Post by
wazzzz on May 04, 2014 10:04am
A quick look at some components of the MD&A
I took a quick look at their MD&A and the following are some key observations.
Revenues
As this was a harsh winter (along with a mild business decline in the oil & gas industry), it did not help 4th quarter 2013 revenues. Additionally, as this was the coldest winter in 100 years in western Canada, this (I believe) will have some impact on revenues in Q1 2014 as well. Additionally, in the MD&A, it contained the following text under "Seasonality of Operations"
"The three month period ended June 30 is traditionally the Company’s slowest period".
So the story may not be too positive until Q3 2014.
Operating Expenses
I have also looked at their operating expenses, to better understand if their incremental costs were short term hits or if they were going to be on-going recurring costs.
Sadly, they appear to be the latter as the company has staffed for growth.
I mention has staffed for growth and is not staffing for growth. There is a difference because if the company has staffed for growth, its payroll expenses should not increase all that much (however other costs such as contractual services, fuel,... will definitely go up with increased business). Re being staffed for growth, the MD&A states
- The Company is continually evaluating its personnel to ensure that it has adequate administrative and operational staff to meet its business requirements. The Company believes that it presently has sufficient human resources to successfully operate its business and to execute its strategic plan
Additionally (as a result), the total of their operating expenses as a percentage of their total revenues should diminish over time, as the company garners new business, as the weather improves,... The following (from the MD&A) summarizes their revenue position based on the utilization of their assets (i.e. their fleet).
- For the six month fiscal period ended December 31, 2013 the Company experienced a utilization rate of 68% a decrease of 12% when compared to the twelve month fiscal period ended June 30, 2013 of 80%.
- For the three month interim period ended December 31, 2013 the Company experienced a utilization rate of 66% a decrease of 14% when compared to the prior year equivalent quarter of 80%.
If the company can achieve an 80% utilization rate, as it has in the mentioned recent past, its revenues for its most recent 6 months would have been about $3.7M higher, offsetting its expenses and would have probably given the company one of its best quarters ever (at least from a EBITDAC as I did not look at debt payments...). And as an additional note, the company also mentioned that in Q1 2014 in the MD&A
- In addition, in line with the Company’s growth strategy, substantial additions were made to Lonestar’s fleet post year-end with the purchase of 11 HVAC units, 6 Vacuum units and 2 water trucks.
These are post year end additions, so this had no contribution to revenues in Q4 2014. And, If they have sufficient staff (from my comments above) to execute its vision, the incremental costs to generate additional revenues should further be much less as a percentage of revenues, hence further increasing the bottom line.
Naturally, there are many other metrics to look at (i.e debt repayment, cash flow - don't want further share dilution) but based on the areas I have looked at, there appears to be a light at the end of the tunnel for those of us patient enough to wait it out.
Before posting this I decided to quickly look at some of these areas and the following quickly drew my attention as I was wondering why the company was negative with their operating cash flow (implying they have to reduce their physical cash on the B/S to run their business, pay their debt, further implying if this goes on for too long, they will run out of cash, ... not a good thing).
- One thing that quickly stood out is that the company has (in my opinion) a very large $ amount in their accounts receivable account. As at Dec 31, 2013 it was $10M, which was greater than the total $9.2M in revenues they received in Q4 2013. As at the end of Q4 2013, they had $2.35M in outstanding receivables that were greater than 90 days overdue (an increase of approximately $900K from June 30, 2013). They also have $1.25M in receivables due that are between 61-90 days overdue.
In the MD&A, mgmt mentions (extracted from different sections of the document)
- Although collection of these receivables could be influenced by economic factors affecting this industry, management considers the risk of a significant loss to be remote at this time.
- As at December 31, 2013 three customers accounted for 32% of the Company's accounts receivable (June 30, 2013 – three customers accounted for 31%).
- For the six months ended December 31, 2013 $100,000 (Twelve month period ended June 30, 2013- $nil) of bad debt expense was recognized.\
- The Company is dedicated to managing its receivables and payables and has hired dedicated staff for the collection of customer receivables and a purchaser to maintain its balance sheet strength to facility the growth strategy of the Company.
Take care.