Steve Smith

Syntax-Brillian: A Classic Bottom

"I was always trained that working capital was current assets less current liabilities." This was the point I was trying to make without getting into the nitty-gritty. I'll concede the point that I should have used current liability and current assets to be clearer. The point still remains that BRLC is vastly underutilizing its working capital. As of the 09-30-07 quarter, Syntax-Brillian has $498M in current assets and $222M in current liabilities or potential working capital of $376M. Again, I'll repeat my point is that BRLC isn't generating nowhere the amount of revenues that could be generated based upon BRLC's working capital.

"You stated, 'Negative margins results from sales (i.e., revenues) being greater than costs of sales (i.e., COGS).' HUH? Once again I missed something or maybe I skipped class the day that concept was taught. If revenues were larger than the cost of goods sold wouldn't you be measuring GROSS profits?"

You are again correct, I should have written COGS being greater than sales. This is what happens when I don't take the time to review what I write very carefully.

However, the end result is still the same. Actually, I did some double checking on my numbers (page 14 of latest 10-Q) and it appears that the COGS for Q1 was $5.0M and not $4.0M, as I initially thought. This means that negative gross profit for LCOS was $4.3M (or $17.2M annually). This would account for all of the savings attributable to the divesting of the LCoS division. Page 14 of the 10-Q includes a little discussion about what goes into "Selling, Distribution, and Marketing Expenses" and "General and Administrative Expenses." Only expenses related to LCD HDTVs and Vivitar were discussed. As such, based upon the information that Syntax-Brillian has provided, it does not look like the new Chinese royalty model or the divesting of LCoS will materially help BRLC SG&A costs, which were $21.1M last quarter, which is considerably higher than your estimated $10.6M/quarter for CY2008.

For someone valuing BRLC, particularly since it is working with low margins, having a good handle on SG&A expenses is critical. If you underestimate SG&A expenses (which I believe you are to a very large degree), you will overvalue the company.

As far as the "cosmetic" difference that could effect valuation, it is quite simple. Shifting an expense that is best counted as COGS to SG&A will increase margins. The general belief is that COGS (as a percentage of revenue) will likely remain steady as volume increases. However, there is a greater chance that SG&A expenses (as a percentage of revenues) will decrease at a greater rate than COGS because SG&A expenses are considered more fixed whereas COGS are considered variable. You have to note that these statements are generalizations and not absolutes. Anyway, the general expectation is that with higher margins, a particular company can become more profitable with increased revenues than a similarly situated company with lower margins.

This is why expenses are broken up between COGS and other expenses (such as SG&A and R&D). In the end, all these expenses are equally subtracted from revenues to obtain net profits, which is the most important number. However, being able to distinguish a COGS expenses from a more fixed expenses can help someone better analyze the operations of the company.