Meanderings on (1) Effect of KD1 (2) Effect of expanded share issue on losses. (Taken from my RG posting in which I was responding to Wildman who said he had a source which told him that in 1Q NETP counted three months of KD1 revenues but only 2 months of its costs).
KD1 had total revenues of $3.5 million in 1999 and $3.2 million in 1998. By a crude estimate, assuming even monthly revenues throughout the year, 1Q 2000 revenues would have been at the rate of $300,000 per month, or $900,000 for the full 1Q. According to Wildman's information, NETP booked the full $900,000 even though it did not own KD1 until the beginning of February. Without that information, NETP booked two months or $600,000 for 1Q. So the disparity between Wildman's source and the public record is about $300,000.
KD1's cost of revenues increased to $2.8 million in 1999 from $2.0 million in 1998, and its operating expenses increased to $8.8 million in 1999 from $5.7 million in 1998. As of December 31, 1999, KD1 had accumulated net losses, excluding accretion on redeemable convertible preferred stock, of $16.2 million since inception.
It would appear that it had an operating loss in 1999 of about $5.3 million. This works out to a crude pro rata rate of $442,000 per month.
This means that in its 1Q results, NETP ought to have taken on board $884,000 of operating losses from KD1 for February and March and this would have added to NETP's own organic operating losses for 1Q.
It has always been a bit of a puzzle to me. KD1 appears to be dilutive of earnings, yet there have been no references by NETP to this fact, apart from the bald statement of KD1's trading position at the time of the acquisition. Indeed, a reading of NETP's written and verbal comments would suggest that KD1 was accretive to earnings in 1Q. They talk in positive glowing terms of its contribution.
One of the possible outcomes of this is that as NETP reports the 2Q as the first full quarter of KD1 contributions, NETP can count on a one-time bump of $300,000 KD1 revenues (but not according to Wildman) but can also count on an extra one-time bump of $442,000 in operating losses.
One qualification to the above is that KD1 - considered as a separate entity - might have reduced its operating losses much more quickly since it joined NETP. There would be economies of scale, but also cross-selling of KD1 products to classic NETP customers. Furthermore, NETP classic would have cross-sold its products to KD1 customers. And NETP and KD1 have created new products which will have increased their combined new revenues and reduced their combined net operating losses
Do we have an accountant in the house? When I try to be one, I sometimes make huge conceptual mistakes. Nevertheless, I think the above points about KD1 raises other interesting points about earnings.
1. I noticed that the announcement of 1Q results as -0.17 cents a share was based on a share issue of just less than 23 million. I don't know what the rule is but I would have thought that 2Q must take into consideration the 2.24 million shares issued for KD1 and the 2+ million shares issued for the SPO. So the total is probably about 28+ million now. If so, this will lower the loss stated on a per share basis. (Unless there is some rule that the same share base must be used quarter to quarter for the purposes of comparison. I wonder what figure the analysts were using when they made an estimate of -0.17 per share for 2Q? Perhaps the decrease in loss that some of them projected was caused by such an adjustment).
2. If my prior posts about the effect of KD1 on 1Q are correct, then it could be argued that without KD1, NETP would have had revenues of $8.6 million (according to Wildman's information) or $8.9 millon instead of $9.5 million.
3. With the assumptions set out in #2, then 1Q would also have been free of the $884,000 KD1 loss in 1Q, which works out at almost 4 cents a share, if the share issue is assumed to be 23 million. This would have brought the 1Q loss down to -0.13 cents a share - a huge percentage improvement over expectations. If the share issue had been adjusted for the SPO to 25 million, it would have been -0.12.
4. With KD1 in 2Q, let us assume, for the sake of the argument that the loss is between -0.17 and -0.13 based on 23 million shares. The following table shows what it will be if the 28 million figure is used. (These calculations are rough, I believe the 1Q figures were less than 23 million and the 2Q figures are higher than 28 million. I have also rounded some of the results).
-23 M to -28 M
-0.17 to -00.14
-0.16 to -00.13
-0.15 to -00.12
-0.14 to -11.50
-0.13 to -10.60 |
