Hi Bonnie,
You were asking why AFS needs to look for financing (issue more shares) should it be successful in finalizing the letter of intent into a firm agreement for sales of 10,000 units per year to give a revenue of $20 million a year. Have a look at its audited income statement for the last year. Revenue was $48,393 and cost of goods was $37,497 that is, 23% margin.
So, for every Sparrow unit it sells for $2,000 it needs $1,540 in working capital to build the unit. 10,000 units = $15.4 million working capital. Say, it gets paid 4 times a year, working capital = $15.4 /5 = $3 mill working capital.
Presently, with no revenue, the company is using approx. $1.5 million a year to maintain its operations (salaries, r&d, admin, mkting,rent, etc. etc). If the agreement comes through, it will need to hire more people, incur more inventory etc. to produce the units. Say, its total operational needs (without the direct costs of manufacturing the Sparrows) rise to $2.5 mill a year.
Add $3 mill to $2.5 mill = $5.5 million working capital each year. How is management going to get this funding to support the sales? Presently it appears their cash flow is very, very tight. This will explain why recently they issue a private placement for 100,000 shares for $150,000.
Someone in this thread mentioned that AFS will get paid in advance. Ugh, ugh, that's not how business works. Produce, deliver, then get paid. With a foreign country, getting paid is a bigger concern. That's why there is the letter of intent. It shows AFS don't trust it'll get paid and the money is escrowed in the bank to be released when products are delivered.
For this "project" of 1,050 units, AFS got a cash advance. I don't think it has already received the full $2 million. You may want to confirm this with management in your next contact with them. You may also want to ask how the company intends to finance the $20 million sales a year. And thirdly, ask them how they secured the Mexican project and beating 20 other competitors - was it clearly because of better technology, or better pricing.
FWIW, in my dd, I see the large float as a BIG factor with this stock. Over the number of years it took management to be able to bring the company to this stage, it had to pay its way by issuing shares. Should the $20 mill sales materialize, it would either have to take a loan (if a bank is willing to lend) or issue more shares. Mostly likely it will issue more shares. It's a long way from sales to eps. And in the final analysis, it is eps that will sustain a stock price appreciation.
Regards,
Denise
p.s. I'm not a broker either. Any broker on this thread who may have a conflict of interest (e.g. firm planning to underwrite AFS in the future, or talking the stock up to support sales to clients) should fess up! |
