I've had a change of heart about this company. I now think Sevl is much riskier than I originally did, so I'm posting an update.
Here's the problem, as I see it. The company has enough cash on hand for about one more quarter's operation after the present quarter is over. With the sale of the building, which they carried as of Q1 as a current asset, they paid off their bank loan and I understand that they are trying to arrainge asset based financing to carry them forward.
Now, if they had a good crop of games for release in the fall, as I was lead to believe, I thought the stock was worth a shot. However, after speaking to investor relations again today, my distinct impression is that it's very iffy whether they will meet the Christmas deadline with anything but the Barney games. Return to Krondor, which I had been lead to believe would be released this fall is, I'm now told, not to be released until 1/98. I don't know when the Python game is to be released but they apparently will have no new games ready to exhibit in final form at E3, which comes up next week. The Python game, I was told, will be exhibited at E3, but in rough form.
Also, I don't think the MSFT deal will net them very much. BusinessWeek estimated that MSFT might sell 100,000 to 500,000 of the Barney talking doll. Now let's assume that they sell 500,000, which I doubt, and that with each purchase they sell all four Barney games, which seems unlikely, and that by some miracle all those sales fall in Q4 of 1997. The games are to retail for $15 to 24, again according to BW. So let's assume they sell all 2,000,000 (4 X 500,000) games at $24, again unlikely. That would result in sales of $24,000,000 of which, let's say MSFT takes in half or $12,000,000. Now, Sevl is to get 10-15%, depending on the number sold. If their royalties averaged out at 12.5% that would leave Sevl with a total of $1.5 million for 1997.
So, to sum up what I'm trying to say thus far is that even if the Barney games flew out the door this year, the income to Sevl would just about knock out 1/'3 of one quarters loss! And, since there don't seem to be any big new games that can be relied on for Q4, the company is going to be in desparate need of financing. Now, last year they obtained a $12 million line of credit, which they paid down, apparently, with the sale of the aforementioned building. If they get another $12 million line of credit and fully take it down they can probably make through Q3 of 1998. But after that the well runs dry. Thus the company will have to either produce and market a real hit before then or get additional equity financing.
In sum, I think that with their new games not likely to be released in 1997, the stock has less upside and more risk than I originally thought. |
