Frank. At only a $2.4 million market cap, the relationship with Costco getting closer every week in the company already very near profitability, I think it's a great time to buy. I think the real story here is in the numbers and I've taken a lot of time to understand them here's my thoughts on what will happen for the fall promotion. Good luck in your new position.
Costco Promotion - The conservative likely scenario.
The price on the Costco site is $139. Costco typically takes 15% margin leaving $118 for the company. This generates $236,000.
Let's assume that 50% of these customers upgrade to a one-year contract at $29 per month. MDHI keeps all of this money with Costco getting nothing. $29 times 6 months is $174. Multiply this by the 1000 upgrades and the company walks away with an additional $174,000. This added to the $236,000 equals $410,000.
Then we must figure out what the 500 customers who did not upgrade do at the end of the first 6 months. Let’s say half of them (500) extend for another 6 months. That yields another $87,000 in revenue. Less the $4 per month monitoring fee ($12,000) we are left with gross margin of $75,000.
This gives total revenue of $485,000.
The company’s costs are $100,000 for the units (at $50 each) and $4 per month for monitoring fees, which equals $72,000 for a total hard cost of $172,000.
When we take the revenue of $485,000 and subtract out the $172,000 we are left with a gross margin of $313,000
The company's monthly overhead is only about $30,000 for yearly total of $360,000.
As you can see, the gross margins produced at the mid range of Costco’s estimate covers most of the monthly expenses for the year. Of course, on top of this the company is selling separate from the Costco promotion in addition to their own web sales, Europe, and units to resellers and to their big distributor, etc.
It is almost impossible for MDHI not to turn profitable even if the big Costco promotion is only moderately successful.
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