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I don't worry much about the slowdown in sales. If anything it confirms that FARO's sluggishness is a result of the US economic slowdown. The same tide is lowering the SYSS boat.

What is absolutely atrocious in my book is the financial statement (what is shown) and the frightening bits that came out of the CC.

Slide the balance sheet in front of you and see if you don't get nauseous like I did when they released it this morning. I selected a few items and have some notes below

SELECTED ITEM June 30 2008 December 31 2007
Cash 21,532,951 16,211,771
Short-term Investments 7,179,424 27,257,592 (1)
Accounts Receivable 34,471,168 26,302,053 (2)
Inventories 18,450,306 12,771,235 (3)

Accounts Payable 9,918,165 13,959,022 (4)

(1) They bailed out of the ARS traded bonds (ex for $5M now). They took a charge last quarter for $400K or so but did not impair any more this quarter even though they admit they have some bad ones left (one ccc rated). [frightening bit]

(2) $8M increase (31%) - in ARs. Who is watching the receivables - anyone? In conf call CFO says there might be a collections issue. Hmmm, maybe. They are allowing $1.2M for returns and doubtful accounts. [frightening bit]

(3) Nearly $6M in inventory increase. In CC CFO says they are making strategic buys cuz prices are getting cheaper on the consumable raw materials. Is now the time to be stockpiling? Is their guess on future commodity pricing going to be any better? I think they are making buys they really can't afford. In the CC the CFO said they were negative $5M in cash flow from operations (this year, $3M qtr). They did not provide a cash flow statement in the PR [frightening bits].

(4) In the meantime, while not collecting receivables and while off buying inventory they don't need they are paying all their bills early it looks like. [frightening bit]

Look at cash account. Up around $5M. In the meantime, Short term investments down $20M with movement of about $2M into long term assets. Where is the missing $13M? In receivables and inventory. Why?

CFO comments in the call (when asked what they are doing to reduce costs) that they made some staff reductions yesterday(!). And they are reducing discretionary spending. Did that start yesterday as well, I wonder. [frightening bits].

Days Sales Outstanding up to 100 days vs 89 in 1Q. Why? No answer provided in CC but said it will go back down to normal levels soon. [frightening bit]

This press release was released exactly one hour before the start of the conference call which started promptly at 7:30 AM Central where the company is located. And they cut it off at an hour. The press release had no cash flow statement. The press release contained a lot of hand-waving (2.5 pages) about GAAP to non-GAAP reconciliation trying, I suppose, to shed a better light on the lousy results. They are still fighting the non-cash based stock compensation expense requirement. [frightening bits]

My opinion is that the CFO should go. The CEO is too tied into this company - too much family involvement here. So I have no hope they will replace themselves with professional management like FARO did.

But I still feel this is a company producing a great product with a huge demand over the next 20 years. I only hope they don't manage to shoot themselves in the feet til they bleed to death. If any similar competitor shows up, I would be buying that too.

I did not buy more today although I was tempted. I think there is yet more bad news to come and much better pricing will prevail. Can't wait for the 10Q!

Stan, cheap enough for you yet?

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