Here's a poser for you. Do reporters at BusinessWeek know how read a statement of cash flows? Do they bother to do so? I wonder.
If all of them did, I doubt we'd see this naive piece of fluffery on Utek (AMEX:UTK), a supposed technology "matchmaker" that blows through cash like D.C. commuters run red lights.
I first caught wind of this outfit when I learned it was a holder of another horrendous stock, Xethanol (AMEX:XNL). When I looked at the cash flows, I could see something was drastically wrong with the whole "earnings" story.
See for yourself:
|
FY Ended 12/31/02 |
FY Ended 12/31/03 |
FY Ended 12/31/04 |
FY Ended 12/31/05 |
TTM 9/30/06 | |
|---|---|---|---|---|---|
|
Revenues |
$3.39 |
$3.81 |
$7.19 |
$22.74 |
$55.69 |
|
Operating Income |
$0.25 |
$0.29 |
$1.53 |
$9.45 |
$31.27 |
|
Net Income |
$(2.69) |
$(0.52) |
$2.26 |
$2.10 |
$12.28 |
|
Cash from Operations |
$(2.58) |
$(2.52) |
$(4.25) |
$(10.62) |
$(20.07) |
|
Free Cash Flow |
$(2.58) |
$(2.56) |
$(4.33) |
$(10.76) |
$(20.52) |
Soooo, for the nine months ended in September (the latest filing available), Utek's $12 million in net income becomes a $20 million drain? How's that happen?
Simple. The wonders of accounting!
Utek receives shares of companies as payment for its technology-transfer services. Here's how Utek explains its business in its 10-K.
"Our investment objective is to increase our net assets by exchanging stock in new companies that we form to acquire new technologies for securities of, and cash from, companies seeking to acquire such new technologies."
How does it get paid?
"We normally receive unregistered shares of common stock from companies as payment for the services we render under our strategic alliance consulting engagements." [emphasis mine]
Unregistered? Where's the market then? How do you value this stuff? Here's how. Again, from the 10-K, under the "valuation methodology" section:
"Pursuant to the requirements of the 1940 Act, our Board of Directors is responsible for determining in good faith the fair value of our investments for which market quotations are not readily available. Although the securities of many of our portfolio companies are quoted on the OTC Bulletin Board or listed on the American Stock Exchange, our Board of Directors is required to determine the fair value of such securities if the validity of the market quotations appears to be questionable, or if the number of quotations is such as to indicate that there is a thin or illiquid market in the security."
See where this is headed? (And don't tell me Enron doesn't come to mind.) Utek, in essence, decides what its earnings are.
In practice, this means that the net income at Utek depends greatly on what Utek believes its payment (thinly traded or unregistered stocks) is worth. In plenty of cases, I think the company's engaging in some wishful thinking.
Luckily, I don't need to lay out the entire horror story for you, because Chris Carey has done a good job explaining it here -- at the web site Mark Cuban runs to talk about companies he's shorted. Utek's on that list.
Whether or not you agree with Cuban's "short first and talk later" strategy, the facts in the article speak pretty strongly for themselves. And that cash flow doesn't lie.
Note to BusinessWeek: Before you hype the next great tech company in your pages, have your writers step away from the feel-good story and crack open an SEC filing or two. (And maybe try out this thing called The Google on the Internets.)
Comments? Bring them here.
At the time of publication, Seth Jayson had no positions in any company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here
