Steve: In line with your desire that we ignore the activities of Ram Capital and focus instead on the facts related to DCHT, I wanted to comment on the financial information that DCHT has revealed about itself at its website: dch-technology.com
The company states clearly that the financial information is unaudited, and is thus subject to change by an audit. An audit, if one ever occurs (I question whether it will, for a reason discussed below), will make significant changes to DCHT's purported numbers, because the numbers are self contradictory, and clearly the product of people who know little about accounting.
The purported income statement starts out with a top line labeled "income". Surely DCHT meant "sales" or "revenues", right? No one with even minimal accounting knowledge could possibly make that mistake. Weak skills in accounting are bad in the best of circumstances - in a small company with huge losses, they can be fatal.
In any event, sales were supposedly $215,514 in 1998. Gross profit on those sales were supposedly $193,297; that number is almost certainly incorrect, for two reasons.
First, virtually no company in the world has gross margins of 89.7%. The only one I know of is Microsoft, and it has huge sales of the Windows operating system and other software in which it doesn't ship any physical product at all, in effect just receiving fees from customers for its intellectual property. Anybody besides MSFT? Forget it.
Years ago I had money in a scientific instrument business and got to know the industry characteristics. Gross margins rarely get much above 65%, and that only on high volume instruments during periods of peak demand. The idea that DCHT can cobble together $215,514 worth of product over the course of a year, buying all its materials and components in minuscule quantities at high prices, and show 89.7% gross margins, is ludicrous on the face of it.
Secondly, the gross profit number contradicts other financial information. The company claims that during the course of the year it figured out how to lower the material cost on its hand held analyzers to 11% from 25%. Even if it accomplished this wonderful feat on January 1, 1998, and did the same for its other products, the cost of materials alone would still exceed the ENTIRE cost of goods sold, which is supposedly only 10.3% of sales (100% minus the 89.7% gross profit).
Cost of goods sold actually comprises three things - material costs, labor costs, and factory overhead. Since DCHT's claimed material cost is already greater than total cost of goods sold, that doesn't leave anything at all for labor or factory overhead. Does someone sprinkle fairy dust around the room, and the materials leap out of their boxes and assemble themselves into hydrogen sensors, without needing any human labor? No rent required? No equipment?
OK, so the gross profit figure is bogus. Most likely, someone mistakenly put a lot of the costs of the products into "expenses" or "R&D" rather than in "cost of goods sold" where they belong. Given the company's small volume, actual gross profits, when accounted for properly, were probably minimal or non-existent. (How people who don't know the very basics of accounting can dare put a projection on their website promising sales over the next five years of $105 million and profits of $26.7 million, is beyond me.)
This is NOT just trivial bean counting. A company that doesn't know proper accounting can't raise capital, will never know its true costs, won't price its products sensibly, and is ultimately doomed.
Doom is an issue that shareholders of DCHT might want to contemplate. The company's pseudo balance sheet shows assets that are $194,358 more than liabilities as of December 4, 1998. With losses that averaged $335,000 per MONTH in 1998, that doesn't leave much time before the company runs completely out of money. True, some employees were paid in stock, which reduces the cash flow needs, but most suppliers and employees prefer coin of the realm. Most operating losses are not just paper entries - they involve an actual reduction in cash.
Presumably DCHT could knock a big chunk off its expenses by stopping all R&D, at the risk of allowing Ballard time to catch up to DCHT's huge lead in fuel cells (er...cough-cough). Even with zero R&D, though, DCHT is still running huge losses and appears likely to run out of money soon.
Ah, but what about the huge backlog and great sales prospects for 1999?
Well, what about them? Without substantial new financing DCHT simply won't be able to do the business.
Why? When a company sells a product to another company, they don't get paid C.O.D. They get paid in 30 days at best, 50-60 days more likely. This is especially true in scientific instruments, where customers often won't even start the payable cycle until its engineers have played around with the instrument for a while and are satisfied that it works properly.
So if DCHT actually does achieve its sales goal of $482,700 in Q1, it would probably have at least $350,000 in accounts receivable on its books at quarter's end. Assuming a generous 50% gross margin in real life, not the nonsense figure DCHT claimed for 1998, that means that DCHT will have spent $175,000 on materials, labor, rent, equipment leases, and other things, to make products before it will get paid for them. (Yes, I know you can string along your suppliers for a while, but they take that into account in what prices they charge you. And labor likes to be paid US dollars, promptly please.) DCHT doesn't appear to have the $175,000 needed to support these sales.
In other words, DCHT may have the orders, but without enough money to buy the raw materials and pay the workers, it won't be able to make the products.
This puts a new light on why the audit has been delayed. Accounting firms usually know something about accounting, and I would think that they can do the same analysis that I have just done, and figure out that they are probably not going to get paid for their work.
It also puts a new light on DCHT's proud claim that it doesn't owe even one red cent to the banks. Is there a bank out there that would lend DCHT money? Without substantial equity financing first, I doubt it.
So DCHT is going to have to raise equity money soon, or it will probably go under. While anything can happen, any equity investor willing to put money into a company showing such huge losses, run by a management with such limited accounting abilities, would probably invest only at a substantial discount to the current market cap. So if DCHT isn't bankrupt before the year is out, that will probably be because it sold someone 100 million new shares at $0.05 per share, or something on that order. I'll leave it to others to speculate on what such a financing would do to the stock price.
Of course, perhaps DCHT might find an equity investor not bothered by the drawbacks mentioned above nor the market cap of about 50 times sales, in which case it may be able to raise money with little or no dilution, and go on to achieve great things.
Keep in mind that I am not an insider. I have not looked at DCHT's books, and know nothing about the company beyond what is posted on its website. There may be some mistake in my analysis which has escaped my notice, in which case I would hope that Steve or some other well informed person can post corrective information here.
Incoherent flames and threats will be ignored. Intelligent discussions of DCHT's finances will be welcomed, and I look forward to acknowledging as wrong any mistakes anyone can find in this post. |
