Monday, March 27, 2006
Revisiting companies 11
DRUG (sec) Dragon Pharma (fast ramping capital intensive chemical and legacy pharm with some new capital intensive biotech revenues). Revenues increasing rapidly, but lost money in Q3, though very near break-even. Huge PP&E mostly plant and equipment (with very large depreciation and even larger capex, but not sure how much is new investment). Somewhat weak balance sheet. 1/3 equity. Weirdness with gross margins dropping from prior year. Free cash flow is $1.4 million. 63 million shares with 6.7 million options for about 70 million fully diluted shares.
My very rough guess is that they'll eventually earn about 9 cents per share with real free cash flow of perhaps 7 cents per share, making the stock worth about $1.00 (I know, this contradicts the 30 cents I mentioned here). The ask is at 65 cents. I don't consider it cheap enough, given all the uncertainty.
They sold their Devel & Mfg Agreement with Polymun Sci Immun GmBh to a Swiss company for US$1 million. This was to develop a future new cell line for the Euro market. The EU threw up roadblocks and DRUG now has other areas to work on, so this sale makes sense (including based on ROI considerations). But it was sold to a related party!
SMID (sec) Smith-Midland pre-cast concrete used in construction, utilities, and farming. An investment advisor bought 14% of the stock. Stock is probably worth about $4.60.
SOTK (sec) Sono-Tek ultra-sonic spray nozzles. The primary market of printed circuit boards has been in decline. They're going after new markets: medical devices, nanotech drying systems, float glass. Down slightly to $1.55.
March 6, 2006 announcement: patented new generation of nozzles to generate smaller drops (5-10 microns for the three new market areas. It also allows for greater flow rates for glass coatings, textiles, and who knows what else.
Q4 un-audited results are also in the announcement: revenues up 15%. Earnings up 30%. This continues as 30% un-compounded annual growth rate since 2003. New partnerships (joining with Specialty Coating Systems). They're looking for 20% growth going forward (which probably means something like 10% over 2005). Why try to deceive investors like that? It'll only backfire. Maybe the stock is worth 80 cents?
GDVI (sec) Modular buildings for schools, typically in California. They acquired new designed from apparently a competitor (Aurora) who went bankrupt. The new designed brought an increase in business over the prior year.
Q3 results: AR and inventories increased by about 15% of revenues. Assets are AR, inventories, PP&E, and engineering/architect intangible plans that have been capitalized. Fairly strong balance sheet.
Q3 revenues down (9 month revenues way up). Gross margin down to 31% (from 41%) due to the timing of types of revenue (lower margin field construction vs higher margin manufacturing). 3-month SG&A is half of prior year due to reduction in manufacturing (the 9-month SG&A increased). Three month $95K earnings on 158 million diluted shares.
Seriously negative cash flow from ops (prior year as well). Capex both years above depreciation (but this year was due to acquiring the Aurora designs). They borrowed money both years. Interest-only loan to a shareholder at 10% interest! A noteholder holding $400K of GDVI debt was given effectively 27 million shares (via convertible pfd), which means management values the company at only 1.5 cents per share. It never sold below 5 cents (or even close to it) in the last few years. Also, a $34K loan is secured with 3.2 million shares in escrow: around 1 cent per share). These guys get no respect. However, they did get nearly 10 cents per share for (inflated?) consulting fees.
A rough guess says the business is worth 3 cents per share, but I don't like what I see in the report. This seems like a crappy business that doesn't generate much cash. Keep following for now, but consider dropping it.
LVLT (sec) I had expected LVLT to disappoint shareholders a lot more, but they acquired WilTel (paying essentially $600 million for a regular $150 million per year in cash flow) and others that were pretty good. And they've continued the financial tap dancing that they're so good at.
The 10-K is out, but the key thing is their Q4 results: The long awaited end to the constant communications services revenue drop is still not here. After backing out the WilTel contribution, CSR is down to $337 million from $344 million. It's close, but still dropping. They're projecting an increase in Q1 2006. Boy, have I heard that story before. And LVLT is hilarious at inventing new metrics in their intense effort to finally show some sort of positive number.
In all likelihood, they will severely disappoint investors in the future. When that happens, I might be there to buy shares at some low enough price.
AORGB (website) Church organs, data communications equipment, and electronic assemblies. Went dark. I sent them a request for investor info.
ARKN (sec) Arkona, develops and licenses management software for auto dealerships.
Last time I checked, everything was all screwed up and needed to be re-stated due to inadequate documentation about how inter-quarter allocation decisions are made. The day after I checked, they published their Q3 10-Q for Dec 31, 2005.
AR is way up. Revenues are up somewhat. Gross margins are 46% (vs 49% in prior year Q3). SG&A increased significantly. So did R&D. Operating income is down. No taxes (prior year was a tax benefit). Diluted earnings per share of $0.003 for Q3. Free cash flow is zero due to AR and software development costs (which were capitalized). They borrowed some cash and issued a small amount of stock for cash. NOLs of $14 million.
If everything is on the up-and-up, the stock might be worth 11 cents. It's selling for 65 cents.
AMNF (website, old sec) Pasta sauce and other prepared foods for the foodsevice industry and processed food manufacturers.
On March 1, 2006, they issued a press release (details) for Q4 and the year ending Dec 31, 2005. Q4 sales up 20% over prior year to $4.15 million. Net income was $244K. Unfortunately, they don't provide any balance sheet or cash flow information. They claim there are 18 million weighted ave shares outstanding.
ARTNB (sec) Water utility company in Delaware, Artesian Resources Corp. Apparently heavily regulated business.
2005 results: Revenues up 14.4% to $45.3 million. Net income was $5.0 million. 100 years in business. Favorable rainfall and weather conditions in 2005. 10 wastewater treatment projects. Water users up 1.9%. Expenses up 18.6% due to new projects, increased staff, SOX, higher energy costs. $20 million invested in new plant (bad).
Full year: gross margins 23.5%. Interest expense is 13% of revenues, could be trouble in the event of rapidly rising rates. Net margin 11%, not too shabby. $1.22 income per diluted share.
Assets are almost entirely utility plant. 24% equity. 38% long term debt.
Shares have been trading at around $31. They've been as low as $24 in late 2004, $18 in early 2003.
USTG (website, old sec) Web hosting and internet services, specialized applications for municipalities.
No new financial info since they went dark. They only have the 2004 annual report and a broken link for press releases. Try again later.
SUWN (sec, website) They're really pushing the stock.
Q3 Results: Period ending Jan 31, 2006. 64 million shares on March 6, 2006 with 2.8 million warrants outstanding (all options were exercised, not surprising). Cash continued to increase from $2.4 million in Q2 to $3.6 million. AR jumped from $1.8 million to $2.4 million and allowance for doubtful accounts decreased from $986K to $232K. Inventories are up a bit. PP&E jumped to $5.8 million from $3.6 million. They loaned $1.1 million to a related party (I seem to recall it was ok here). Current liabilities are remarkably similar to Q2, which is worth noting given the large changes on the asset side of things (e.g. did AP jump along with AR?).
Revenues are actually down from Q2. Gross margin is 32%, down from 33%. A huge bad debt recovery of $619K boosted operating income to $1.14 million. Without the bad debt recovery, operating income would be $521K, down from $528K in Q2. They have a small benefit from taxes.
Cash flow from operations matches up pretty well with earnings even backing out depreciation. Capex was slightly less than total earnings, so they're plowing everything back into the business... not surprising.
Financing produced over $2 million in proceeds from stock options and warrants. Wow, that's a hell of a lot.
Right now, I'd assume about 70 million totally diluted shares when all is said and done in the future. I'd expect them to have about $2 million in earnings per year going forward if nothing changes. With the additional investment being made, perhaps that might be as high as $3 million or $4 million, I don't know. If it's $4 million, that works out to 5.7 cents per totally diluted share. With a P/E of 15 that becomes 85 cents. The stock is well over a dollar right now and to be honest, this whole thing gives me a serious case of the heebeegeebees. I'll keep following it just to see what happens.