Beruflich Dokumente
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GLCSummary
October 28,2010
After assessment of last 3 years income and expense statements, as well as an analysis of
inventory, we find the following:
I. Basic Operations are strong, creating real value (assuming normal debt cost)
1. Sales have increased steadily from '08 to '10 results. Total sales in the 3-year period
were $20mm, with 2010 accounting for just over Y2 of that totaL
2. Gross profit margins On those sales have been steady in mid to high 50's. 2010 margin is
projected to be 57%.
3. Cost of Goods Sold over the three year period is $8.67mm, including a 2010 projection of
$4.97mm .
4. The Gross Profit over the 3-year period is $11.3, with 2010 at about $6.5mm.
5. Operating costs have been steady in the last 2 years after an increase in year 2 of about
400% matching the increase in sales, there was no increase in operating-costs in year 3
despite a near 200% increase in sales. The operating costs for the current level of sales
appears mostly fixed at just under $500k, currently about 5% of sales.
6. The Net Ordinary Income over the period was $10.2mm, with about $6mm in 2010.
7. These figures represent unleveraged operations before financing costs, but could support
debt costs into mezzanine levels easily (low, mid 20's) as an interim step towards
normalized (bank debt/single digit) levels.
n. Inventory has exceeded sales capacity, must be monetized to meet obligations
1. The market value of inventory is estimated at $54mm assuming a normal sales period and
effort.
2. The cost of that inventory is estimated at $24.5mm, yielding a gross profit margin of 54%
(consistent with actuals).
3. At 2010 sales velocity level, current inventory would require 4.7 years to deplete. If sales
growth levels continue year-aver-year at same rate as increase from 2009-2010 (66%)
then the sell-out time is still 2 years.
m. Conclusions
1. Financing has exceeded capacity of the operations. Too much capital has been raised and
excessive inventory was purchased. Overall financing picture raises questions about
variance between Sources and Uses:
SOURCES:
Invested capital:
Proceeds from sales:
Total sources
USES:
Purchased Goods sold (COGS)
Purchased Inventory unsold
Operating Expenses
Cash
Total Uses
VARIANCE:
$54mm
$20mm
$74mm
$ 8.70mm.
$24.50inm
$ 1.10mm
$ O.75mm
. $35.05 mm
+/- $39mm
Must explain Variance. Financing should provide capital for operating costs and cost of
purchased goods/merchandise. Debt Service payments should come from proceeds generated
by operations (NOl). Borrowing in excess of purchase needs yields non-productive capital at
high carry cost. Have investor payouts come from capital and not sales? Obligations do not
include accrued interest (unknown at this time).
GLC-DD-00059
EXHI BI T 7
2. Investor obligations (i.e., principle) outstanding could be met or slightly exceeded
ilirough a sale of inventory at Market value however:
a. Inventory cost (assume "fire sale") is Y2 current estimated investor obligations,
and sales at that level yvould create a $25+mm shortfall.
b. At the 2010 sales vel9city, it would take 4.7years to move the inventory and
monetize the $54mm market value.
3. Trading inventory should yield ahigher value or higher level of liquidity, or at least move
perishable or seasonal goods more quickly. It does not yield any higher value, according
to the numbers we reviewed. Inventory acquired by direct purchase (not trade) has an
estimated margin of 54%. InventOly acquired by trade also has an estimated margin of
54%. Therefore, the time that it takes to accumulate the inventory actually decreases the
value and the practice of trading should be more closely examined.
4. Inventory levels are excessive (4.7 year supply at current sales levels) and must be
reduced even absent the current need for capital to meet investor obligations.
5. Cost of capital at average of 60%/yr is mathematically feasible (although unnecessary)
given high margins and manageable sales costs however inventory must turn within the
year.
Recommended Action: Immediate steps
1. Review operational conclusions with Principle II to ensure we have proper
understanding. If assumptions and. conclusions are correct, move immediately with all
resources towards monetizing the existing inventory at highest number possible - as soon
as possible - focusing on increasing channels and buyers.
2. Develop accurate account summary for each principle, paid-to-date, accrued
interest. Develop strategy for each investor; anticipate settlement strategy.
3. Advisors to work to build on Principle 1's letter to investors and develop a plan to
communicate with investors in anticipation of a change in terms. Advisors to meet with
3
rd
party resources week of November 1 to discover optimal team to develop strategy for
workout including potential conversion of debt to equity.
4. Principle I to initiate conversations with key investors signaling immediate change in
terms with a focus on managing the best outcome in light of changing economy and
business model.
5. Investigate sources of capital to provide for quicker monetization of inventory and permit
some pay down of existing principle. .
Goals: