sprayed with a bunch of pro forma garbage.
2) anyone hanging their hat on bottomline earnings at this stage of the game is delusional.
They are climbing Mt. Everest in barefeet at the moment.
