Too late for April Fools, small cap, so-called research firm Red Chip analyst Jim Altenbach has released a very funny research report on my favorite Christian game company, Left Behind Games. The finance firm is preparing for its May 29th SF investor conference. This report is freely available from Red Chip's site here, but the humor runs far and wide, especially since it follows up on the initial Dec 1, 2006 coverage report (only 4.5 months ago), so there is an easy comparison between the two reports.
On December 1, 2006, "after meeting with corporate management, including the CEO", Red Chip initiated coverage of LFBG, projecting a $2M profit for calendar 2006 Q4 quarter ending literally 30 days later and giving it a STRONG BUY rating. So what happened in those 30 days? Well, LFBG ended up reporting a loss of $4.125M for the quarter. At least there should be no SEC worry that Red Chip somehow got insider information :)
Now that it's 4 months later, what does the new April 19th report indicate? To no one's surprise, after watching LFBG's stock plunge to $.21 from the $4.00 in December (and far lower than the projected mid-2008 $15 price), Red Chip has decided that LFBG is undervalued. This is especially fun since Red Chip is still projecting the company to be profitable in fiscal year 2008 (3/31/08), for reasons no one can really understand based on the numbers or even a remote understanding of the video game sector.
Red Chip currently projects that Left Behind will show revenue of $4.45M for the year ending 3/07, with a loss of $18M. That compares to an actual revenue number of $1.01M for the 9 months ending 12/06 and loss of $21.6M, so it projects a revenue rate of $3.44M for Q1 2007, usually a significant down quarter for software publishers since it's post-holiday season, and that LFBG will show a $750K PROFIT for the quarter (I can't figure out what Red Chip did with the other $3M in losses for the year).
One would assume that this projection is a pretty safe bet since the fiscal quarter ended 19 days AFTER the report was issued, and the research firm should be able to roughly establish the LFBG unit sell-through for the company through standard research techniques such as retailer calls and research analysis. However, I can't imagine any possible scenario that would give LFBG a revenue number even remotely close to $3.44M for Q1 2007, but this is probably why I'm not an equity analyst.
There is also the small detail that LFBG had $73K in cash at 12/31/06, had a working capital deficit of $987K, had a "going concern" issue from the auditors, and was burning cash like wild - "Red Chip finds this to be a challenge". But apparently, "most academics and practitioners would agree that financial distress can be fixed by capital restructuring, or if the firm can just squeak by to profitability, it can prosper." It's like reading Sun Tzu - you can't imagine the wisdom in those words...The new rating is a Speculative Buy, with a 2-3 year target price of $2.60.
So what happens now? As CFO Shrakes apparently indicates to Red Chip (and I agree), LFBG is probably going to raise additional funds at the current very low (and dilutive) price since it still holds a valuable asset - the game license to immensely popular literary series Left Behind Games. But this company continues to be an utter disaster at so many levels that investors should just flee this stock and pray for forgiveness. Or they can find comfort by reading the blog by Red Chip CEO Dave Gentry, who engages in some of the more amusing Middle East political analysis that I have seen in a long time - see here