Slight Edit - 03.23.09
Last September I posted about Arafura Pearls’ announcement of an after-tax profit of $10.05 million; a sizable sum of money for any small- to medium-size operation. It assuredly seemed like the folks at Arafura were doing something right. But are they? At the time, I took little notice of the accountancy, falling arse over tit for any morsel of good news. But the continuing announcements of good news in the form of staggering profits from a company trading in an otherwise floundering industry caught my assiduity.
When I first posted on Arafura last year, I didn’t take a close look at the company. Arafura is a publicly traded company. Their numbers are public. When they reported a profit of more than $10 million, whilst surprising, I took the figures at face value. But how are they determining such a high profit?
Upon examining Arafura’s income statement for the fiscal year ending June 2008, I rescind my earlier post on their profitability. It does not look like profit to me, merely the hope of a future windfall.
Sales revenues for Arafura through June, 2008 are reported to be $6,514,971, with other revenues of $398,104. So how in the hell could they report a profit of more than $10 million? Consider this! Employee expenses during the reporting period were $6,061,428. There go the revenues, right? But operating expenses are not strictly tied to employee expenses. There are equipment expenses, lease expenses, travel expenses, fuel expenses…the list goes on. Total Arafura operating expenses were nearly $15,000,000. But they made an after-tax profit of more than $10 million?
Let’s examine the second half of 2008 – the first half of the following fiscal year. Arafura’s total sales revenue was a diminutive $235,427. Their operating expenses totaled $8,107,463. That’s not within cooee of a profit. In fact, it looks like nearly an $8 million loss, right? But no, according to Arafura’s books, it’s a before-tax profit of another $4 million.
Are you gobsmacked yet? You should be. It doesn’t take a mathematician to see something is a wee bit odd here.
So where in the hell is this profit coming from??!! I found it in the income statements.
In June 2008, Arafura’s income statement showed an increase in non-current biological assets of $22,325,412. By December 2008, that figure rose again by another $10,351,838 to nearly $52 million! So what are biological assets? What might it mean for a biological asset to “not be current”?
Let's examine a few statements from Arafura’s annual and
half-yearly reports.
The value of shell inventory stocks in the water has increased substantially since the half year ended 31 December 2007. Successful spawning seasons for 2008 & year to date 2009 have generated sufficient spat stocks that will be required to meet our 2009 – 1011 seeding quotas. Accordingly, the increased number of shell in the water is reflected on the Balance Sheet with a much higher inventory valuation figure.Further
Increased hatchery production of over 1 million shell that has and will be selected into panels for growout. The spawning season runs from September to May and the 2008 output level represents a significant increase above previous years production levels to meet the recent increases in our quota level. The significance to the Company is that this hatchery production should enable the Company to meet quota levels in the 2009 season and beyond.And further
As a consequence of the production performance for the year, the value of shell inventory more than doubled in the financial year, from $19.1 million to $41.3 million. The shell which is being farmed for the Company’s account is valued according to the SGARA accounting standard for biological assets and the shell which is farmed for the Managed Investment Scheme (“MIS”) growers are valued at cost of production.Is this a cockup? It looks as if the profit Arafura is publishing appears to be based on the value of the shell they are producing, including the
SPAT! Am I reading that wrong?
I wonder if this large write up of biological assets could possibly be considered deceptive under the Corporations Act. Presumably, they write up the value of all types of shell at whatever stage they are at, at an inflated price, thus reaching their staggering value. This could be misleading on several counts. Firstly, by giving all oysters an asset value, it presumes there is some sort of market in the pearl industry for all types of oysters. There is not. Australian farms are winding their production programs back, and most will not seed anywhere near their own quotas, let alone buy oysters from another producer such as Arafura.
Secondly, the whole industry is governed by quotas. It would be interesting to know how many oysters are included in their calculations to reach $52 million, but it must be millions. There is no scope under the quota system to use anywhere near these numbers in a legal manner.
Further, how can shell be counted at all stages of growout? What percentage of hatchery spat, or even juvenile shell actually reach the seeding table?
Finally, these figures do not take into account the dire situation the industry has found itself in. Producers are cutting back for a reason. Pearls are not selling. The market has dried up and until this world recession reverses direction, there is no bright light visible on the near horizon. Pearl oysters cannot be shelved like their pearls.
The Australian industry has sailed into terribly dangerous waters. More than ever, serious long-term farmers need the support of bankers and investors.
It would be interesting to know if a lawyer or ASIC considered these tactics of theirs legal. Presumably, Arafura is attempting to show a profit to appease banks and investors, as they burn money at a furious rate (A$16 mill p.a.) while the rest of the industry scrambles to scale back, and have a pitiful income from sale of pearls ($235,000 for the half year).
In an interesting development near the end of February, Arafura released a
New Issue Announcement. It reads 82,081,790 shares at $0.05 per share. The purpose of the lion’s share of shares, SHORTFALL ALLOCATION.
It might not be long before the spat hits the fan.
When I hit the Basel Fair Ground, the messages were already clearly visible: public transport (trams and buses) are practically empty... not like in the past, standing up tight in the trams, no, one can get seats, and to catch a taxi is possible even during Fair rush hours.
Would any readers care to speculate on the origin of each? It would be certainly be an opportunity to shine. There is no doubt a prize would be necessary.
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