OK, DCHT's response is in, and it answers some questions, leaves others unanswered. A few comments:
The company is admitting that it knows nothing about accounting. Yes, the figure that they called "income" was, as I thought, really "revenues" or "sales". And yes, their outside accountants have not yet explained to them that when you are running a consulting or contract R&D business, you charge off the salaries above the gross margin line, not below it.
So, as I expected, that "gross profit" figure of $193,297 is wrong. It will be reduced to a substantially lower figure when the accountants move the labor expense from "expenses" to "cost of revenues". That should have no effect on the total loss of $4,024,967 for the year, but it would bring the absurdly high 89.7% gross margin figure down to something more plausible (I predict around 10% - we'll see.)
My comment on this remains the same: it is very dangerous for even a wealthy company to be ignorant of the rules of accounting. It is not just an issue of following or breaking the rules, it is that accounting is a powerful information tool. If you don't know how to do it, you don't know what is really going on in your business. You don't know what things cost, you don't know how to price them, and when you do try to get capital, organizations with money laugh at you.
OK, off the soapbox Turtlman, put the green eyeshades back on:
The company is arguing that it is financially stronger than meets the eye, because most of its liabilities are long term loans rather than anything requiring immediate cash outlays. Let's run with that for a bit: Total assets are listed as $648,444. I would like to pretend for DCHT's sake that it is 100% cash, but we know it is not, because the company says it already has plenty of inventory to make its products. Since Q1 sales are projected at $482,700 and DCHT claims that materials will be only 11% of sales, presumably there are $53,000 of raw material inventories on hand, reducing cash to a maximum of $595,000. I also presume that the company has some desks, chairs, computers, screwdrivers and other manufacturing equipment, which I'll arbitrarily say is worth $75,000. That would bring cash down to $520,000. Of the $454,086 in liabilities, let us assume that $400,000 represent long term loans that we can ignore as a claim on cash (DCHT shouldn't need an auditor to tell them that figure - they could have given it on the website, had they wanted.) The rest are probably liabilities that do have to be paid, like to suppliers of material, lease obligations, etc. So we conclude that in December the company had net cash resources of $466,000 ($520,000 minus $54,000). To get to that $466,000 involves a lot of generous assumptions; I will bet that when we see the audited numbers, the real figure will be less.
Nevertheless, that may be a sufficient amount of money to keep the company alive, provide that it keeps losses in line. Last year it lost $355,000 per month. R&D will have to be drastically cut to husband these resources. I don't see how the company can claim that it is not looking for cash at the moment. Even if it achieves its Q1 goal of $482,700 in sales and somehow manages to get 50% gross margins on the products (being generous again), the gross profits of $241,350 will pay for only three weeks of expenses at the 1998 rate.
In other words, without a cash infusion, the company might possibly survive, but only with drastic cost cutting that eliminates chances of future growth.
As to Antaeus Corp. its supposed customer, DCHT remains totally evasive. Oh, Antaeus will have a website soon. That is nice. Where is located? Does it have any money? Does it even have a telephone number or any employees? We still know nothing. That is not good.
On the other hand, the company's willingness to promptly answer many questions in writing is a plus, not typically the characteristic of crooked companies. Unfortunately, the content of the response, despite the optimistic attitude, is not as informative or reassuring as it should be. |
