In August and September 2007, Paragon sold almost 11 million Class A common shares in an initial public offering. At $16 per share, less expenses of $1.04 per share, the company brought in $164.5 million. These funds, along with $318 million in debt assumed in 2007, have been used to expand the company's fleet.
The twelfth vessel, the Friendly Seas, was added on 5 Aug 2008. The purchase price was $79.25 million.
We have examined Paragon's results for the second quarter of 2008. This report includes financial statements prepared in accordance with U.S. generally accepted accounting principles. The report is submitted to the SEC on Form 6-K, Report of Foreign Private Issuer, and not the more familiar Form 10-Q quarterly report. The financial statements are expressed in U.S. Dollars.
Paragon is too new to compute GCFR gauge scores, but we can examine, with some adjustments, many of the metrics that influence the gauges. However, we will begin with a review of the Paragon's second quarter Income Statement.
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($ 000) | | June 2008 (actual) | (actual) |
| Revenue (1) | | 38,667 | 12,979 |
| Op expenses | | | |
| | CGS (2) | (5,522) | (1,914) |
| | Depreciation | (7,849) | (3,256) |
| | SG&A (3) | (2,519) | (1,076) |
| Operating Income | | 22,778 | 6,733 |
| Other income | | | |
| | Asset sales | 0 | 0 |
| | Interest, etc. | 1,833 | (1,242) |
| Pretax income | | 24,611 | 5,491 |
| Income tax | | (0) | (0) |
| Net Income | | 24,611 | 5,491 |
| | | $0.91/sh | $0.48/sh |
| Shares outstanding (4) | | 27,156 | 11,507 |
2. Voyage expenses + Vessel operating expenses + Dry-docking expenses
3. Management fees + G&A expenses (including share-based compensation)
4. Weighted average number of Class A, common shares, diluted
Revenue in the June 2008 quarter was nearly triple that of the June 2007 period. The average number of vessels in Paragon's fleet increased from 6 to 11.
The Gross Margin rose from 85.3 percent in the year-earlier quarter to 85.7 percent in the most recent quarter. The Cost of Goods Sold was, therefore, 14.3 percent of Revenue in the June 2008 quarter.
Depreciation dropped from 25.1 percent of Revenue to 20.3 percent of Revenue.
Sales, General, and Administrative (SG&A) expenses, in which we include related-party management fees, were 6.5 percent of Revenue. These expenses were 8.3 percent of Revenue in the June 2007 quarter.
Operating Income grew by 238 percent.
Other non-operating activities shifted from a loss of $1.2 million to a gain of $1.8 million. This turnaround was primarily the result of a $4.1 million profit on an interest rate swap in the second quarter of 2008. However, to illustrate the variability of these derivatives, we will note the Paragon reported on net loss of $1.1 million in the first six months of 2008.
Paragon paid no income taxes in either period.
Net Income surged by 348 percent.
Cash Management.
| June 2008 | 3 months ago | |
| Current Ratio | 3.5 | 2.9 |
| LTD/Equity | 108.5% | 105.1% |
| Debt/CFO | 5.2 yrs | 6.1 yrs |
| Inventory/CGS | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A |
| Days of Sales Outstanding (DSO) | 1.7 days | 1.4 days |
| Working Capital/Market Capitalization | 7.5% | 4.7% |
| Cash Conversion Cycle Time (CCCT) | N/A | N/A |
As a result of the IPO and debt offerings, Paragon has a lot of Cash on its Balance Sheet. A good chunk of these funds will probably be used to expand the fleet further. The presently high ratio of Debt to Cash Flow from Operations might be a concern, but the recent rapid pace of Cash Flow growth (see below) suggests that the ratio will be much lower in another year or so.
Growth.
| June 2008 | |
| Revenue growth (1) | 199% |
| Revenue/Assets (2) | 22.8% |
| CFO growth (1) | 151% |
| Net Income growth (1) | 257% |
2. Annualized based first two quarters
Since Paragon doesn't yet have eight quarters under its belt, we can't compute year-over-year growth rates in our normal fashion. The three growth rates shown above compare the first two quarters of 2008 to the first two quarters of 2007. Revenue/Assets compares Revenue in the first two quarters to the average value for Total Assets during this period, and it has been multiplied by 2 to approximate an annual rate.
Profitability.
| June 2008 | |
| Operating Expenses/Revenue | 61.0% |
| ROIC | 5.1% |
| FCF/Equity | -99.2% |
| Accrual Ratio | N/A |
Free Cash Flow is negative because capital expenditures to acquire vessels has exceeded Cash Flow from Operations. However, once the company gets past its start-up phase, we would expect the pace of fleet expansion to slow significantly.
Value. Paragon shares ran up after the IPO, surpassing $27 at one point, but the current share price is now below the $16 offering price. The ratios below assume the $16.79 closing price on 30 June 2008.
| June 2008 | |
| P/E | 13.4 |
| P/E to S&P 500 average P/E | 76% |
| Price/Revenue | 3.7 |
| Enterprise Value/Cash Flow (EV/CFO) | 10.8 |
As Paragon matures, its growth pace will stabilize and its financial data will become more suitable for GCFR analysis. Although we need more data, and we would also suggest that potential investors consider corporate governance, Paragon has a big fan at Zacks.com.
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