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Thursday, March 15, 2007

Conforce International (CFRI) looking at financials

Conforce (combined links) issued their Q3 results here on Feb 15, 2007. They incurred a loss of $142K which is pretty much all explained by the increased R&D costs which increased from Q2 due to the EKO-FLOR work. The costs of rolling the product out should be even larger. Where will the cash come from?

Cash $4,785 (i.e. pretty much none)
AR: $445K (increased by $109K from $336K)
Fixed assets: $80K (net of $40K accumulated depreciation)
and some other small assets.

Shareholder advances: $309K (up from $250K), no interest or terms of repayment
plus some other liabilities for a total of $463K

Pretty close to zero

The cash flow statement is fairly screwed up. Basically they have almost no cash, shareholders have loaned the company cash to keep things going (probably by delaying their salary payments).

I'm probably crazy to continue owning the stock. I haven't been selling, although it's clear that some people have been, probably due to the less-than-ideal financial results of Q3.

How much dilution will occur? Can they get bank loans? Would this still be a good investment with 50% dilution? Can a slow ramp-up be done at low cost?

There are two important questions to ask here:
1) Will they succeed?
2) What is one share worth after dilution and/or costs of financing?

I'm betting that the answer to #1 is yes. I could be wrong.

Regarding question #2, the way to look at this is to assume a fairly severe dilution scenario and then figure out what the stock is worth afterwards. I think 50% dilution is a good yardstick to use (double the share count). Given the current price of around 50 cents and 120 million shares outstanding (which would become 240 million), is this company worth more than $120 million? I think the answer is yes.

How much cash could they raise with a 50% dilution? I figure more than $10 million.

In the first post, I asked if this is worth significantly more than $60 million. This is a great example of why you need a seriously deep discount for these sorts of stocks because you may need a massive margin of safety.

Container floors for a 20 foot container have historical prices of very roughly $150, often times more. Given the advantages of EKO-FLOR, maybe Conforce can charge $200 per container. That might be optimistic, I don't know. If they fetch a net margin of 5%, that would be $10 per container. There are roughly 20 million containers manufactured per year. Conforce has a goal of about 6% market share, which would be about 1.2 million containers per year. With 5% net margins, that would mean they'd be worth around $180 million as a company. That's not a very good margin of safety if they have 50% dilution. But the long term trends are definitely in Conforce's favor: diminishing apitong plywood supplies, increasing global trade, increasing ecological awareness, and presumably more need for controlling the container environment in terms of chemical contamination etc.

And then there's the issue of whether they'll get more than 6% market share in the long run.

I don't know, maybe I'm just trying to convince myself to stay with it. I have to admit that the lack of liquidity caught me off guard. Am I paying attention here? I continue to own the stock (I haven't sold any).

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