Steve --
Thanks for the link to the Magra financials. (For some reason I haven't been able to open the proxy. Anyone else have this problem?)
Anway, here's one read on the financials: True, Magra's sales continue to grow -- but it keeps losing money, and at a fairly consistent rate. Also, its tangible net worth is virtually zero.
LOSING MONEY:Here's what I mean about losing money (sorry I don't know how to format this better):
1996 fiscal year: Sales $1,336,654 Gross Profit 572,669 Gross Margin 42.84% Expenses 620,582 Expenses as % of Sales 46.43%
1997 Fiscal year: Sales $2,493,559 Gross Profit 930,994 Gross Margin 37.34% Expenses 1,161,231 Expenses as % of Sales 46.57%
1997 calendar year last quarter: Sales 804,719 Gross Profit 281,587 Gross Margin 34.99% Expenses 340,725 Expenses as % of Sales 43.15%
For the 1996 and 1997 fiscal years, expenses were fairly constant at about 45.5 percent of sales, while gross margins declined from 42.84% to 34.99% -- increasing Magra's loss on every dollar of sales.
The (unaudited) last 3 months of calendar 1997 saw expenses lower as a percentage of sales, but margins also were lower. Whereas during fiscal year 1997 Magra lost a little over 9 cents for every dollar of sales, during the last 3 months of calendar 1997 Magra lost a bit over 8 cents on every dollar of sales.
HNLY's press release says that the net loss for the quarter ended 12/31/97 was due to "the purchase of equipment, the expanding of its offices, and the hiring of additional sales personnel necessary the the expansion efforts currently underway," but that explanation is really hard to swallow, especially when you look at the "Interim Schedule of Expenses" for Magra. Where's the big jump in these items?
For example, wages for the last 3 months of calendar 1997 were $191,559, a number right in line with the $764,305 spent on this item for the fiscal year ended 9/30/97. "Office" expenses for the 3 months ended 12/31/97 were up about $9000 from the corresponding 3 months in 1996, but "Office services" were DOWN by $13,000. "Rent" was only up about $1,400 from the corresponding 3-month period in 1996. Expenses for "equipment rental," "Utilities," and "Telephone" were about the same.
It wouldn't be surprising if a number of expense items were higher in the last 3 months of calendar 1997 than in the last 3 months of 1996, since sales were considerably higher. Sales kept increasing, and expenses more or less kept pace. The implication of HNLY's press release -- namely, that the recent Magra loss was due to one-time expansion spending -- deserves to be taken with a grain of salt.
Also, where are all these equipment purchases on the balance sheet?
Magra's "capital assets" declined by just under $10,000 from 12/31/96 to 12/31/97. Since amortization seems to have increased by $23,000 during that period, by my estimation the additonal capital purchases during all of 1997 couldn't have been more than about $13,000.)
VALUE OF MAGRA -- How about Magra's assets? There don't seem to be many. Most of Magra's "book" value consists of intangibles -- over $1 million in "goodwill," meaning essentially that Magra bought assets for prices more than $1 million in excess of their tangible value. Nothing inherently wrong with that -- especially when you buy a going concern that's making money -- but I wonder what Magra has going for it that would make that $1 million anything other than a technical bookkeeping entry.
Magra's capital assets are nominal at about $32,000. This means all Magra really has left that's tangible is its current assets less current liabilities, leaving a net of about $50,000. Magra owes $140,000 to "related parties," so in TANGIBLE terms it's worth about zero.
(This doesn't mean it's worthless -- just that it has no tangible net worth.)
Those receivables and payables numbers are pretty large, and could be read to suggest that some of Magra's customers have been slow to pay (and may eventually NOT pay), and that Magra has been slow to pay its vendors. I don't know whether that's the case or not, but it is pretty scary when you can't pay your debts unless and until someone pays you.
BOTTOM LINE -- Magra has indeed been growing rapidly -- both in terms of sales and in terms of expenses. The company has no net tangible assets (such as real estate, cash, etc.), and its worth therefore depends entirely upon its ongoing business operations.
Magra will not make money unless and until it either (1) significantly increases its gross margins (which have been declining) or (2) significantly reduces its expenses per dollar of sales, or both. I have no idea whether it can do that or not.
I agree with you that we ought to work though these issues in a constructive way, which is exactly why you posted the link to the financial statements. I hope this post helps move the discusison forward.
-- Jim |
